<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
--------------------------
FORTUNE PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 95-4114732
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
515 WEST GREENS ROAD, SUITE 720
HOUSTON, TEXAS 77067
(281) 872-1170
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
TYRONE J. FAIRBANKS
FORTUNE PETROLEUM CORPORATION
515 WEST GREENS ROAD, SUITE 720
HOUSTON, TEXAS 77067
(281) 872-1170
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
BRUCE L. ASHTON, ESQ. JOHN J. HALLE, ESQ.
REISH & LUFTMAN STOEL RIVES LLP
11755 WILSHIRE BLVD., 10TH FLOOR 900 SW 5TH AVENUE
LOS ANGELES, CALIFORNIA 90025 PORTLAND, OREGON 97204
(310) 478-5656 (503) 224 3380
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED AMOUNT
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................ 2,300,000(1) $2.56(1) $5,888,000 $1,784
</TABLE>
(1) Includes 300,000 shares of Common Stock subject to an over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM IN FORM S-2 LOCATION IN PROSPECTUS
- -------------------------------------------------------------- -------------------------------------------------
<S> <C> <C>
ITEM 1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Outside Front Cover Page of Prospectus
ITEM 2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front and Outside Back Cover Page of
Prospectus; "Available Information"
ITEM 3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ "Prospectus Summary"; "Risk Factors";
"Management's Discussion and Analysis of
Financial Condition and Results of Operations"
ITEM 4. Use of Proceeds.................................. "Prospectus Summary"; "Use of Proceeds"
ITEM 5. Determination of Offering Price.................. Outside Front Cover Page of Prospectus
ITEM 6. Dilution......................................... "Dilution"
ITEM 7. Selling Security Holders......................... Not Applicable
ITEM 8. Plan of Distribution............................. Outside Front Cover Page of Prospectus;
"Underwriting"
ITEM 9. Description of Securities to be Registered....... "Description of Securities"
ITEM 10. Interests of Named Experts and Counsel........... "Experts"
ITEM 11. Information with Respect to the Registrant....... "Business and Properties"
ITEM 12. Incorporation of Certain Information by
Reference........................................ Not Applicable
ITEM 13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities...................................... "Description of Securities"
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 3, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
FORTUNE PETROLEUM CORPORATION
2,000,000 SHARES OF COMMON STOCK
Fortune Petroleum Corporation ("Fortune" or the "Company") hereby offers
2,000,000 shares ("Shares") of Common Stock, $.01 par value per share (the
"Common Stock"). The Common Stock is listed on the American Stock Exchange
("AMEX") under the symbol FPX. On February 27, 1997, the last reported sale
price of the Common Stock on the AMEX was $2.56 per share.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share.......................................
Total (3).......................................
</TABLE>
(1) The Company has reimbursed Paulson Investment Company, Inc., the
representative ("Representative") of the several Underwriters, for $35,000
of its expenses related to this offering and has agreed to pay to the
Representative a non-accountable expense allowance of 3% of the initial
public offering price of the securities sold to the Underwriters, which
amount will include the $35,000 already advanced. The Company has also
agreed to issue to the Representative or its designees warrants (the
"Representative's Warrants") to purchase up to 200,000 shares of Common
Stock for $ per share (120% of the initial public offering price of the
Shares) and to indemnify the Underwriters against certain liabilities. (See
"Underwriting.")
(2) Before deducting expenses estimated to be $340,000, including the
Representative's non-accountable expense allowance.
(3) The Company has granted to the Underwriters an option to purchase up to
300,000 additional shares of Common Stock to cover overallotments. (See
"Underwriting.") If all such shares are purchased, the Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively.
------------------------
The Shares are offered by the several underwriters when, as and if delivered
to and accepted by the Underwriters and subject to their right to reject any
order in whole or in part. It is expected that delivery of the Shares will be
made against payment therefor on or about , 1997.
PAULSON INVESTMENT COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[MAP]
[DESCRIPTION OF MAP]
The map consists of coastal Texas, Louisiana, Mississippi and Alabama and
their near-shore Gulf of Mexico waters. It depicts, through the use of differing
symbols, the Company's producing and exploration properties and the seismic
programs in which the Company is included.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act (File No. 1-12334) are incorporated in this Prospectus by
reference and are made a part hereof:
1. Annual Report on Form 10-K for the year ended December 31, 1996 (the
"Fortune Petroleum 10-K"), filed on , 1997;
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities made
hereby shall be deemed to be incorporated by reference in this Prospectus and to
be a part hereof from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated herein by
reference shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon oral or written request, a copy of any or all of
the documents incorporated herein by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference in
such documents). Written or telephone requests should be directed to Fortune
Petroleum Corporation,
<PAGE>
515 West Greens Road, Suite 720, Houston, Texas 77061. Attention: Dean W.
Drulias, General Counsel (telephone (281) 872-1170).
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. CAPITALIZED TERMS ARE USED AS DEFINED IN THE GLOSSARY INCLUDED
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION
PRESENTED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVERALLOTMENT OPTION
IS NOT EXERCISED.
THE COMPANY
Fortune Petroleum Corporation ("Fortune" or the "Company") is an independent
oil and natural gas company whose primary focus is exploration for and
development of domestic oil and natural gas. Fortune's principal areas of
interest include onshore and offshore Louisiana and Texas, including the
relatively shallow transition zone where the use of modern geophysical
technology and advanced interpretation techniques offers the opportunity for new
discoveries in areas of proven historical production.
Fortune seeks to participate, generally as a minority, non-operating
interest holder, in a variety of exploration and development projects developed
with industry partners using state-of-the-art technologies including, where
appropriate, three dimensional ("3D") seismic and computer-aided exploration
("CAEX") technology. Fortune believes that these techniques have undergone
important technological advances in recent years and that their use can provide
Fortune and its project partners with a more accurate and complete prospect
evaluation, materially increasing the likelihood of finding commercial
quantities of oil and gas at lower average reserve finding costs.
Although Fortune does not currently operate properties or originate oil and
gas exploration prospects, it actively participates in the evaluation of the
opportunities presented to it, both at the time of its initial investment in a
prospect and thereafter during the evaluation and selection of drilling
projects. In order to use state-of-the-art technology while controlling fixed
operating costs, Fortune relies heavily on industry consultants for its project
evaluations.
Fortune's strategy is to offer its shareholders an opportunity to invest in
a diversified portfolio of oil and gas exploration and development properties
within the Company's area of interest. Fortune seeks to achieve a balance
between the risks of exploration drilling and return on investment by generally
taking minority interests in projects with large potential reserves and
additional development potential. In furtherance of this strategy, Fortune has
developed close working relationships with other independent resource companies
operating in its area of interest and has acquired interests in over 25
exploration projects, which are currently in various stages of evaluation,
acquisition and preparation for drilling.
Fortune has a 12.9% working interest in the Schwing #1 field discovery well
at East Bayou Sorrel, Iberville Parish, Louisiana. The well began producing in
December 1996 and has been producing from permanent facilities since January 22,
1997. Although the well reached production rates as high as 1,711 BOPD and 1,710
MCFD during February 1997 on a 12/64" choke, sustained production will be
limited to an average of approximately 1,400 BOPD under the State of Louisiana
allowance for the producing reservoir unless an exemption is granted by the
State. Fortune expects to spend approximately $2 million as its share of the
projected development costs for the East Bayou Sorrel property over the next 18
months, including the drilling of up to four additional wells.
Fortune has a 12.5% interest in the producing 5,000 acre South Timbalier
Block 76. The well currently producing on this property accounts for about 50%
of the Company's current production and cash flow. The Company believes this
property has significant development potential.
The Company also has a 12.5% working interest in the South Lake Arthur
prospect well being drilled in Jefferson Davis Parish, onshore South Louisiana.
The well is scheduled to drill to 17,500 feet to test the miogyp sands which
have been prolific natural gas producers in the immediate area. In addition, the
Company has a 37.5% interest in the La Rosa Field and an 18.75% interest in a 24
square mile proprietary 3D seismic survey currently underway in Refugio County,
Texas.
3
<PAGE>
In addition to exploration projects onshore Louisiana and Texas, the Company
has entered into a multi-year proprietary 3D seismic joint venture to evaluate
and identify exploration prospects in and around the Texas transition zone
including the intracoastal waters at Espiritu Santo Bay, and certain surrounding
areas. Fortune owns a 12.5% working interest in the 166.5 square mile AMI and a
135 square mile proprietary 3D seismic venture. Fortune's principal partners are
Fairfield Resources Corporation, a wholly owned subsidiary of Fairfield
Industries, Inc., and Smith Management Company, Inc. Fairfield Industries, Inc.
has designed a new state-of-the-art proprietary transition zone 3D seismic
acquisition system specifically for use on this project. CAEX Services, Inc.,
also a minority equity partner in the joint venture, will process and interpret
the seismic data with input from Interpretation(3).
In February 1995, Fortune formed a strategic joint venture with Zydeco
Exploration, Inc. ("Zydeco") to conduct a multi-year program to identify,
evaluate and explore oil and gas prospects in the Louisiana transition zone and
Timbalier Trench. The joint venture has identified and acquired an interest in
20 exploration projects in the shallow Gulf Coast waters of Louisiana (the
"Joint Venture Projects"). To date, wells have been drilled on two of the Joint
Venture Projects, the Aurora and Polaris prospects. Hydrocarbons were
encountered in both wells, but neither well was completed as a producer. The
joint venture is currently seeking to farm out both of these prospects for
additional exploration. It is anticipated that drilling will commence on at
least one of the other Joint Venture Projects during 1997, although there is no
assurance that drilling will take place during 1997 or at all.
Under its exploration agreement with Zydeco, Fortune holds a 50% interest in
each of the Joint Venture Projects. The Company contributed $4,800,000 to the
venture, which is being used to to pay 100% of the budgeted leasehold
acquisition and seismic costs for the projects. Through December 31, 1996,
$2,507,000 had been expended. Using advanced interpretation techniques, Zydeco
and Fortune have blended 2D and 3D seismic and CAEX technologies with production
data and characteristics of existing wells to identify the Joint Venture
Projects. In keeping with its strategy of balancing risk and return, the Company
does not currently expect to retain a working interest of more than 25% in any
well drilled on the Joint Venture Projects, as a general rule, and intends to
farm out its remaining interest to other oil and gas companies.
Prior to mid-1994, the Company focused its efforts on the acquisition of
producing properties in an effort to take advantage of competitive prices for
proved reserves with development potential in relation to the cost of reserves
discovered through exploration activities. In mid-1994, the Company made a
strategic decision to shift its emphasis from the acquisition of producing
properties to exploration for oil and natural gas reserves, although the Company
continues to examine attractive acquisition opportunities. This decision was
prompted by increasing price competition for attractive producing properties as
well as the recent important advances in exploration technology. To help
facilitate its exploration strategy and focus its efforts, the Company sold all
of its California producing properties and prospects in early 1996. The Company
relocated its headquarters from Los Angeles, California to Houston, Texas in
February 1996.
All of the Company's current and proposed exploration activities involve a
high degree of risk, including the risk that the Company will make substantial
investments in properties and wells without achieving commercial production.
While the Company attempts to manage exploration risk through careful evaluation
of potential investments and diversification, there is no assurance that the
Company's efforts will result in successful development of oil or gas wells.
The Company's principal executive offices are located at 515 West Greens
Road, Suite 720, Houston, Texas 77067. Its telephone number at that address is
(281) 872-1170. At its 1997 Annual Meeting, the shareholders will be asked to
vote on an amendment to the Company's charter to change the name of the
corporation to "Fortune Natural Resources Corporation," the name under which
Fortune currently operates in Louisiana and Texas.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.............. 2,000,000 shares
Common Stock to be outstanding
after the offering.............. 14,138,424 shares
Common Stock reserved for issuance
under options, warrants and
debentures...................... 7,395,309 shares
Use of proceeds................... Further development of the Company's existing
properties; acquisition of additional properties and/or
geological and geophysical data; general corporate
purposes, including possible reduction of outstanding
debt. (See "Use of Proceeds.")
AMEX symbol....................... FPX
</TABLE>
- ------------------------
(1) The Company has outstanding options and warrants that, in the aggregate, are
exercisable to purchase, up to 7,232,628 shares of Common Stock at prices
ranging from $2.40 to $6.00 per share and with expiration dates ranging from
December 1997 to February 2002. The Company also has outstanding
subordinated Debentures (the "Debentures") that are convertible into 162,681
shares of Common Stock at a price of $6.32 per share and are due December
31, 1997. (See "Description of Securities.")
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following Summary Condensed Financial Data for each of the years in the
three year period ended December 31, 1996, are derived from, and qualified by
reference to, the Company's audited financial statements, appearing elsewhere
herein. The Summary Condensed Financial Data should be read in conjunction with
the financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein. The data for
years ending prior to 1996 have been restated to reflect the change in the
Company's method of accounting for oil and gas operations to the full cost
method of accounting. (See Note 2 to Financial Statements.)
SUMMARY CONDENSED FINANCIAL DATA
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994* 1995* 1996
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues........................................................ $ 3,397 $ 3,143 $ 4,040
Net Loss.............................................................. $ (4,453) $ (5,876) $ (1,330)
Net Loss per share.................................................... $ (1.69) $ (0.90) $ (0.12)
Net weighted average shares outstanding............................... 2,639 6,556 11,351
OPERATING DATA:
Net Production:
Crude oil, condensate and gas liquids (Bbl)......................... 88,000 92,000 57,000
Natural gas (Mcf)................................................... 1,017,000 909,000 1,038,000
Gas equivalent (MCFE)............................................... 1,542,000 1,461,000 1,383,000
Average Sales Price:
Crude oil, condensate and gas liquids ($ per Bbl)................... $ 14.14 $ 14.66 $ 20.24
Natural gas ($ per Mcf)............................................. $ 2.09 $ 1.77 $ 2.56
<CAPTION>
DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets.......................................................... $ 10,066 $ 17,800 $ 16,335
Total Debt............................................................ $ 7,123 $ 4,897 $ 2,933
Net Stockholders' Equity.............................................. $ 2,130 $ 12,314 $ 13,037
RESERVES:
Estimated Net Proved Reserves (1):
Crude oil and condensate (MBbl)..................................... 1,647 347 249
Natural gas (Bcf)................................................... 5.9 5.9 3.5
Estimated future net revenues before income taxes..................... $ 15,932 $ 12,600 $ 14,112
Present value of estimated future net revenues before income taxes
(discounted at 10% per annum)....................................... $ 8,148 $ 8,942 $ 10,820
</TABLE>
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* Restated
(1) Estimates of oil and gas reserves in future years are based in part on the
sales price at December 31 of the respective year. To the extent that the
cost of producing the oil and gas, plus applicable taxes, from any
particular property exceeds the sales price, the quantity of proved reserves
is reduced. (See "Business and Properties--Oil and Gas Operations--Oil and
Gas Reserves.")
6
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933. Such forward-looking statements may
be found in this section and under "Prospectus Summary," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business and Properties." Forward looking statements include
statements regarding: future oil and gas production and prices, future
exploration and development spending, future drilling and operating plans,
reserve and production potential of the Company's properties and prospects and
the Company's business strategy. Actual events or results could differ
materially from those discussed in the forward-looking statements as a result of
various factors including, without limitation, the risk factors set forth below
and elsewhere in this Prospectus. An investment in the Shares involves a high
degree of risk. The Shares should not be purchased by persons who cannot afford
the loss of their entire investment. Prospective investors should carefully
consider all of the information contained in this Prospectus, including the
following risk factors:
RISKS ASSOCIATED WITH THE COMPANY
EXPLORATION RISKS. The business of exploring for and, to a lesser extent,
of developing oil and gas properties is an inherently speculative activity that
involves a high degree of business and financial risk. Property acquisition
decisions generally are based on various assumptions and subjective judgments
that are speculative. Although available geological and geophysical information
can provide information with respect to a potential oil or gas property, it is
impossible to determine accurately the ultimate production potential, if any, of
a particular property or well. Moreover, the successful completion of an oil or
gas well does not ensure a profit on the Company's investment therein. The
Company's current investments are primarily in exploration projects. Drilling
for oil and natural gas involves numerous risks, including the risk that no
commercially productive hydrocarbon reservoirs will be encountered. These risks
are substantially greater in the case of exploratory drilling than in the case
of wells drilled into established production. The Company's future drilling
activities may not be successful. For example, the first well drilled on one of
the Joint Venture Projects (the Aurora prospect) was plugged and abandoned in
January 1996 after the Company determined that even though the well had
discovered hydrocarbons, the costs of completion and construction of production
facilities made the well uneconomic. Some other prospects in which the Company
had participated have resulted in less than anticipated success, and it is to be
expected that a substantial number of the projects in which the Company invests
will fail to achieve commercial production or to justify the investment made in
them.
CHANGE IN STRATEGY. In mid-1994, Fortune changed its strategy from the
acquisition of producing oil and gas properties with anticipated development
potential to a strategy that primarily stresses exploratory drilling for oil and
natural gas. In furtherance of this change in strategy, Fortune made substantial
changes in management and personnel and, in 1996, sold all of its California
properties, which accounted for a significant portion of the Company's oil and
gas reserve volumes at the time of the sale, and relocated its offices to
Houston, Texas. It has also developed a new area of interest and new working
relationships, and invested in new prospects, the operating results of which are
too preliminary to support meaningful evaluation of their potential. Because of
these changes in business strategy, current and future results of operations may
not be comparable to historical performance.
NET LOSSES INCURRED BY COMPANY. The Company has incurred substantial net
losses in each of the last three years. These losses equaled $4,453,000,
$5,876,000 and $1,330,000 for 1994, 1995 and 1996, respectively. Based on its
current operating plan, the Company may break even or record a slight profit in
1997. However, the plan makes certain assumptions about the success of drilling
projects and other events that may not, in fact, occur, and there is no
assurance that losses will not continue in 1997 and thereafter. The Company has
incurred a $316,000 non-cash expense in connection with the recent exchange of a
portion of its outstanding Debentures for Common Stock and warrants. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
7
<PAGE>
NEED TO REPLACE DECLINING RESERVES. The Company's future oil and natural
gas reserves and production, and thus cash flow and income, are highly dependent
on the Company's ability to find or acquire additional reserves. Without adding
new reserves in the future, the Company's oil and gas reserves and production
will decline over the long term. There is no assurance that the Company will be
able to find and develop or acquire additional reserves.
DEPENDENCE ON LIMITED NUMBER OF WELLS. Over one-half of the Company's oil
and gas revenues, cash flow and proved oil and gas reserves is currently
accounted for by two wells, the South Timbalier Block 76 well and the East Bayou
Sorrel well. Although the East Bayou Sorrel well only began producing in
December 1996, this field is expected to have a significant impact on 1997
operations. Furthermore, the South Timbalier Block 76 well was shut in for over
two months during 1996 as the result of a mechanical failure. (See "Risks
Associated with the Oil and Gas Industry--Operating Hazards.") A significant
curtailment or loss of production from either of these wells for a prolonged
period before the Company could replace the reserves through new discoveries or
acquisitions would have a material adverse effect on the Company's projected
operating results and financial condition in 1997.
WORKING CAPITAL; NEED FOR ADDITIONAL FINANCING. Investment in oil and gas
exploration requires the commitment of substantial amounts of capital over
significant periods of time. For the three year period ended December 31, 1996,
the Company incurred over $15 million of capital costs in its oil and gas
exploration and development activities. The Company expects to make additional
capital investments of approximately $2.5 million to $5 million in 1997. While
the Company believes it will have sufficient capital or cash flow to meet all of
its projected capital needs over the short-term, if the operators of the
properties in which the Company has invested propose an accelerated drilling
schedule, or if capital requirements otherwise exceed, or capital resources fall
short of, expectation, the Company may not have sufficient liquid capital
resources to participate at its existing working interest level or at all. If
the Company declines participation, its interest in the project is substantially
reduced. In the case of the joint venture with Zydeco, the Company generally
does not intend to retain its current 50% working interest in the Joint Venture
Projects and therefore intends to preserve its investment in these projects at a
lower percentage level by finding other oil and gas companies to participate in
a farmout arrangement. There is no assurance that the Company will be able to
farm out any portion of its interest in any of the Joint Venture Projects. The
Company is required to assign to Zydeco, in exchange for an overriding royalty
and back-in working interest, any portion of its interest it does not fund or
farm out. (See "Business and Properties-- Exploration Activities--Joint Venture
with Zydeco.")
DEPENDENCE ON OPERATORS, CONSULTANTS AND OTHERS. Fortune is currently
organized to be a participant in exploration projects but does not currently
intend to operate any such projects and will thus be dependent on other oil and
gas companies to conduct operations in a prudent and competent manner. Although
it expects to be actively involved in project evaluations, Fortune may have
little or no control over the way in which such operations are conducted or the
timing of exploitation of particular projects. If the entity selected to act as
operator proves incompetent, Fortune could be forced to incur additional costs
to conduct remedial procedures and could lose its investment in a property
altogether. Because Fortune employs a variety of technological approaches to its
evaluation of properties and projects, it relies heavily on outside consultants
for the required technological expertise. The Company has no long-term
agreements with such consultants, all of whom are available to other natural
resource companies, including the Company's competitors.
ACCOUNTING RISKS. The Company reports its operations using the full cost
method of accounting for oil and gas properties. Under full cost accounting
rules, all productive and non-productive costs incurred in connection with the
exploration for and development of oil and gas reserves are capitalized.
Dispositions of oil and gas properties are generally accounted for as
adjustments of capitalized costs, with no gain or loss recognized, unless such
disposition is deemed to be significant. (See Note 4 of Notes to Financial
Statements.) Under full cost accounting rules, the net capitalized costs of oil
and gas properties may not
8
<PAGE>
exceed a "ceiling" limit of the tax effected present value of estimated future
net revenues from proved reserves, discounted at 10%, plus the lower of cost or
fair market value of unproved properties. This rule requires calculating future
revenues at unescalated prices in effect as of the end of each fiscal quarter
and requires a write-down if the net capitalized costs of the oil and gas
properties exceed the ceiling limit, even if price declines are temporary. The
risk that the Company will be required to write-down the carrying value of its
oil and gas properties increases when oil and gas prices are depressed or
unusually volatile. The use of the full cost accounting method also exposes the
Company to the potential for large write-downs of assets if and when
non-producing properties carried at cost are disposed of below that cost or
abandoned.
PROPERTIES PLEDGED TO SECURE DEBT. All of the Company's producing
properties are pledged to secure its bank credit facility. A failure to pay the
principal or interest or breaches of financial covenants under the credit
facility could cause the Company to lose all or part of its interest in its
principal producing properties. The entire principal balance of the credit
facility is due October 1, 1997. If Fortune's operating activities are
significantly curtailed or Fortune's financial position weakens significantly
and it is unable to repay such debt when it comes due, it is possible that
substantially all of Fortune's productive properties could be seized by the bank
through a foreclosure. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations.")
UNINSURED RISKS. Under the terms of operating agreements entered into with
the operator of wells in which the Company has an interest, it is anticipated
that the operators will carry insurance against certain risks of oil and gas
operations. The Company would normally be required to pay its proportionate
share of the premiums for such insurance and be named as an additional insured
under the policy. In addition to such insurance, the Company also carries
insurance against certain oil and gas operating risks. However, the Company may
not be fully insured against all risks, either because such insurance is not
available or because of premium costs.
DEPENDENCE ON KEY OFFICER. The Company depends to a large extent on the
abilities and continued participation of its key employee, Tyrone J. Fairbanks,
President and Chief Executive Officer. The loss of Mr. Fairbanks could have a
material adverse effect on the Company. In an effort to reduce the risk, the
Company has entered into an employment agreement with Mr. Fairbanks which
expires December 31, 1997. (See "Management.") The Company has obtained $500,000
of key man life insurance on the life of Mr. Fairbanks.
RISKS ASSOCIATED WITH THE OIL AND GAS INDUSTRY
VOLATILITY OF OIL AND GAS PRICES. The Company's revenues, profitability and
future rate of growth are substantially dependent upon prevailing market prices
for natural gas and oil, which can be extremely volatile and in recent years
have been depressed by excess domestic and imported supplies. In addition to
market factors, actions of state and local agencies, the United States and
foreign governments, and international cartels affect oil and gas prices. All of
these factors are beyond the control of the Company. These external factors and
the volatile nature of the energy markets make it difficult to estimate future
prices of natural gas and oil. There is no assurance that current price levels
can be sustained or that the Company will be able to produce oil or gas on an
economic basis in light of prevailing market prices. Any substantial or extended
decline in the price of natural gas would have a material adverse effect on the
Company's financial condition and results of operations, including reduced cash
flow and borrowing capacity, and could reduce both the value and the amount of
the Company's oil and gas reserves. The average gas prices received by the
Company were $2.09, $1.77 and $2.56 per Mcf in 1994, 1995 and 1996,
respectively. The average oil prices received by the Company were $14.14, $14.66
and $20.24 per Bbl in 1994, 1995 and 1996, respectively. At February 26, 1997,
the Company was receiving an average of approximately $2.96 per Mcf for its gas
production and $20.62 per Bbl for its oil production. These current prices
represent declines from December 1996 and January 1997 prices and the Company
expects further prices declines through the spring and summer of 1997.
9
<PAGE>
UNCERTAINTY OF ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUES. There
are numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. The
reserve data set forth in this Prospectus represent only estimates. Estimating
quantities of proved reserves is inherently imprecise. Such estimates are based
upon certain assumptions about future production levels, future natural gas and
crude oil prices and future operating costs made using currently available
geologic engineering and economic data, some or all of which may prove to be
incorrect over time. As a result of changes in these assumptions that may occur
in the future, and based upon further production history, results of future
exploration and development, future gas and oil prices and other factors, the
quantity of proved reserves may be subject to downward or upward adjustment. In
addition, the estimates of future net revenues from proved reserves of the
Company and the present value thereof are based on certain assumptions about
future production levels, prices, and costs that may not prove to be correct
over time. The rate of production from oil and gas properties declines as
reserves are depleted. Except to the extent the Company acquires additional
properties containing proved reserves, conducts successful exploration and
development activities or, through engineering studies, identifies additional
behind-pipe zones or secondary recovery reserves, the proved reserves of the
Company will decline as oil and gas are produced. Future oil and gas production
is, therefore, highly dependent upon the Company's level of success in acquiring
or finding additional reserves. (See "Business and Properties--Oil and Gas
Operations--Oil and Gas Reserves.")
OIL AND GAS LEASES. The Company's right to explore and produce oil and gas
from its properties derives from its oil and gas leases with the owners of the
properties. There are many versions of oil and gas leases in use. The oil and
gas leases in which the Company has an interest were, in most cases, acquired
from other companies who first entered into the leases with the landowners. Oil
and gas leases generally call for annual rental payments and the payment of a
percentage royalty on the oil and gas produced. Courts in many states have
interpreted oil and gas leases to include various implied covenants, including
the lessee's implied obligation to develop the lease diligently, to prevent
drainage of oil and gas by wells on adjacent land, to seek diligently a market
for production, and to operate prudently according to industry standards. Oil
and gas leases with similar language may be interpreted quite differently
depending on the state in which the property is located. The Company believes it
(or the operator of its properties) has followed industry standards in
interpreting its oil and gas leases in the states where it operates. However,
there is no assurance that the leases will be free from litigation concerning
the proper interpretation of the lease terms. Adverse decisions could result in
material costs to the Company or possibly the loss of one or more leases.
Oil and gas leases typically have a primary term of three to ten years.
During that time the lessee has the obligation to drill a productive well or the
lease expires. If a productive well is drilled, the lease is extended for the
life of the production. Many of the leases in the Company's exploration projects
will expire over the next three to five years. If productive wells are not
drilled on these projects before that time, the leases will terminate. There is
no assurance that the Company and its industry partners will be able to drill or
farm out all of the existing exploration projects prior to expiration of the
leases in those prospects or that the Company will be able to renew those
existing leases.
OPERATING HAZARDS. The cost of drilling, completing and operating wells is
often uncertain, and drilling operations may be curtailed, delayed or canceled
as a result of a variety of factors, including unexpected drilling conditions,
equipment failures or accidents and adverse weather conditions. The Company's
operations are subject to all of the risks normally incident to the operation
and development of oil and gas properties and the drilling of oil and gas wells,
including encountering unexpected formations or pressures, corrosive or
hazardous substances, mechanical failure of equipment, blowouts, cratering and
fires, which could result in damage or injury to, or destruction of, formations,
producing facilities or other property or could result in personal injuries,
loss of life or pollution of the environment. Any such event could result in
substantial loss to the Company which could have a material adverse effect on
the Company's financial
10
<PAGE>
condition. In April 1996, the Company experienced a mechanical failure of
downhole equipment at the Company's South Timbalier Block 76 well. As a result
of this equipment failure, the well was shut in from April 29, 1996 to July 6,
1996, and the Company incurred significant costs to repair it. (See "Business
and Properties--Property Acquisition Activities--South Timbalier Block 76
Acquisition.") Although such operational risks and hazards may to some extent be
minimized, no combination of experience, knowledge and scientific evaluation can
eliminate the risk of investment or assure a profit to any company engaged in
oil and gas operations.
WEATHER HAZARDS. Weather conditions, including severe rains and winter
conditions, have adversely impacted the Company's oil and gas operations. Heavy
rains during the winter of 1995 washed out a road to one of the Company's
California properties, which required the producing wells on the property to be
shut in. Severe winter conditions on the San Juan Basin, New Mexico property
caused a curtailment of operations, including attempts to complete wells which
had been drilled. The inability to produce existing wells and to complete wells
which may yield commercial quantities of oil or gas has an adverse impact on the
Company's cash flow and financial condition. Furthermore, weather conditions in
the future, including hurricanes in the Gulf of Mexico, could interrupt or
prevent production and drilling operations in the Gulf of Mexico and the coastal
counties and parishes, and could result in damage to equipment or facilities.
ENVIRONMENTAL HAZARDS. Oil and gas operations present risks of
environmental contamination from drilling operations and leakage from oil field
storage or transportation facilities. The Company has never experienced a
significant environmental mishap, but spills of oil could occur which could
create material liability to the Company for clean-up expenses. Environmental
contamination occurred on the San Juan Basin, New Mexico property prior to the
Company's acquisition of its interest but has been cleaned up at no cost to the
Company. Although there is no assurance of any third party recovery in the event
of a material liability, the Company generally seeks an indemnity from the
seller against claims for environmental hazards on properties acquired through
its acquisition program. In addition, the Company carries $2,000,000 of
environmental insurance with a $10,000 deductible to cover potential liability
for onshore environmental hazards and $1,000,000 coverage with a $25,000
deductible for offshore hazards.
The Company is not currently a party to any judicial or administrative
proceedings which involve environmental regulations or requirements and believes
that it is in substantial compliance with all 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. (See "Business and Properties--Governmental Regulation.")
COMPETITION. The oil and gas exploration, production and acquisition
business is highly competitive. A large number of companies and individuals
engage in acquiring properties or drilling for oil and gas, and there is a high
degree of competition for desirable oil and gas prospects and properties. There
is also competition between the oil and gas industries and other industries in
supplying the energy and fuel requirements of industrial, commercial,
residential and other consumers. Many of the Company's competitors have greater
financial and other resources than does the Company, and there is no assurance
that the Company will be able to compete successfully in acquiring desirable
opportunities.
GOVERNMENT REGULATION. The Company's business is regulated by certain
federal, state and local laws and regulations relating to the development,
production, marketing and transmission of oil and gas, as well as environmental
and safety matters. State conservation laws regulate the rates of production
from oil and gas wells for the purpose of ensuring maximum production of the
resource. Such regulations may require the Company to produce certain wells at
less than their maximum flow rate. Production from the East Bayou Sorrel well is
currently restricted to approximately 1,400 Bbl. of oil per day because of such
a state mandated restriction. (See "Business and Properties--Exploration
Activities--East Bayou Sorrel Field, Iberville Parish, Louisiana.") State law
also governs the apportionment of production among property
11
<PAGE>
owners and producers where numerous wells may be producing from a single
reservoir (referred to as unitization proceedings). Rulings in unitization
proceedings may allocate production in a particular reservoir in a manner that
decreases the Company's share of production. There is no assurance that laws and
regulations enacted in the future will not adversely affect the Company's
exploration for or production and marketing of oil and gas. From time to time,
proposals are introduced in Congress or by the Administration which could affect
the Company's oil and gas operations. (See "Business and Properties--
Governmental Regulation.")
SHORTAGES OF SUPPLIES AND EQUIPMENT. The Company's ability to conduct its
operations in a timely and cost effective manner is subject to the availability
of oil and gas operations equipment, supplies, and service crews. The industry
is currently experiencing a shortage of certain types of drilling rigs and work
boats in the Gulf of Mexico. This shortage could result in delays in the
Company's operations as well as higher operating and capital costs. Shortages of
other drilling equipment, tubular goods, drilling service crews and seismic
crews could occur from time to time, further hindering the Company's ability to
conduct its operations as planned.
RISKS ASSOCIATED WITH INVESTMENT IN THE COMMON STOCK
MARKET PRICE VOLATILITY. The market price of the Common Stock may be
subject to significant fluctuations in response to drilling results and the
financial results of operations. Developments affecting the oil and gas industry
generally, including national and international economic conditions and
government regulation, could also have a significant impact on the market price
of the Common Stock. In addition, the stock market in recent years has
experienced significant price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies, and the
price of the Common Stock could be affected by such fluctuations.
SHARES ELIGIBLE FOR FUTURE SALE. At February 28, 1997, 12,138,424 shares of
Common Stock were outstanding, of which 11,964,952 shares were freely tradeable
and 173,472 shares were "restricted securities" as that term is defined in Rule
144 adopted by the Commission under the Act. At that date, the Company also had
outstanding options and warrants to acquire an aggregate of 7,232,628 shares of
Common Stock, effectively all of which are currently exercisable. The Company
also has outstanding subordinated Debentures that are convertible into 162,681
shares of Common Stock at a price of $6.32 per share and are due December 31,
1997. Sales of substantial amounts of the Common Stock in the public market
could adversely affect the market price of the Company's Common Stock. (See
"Description of Securities.")
DILUTION. The initial public offering price of the Shares is expected to be
substantially higher than the net tangible book value per share of the Company.
Accordingly, purchasers of the Shares will experience substantial and immediate
dilution in the value of the Shares as measured by their pro-rata share of the
Company's net tangible book value. In addition, the outstanding options,
warrants and Debentures to acquire shares of Common Stock can be expected to be
exercised or converted, if at all, at a time at which the exercise price is less
than the market value of the Common Stock so obtained. Dilution resulting from
any such exercises, or the potential therefor, can have a depressive effect on
the price of the Common Stock and can make additional financing more difficult
or less attractive. (See "Dilution.")
Certain shareholders of the Company have filed suit to require the issuance
to them of additional shares of Common Stock under certain "reset" provisions
which required the Company to issue additional shares if the market price of the
Common Stock declined during certain recalculation periods. ("Business and
Properties--Legal Proceedings.") While the Company believes that it is not
obligated to issue any additional shares, any such issuance would be dilutive to
the other shareholders. The exercise price and number of shares to be acquired
upon exercise of the Company's publicly-traded Common Stock Purchase Warrants
(the "Public Warrants") are subject to adjustment in the event the Company
issues shares of
12
<PAGE>
Common Stock at a price below $2.61 per share. Such an adjustment could occur if
the Company is required to issue the "reset" shares in the above-described
lawsuit or for other reasons.
USE OF PROCEEDS
The net proceeds from the sale of the 2,000,000 Shares offered hereby are
estimated to be approximately $4,610,000 ($5,327,750 if the Underwriters'
overallotment option is exercised in full) assuming a public offering price of
$2.75 per share. The Company anticipates that substantially all of the net
proceeds, together with its operating cash flow, will be used to purchase
interests in additional oil and gas properties and/or geological and geophysical
data related to such additional properties, to fund the exploration and
development of oil and gas projects and possibly to reduce outstanding debt. At
the date hereof, the Company has committed approximately $2.5 million to capital
expenditures for 1997, including further development of the East Bayou Sorrel
and LaRosa projects and acquisition of an interest in and initial evaluation of
the Espiritu Santo Bay project. However, a variety of unanticipated events,
including reductions in market prices for oil and gas, less than anticipated
production, mechanical or weather problems requiring shutting in producing
wells, an accelerated development schedule for existing properties, an inability
to farm out portions of its interests in existing properties or higher than
expected operating expenses could cause the Company to use net proceeds of this
offering to cover existing property expense, general overhead or other costs.
DILUTION
The pro forma(1) net tangible book value of the Company at December 31,
1996, was $13.7 million or $1.13 per share of Common Stock. Net tangible book
value per share represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of 2,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $2.75 per share, the pro
forma adjusted net tangible book value of the Company at December 31, 1996,
would have been $18.3 million or $1.30 per share of Common Stock. This
represents an increase in net tangible book value to existing stockholders and a
substantial dilution to new investors acquiring Common Stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share........................... $ 2.75
Pro forma net tangible book value per share at December
31, 1996................................................ $ 1.13
Increase attributable to this offering.................... .17
---------
Adjusted pro forma net tangible book value after this
offering................................................ 1.30
---------
Dilution to new investors................................. $ 1.45
---------
---------
</TABLE>
- ------------------------
(1) Pro forma net tangible book value per share gives retroactive effect to the
exchange of certain Debentures for Common Stock and warrants that occurred
in February 1997. (See Note 6 of Notes to Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of December 31, 1996, (ii) the pro forma capitalization at that date
as if the exchange of a portion of the Debentures for Common Stock and warrants
consummated in February 1997 had occurred on that date and (iii) as further
adjusted to give retroactive effect to the sale of the 2,000,000 Shares at an
estimated offering price of $2.75 per Share:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------------ -------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents.......................... $ 2,174,000 $ 2,174,000 $ 6,784,000
------------------ -------------- --------------
------------------ -------------- --------------
Long-term debt (excluding current portion)......... 680,000(1) -- --
Stockholders' equity
Preferred stock, $1.00 par value, 2,000,000
shares authorized, none outstanding............ -- -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 11,853,663 shares outstanding at
December 31, 1996, 12,072,521 shares
outstanding after the Debenture exchange;
14,072,521 shares outstanding as adjusted...... 119,000 121,000 141,000
Additional paid-in capital......................... 29,273,000 30,245,000 34,835,000
Accumulated deficit (2)............................ (16,355,000) (16,671,000) (16,671,000)
------------------ -------------- --------------
Net stockholders' equity........................... 13,037,000 13,695,000 18,305,000
------------------ -------------- --------------
Total capitalization............................... $ 13,717,000 $ 13,695,000 $ 18,305,000
------------------ -------------- --------------
------------------ -------------- --------------
</TABLE>
- ------------------------
(1) Constitutes the portion of Debentures exchanged effective February 26, 1997.
Although the Debentures constituted short-term debt, the subsequent exchange
prior to the issuance of the auditors' report for 1996 caused the exchanged
Debentures to be classified as long-term debt at December 31, 1996.
(2) Pro Forma columns include $316,000 non-cash debt conversion expense incurred
in the first quarter of 1997 in connection with the Debenture exchange. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Convertible Subordinated
Debentures.")
14
<PAGE>
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and does not intend
to pay such dividends in the foreseeable future. Under the Company's line of
credit, the Company may not pay dividends on its capital stock without the prior
written consent of its lending bank. The Indenture under which the Debentures
were issued restricts the payment of dividends in the event the Company is in
default on the Debentures.
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and the low closing prices of the
Common Stock and certain publicly traded warrants of the Company on the AMEX for
the periods indicated.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------------------ -----------------------
HIGH LOW HIGH LOW
------ ----- ----------- -----
<S> <C> <C> <C> <C>
1995
First Quarter......................................................... $ 21/2 $ 13/4 $ 7/8 $ 1/2
Second Quarter........................................................ 35/16 15/6 1 1/4
Third Quarter......................................................... 315/16 25/8 21/2 11/2
Fourth Quarter........................................................ 415/16 33/8 37/16 17/8
1996
First Quarter......................................................... 5 2 33/16 13/8
Second Quarter........................................................ 4 25/8 3 13/8
Third Quarter......................................................... 311/16 21/4 23/8 11/4
Fourth Quarter........................................................ 31/2 21/4 13/4 1
1997
First Quarter (through February 27, 1997)............................. 31/4 27/16 17/8 11/4
</TABLE>
At February 27, 1997, the closing price of the Common Stock was $2.56 per
share. At February 28, 1997, there were 12,138,424 shares of the Company's
Common Stock outstanding held of record by approximately 3,000 stockholders.
15
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following Summary Condensed Financial Data for each of the years in the
five year period ended December 31, 1996, are derived from, and qualified by
reference to, the Company's audited financial statements, appearing elsewhere
herein. The Summary Selected Financial Data should be read in conjunction with
the financial statements and "Management's Discussion and Analysis of Financial
condition and Results of Operations" appearing elsewhere herein. The data for
years ending prior to 1996 have been restated to reflect the change in the
Company's method of accounting for oil and gas operations to the full cost
method of accounting. (See Note 2 to Financial Statements.)
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1992* 1993* 1994* 1995* 1996
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues............................. $ 2,160 $ 2,834 $ 3,397 $ 3,143 $ 4,040
Net Loss................................... (174) (3,703) (4,453) (5,876) (1,330)
Net Loss per share......................... (0.24) (2.09) (1.69) (0.90) (0.12)
Net weighted average shares outstanding.... 714 1,773 2,639 6,556 11,351
OPERATING DATA:
Net Production:
Crude oil, condensate and gas liquids
(Bbl).................................. 87,000 79,000 88,000 92,000 57,000
Natural gas (Mcf)........................ 234,000 724,000 1,017,000 909,000 1,038,000
Gas equivalent (MCFE).................... 758,000 1,196,000 1,542,000 1,461,000 1,383,000
Average Sales Price:
Crude oil, condensate and gas liquids ($
per Bbl)............................... $ 17.57 $ 14.33 $ 14.14 $ 14.66 $ 20.24
Natural gas ($ per Mcf).................. 2.39 2.28 2.09 1.77 2.56
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1992* 1993* 1994* 1995* 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets............................. $ 8,199 $ 10,429 $ 10,066 $ 17,800 $ 16,335
Total Debt............................... 3,574 3,003 7,123 4,897 2,933
Net Stockholders' Equity................. 4,177 6,588 2,130 12,314 13,037
RESERVES:
Estimated Net Proved Reserves (1):
Crude oil and condensate (MBbl)........ 2,066 813 1,647 347 249
Natural gas (Bcf)...................... 4.8 5.6 5.9 5.9 3.5
Estimated future net revenues before
income taxes......................... $ 20,358 $ 12,835 $ 15,932 $ 12,600 $ 14,112
Present value of estimated future net
revenues before income taxes
(discounted at 10% per annum).......... $ 8,555 $ 8,554 $ 8,148 $ 8,942 $ 10,820
</TABLE>
- ------------------------
*Restated.
(1) Estimates of oil and gas reserves in future years are based in part on the
sales price at December 31 of the respective year. To the extent that the
cost of producing the oil and gas, plus applicable taxes, from any
particular property exceeds the sales price, the quantity of proved reserves
is reduced. (See "Business and Properties--Oil and Gas Operations--Oil and
Gas Reserves")
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
All of the Company's operating revenues are derived from the production of
oil and natural gas. Prior to 1994, the Company was principally engaged in the
purchase and production of oil and gas reserves, primarily in California. In
1995, the Company changed its business strategy and now concentrates in
exploration projects onshore and offshore Louisiana and Texas and in the related
transition zone.
From 1994 to 1995, operating revenues decreased, primarily as a result of
lower natural gas prices and weather related production curtailments. In 1996
the Company sold its California properties, but revenues increased as production
from an existing offshore Louisiana well contributed to revenues for a full
year. The Company expects that revenues will increase substantially in 1997 as a
result of an additional well put on production in late December 1996 and any
other wells that may be put into production during the year.
Operating results in 1994 were substantially affected by impairment expense
related to lower oil and natural gas prices while 1995 operating results were
substantially affected by a loss on sale related to the Company's California
properties. No such loss or expense was recorded in 1996. General and
administrative expense, however, increased significantly in 1996 because of the
Company's relocation to Houston and the addition of executive personnel. The
Company anticipates that general and administrative expense may increase further
as the scope of the Company's oil and gas exploration activities are expanded in
future years.
The Company experienced substantial operating and net losses in 1994 and
1995, primarily attributed to the impairment and loss on sale expenses described
above, and a significantly smaller loss in 1996. Operations contributed cash in
1994 and 1996, primarily due to relatively high natural gas prices and increases
in production, but consumed cash in 1995 because of low natural gas prices
during early 1995 and the shut-in of one of the Company's primary California
properties. The Company made substantial net investments in oil and gas
properties in 1994 and 1995, primarily for acquisitions, and a somewhat smaller
net investment in oil and gas properties in 1996, principally for exploration.
The Company funded its operating deficits and property investments from
commercial borrowing in 1994, a substantial portion of which was repaid by the
end of 1996, and from the sale of equity securities in 1995. The Company
anticipates that operating revenues will be sufficient to sustain budgeted
operations through 1997 but expects to use additional funds, including the
proceeds of this offering, to participate in additional exploration
opportunities and to purchase geological and geophysical data.
Substantial sales of equity securities in 1995 resulted in significant
increases in the weighted average shares outstanding in both 1995 and 1996. Net
loss per share decreased in 1995 despite an increase in the net loss from
operations and also decreased in 1996 as a result of a decrease in the net loss
from operations and an increase in the weighted average shares outstanding.
In the fourth quarter of 1996, the Company elected to change to the full
cost method of accounting. Management of the Company believes that full cost
accounting is preferable because it will more accurately reflect the results of
the Company's future operations. (See Notes 1 and 2 to the Financial Statements
for a further discussion of the reasons for and impact of this change in
accounting method.)
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Fortune had a net loss of $1.3 million in 1996 compared to a net loss of
$5.9 million in 1995. The higher net loss in 1995 is primarily attributable to a
$3.6 million loss on the sale of the California properties.
17
<PAGE>
Net revenues from sales of oil and gas increased 29% to $3.8 million for
1996, compared to 1995. The increase resulted primarily from the combination of
higher natural gas prices and a full year of production from the South Timbalier
Block 76. The 1995 production was adversely affected by a 5 1/2 month shut down
of the Company's Hopper Canyon, California oil field due to storm damage.
Revenues for 1996 were adversely affected by a two month shut down of the
Company's South Timbalier Block 76 well due to a mechanical failure in the
second quarter of 1996. Fortune has a 9.375% net revenue interest in the well,
which accounted for about 50% of the Company's oil and gas revenues in 1996. The
Company incurred approximately $300,000 in workover costs to repair the problem,
most of which was expensed as production and operating expense in June and July
1996.
Natural gas prices for the Company's production averaged $2.56 per MCF for
1996 as compared to $1.77 per MCF for 1995. Oil prices averaged $20.24 per
barrel in 1996 compared to $14.66 per barrel in 1995. These higher average
prices contributed to the increase in revenues.
Other income consisted primarily of interest income in 1996 and 1995.
Production and operating expenses decreased by $342,000 (23%) in 1996
compared to 1995 despite the expense of the South Timbalier workover discussed
above. The decrease in operating expenses resulted primarily from the Company's
sale of its California properties in early 1996.
In 1996, Fortune's general and administrative expenses increased by $712,000
(59%) over 1995. The increase was due primarily to increased legal fees
resulting from certain litigation, costs incurred in the sale of the Company's
California properties, increased shareholder reporting expense and increased
personnel expense. The Company also incurred non-recurring office relocation and
severance costs of $216,000 during 1996 in connection with the Company's move to
Houston. Interest expense decreased by $435,000 (50%) for 1996 compared to 1995
due to the lower debt balance in 1996. The lower depletable property balance,
resulting from the year end 1995 impairment, led to a decrease in the Company's
provision for depletion, depreciation and amortization of $193,000 (11%) in 1996
as compared to 1995. Depletion, depreciation and amortization decreased from
$1.22 per MCFE in 1995 to $1.14 per MCFE in 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994
During 1995, Fortune had a net loss of $5.9 million compared to a net loss
of $4.5 million for 1994. The net loss for 1995 was primarily due to a $3.6
million loss on sale attributable to the sale of the California properties. The
Company also had an impairment expense of $3.3 million in 1994 attributable to
the full cost ceiling test. (See Note 4 to the Financial Statements.)
Net revenues from sales of oil and gas decreased $380,000 (11%) in 1995,
compared to 1994. The decrease resulted primarily from lower natural gas prices
combined with shutting in the Company's Hopper Canyon, California oil field for
5 1/2 months due to a storm damaged access road. Natural gas prices averaged
$1.77 for 1995, compared to $2.09 for 1994. Oil prices averaged $14.66 per
barrel for 1995 as compared to $14.14 per barrel for 1994.
Other income consisted primarily of interest income and operator's overhead
fees earned by the Company on its operated wells, all of which were sold as of
December 31, 1995.
Production and operating expenses increased during 1995 by $424,000 (39%)
compared to 1994. The increase was due primarily to the additional operating
expenses from the acquired production in Rio Arriba County, 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 expenses and expenses
in preparing to relocate the Company's headquarters. Interest expense
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increased by $410,000 (89%) in 1995 compared to 1994, due to increased debt from
the Refugio County, Texas and Rio Arriba County, New Mexico acquisitions. The
Company's provision for depletion, depreciation and amortization increased by
$108,000 (6%) in 1995, compared to 1994 as a result of a higher depletion,
depreciation and amortization per unit of production. The higher rate resulted
from lower reserves in 1995.
LIQUIDITY AND CAPITAL RESOURCES
CASH BALANCE AND WORKING CAPITAL
The Company's cash balance at year end 1996 increased to $2.2 million as
compared to $1.9 million at year end 1995. This increase was primarily
attributable to increased cash flow from operations in 1996 as well as cash
proceeds from a 1996 private placement and the exercise of private warrants and
options. The Company's cash balance and its total working capital at December
31, 1995, increased compared to December 31, 1994, because of the cash proceeds
from two 1995 stock offerings and the classification of the California
properties held for resale as a current asset at December 31, 1995. The Company
also reduced its total debt balance by $4.2 million (59%) from December 31, 1994
through December 31, 1996. As a result of the Debenture Exchange Offer discussed
below, the Company has reduced debt by another $697,000 at February 26, 1997.
Although the Company's cash balance increased in 1996, working capital
decreased by $196,000 as a result of a significant portion of the Company's debt
being classified as current liabilities at December 31, 1996. The Company's
outstanding debt is comprised of bank debt and Debentures.
Fortune's internal liquidity and capital resources in the near term will
consist primarily of working capital derived from its oil and gas operations
along with the capital raised in connection with the public offering discussed
herein. At December 31, 1996, the Company also had $2.3 million of restricted
cash held by the joint venture with Zydeco which is available for lease and
seismic acquisition and seismic processing in the Transition Zone and Timbalier
Trench areas offshore Louisiana. (See "Business and Properties-- Exploration
Activities--Joint Venture with Zydeco.")
CASH FLOWS FROM OPERATING ACTIVITIES
Fortune's cash flow provided by operating activities increased for 1996 to
$607,000 as compared to an operating cash flow deficit of $744,000 for 1995.
This increase resulted from higher natural gas prices and higher gas production
in 1996 as discussed above. Cash flow in 1996 was adversely affected by the
shut-in of the South Timbalier Block 76 well for over two months in the second
quarter of 1996, resulting in a loss of revenues from the well, and workover
expenses incurred to bring the well back on production. Fortune's 1995 operating
cash flow deficit of $744,000 compares to cash flow from operating activities of
$491,000 in 1994. The 1995 cash flow deficit resulted primarily from lower
natural gas prices, the shut-in of the Company's Hopper Canyon Field and higher
operating costs.
The Company's 1996 discovery well at East Bayou Sorrel, Iberville Parish,
Louisiana began producing on December 20, 1996. This discovery had no impact on
the Company's revenues in 1996 but the Company believes that this well will have
a positive impact on its cash flow from operations in 1997. The Company expects
that drilling will commence on the first development well in this field in March
1997.
CASH USED IN INVESTING ACTIVITIES--CAPITAL EXPENDITURES
Capital expenditures funded with cash for the years ended December 31, 1994,
1995 and 1996 were $4.3 million, $5.7 million and $3.2 million, respectively.
1994 capital expenditures consisted primarily of the following: $1.7 million for
the acquisition of New Mexico properties; $760,000 for the acquisition of the La
Rosa gas field in Refugio County, Texas; and capital expended to explore and
develop the New Mexico, La Rosa and AWP properties. The increase in capital
expenditures for 1995 was principally attributable to
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capital expended to acquire, explore and develop the Company's New Mexico,
LaRosa and AWP properties; begin the acquisition of seismic and leases offshore
Louisiana; acquire South Timbalier Block 76 for $2.2 million; and drill the
exploratory well at Aurora. 1996 capital expenditures were primarily for four
exploratory wells (East Bayou Sorrel, Lirette, DABM and South Lake Arthur) and
continued lease and seismic acquisition offshore Louisiana. The Company also
received $2.2 million of proceeds from the sale of oil and gas properties in
1996, including $1.2 million for the sale of the California properties that was
used to retire debt in February 1996. The Company also received $940,000 for the
sale of 25% of its interest in South Timbalier Block 76. (See "Business and
Properties--Exploration Activities" and
"--Property Acquisition Activities.")
Fortune's capital expenditures for 1997 are currently estimated to range
from approximately $2.5 million to $5.0 million depending on the Company's
available capital resources. The Company intends to provide for these
expenditures with its available cash and either the exercise of outstanding
warrants, the recovery of prospect costs advanced by the Company, or the
proceeds of this offering. 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 interests or, in the joint
venture with Zydeco, put its interest back to Zydeco for an overriding royalty
and an after payout working interest. Should the Company's working interest in
exploration projects be reduced, the Company would not derive as great a benefit
as it may have otherwise enjoyed in the event of an exploration success.
CASH FLOWS FROM FINANCING ACTIVITIES--CASH PROVIDED FROM EQUITY TRANSACTIONS
Fortune's primary source of additional capital during 1995 and 1996 has been
stock offerings and the exercise of warrants and options. In December 1996, the
Company sold 412,000 shares of common stock at a price of $3.00 per share in a
private placement. Net proceeds of approximately $1.1 million were received from
the sale of these shares. 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--Property Acquisition Activities--South Timbalier Block 76
Acquisition.")
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. In February 1995, the Company netted
$795,000 in a private placement of Common Stock. The proceeds were used to fund
the initial contribution to the joint venture with Zydeco. (See "Business and
Properties--Exploration Activities--Joint Venture with Zydeco.")
OUTSTANDING DEBT AND DEBT REDUCTION
As of February 27, 1997, the Company has $2.1 million of debt outstanding,
all of which is due in 1997. Outstanding debt is currently comprised of $1.1
million of bank debt and $1.0 million outstanding Debentures. As discussed
above, this represents a substantial reduction (70%) in the Company's total debt
since December 31, 1994. The Company believes it will have the financial
resources during 1997 to either pay off or extend all of its outstanding debt.
In the event that the public offering described herein is completed, the Company
may use a portion of the proceeds to pay off the remaining balance of the
Debentures.
CREDIT FACILITY
The Company's bank debt was incurred under a $10 million secured master
revolving credit facility with Bank One, Texas, N.A. which has been in place
since January 14, 1994 (the "Credit Facility"). 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
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balance of the Credit Facility at February 26, 1997 was $1,100,000. The Credit
Facility is secured by a mortgage on all of the Company's existing producing oil
and gas properties and currently requires monthly principal payments of $75,000.
During February 1996, the Company made a principal reduction of $1,100,000,
primarily from the proceeds of the sale of its California properties.
Under the terms of the Credit 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. In certain quarters during 1995 and 1996, the Company was not
in compliance with its cash flow coverage ratio covenant in the Credit Facility.
Under the terms of the Credit Facility, the bank has the right to demand
repayment of the entire loan balance in the event of covenant defaults. The
Company obtained waivers of these past defaults; however, the Company has
determined that it was in compliance with the cash flow coverage ratio for each
of the last two quarters of 1996. The Company is not able to borrow any
additional amounts under the Credit Facility at this time.
The Credit Facility is due October 1, 1997, at which date the loan balance
would be $575,000 after payment of the required monthly principal reductions.
Prior to that date, the Company expects its borrowing base will be sufficient to
allow the Company to extend the term of this debt. The Company has not received
a commitment to extend the term of this debt and there can be no assurance that
the term will be extended. However, the Company believes that it will have the
financial resources, as discussed herein, to renew or repay the Credit Facility
during 1997. (See "Risk Factors--Risks Associated with the Company--Working
Capital; Need for Additional Financing" and "--Properties Pledged to Secure
Debt")
CONVERTIBLE SUBORDINATED DEBENTURES
The Company's Debentures are due December 31, 1997. On, February 26, 1997,
the Company closed an exchange offer for these Debentures which resulted in
$697,000 principal amount of Debentures being exchanged for 218,858 shares of
Common Stock and 174,250 Common Stock Warrants. Consequently, the balance due on
the Debentures at December 31, 1997 is $1,028,000. Furthermore, the Company will
record a non-cash debt conversion expense of approximately $316,000 during the
first quarter of 1997. The non-cash debt conversion expense represents the
difference between the fair market value of all of the Common Stock and warrants
issued in connection with the Exchange Offer and the fair market value of the
lower number of shares of Common Stock that could have been issued upon the
conversion of the Debentures under the Indenture prior to the exchange offer.
(See "Description of Securities-- Debentures.")
OIL AND GAS PRICES AND RESERVES
The price Fortune receives for its oil and gas production is influenced by
conditions outside of Fortune's control. As of February 26, 1997, the Company
was receiving approximately $20.62 per Bbl as an average price for its oil
production and $2.96 per Mcf as an average price for its gas production. At
December 31, 1996, the Company received approximately $4.04 per Mcf for its gas
production and $22.79 per Bbl for its oil production. At December 31, 1995, the
Company received approximately $2.32 per Mcf for its gas production and $16.10
per Bbl for its oil production. At December 31, 1994, the Company received
approximately $14.62 per Bbl for its oil production and $1.39 per Mcf as an
average price for its gas production. (See "Risk Factors--Risks Associated with
the Oil and Gas Industry--Volitility of Oil and Gas Prices".)
The Company's December 31, 1996 oil and gas reserve report prepared by
Huddleston & Co. Inc., of Houston, Texas, its independent petroleum engineers,
indicated a net present value, discounted at 10%, of the Company's proved
reserves equal to $10.8 million at December 31, 1996, compared to an $8.9
million discounted value at December 31, 1995. Of that total value, the proved
developed producing wells had a discounted value of $6.3 million at December 31,
1996 compared to $6.7 million at December 31, 1995.
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Total net proved recoverable reserves at December 31, 1996 decreased to
249,000 barrels of oil and 3.5 billion cubic feet of natural gas from 347,000
barrels of oil and 5.9 billion cubic feet of natural gas at December 31, 1995.
The increase in the present value of the reserves is attributable to the higher
oil and gas prices at year end 1996 vs. 1995. The decrease in proved reserves
was primarily attributable to the sale of 25% of the Company's interest in South
Timbalier Block 76 in March 1996, the sale of the one remaining California
property and a West Texas property in 1996 and natural depletion, offset by the
reserve addition at East Bayou Sorrel. (See "Business and Properties--Property
Acquisition Activities.")
ACCOUNTING FOR STOCK OPTIONS
The Company follows the intrinsic value method for accounting 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 did not adopt, for
accounting purposes, the fair value method of accounting for stock-based
compensation plans as compensation expense over the period options are vested,
which is an optional provision of Accounting Standard 123. (See Note 11 to the
Financial Statements.)
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BUSINESS AND PROPERTIES
GENERAL
Fortune is an independent public oil and natural gas company whose primary
focus is on exploration for and development of domestic oil and natural gas
properties. The Company's principal properties are located onshore and offshore
Louisiana and Texas.
During 1995, the Company implemented a program of exploration for
significant oil and natural gas reserves using state-of-the-art 3D seismic and
CAEX technology. 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 traditional 2D evaluation methods. Since
early 1995, the Company has acquired, with other industry partners, interests in
over 25 oil and gas prospects in the Louisiana Gulf Coast, including the Joint
Venture Projects, and is continually evaluating other 3D and 2D exploration
projects.
The Company also seeks to take advantage of attractive acquisition targets
which will enable it to acquire reserves at an attractive price. In furtherance
of that objective, on December 11, 1995, the Company purchased for cash an
interest in the South Timbalier Block 76, a producing oil and gas property
located in the Gulf of Mexico offshore Louisiana.
STRATEGY
Fortune's strategy is to offer its shareholders an opportunity to invest in
a diversified portfolio of oil and gas exploration and development properties
within its area of interest. It seeks to achieve a balance between the risks of
exploration drilling and return on its investment by generally taking minority
interests in projects with large potential reserves and additional development
potential. Together with other industry partners, Fortune has invested in
seismic exploration programs to identify new exploration prospects, in
exploration prospects ready to drill, and in producing properties believed to
have additional development potential, each described in more detail below.
Fortune seeks to participate, generally as a minority, non-operating
interest holder, in a variety of exploration and development projects with
industry partners. The Company's approach to prospect acquisition is twofold. It
seeks prospects on an opportunistic basis, evaluating individual prospect
opportunities presented to it by other oil and gas companies or consultants. It
also seeks to develop prospects through multi-year strategic joint ventures
designed to evaluate a wide area for potential drilling prospects, such as the
joint venture with Zydeco and the recently commenced venture along the Texas
intracoastal waters and Matagorda Island at Espiritu Santo Bay.
In all cases, Fortune and its partners use state-of-the-art technologies
including, where appropriate, 3D seismic and CAEX technology in defining and
evaluating drilling prospects. Fortune believes that these techniques have
undergone important technological advances in recent years and that their use
can provide Fortune and its project partners with a more accurate and complete
prospect evaluation, materially increasing the likelihood of finding commercial
quantities of oil and gas at lower average reserve finding costs.
Although Fortune does not currently operate properties or originate
exploration prospects, it actively participates in the evaluation of
opportunities presented by its industry partners, both at the time of its
initial investment in a prospect and thereafter during the evaluation and
selection of drilling locations. In order to maintain the ability to employ
state-of-the-art technology while controlling fixed operating costs, Fortune
relies heavily on industry consultants for its project evaluations. With
aggressive downsizing by major oil companies in recent years and the
reorganization of many independent oil companies, Fortune has found that highly
qualified prospect originators and technical advisors are available as
consultants and joint venturers, enabling Fortune to acquire expert technical
assistance in its target geographic areas while avoiding the overhead associated
with a larger number of permanent employees.
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Currently, Fortune employs the services of Interpretation(3), a consulting
company headed by Daniel Shaughnessy, formerly an exploration supervisor with
Mobil Oil Company, to assist in evaluating prospects. Mr. Shaughnessy recently
became a director of Fortune. (See "Management.") The Company employs Huddleston
& Co., Inc., Houston, Texas, independent petroleum engineers, to estimate
reserves in successful wells and in properties being evaluated for acquisition.
The Company does not have contracts with these consultants that obligate the
consultants to continue their availability to the Company. However, the Company
has no reason to believe that these consultants will cease providing services in
the foreseeable future. In addition, the Company has formed strategic alliances
with, among others, National Energy Group, Inc., Sandefer Oil & Gas Company and
Zydeco Exploration, Inc. as further described below. These industry partners,
along with others, play an important role in bringing attractive prospects to
Fortune's attention, though there can be no assurance that these companies will
continue to offer prospects to the Company.
EXPLORATION ACTIVITIES
Fortune has evaluated and elected to participate in various exploration
projects prospects proposed by industry partners. The Company reviews prospects
developed by companies that have particular expertise in specific exploration
areas and uses its consultants and management knowledge to analyze the
exploration data. By taking a minority non-operated position in such wells, the
Company gains opportunities to participate in significant discoveries while
minimizing its losses if the exploration wells are unproductive.
EAST BAYOU SORREL FIELD, IBERVILLE PARISH, LOUISIANA
On December 15, 1995, the Company entered into a Participation Agreement
with National Energy Group, Inc. and others to drill a well on the East Bayou
Sorrel prospect in Iberville Parish, Louisiana. The area has produced
substantial amounts of oil from other wells. The exploration project was
developed by geologists with Sandefer Oil & Gas Company who have many years of
experience in the area. Fortune's share of the initial costs to acquire,
evaluate and drill the prospect was approximately $312,000. Subsequently, the
Company acquired an additional 1.5% working interest in the field for $357,000,
bringing its total working interest to approximately 12.9%. The well began
producing in December 1996 and has been producing from permanent facilities
since January 22, 1997. Although the well reached production rates as high as
1,711 BOPD and 1,710 MCFD during February 1997 on a 12/64" choke, sustained
production will be limited to an average of approximately 1,400 BOPD under the
State of Louisiana allowance for the producing reservoir unless an exemption is
granted by the State. This well is in an AMI totaling approximately 3,500 acres.
Since the well has only been on production since late December 1996, it is
difficult to assign meaningful proved reserves to the well. The well is now
producing from the lowest of seven zones containing oil and gas encountered when
drilling. The remaining zones in the well have not been tested. Based on this
limited data, at December 31, 1996, the Company's reserve engineers estimate
future net revenues from proved reserves in the well, discounted at 10%, of $1.5
million to the Company's net revenue interest. The Company expects that
additional reserves will be assigned to the well as the field is developed.
The Company has approximately a 12.9% non-operated working interest
(approximately 9.3% net revenue interest) in the East Bayou Sorrel well before
payout and an approximate 11.3% working interest (approximately 8.2% net revenue
interest) after payout. The Company will participate in a development well on
which drilling is scheduled to commence in March 1997 in the same area. The
Company is also considering participation in other prospects in the same area.
Fortune's share of the development well drilling costs is expected to be
approximately $318,000. Although the Company believes that the chances for
success with the development well are very good, there is no assurance that
additional production will be discovered.
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LIRETTE PROSPECT, LAFOURCHE PARISH, LOUISIANA
Also in 1996, Fortune entered into a Participation Agreement with National
Energy Group and others to drill an exploratory well on the Lirette Prospect,
Lafourche Parish, Louisiana. The well was plugged and abandoned as a dry hole in
August 1996. The total cost to the Company of this exploration project at that
stage was $260,000. At the end of 1996, Unocal, which owned a 60% working
interest in the prospect, quitclaimed its interest to Fortune, so that Fortune
now has a 70% working interest in the leases. By virtue of its leasehold
position, the Company will be able to use, free of cost, new 3D seismic data
being prepared in the area. The Company retains an interest in 120 acres of
mineral leases on this prospect and, using the new 3D seismic information, will
evaluate whether to conduct further exploration drilling. The Company expects to
abandon the leases on this prospect before substantial delay rental payments
become due in May 1997 unless it is able to identify additional exploration
sites using such 3D seismic data.
SOUTH LAKE ARTHUR, JEFFERSON DAVIS PARISH, LOUISIANA
In November 1996, the Company entered into a third Participation Agreement
with National Energy Group and others to drill a well on the South Lake Arthur
prospect in Jefferson Davis Parish, Louisiana. This prospect was also developed
by Sandefer geologists. The Company has acquired an interest in approximately
1,900 acres of mineral leases, with rights to participate in additional leases
acquired in an AMI covering approximately 2,800 acres.
The test well on this prospect was commenced on January 9, 1997 and is
planned to be drilled to a depth of approximately 17,500 feet under a turnkey
drilling contract for $2.6 million. The Company expects that the well will reach
the proposed total depth in April 1997. Fortune's working interest in the well
is 12.5% before payout and 10% after payout. Fortune expects the total cost of
acquiring the interest and its share of the drilling to total approximately
$360,000. National Energy Group is the operator for the drilling phase. If the
well is successful, Mobil Oil Exploration & Producing Southeast, Inc., which has
a 50% working interest in the well, will be the operator for the completion and
production stages of the well.
JOINT VENTURE WITH ZYDECO
Fortune owns a 50% interest in 20 Joint Venture Projects and a 10% interest
in one additional project (the DABM Prospect) located in the Transition Zone and
Timbalier Trench regions offshore Louisiana. Each of these projects, except
DABM, were identified and acquired by a multi-year joint venture formed by
Fortune with Zydeco to identify, evaluate and explore oil and gas prospects in
this AMI. Each of these projects were identified using a combination of advanced
2D and 3D seismic and CAEX technology in conjunction with geological analysis of
existing wells.
The Joint Venture Projects are in various stages of evaluation and leasehold
acquisition. At the date of this prospectus, approximately 21,000 acres are
under lease in the aggregate. The leases have initial lease terms varying from 3
to 5 years, during which period the venture must either commence drilling
operations or lose the leases. The Company expects that wells will be drilled on
several of the projects before the end of 1998, but no assurance can be given
when, or if, any such wells will be drilled.
Fortune has contributed $4,800,000 to the joint venture which is being used
to pay 100% of the budgeted leasehold acquisition and seismic costs for the
projects. Of this amount, $2,507,000 had been expended as of December 31, 1996.
Each party agreed to pay its prorata share (50%) of any leasehold acquisition
and seismic costs in excess of $4,800,000 and the cost of drilling wells on the
Joint Venture Projects. Fortune expects that it will participate in the drilling
of wells on the projects, subject to its evaluation of the exploration risk and
potential return on a prospect-by-prospect basis.
The Company does not currently expect that wells will be drilled on all 20
of the Joint Venture Projects or that it will retain a working interest of more
than 25%, except in certain circumstances, in wells that are drilled on the
Joint Venture Projects. Fortune intends to farm out its remaining interest to
other
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oil companies, giving Fortune an interest in the production from a successful
well greater than its working interest in the well. 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 all or part its obligation to pay drilling expenses, and could
recover its acquisition and exploration costs but would wind up with a smaller
interest in any given prospect. No assurance can be given that Fortune will be
able to farm out any of the projects or that, if it is successful in doing so,
that the farmout will be on the exact terms described above.
Each of the parties in the joint venture has a right to farm out a portion
or all of its interest in each prospect to the other under a "put" arrangement
in the exploration agreement. In the event of such a farmout of a 50% 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 for the well from
production. Should either Fortune or Zydeco farm out a smaller working interest
to the other, the overriding royalty and after-payout working interests would be
proportionately reduced.
In May 1995, the joint venture farmed out the Polaris Prospect to Southern
Gas Company of Delaware ("Southern"). Under the terms of the farmout, Southern
paid an aggregate of $100,000 in exchange for 100% of the working interest in
the Project. The joint venture also retained an overriding royalty interest
convertible to a working interest after payout. In March 1996, Southern conveyed
its rights under the farmout to a third party which subsequently drilled a well.
The well was plugged and abandoned in October 1996 because of mechanical
difficulties encountered in an attempt to complete the well. The 100% working
interest in the Polaris Project has reverted back to Fortune and Zydeco pursuant
to the terms of the farmout agreement. The joint venture is attempting to farm
out the prospect to another party.
In January 1996, the Company drilled a well on the Aurora Prospect. Zydeco
did not participate in drilling the well. The well reached total depth on
January 18, 1996. Well logs indicated that the well had penetrated three
hydrocarbon reservoirs. However, given the significant costs of completing the
well as an oil producer and installing production facilities, management elected
not to complete it. The Company incurred costs of approximately $832,000,
primarily in 1995, to drill and plug the well. The joint venture is attempting
to sell or farm out the Aurora Project to third parties.
Although not part of the joint venture with Zydeco, the Company participated
with Zydeco in another well on a prospect known as DABM, which encountered
mechanical difficulties before reaching its first objective. Operations were
suspended and the well was temporarily plugged in August 1996, pending an
evaluation by the working interest owners as to methods to overcome the
difficulties experienced in the well. The Company incurred drilling costs of
approximately $395,000 attributable to its 13.3% non-operating working interest
in the third quarter of 1996.
The Company believes that many of the Joint Venture Projects represent
excellent opportunities to find significant oil and gas production. Many are in
the vicinity of other recent discoveries in the Transition Zone and Timbalier
Trench. However, there can be no assurance that Fortune will have sufficient
resources to participate in all exploration wells proposed, that it will be able
to farm out its interest on favorable terms or that any of the exploration wells
will be drilled or be successful.
Fortune acquired its interest in the joint venture through its acquisition
in May 1995 of Lagniappe Exploration, Inc. ("LEX"), for 1,200,000 shares of
Common Stock and 1,200,000 stock purchase warrants exercisable at $4.75 per
share through May 12, 2000. The interest in the joint venture was the only
significant asset of LEX. 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 "Principal Stockholders.")
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ESPIRITU SANTO BAY PROPRIETARY 3D SEISMIC EXPLORATION JOINT VENTURE
On February 27, 1997, Fortune entered into a multi-year proprietary 3D
seismic joint venture to evaluate and identify exploration prospects in and
around the Texas transition zone, including the intracoastal waters at Espiritu
Santo Bay, and certain surrounding areas. Fortune owns a 12.5% working interest
in the 166.5 square mile AMI and a 135 square mile proprietary 3D seismic
venture. Its principal partners are Fairfield Resources Corporation, a wholly
owned subsidiary of Fairfield Industries, Inc., and Smith Management Company,
Inc. Fairfield Resources Corporation was formed for the purpose of Fairfield
Industries, Inc.'s first equity participation in oil and gas exploration.
Fairfield Industries, Inc. has designed a new state-of-the-art proprietary
transition zone 3D seismic acquisition system specifically for use on this 3D
project. CAEX Services, Inc., also a minority equity partner in the joint
venture, will process and interpret the seismic data with input from
Interpretation(3). (See "Management.")
Fortune will pay approximately $155,000 for its share of pre-seismic
acquisition expenses incurred prior to forming the joint venture and
approximately $1,750,000 for its share of seismic acquisition and processing
costs over the term of the program, exclusive of any exploration drilling costs.
The term of the joint venture agreement extends through July 15, 2002 but may be
extended, if necessary. Under the Agreement, upon delineation of each
exploration prospect, Fortune may then elect to participate, or not, in drilling
an initial well or farming out all or part of its interest to other joint
venture parties or third parties. It is expected that seismic acquisition
activities will commence in March 1997 and be completed in August or September
1997. It is not expected that any exploration drilling activities will begin
before early 1998, although no assurance can be given that any exploration
prospects will be identified or that any commercial quantities of hydrocarbons
will be discovered.
LA ROSA PROPRIETARY 3D SEISMIC EXPLORATION PROGRAM
On February 13, 1997, Fortune and its working interest partners commenced a
proprietary 3D seismic survey covering 24 square miles over its onshore Gulf
Coast La Rosa Field and surrounding acreage in Refugio County, Texas. The survey
is being conducted using a state-of-the-art technology and is expected to be
completed by the end of March 1997. Fortune will oversee the processing and
interpretive stages of the program after the seismic is acquired.
The Company currently owns an undivided 37.5% working interest in existing
reserves and production. (See "--Property Acquisition Activities--Refugio
County, Texas--La Rosa Field.") The Company recently farmed out 50% of its
rights in this proprietary seismic program and in any new exploration
opportunities generated by that program in exchange for the payment of 100% of
Fortune's costs of such survey.
PROPERTY ACQUISITION ACTIVITIES
SOUTH TIMBALIER BLOCK 76 ACQUISITION
On December 11, 1995, Fortune 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 in South Timbalier Block 76. The seller was Petrofina, S.A. This
property ("Block 76") includes a producing well which was completed in 1990,
drilling and production platform and a transmission line. The effective date of
the acquisition for oil and gas purposes was June 1, 1995. Therefore, Fortune
received the net cash flow from the well to its interest from June 1, 1995. The
effective date for financial reporting purposes was November 1, 1995. The
Company initially paid $2.2 million for its interest in Block 76 plus 150,000
common stock purchase warrants exercisable over a two-year period at prices from
$4.625 to $6.00 per share. In the acquisition, Fortune granted an intermediary
the option, exercisable until March 11, 1996, to acquire a 4 1/6% working
interest in the property for $790,000 plus the retention by Fortune of a
$150,000 deposit for a total of $940,000. The option was timely exercised, which
reduced the Company's interest in the block to a 12 1/2% working interest
(9.375% net revenue interest) effective January 1, 1996.
27
<PAGE>
On April 29, 1996, the Block 76 well was shut in due to a mechanical failure
of downhole equipment. A remedial workover, started June 16, 1996, cost the
Company approximately $300,000. The well came back on line July 6, 1996 and
resumed production at a rate of approximately 16,000 MCFD and 1,100 BOPD.
Notwithstanding the shut in for repairs, the well has already returned Fortune's
investment and the Company is evaluating the possibilities for development
wells.
In order to finance the acquisition of the South Timbalier Block and 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. From this sale in December 1995, the
Company netted approximately $3.3 million after payment of expenses of the
offering. The balance of approximately $1.1 million remaining after payment of
the purchase price for the South Timbalier Block interest was added to working
capital to be used for general corporate purpose. 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. Despite a drop
in the price of the Common Stock during the calculation period, the Company does
not expect to issue any reset shares. (See "--Legal Proceedings.")
RIO ARRIBA COUNTY, NEW MEXICO--SAN JUAN BASIN
On June 24, 1994, Fortune concluded the purchase of a 25% interest in
EnRe-1, LLC, a newly formed Texas Limited Liability Company, which owned three
Jicarilla Apache Minerals Development Agreements ("MDA's") covering 60,000
producing, development and exploratory acres in Rio Arriba County, New Mexico
and associated tangible property, and 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. These interests were
acquired for $1.7 million. Since that date, Fortune has expended approximately
$1.5 million for its share of the cost of drilling wells in the San Juan Basin.
In 1996, one of the MDA's comprising approximately 20,000 acres terminated and
the acreage reverted back to the lessors.
Of the seven wells drilled during 1994 and 1995, two were completed as
producing wells. Total production from the New Mexico properties in 1996 was
approximately 74 MCFD and 8 BOPD to the Company's net revenue interest. The
Company did not participate in the drilling of any additional wells in 1996.
Production revenues from the properties have not exceeded the total cost of
acquiring and conducting drilling operations on the properties. The Company's
reserve engineers have not assigned any proved reserves to the San Juan Basin
properties.
There are no immediate plans to conduct further evaluations of the wells
that are temporarily shut in or to drill additional wells in this field. AMPOLEX
USA, Inc. (AMPOLEX), the current operator of the field, was recently acquired by
Mobil Oil, and has informed Fortune that AMPOLEX intends to sell its interest in
the field. Fortune has indicated that it would review any offers which are
received by AMPOLEX for the purchase of the Company's interest.
As of December 31, 1996, the Company has $1.3 million of unevaluated costs
attributable to these properties which will become subject to depreciation,
depletion and amortization and the full cost ceiling test to the extent it
exceeds what the Company will realize from a sale or further evaluation of its
interest. If the entire amount were included in the full cost ceiling test, the
risk of a ceiling cost writedown is significantly increased. In late July 1996,
the Company received invoices from AMPOLEX, billing Fortune for $232,805 of
costs not paid by two other working interest owners in the properties. The
Company has reviewed this matter and does not believe that it owes any portion
of such amounts.
WEBB COUNTY, TEXAS - BELLE PEPPER AND BELLE JEFFERS FIELDS
On October 5, 1993, the Company completed the acquisition of certain
mineral, oil and gas leasehold interests and associated tangible property from
Michael Petroleum Corporation, Brazos Resources, Inc., Pioneer Drilling Company
and Endowment Energy Partners. The mineral, oil and gas leasehold interests
28
<PAGE>
include working interests in producing and non-producing oil and gas properties
located in Webb County, Texas, known as the Belle Pepper and Belle Jeffers
Fields. The Company acquired interests in approximately 2,300 acres of mineral
leases, including 10 producing gas wells. 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 (which includes 9 of the wells on the property)
is exempt from Texas state severance tax.
Fortune paid an adjusted price of $6.5 million in cash and 195,000
three-year common stock purchase warrants exercisable at $3.88 for the
properties. Aggregate production from the producing wells acquired by Fortune
has not yet returned the Company's investment in this area.
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
non-commercial. Fortune had a 25% working interest in this well, and its dry
hole costs were $115,000. The Company has a 20% interest in a proved undeveloped
infill location within the Belle Pepper Field.
REFUGIO COUNTY, TEXAS--LA ROSA FIELD
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, four
saltwater disposal wells and 35 shut-in wells with total new proved reserves to
the Company of one BCFE and additional probable reserves behind pipe. The lease
includes 2,700 undeveloped acres adjacent to production which was acquired for
future exploration.
Since acquiring an interest in the LaRosa Field in February 1994, the
Company has participated in over 50 natural gas and oil recompletions in new
zones of shut-in wells, of which a majority have been successful. The LaRosa
Field produced an average of 607 MCFD and 30 BOPD during 1996 to the Company's
net revenue interest. The Company plans to participate in a 3D seismic program.
(See "--Exploration Activities--La Rosa Proprietary 3D Seismic Exploration
Program.")
In January 1997, Laroco LLP, the Company's working interest partner,
exercised its right to accelerate its one-eighth back-in by paying Fortune
approximately $85,000, the amount necessary to repay Fortune's remaining net
investment in the Field attributable to the back-in interest. This reduced the
Company's working interest in the Field to 37.5%. In February 1997, Fortune
farmed out 50% of its rights in the proprietary 3D seismic acquisition program
currently underway over the Field and in any new wells drilled in exchange for
the payment of 100% of Fortune's costs of conducting the seismic survey. The
Company now owns a 37.5% working interest in the existing reserves and
production and an 18.75% working interest in new discoveries that result from
the 3D survey.
MCMULLEN COUNTY, TEXAS--AWP FIELD
In 1992, the Company acquired a 10% working interest in the AWP Field,
McMullen County, Texas as part of a package of California and Texas properties
for a purchase price of 243,153 shares of Common Stock and the assumption of a
$2,000,000 Note. The Company has since sold the California properties and paid
off the $2,000,000 Note. The property includes approximately 3,500 acres of oil
and gas leases and 10 proved developed locations remaining to be drilled on
either 40 or 80 acre spacing. The operator of the field 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 $48,000. In February
1996, developmental drilling was resumed with the commencement of drilling the
Bracken Ranch #47 well location which was successfully completed as a producer.
The Bracken Ranch #48 well was completed as a producer in January 1997. Total
production in this field
29
<PAGE>
averaged 350 MCFD and 14 BOPD in 1996 to the Company's net revenue interest.
Production to date has not returned the Company's investment.
DIVESTITURE OF CALIFORNIA PROPERTIES
At December 31, 1995, Fortune owned and operated 39 gross and 29.92 net
wells located in California (including all the wells that were sold in 1996).
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 Sespe property 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 the Company's 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.
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 paid commissions and expenses of approximately $75,000. The Company sold
its remaining California property, the Sespe Field, Ventura County, California,
to Seneca Resources for approximately $300,000 net of closing adjustments in
April 1996. The Company recorded a loss on sale of $3.6 million in 1995 as a
result of these divestitures.
All of the Company's California properties were pledged to secure the
Company's Credit Facility with Bank One. 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 California properties and
the relocation of the Company's headquarters to Houston completed the Company's
strategic move to focus its efforts on exploration in the Gulf Coast.
Prior to 1994, the Company made various other acquisitions, primarily of
producing properties located in California, which have since been sold.
30
<PAGE>
OIL AND GAS OPERATIONS
DRILLING ACTIVITIES
The following table sets forth information regarding development and
exploratory wells drilled by Fortune in the years ended December 31, 1994, 1995
and 1996:
WELL DRILLING ACTIVITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Gross Wells
Productive...................................................................... 5 1 3
Dry............................................................................. 3 -- 3
--- --- ---
Total......................................................................... 8 1 6
--- --- ---
--- --- ---
Net Wells
Productive...................................................................... 1.18 .20 .31
Dry............................................................................. .47 -- 1.21
--- --- ---
Total......................................................................... 1.65 .20 1.52
--- --- ---
--- --- ---
</TABLE>
OIL AND GAS RESERVES
The Company's reserves are located in Texas and onshore and offshore
Louisiana. 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.
The oil and gas reserve estimates at December 31, 1994, were reviewed by
Huddleston & Co., Inc., Houston, Texas, independent petroleum engineers, and
Sherwin D. Yoelin, Los Angeles, California, independent petroleum engineer. For
the years ended December 31, 1995 and 1996, the oil and gas reserve estimates
were reviewed by Huddleston & Co., Inc..
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 estimates
presented herein are believed to be reasonable, they should be viewed with the
understanding that subsequent production of oil and gas from each reservoir, the
timing and success of future development drilling and changes in pricing
structure or market demand will affect the reserve estimate. (See "Risk
Factors--Risks Associated with the Oil and Gas Industry-- Uncertainty of
Estimates of Proved Reserves and Future Net Revenues.")
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, 1994, 1995 and 1996.
31
<PAGE>
ESTIMATED NET RESERVE QUANTITIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1994 1995 1996
------------ ---------- ----------
<S> <C> <C> <C>
Total Proved Reserves (1):
Oil (Bbls).................................................... 1,647,000 347,000 249,000
Natural Gas (Mcf)............................................. 5,911,000 5,938,000 3,481,000
------------ ---------- ----------
Equivalent Mcf (MCFE) (2)....................................... 15,793,000 8,020,000 4,975,000
------------ ---------- ----------
------------ ---------- ----------
Total Proved Developed Reserves:
Oil (Bbls).................................................... 675,000 324,000 160,000
Natural Gas (Mcf)............................................. 3,317,000 4,686,000 1,749,000
------------ ---------- ----------
Equivalent Mcf (MCFE) (2)....................................... 7,367,000 6,630,000 2,709,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
- ------------------------
(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 decrease in proved reserves from 1995
to 1996 was primarily attributable to the sale of 25% of the Company's
interest in South Timbalier Block 76 in March 1996, the sale of the one
remaining California property and a West Texas property in 1996 and natural
depletion, offset by the reserve addition at East Bayou Sorrel. The decrease
in reserves from 1994 to 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 South Timbalier Block 76.
(2) After conversion (1:6); one Bbl of crude oil to six Mcf of natural gas.
DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES
The following table represents the estimated future net revenues (using
unescalated prices 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,
1994, 1995 and 1996.
DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cumulative Future Net Revenue (1)......................... $ 15,932,000 $ 12,600,000 $ 14,112,000
less adjustment to give effect to a 10% annual
discount.............................................. (7,784,000) (3,658,000) (3,292,000)
------------- ------------- -------------
8,148,000 8,942,000 10,820,000
less discounted present value of future income taxes.... -- -- --
------------- ------------- -------------
$ 8,148,000 $ 8,942,000 $ 10,820,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) The increase in the present value of the reserves from 1995 to 1996 is
attributable to the higher prices at year end 1996 of $4.04 per MCF and
$22.79 per Bbl vs. $2.32 per MCF and $16.10 per Bbl at December 31, 1995.
The increase in 10% discounted value at year end 1995 vs 1996 is due to the
net effect of acquiring the high production rate reserves offshore Louisiana
offset by the exclusion of the longer life California properties sold in
February 1996. The decrease in net revenues from 1994 to 1995 is primarily
due to the significant reduction in reserve volumes attributable to the
exclusion of the California properties.
32
<PAGE>
PRODUCTION
The approximate net production data related to the Company's properties for
the periods ended December 31, 1994, 1995 and 1996 is set forth below:
NET PRODUCTION DATA
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1994 1995 1996
---------- --------- ----------
<S> <C> <C> <C>
Oil (Bbls)............................................... 88,000 92,000 57,000
Gas (Mcf)................................................ 1,017,000 909,000 1,038,000
</TABLE>
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, 1994, 1995 and 1996:
AVERAGE SALES PRICES AND PRODUCTION COSTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Average Sales Price Received:
Oil (per bbl)............................................................ $ 14.14 $ 14.66 $ 20.24
Gas (per Mcf)............................................................ 2.09 1.77 2.56
Average Production and Operating Cost per MCFE........................... 0.71 1.04 0.85
</TABLE>
PRODUCING WELLS
The following table lists the total gross and net producing oil and gas
wells in which Fortune had an interest at December 31, 1996:
PRODUCING WELLS
<TABLE>
<CAPTION>
GROSS
----------- NET
OIL --------------------
-- GAS OIL GAS
--- --------- ---------
<S> <C> <C> <C> <C>
Texas.................................................................. 39 40 3.90 13.40
Louisiana.............................................................. 1 1 .11 .12
New Mexico............................................................. 2 -- .43 --
-- --
--- ---------
Total................................................................ 42 41 4.44 13.52
-- --
-- --
--- ---------
--- ---------
</TABLE>
PRINCIPAL CUSTOMERS
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, while
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; 29% of the Company's
gas production was sold to Laroco LLP, 26% to Michael Gas Marketing and 16% to
AWP. During 1996, 54% of the Company's oil production was sold to Scurlock
Permian Corporation; of the Company's gas production 26% was sold to CNG Energy
Services Corporation, 23% to Fina Natural Gas Company, 20% to Texana Pipeline
Joint Venture and 17% to Michael Gas Marketing.
33
<PAGE>
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.
PROPERTIES
LEASEHOLD ACREAGE
Fortune's holdings of developed and undeveloped leasehold acreage as of
December 31, 1996 were approximately as follows:
LEASEHOLD ACREAGE
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
-------------------- --------------------
GROSS NET GROSS NET
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Louisiana..................................................... 660 81 28,441 10,995
Texas......................................................... 5,504 1,080 3,960 1,468
New Mexico.................................................... 1,320 285 48,680 11,231
Oklahoma...................................................... -- -- 80 5
--------- --------- --------- ---------
Total....................................................... 7,484 1,446 81,161 23,699
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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
establishment of the Company's bank credit facility, 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 of the drillsite and any
pass-through parcels is conducted and any significant defects are remedied
before proceeding with operations. All of the Company's producing leasehold
interests 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
In February 1996, the Company relocated its headquarters to Houston, Texas.
Prior to that, the Company leased office space in Agoura Hills, California. 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. Fortune also assumed the term remaining on Animation
Magazine's lease on its prior location for the period from March through October
1996. Rent for the 4,777 square feet which the Company occupied was $53,000 in
1995 and $45,000 in 1994. 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 on this space was $42,000 and is expected to be
$84,000 in 1997. (See Note 9 of Notes to Financial Statements)
34
<PAGE>
COMPETITION
The principal raw materials and resources necessary for the exploration for,
and the acquisition, development, production and sale of, oil and natural gas
are leasehold prospects under which oil and gas reserves may be discovered,
drilling rigs and related equipment to explore for such reserves, and
knowledgeable personnel to conduct all phases of oil and gas operations. The
Company must compete for such raw materials and resources with both major
companies and independent oil and gas operators. Each of these resources is
currently in high demand. Many of the companies with which Fortune competes for
these resources are better equipped to acquire them. There is no assurance that
the Company will be able to acquire any portion of these resources in a timely
and economical manner.
EMPLOYEES
As of February 28, 1997, the Company employed eight persons, all in
management and administration. 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 jurisdictions 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 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 $3,000, $25,000, and $14,000 in
environmental compliance costs in 1996, 1995 and 1994, respectively.
The Company is not currently a party to any judicial or administrative
proceedings which involve environmental regulations or requirements and believes
that it is in substantial compliance with all 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 with a $10,000 deductible for onshore hazards and
$1,000,000 of coverage with a $25,000 deductible for offshore hazards.
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.
35
<PAGE>
LEGAL PROCEEDINGS
On March 26, 1996, Fortune was served with a lawsuit which had been filed in
the Federal District Court in Delaware by one of the purchasers of Fortune
common stock in an offering in December 1995 under Regulation S. Under the terms
of the subscription agreement pursuant to which the plaintiff acquired his
shares, he was entitled to receive additional shares of Fortune stock if the
market price fell below a stated level during a specified period following the
40-day holding period prescribed by Regulation S. Fortune vigorously contested
this action, believing that plaintiff either participated in a scheme to
unlawfully manipulate the market price of the Common Stock or benefitted from
such manipulation by others. On February 3, 1997, the plaintiff voluntarily
dismissed the complaint without prejudice, and the court ordered the return to
Fortune of shares of Common Stock which had been voluntarily placed in escrow by
Fortune. Management does not anticipate that the action will be refiled.
On April 16, 1996, Fortune was advised that similar suits had been filed in
Federal District Court in New York by two other buyers in the same offering.
Fortune responded to the suits, admitting that the stock price declined but
alleged that suspicious trading activity in Fortune stock occurred immediately
prior to and during the time period in which the additional-share allocation was
computed. Fortune believes that it has discovered evidence of active market
manipulation in the Common Stock by these plaintiffs; accordingly, it has
commenced a countersuit for damages suffered by the Company and its shareholders
as a result of these acts and has also sought leave of court to add third-party
defendants whose actions furthered this market manipulation. Fortune intends to
continue to vigorously defend plaintiffs' actions and prosecute its own
counterclaims.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
DIRECTOR
EXECUTIVE OFFICER AGE SINCE TITLE
- --------------------------------- --- ----------- --------------------------------------------------------------
<S> <C> <C> <C>
Tyrone J. Fairbanks.............. 40 1991 President, Chief Executive Officer, and Director
Dean W. Drulias(1)............... 50 1990 Executive Vice President, General Counsel, Corporate Secretary
and Director
J. Michael Urban................. 43 -- Vice President, Chief Financial Officer and Assistant
Secretary
John L. Collins.................. 52 -- Vice President of Investor Relations
Graham S. Folsom(2).............. 39 1992 Director
William T. Walker, Jr.(1)........ 65 1993 Director
Barry Feiner(1).................. 62 1995 Director
Gary Gelman(2)................... 31 1995 Director
Daniel Shaughnessy(2)............ 46 1997 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Mr. Tyrone J. Fairbanks serves as President and Chief Executive Officer of
the Company. Mr. Fairbanks served as Vice President and Chief Financial Officer
of the Company from January 1991 to June 1994. 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 & 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.
Mr. Dean W. Drulias was hired effective October 16, 1996 as Executive Vice
President and General Counsel. Prior to his employment by the Company, Mr.
Drulias was a stockholder of and a practicing attorney at the law firm of
Burris, Drulias & Gartenberg, a Professional Corporation, which served as
counsel to the Company since its incorporation in May 1987. He practiced law in
the Los Angeles area since 1977, specializing in the areas of energy,
environmental and real property law.
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 Houston 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. Mr.
Urban received his B.B.A. in Accounting from the University of Texas in 1976 and
has been a Certified Public Accountant in the State of Texas since 1978.
Mr. John L. Collins was hired by the Company as Vice President of Investor
Relations effective May 30, 1995. Mr. Collins 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 in
1970 and spent approximately 20 years in the securities industry.
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
37
<PAGE>
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. William T. Walker, Jr. founded Walker Associates, a corporate finance
consulting firm for investment banking, in 1985 and has participated in or been
instrumental in completing over $250 million in public and private offerings
since its inception. He also serves on the board of directors of Go Video, Inc.
(AMEX).
Mr. Barry Feiner 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. He is
Chairman of the Company's Compensation Committee.
Mr. Gary Gelman has served as president of GAR-COR Holding Corporation, a
real estate management and brokerage firm, since 1989. Mr. Gelman is a principal
of and serves as a loan consultant for National Bank of New York City.
Mr. Daniel Shaughnessy is a geologist and geophysicist. He is the founder
and president of Interpretation(3), a company which specializes in
interpretation of 2D and 3D seismic data. His firm provides consultation
services to Fortune. Prior to organizing Interpretation(3), Mr. Shaughnessy
served as a consultant with Interactive Exploration Solutions, Inc. (INXES) for
approximately one year. For most of the period from 1980 through 1993, he worked
for Mobil Oil, most recently as Exploration Supervisor in Louisiana.
DIRECTOR COMPENSATION
The Company pays outside directors fees of $2,500 per quarter. Inside
directors do not receive any compensation for serving as directors.
38
<PAGE>
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 three other executive officers who received annual
compensation in excess of $100,000 (or at a rate in excess of $100,000):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS
------------------------------
ANNUAL COMPENSATION SECURITIES PAYOUTS
--------------------------------- RESTRICTED UNDERLYING ----------- ALL OTHER
NAME AND PRINCIPAL SALARY OTHER(1) STOCK OPTIONS/WARRANTS LTIP COMPENSATION
POSITION YEAR ($) BONUS ($) ($) AWARDS ($) (#) PAYOUTS ($) ($)
- ----------------------- --------- --------- --------- ----------- ----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tyrone J. Fairbanks.... 1996 150,000 -- 20,934 -- 80,000 -- 3,000
President and CEO 1995 125,000 25,000 -- -- 105,599 -- --
1994 102,500 15,000 -- -- 78,900 -- --
Dean W. Drulias........ 1996 26,291 250 -- -- 56,000(2) -- 1,972
Executive Vice
President
J. Michael Urban....... 1996 97,308 -- -- -- 55,000(3) -- 4,750
Chief Financial
Officer
John L. Collins 1996 96,000 2,000 -- -- 80,000 -- 4,090
Vice President,
Investor 1995 56,738 1,600 -- -- 25,000(4) -- --
Relations
</TABLE>
- ------------------------
(1) Amounts include automobile expenses and loan forgiveness, but are shown only
if such amounts exceed 10% of the total annual salary and bonus.
(2) Includes 20,000 stock purchase warrants exercisable at $2.75 per share (the
market price of the Common Stock on October 16, 1996, the date of issue) and
expiring on October 16, 2001.
(3) Includes 35,000 stock purchase warrants exercisable at $2.5625 per share
(the market price of the Common Stock on March 11, 1996, the date of issue)
and expiring on March 11, 2001.
(4) Includes 25,000 stock purchase warrants exercisable at $3.25 per share (the
market price of the Common Stock on May 30, 1995, the date of issue) and
expiring May 30, 2000.
Charles A. Champion served as Chief Executive Officer from June 23, 1994,
through January 5, 1995. During 1994, he received compensation of $36,000 as
Chief Executive Officer.
The following table lists the outstanding options held on December 31, 1996
by the Company's executive officers under Company's Stock Option Plans:
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/ IN-THE-MONEY OPTIONS
SHARES VALUE WARRANTS AT FY-END AT FY-END
ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE ($) UNEXERCISABLE(1) UNEXERCISABLE
- -------------------------------------------- ------------- ----------- ------------------- --------------------
<S> <C> <C> <C> <C>
Tyrone J. Fairbanks......................... -- -- 296,999 / 0 --
Dean W. Drulias............................. 6,575 -- 82,400 / 0 --
J. Michael Urban............................ -- -- 55,000 / 0 --
John L. Collins............................. -- -- 105,000 / 0 --
</TABLE>
- ------------------------
(1) Includes warrants reflected in the preceeding table.
39
<PAGE>
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 years' 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 years of consulting
services upon the completion of the primary term of his contract at 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.
The Company has entered into an employment agreement with Dean W. Drulias,
its Executive Vice President and General Counsel. 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. Drulias is entitled to receive a single
payment equal to two years' compensation and all shares of Common Stock subject
to stock options then held by him without payment of the exercise price
therefor. Mr. Drulias' current employment agreement provides for an annual
salary of $125,000. The term of Mr. Drulias' employment contract expires
December 31, 1998.
STOCK OPTIONS
Fortune has three Stock Option Plans, and expects to present a new plan to
its shareholders for approval at the 1997 annual meeting. The plans cover all
officers and employees of the Company. One of the plans also provides for
options for directors of the Company, as will the new plan expected to be
approved in 1997 (the "1998 Plan"). 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 and 1988 plans must be
exercised within ten years of the date of grant or they are forfeited. Options
granted under the 1993 plan must be exercised within five years of the date of
grant or they are forfeited.
All options available under the 1987 and 1988 plans have been granted, and
no shares remain under either of these plans on which options may be granted.
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; and (3) 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, options for 264,000 shares at $6.03 per share
granted in 1995, options for 450,000 shares at $3.125 per share granted in 1996,
and options for 582,500 shares at $3.00 per share granted in 1997. The exercise
prices of all options granted in 1993, 1994 and 1995 were reduced to $2.75 on
January 12, 1995.
It is anticipated that the 1998 Plan will be substantially identical to the
1993 plan.
40
<PAGE>
The following table shows the grants of stock options during 1996 to each of
the executives named in the Summary Compensation Table.
OPTION/WARRANT GRANTS IN 1996(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
------------------------------------------------------------------------ OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/WARRANTS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS/SAR'S EMPLOYEES IN EXERCISE OR BASE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR PRICE ($/SH) DATE 5% 10%
- -------------------------- --------------- ------------------- ----------------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tyrone J. Fairbanks....... 80,000 12.7 3.125 April 5, 2001 $ 69,072 $ 152,624
Dean W. Drulias........... 36,000 5.7 3.125 April 5, 2001 31,082 68,681
October 16,
20,000(2) 3.2 2.75 2001 15,180 33,578
J. Michael Urban.......... 20,000 3.2 3.125 April 5, 2001 17,268 38,156
35,000(2) 5.6 2.5625 March 11, 2001 24,779 54,754
John L. Collins........... 80,000 12.7 3.125 April 5, 2001 69,072 152,624
</TABLE>
- ------------------------------
(1) In addition, the following options were granted on February 14, 1997, at an
exercise price of $3.00 per share: Tyrone J. Fairbanks, 120,000; Dean W.
Drulias, 75,000; J. Michael Urban, 100,000; and John L. Collins, 92,000.
(2) Compensatory warrants granted in 1996 in connection with comencement of
employment.
In the event of a change in control of the Company, the shares of 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.
RETIREMENT PLAN
During 1996, the Company adopted the Fortune Petroleum Corporation 401(k)
Profit Sharing Plan for its eligible employees. Under the plan, all employees on
the Company's payroll as of November 1, 1996, and all employees hired after that
date who have attained age 21 and three months of service, are permitted to make
salary deferrals up to the lesser of 15% of their annual compensation or $9,500.
Salary deferrals will be matched 50% by the Company and are 100% vested after
two years of service with the Company. Salary deferrals are 100% vested at all
times. The Company does not make profit sharing contributions to the plan.
Messrs. Drulias and Urban are the trustees of the plan.
For 1996, the Company's matching contribution was $14,000, all of which will
be paid in shares of Common Stock. The amounts to be contributed to the plan as
matching contributions for executives of the Company are shown in the
Compensation table set forth above.
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 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. At February 28, 1997, the outstanding principal balance of
the non-recourse loan was $40,000.
41
<PAGE>
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 public offering of Common Stock in 1995. Among the individuals who
loaned funds to LEX were Mrs. William H. Forster, mother of William D. Forster,
a principal of LEX and a principal stockholder and former director 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 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, in
December 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 "Principal Stockholders")
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
permitted 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 agreements to convert the note to Fortune Common Stock.
This option was not available to the directors.
As additional consideration for making these loans, 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. Klein Ventures, Inc. and the successors to Mr. Farber
each exercised the warrants issued in connection with this transaction.
During 1995 and 1996, the law firm in which Dean Drulias was formerly a
shareholder billed the Company a total of $183,000 and $152,000, respectively,
for legal fees and costs. (See "Management-- Directors and Executive Officers.")
During 1996, Fortune paid $45,000 for consulting services to
Interpretation(3), of which Daniel Shaughnessy is the owner and president. Mr.
Shaughnessy was elected to the Company's board of directors in January 1997.
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.
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,
42
<PAGE>
(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.
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.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table contains information at February 14, 1997, 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 OF
BENEFICIAL PERCENT
NAME OWNERSHIP OF CLASS
- ------------------------------------------------------------------------- ------------------- ------------
<S> <C> <C>
Barry Blank ............................................................. 911,313 7.3%
5353 N. 16th St., Phoenix, AZ(4)
William D. Forster ...................................................... 715,000 5.8%
237 Park Ave, New York (1)(2)
BSR Investments, Inc. .................................................. 715,000 5.8%
Paris, France(1)(3)
Klein Ventures, Inc. ................................................... 640,017 5.3%
1307 E. Pine St., Lodi, CA(5)
Tyrone J. Fairbanks ..................................................... 438,440 3.6%
(Director, President, and CEO)
515 W. Greens Rd., Houston, TX(6)
John L. Collins ......................................................... 272,000 2.2%
(Vice President)
515 W. Greens Rd., Houston TX(6)
William T. Walker, Jr. ................................................. 226,278 1.9%
(Director)
515 W. Greens Rd., Houston TX(6)
Dean W. Drulias ......................................................... 181,241 1.5%
(Director, Executive Vice-President, General Counsel and Corporate
Secretary)
515 W. Greens Rd., Houston, TX(6)
J. Michael Urban ........................................................ 155,000 1.3%
(Vice President and CFO)
515 W. Greens Rd., Houston, TX(6)
Graham S. Folsom ........................................................ 135,522 1.1%
(Director)
515 W. Greens Rd., Houston, TX(6)(7)
Gary Gelman ............................................................. 94,083 *
(Director)
515 W. Greens Rd., Houston, TX(6)
Barry Feiner ............................................................ 87,862 *
(Director)
515 W. Greens Rd., Houston, TX(6) (8)
Daniel Shaughnessy ...................................................... 10,000 *
(Director)
515 W. Greens Rd., Houston, TX(6)
All Officers and Directors as a group of nine (9) persons................ 1,600,426 12%
---------- ---
---------- ---
</TABLE>
- ------------------------
* indicates less than 1%.
(1) 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
44
<PAGE>
warrants. 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) and
(4), would be as follows:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
OWNERSHIP OF CLASS
------------------- -------------
<S> <C> <C>
Ensign Financial Group Limited, NY, NY............................. 800,000 6.5%
William D. Forster, New York, NY................................... 315,000 2.6%
BSR Investments, Inc., Paris, France............................... 315,000 2.6%
</TABLE>
(2) Includes 515,000 shares of Common Stock underlying stock purchase warrants
exercisable at $4.75 per share and expiring April 2000.
(3) 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.
(4) Includes 279,200 shares of Common Stock and an additional 432,113 shares of
Common Stock which underly 300,600 stock purchase warrants held by Mr. Blank
and exercisable at $3.75 per share and 200,000 shares of Common Stock
underlying 200,000 stock purchase warrants, exercisable at $2.40 per share,
issued to the Underwriters in the Company's 1995 Equity Offering, which Mr.
Blank acquired from Coleman & Company Securities, Inc. Mr. Blank is a Vice
President and registered representative with Coleman & Company Securities,
Inc.
(5) Klein Ventures, Inc. is owned by Mr. Bud Klein. The number of shares shown
includes 138,888 shares underlying stock purchase warrants issued in a 1992
acquisition and 115,000 shares underlying 80,000 Public Warrants acquired in
the Company's 1993 public equity offering exercisable at $3.75 per share.
The number shown also includes an aggregate of 88,629 shares of stock owned
by Klein Bros. Holdings, Ltd. 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 416,999 shares issuable to Mr. Fairbanks upon the exercise of stock
options granted to him under the Company's various stock option plans,
exercisable at prices of $2.75 to $3.125 per share; an aggregate of 799,700
shares issuable upon exercise of stock options granted to other officers and
directors under the Company's various stock option plans, exercisable at
prices of $2.75 to $3.125 per share; 88,289 shares issuable upon exercise of
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 his becoming a director of the Company;
25,000 shares issuable upon the exercise of 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 stock purchase warrants (at $2.5625 per share)
issued to J. Michael Urban on March 11, 1996; and 20,000 shares issuable
upon the exercise of stock purchase warrants (at $2.75 per share) issued to
Dean W. Drulias on October 16, 1996.
(7) Includes 7,187 shares issuable upon exercise of 5,000 Public Warrants (at
$3.75 each) and 5,000 debentures convertible pursuant to their terms into
shares of Common Stock at a price of $6.32 per share.
(8) All shares shown are owned by Mrs. Barry Feiner, wife of Barry Feiner; Mr.
Feiner disclaims beneficial ownership of all such shares. The number shown
includes approximately 11,744 shares issuable upon exercise of approximately
8,170 Public Warrants (at $3.75 each).
45
<PAGE>
DESCRIPTION OF SECURITIES
COMMON AND PREFERRED STOCK
The following description is qualified in all respects by reference to the
Company's Certificate of Incorporation and all amendments thereto and the
Company's Bylaws, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
The Company's Certificate of Incorporation, as amended, currently authorizes
40,000,000 shares of Common Stock, $.01 par value and 2,000,000 shares of
preferred stock, $1.00 par value. Of this total, 12,138,424 shares of Common
Stock were issued and outstanding as of February 28, 1997. An additional
7,395,309 shares of Common Stock are issuable upon exercise of options and
warrants or conversion of Debentures outstanding at February 28, 1997. No
preferred stock is currently outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to dividends when and as
declared by the Board of Directors from funds legally available therefor and
upon liquidation are entitled to share ratably in any distribution to
stockholders. All holders of Common Stock are entitled to one vote per share on
any matter coming before the stockholders for a vote, including the election of
directors. In keeping with stockholder democracy rights, Fortune's Certificate
of Incorporation permits the stockholders to remove any director or the entire
board of directors, with or without cause, upon a vote of a majority of the
outstanding shares.
All issued and outstanding shares of Common Stock are validly issued, fully
paid and non-assessable. Holders of the Common Stock do not have pre-emptive
rights or other rights to subscribe for unissued or treasury shares or
securities convertible into shares.
Additionally, under Section 145 of the Delaware General Corporation Law, the
Company has availed itself of the provisions permitting the limitation of
liability through the indemnification of officers, directors, employees and
agents of Delaware corporations. (See "Certain Relationships and Related
Transactions--Limited Liability of Directors" and "--Indemnification of Officers
and Directors.")
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to
establish and designate the classes, series, voting powers, designations,
preferences and relative, participating, optional or other rights, and such
qualifications, limitations and restrictions of the Preferred Stock as the
Board, in its sole discretion, may determine without further vote or action by
the stockholders.
The rights, preferences, privileges and restrictions or qualifications of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and other matters. The issuance of Preferred
Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock, or could adversely affect the rights
and powers, including voting rights, of holders of Common Stock.
The existence of the Preferred Stock, and the power of the Board of
Directors of the Company to set its terms and issue a series of Preferred Stock
at any time without stockholder approval, could have certain anti-takeover
effects. These effects include that of making the Company a less attractive
target for a "hostile" takeover bid or rendering more difficult or discouraging
the making of a merger proposal, assumption of control through the acquisition
of a large block of Common Stock or removal of incumbent management, even if
such actions could be beneficial to the stockholders of the Company.
WARRANTS
The Company has issued various Common Stock purchase warrants from time to
time.
46
<PAGE>
PUBLIC WARRANTS
The Company currently has outstanding a series of warrants which are
publicly traded (the "Public Warrants") which were issued in connection with a
1993 public offering. The Public Warrants are listed on the AMEX and expire
September 28, 1998.
Each Public Warrant originally entitled the holder to purchase one share of
Common Stock at a price of $3.75 per share. The Public Warrants contain
provisions that protect the holders against dilution by adjustment of the
exercise price in certain events, such as stock dividends and distributions,
stock splits, recapitalizations, mergers or consolidations and certain issuances
below the current market value of the Common Stock. As a result of the operation
of these provisions, the Public Warrants have been adjusted so that the holder
is entitled to purchase 1.4375 shares for an effective purchase price of $2.61
per share. The exercise price of each Public Warrant remains $3.75 per warrant.
The Public Warrants are redeemable by the Company, at $.05 per Public Warrant,
upon 30 days' notice, if the closing price per share of the Common Stock for 20
consecutive trading days within the 30-day period preceding the date notice of
redemption is given equals or exceeds $5.50 per share. In the event the Company
gives notice of its intention to redeem, a holder would be forced to exercise
his or her Public Warrant within 30 days of the notice of redemption or accept
the redemption price.
The Public Warrants were issued in registered form under a warrant agreement
between the Company and U.S. Stock Transfer, as warrant agent. The shares of
Common Stock underlying the Public Warrants, when issued upon exercise of a
Public Warrant, will be fully paid and nonassessable, and the Company will pay
any transfer tax incurred as a result of the issuance of Common Stock to the
holder upon its exercise. The Company is not required to issue fractional shares
upon the exercise of a Public Warrant. The holder of a Public Warrant does not
possess any rights as a stockholder of the Company until such holder exercises
the Public Warrant.
DEBENTURE EXCHANGE WARRANTS
On February 26, 1997, the Company closed an offer to exchange shares of
Common Stock and Common Stock purchase warrants (the "Exchange Warrants") for
outstanding Debentures. Exchange Warrants to purchase 174,250 shares of Common
Stock were issued. Such Exchange Warrants are not listed on the AMEX.
Each Exchange Warrant will entitle the holder to purchase one share of
Common Stock for a period of three years following the effective date of the
exchange offer. One-half of the Exchange Warrants received by exchanging
Debentureholders have an exercise price equal to the $4.00 per share and
one-half have an exercise price of $5.00 per share. The Exchange Warrants are
callable by the Company, at $.05 per Exchange Warrant, upon 30 days notice, at
any time after the closing price per share of the Common Stock for ten
consecutive trading days equals or exceeds $6.00 per share. In the event the
Company gives notice of its intention to redeem, a holder would be forced either
to exercise his or her Exchange Warrant within 30 days of the notice of
redemption or accept the redemption price.
The Exchange Warrants were issued in registered form under a warrant
agreement between the Company and the Debentureholders. The shares of Common
Stock underlying the Exchange Warrants, when issued upon exercise of an Exchange
Warrant, will be fully paid and nonassessable, and the Company will pay any
transfer tax incurred as a result of the issuance of Common Stock to the holder
upon its exercise. The Common Stock received by exchanging Debentureholders,
including any Common Stock received in connection with exercising the Exchange
Warrants, will not be tradable until May 27, 1997 (90 days following the closing
date of the Exchange Offer). The Company is not required to issue fractional
shares upon the exercise of an Exchange Warrant. The holder of an Exchange
Warrant does not possess any rights as a stockholder of the Company until such
holder exercises the Exchange Warrant.
47
<PAGE>
OTHER WARRANTS
The Company has also issued various other warrants to purchase shares of
Common Stock from time to time. The holders of such warrants have the right to
purchase up to 2,888,917 shares of Common Stock at prices ranging from $2.40 to
$6.00 and with expiration dates ranging from December 1997 to October 2001.
DEBENTURES
The Company has outstanding a series of 10 1/2% Convertible Subordinated
Debentures due December 31, 1997. Interest at the rate of 10 1/2% per annum is
payable semiannually on January 1 and July 1 of each year. At February 27, 1997,
there was $1,028,000 principal amount of Debentures outstanding.
The Debentureholders have the right, at the holder's option, to convert any
portion of the principal amount in integral multiples of $1,000, into shares of
Common Stock at a conversion price of $6.32 per share, subject to adjustment on
an anti-dilutive basis. The payment of principal and interest is subordinated to
the payment of the current portion of Senior Indebtedness of the Company (as
defined in the Indenture) outstanding from time to time. At December 31, 1996,
the Company's Senior Indebtedness was $1,250,000. The Indenture under which the
Debentures were issued does not limit the Company's ability to incur Senior
Indebtedness.
The Debentures are redeemable at the Company's option, as a whole or in
part. The Redemption Price is 100% of the principal amount, plus accrued
interest to the date fixed for redemption.
If certain Events of Default occur (as defined in the Indenture), either the
Trustee or the holders of at least 25% in aggregate principal amount of the
Debentures may accelerate the maturity of the Debentures. In addition, the
holders of Debentures representing not less than 25% of the aggregate principal
amount of the Debentures outstanding may (but are not obligated to) appoint one
person to the Company's board of directors so long as the default continues.
The Company expects to retire the Debentures which remain outstanding at or
before maturity, and a portion of the net proceeds of this offering may be used
for that purpose.
TRANSFER AGENT AND REGISTRAR
The principal transfer agent and registrar for the Common Stock is U.S.
Stock Transfer Corporation, Glendale, California. The co-transfer agent and
co-registrar for such securities is Chase Mellon Shareholder Services.
CERTAIN ANTI-TAKEOVER DEVICES
Section 203 of the Delaware General Corporation Law applies to Delaware
corporations with a class of voting stock listed on a national securities
exchange, authorized for quotation on an inter-dealer quotation system or held
of record by 2,000 or more persons. In general, Section 203 prevents an
"interested stockholder" (defined generally as any person owning, or who is an
affiliate or associate of the corporation and has owned in the preceding three
years, 15% or more of a corporation's outstanding voting stock and affiliates
and associates of such person) from engaging in a "business combination" (as
defined) with a Delaware corporation for three years following the date such
person became an interested stockholder unless (1) before such person became an
interested stockholder, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (2) the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding stock held by directors who are also
officers of the corporation and by employee stock plans that do not provide
employees with the rights to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or (3) on
or subsequent to the date such person became an interested stockholder, the
48
<PAGE>
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company.
The Commission has indicated the use of authorized unissued shares of voting
stock could have an anti-takeover effect. In such case, various specific
disclosures to the stockholders are required. Any business combination, as that
term is used in Section 203, would be reviewed by the Company's Board of
Directors solely for its impact on the Company.
The Company's board of directors is considering certain amendments to its
charter and bylaws which may have an anti-takeover effect. No final decision has
been made as to which proposals, if any, will be adopted. In addition, any
proposal to amend the Company's charter must be approved by a majority of the
outstanding shares. No assurance can be given that any such proposal, if
presented, would be approved.
Among the proposals being considered by the board are the following: (1)
adoption of a shareholders' rights plan which would result in the issuance to
existing shareholders of a right to purchase preferred stock in the event of a
tender or exchange offer for the Common Stock; (2) revoking the right of
shareholders to act without a meeting; (3) vesting with the board of directors
the power to change the size of the board and fill vacancies thereon; and (4)
providing restrictions on the manner in which business may be brought before a
meeting of shareholders, including the requirement that any shareholder
nominations for members of the board be presented not less than 60 days prior to
the meeting.
49
<PAGE>
UNDERWRITING
The Underwriters named below (collectively, the "Underwriters"), for whom
Paulson Investment Company, Inc. is acting as the Representative, have severally
agreed, subject to the terms and conditions of the Underwriting Agreement with
the Company (the "Underwriting Agreement"), to purchase from the Company and the
Company has agreed to sell to the Underwriters the number of shares of Common
Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Paulson Investment Company, Inc......................................................
-----------------
TOTAL............................................................................ 2,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to certain conditions precedent and require that the
Underwriters purchase all of the shares of Common Stock offered hereby, if any
such shares are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
selected dealers at such price less a concession within the discretion of the
Representative, of which an amount also within the discretion of the
Representative may be reallowed to other dealers. The public offering price and
concessions and discounts to dealers may be changed by the Representative after
the public offering.
The Company has granted to the Underwriters an option, exercisable not later
than 45 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the public offering price, less
underwriting discounts and commissions. The Underwriters may exercise this
option only to cover any over-allotments in the sale of the 2,000,000 shares of
Common Stock offered hereby.
The Company has paid $35,000 to reimburse the Representative and has agreed
to pay to the Representative a non-accountable expense allowance equal to 3% of
the aggregate public offering price of the securities purchased by the
Underwriters, reduced by the $35,000 already paid to the Representative.
The Company's executive officers and directors have agreed not to sell any
equity securities of the Company owned by such person, pursuant to Rule 144
under the Securities Act or otherwise, without the prior written consent of the
Representative, for a period of 180 days after the date of this Prospectus.
The Underwriting Agreement contains indemnity provisions among the
Underwriters, the Company and the controlling persons thereof against certain
liabilities, including liabilities arising under the Securities Act of 1933, as
amended.
The Company has agreed to issue to the Representative the Representative's
Warrants to purchase up to 200,000 shares of Common Stock. The Representative's
Warrants are exercisable for a period of four years beginning one year from the
date of this Prospectus at a price of $ per share (120% of the initial
public offering price of the Common Stock offered hereby) and are
nontransferable for a period of one year following the date of this Prospectus,
except (a) to any of the Underwriters or to individuals who are either an
officer or a partner of an Underwriter of (b) by will or the laws of descent and
distribution. The holders of the Representative's Warrants will have, in that
capacity, no voting, dividend or other
50
<PAGE>
shareholder rights. Any profits realized by the Representative on the sale of
the securities issuable on exercise of the Representative's Warrants may be
deemed to be additional underwriting compensation.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the Underwriting Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
LEGAL MATTERS
Reish & Luftman, Los Angeles, California, has passed upon the legality of
the securities offered hereby for the Company. C. Frederick Reish, a shareholder
of such firm, holds 1,000 shares of the Common Stock. Certain legal matters will
be passed on for the Underwriters by Stoel Rives LLP, Portland, Oregon.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
for each of the years in the three year period ended December 31, 1996, have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering the
December 31, 1996, financial statements refers to a change from the successful
efforts method to the full cost method of accounting for oil and gas properties.
The information appearing herein with respect to net proved oil and gas
reserves of the Company at December 31, 1994, 1995 and 1996, was estimated by
Huddleston & Co., Inc., independent petroleum engineers, and at December 31,
1994 was estimated in part by Sherwin D. Yoelin, independent petroleum engineer,
and is included herein on the authority of such engineers as experts in
petroleum engineering.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements filed
by the Company with the Commission pursuant to the informational requirements of
the Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission, at Room 1024, Judiciary Plaza Building, 450 Fifth
Street, N.W. Washington, D.C. 20549, and the Regional offices of the Commission:
Seven World Trade Center, Suite 1300, New York, New York 10048, and Kluczynski
Federal Building, 230 South Dearborn Street, Room 3190, Chicago, Illinois 60604.
Copies of such material may be obtained at prescribed rates from the Public
Reference Section of the Commission at Room 1025, Judiciary Plaza Building, 450
Fifth St., N.W., Washington, D.C. 20549. In addition, reports and other
information concerning the Company can be inspected at the offices of the
American Stock Exchange, Inc., 86 Trinity Place, New York, New York 10006-1881,
on which the Common Stock is listed.
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Act"), with respect to the Common Stock offered hereby. This Prospectus,
filed as part of the Registration Statement, does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and to the exhibits and schedules thereto, which may
be inspected at the Commission's offices without charge or copies of which may
be obtained from the Commission upon payment of the prescribed fees. Statements
made in the Prospectus as to the contents of any contract, agreement or document
referred to are not necessarily complete, and in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement.
51
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
AMI. "AMI" means Area of Mutual Interest.
BBL. "Bbl" means barrel. "Mbbl" means thousand barrels. "MMBbl"
means million barrels.
BCF. "Bcf" means billion cubic feet.
BOPD. "BOPD" means barrels of oil (or condensate) per day of
production.
FARMOUT. "Farmout" means an agreement pursuant to which an owner of a
working interest sells a portion of its working interest in an
exploration well or prospect in exchange for either a payment
of previously incurred costs or an agreement to pay a
disproportionate share of future exploration costs. If the
exploration project is unsuccessful, the working interest
farmed out in this manner commonly reverts to the seller.
GROSS ACRES OR WELLS. "Gross Acres or Wells" are the total acres or wells, as the
case may be, in which an entity has an interest, either
directly or through an affiliate.
MCF. "Mcf" means thousand cubic feet. "Mmcf" means million cubic
feet. Natural gas volumes are stated at the legal pressure base
of the state or area in which the reserves are located at 60
degrees Fahrenheit.
MCFD. "MCFD" means Mcf of gas per day of gas production.
MCFE. "MCFE" means thousand cubic feet of gas equivalent, which is
determined using the ratio of one barrel of crude oil,
condensate or natural gas liquids to six Mcf of natural gas so
that one Bbl. of oil is referred to as six Mcf equivalent or
"MCFE". "MMCFE" means Million cubic feet of gas equivalent.
"BCFE" means billion cubic feet of gas equivalent.
NET ACRES OR WELLS. A party's "Net Acres" or "Net Wells" are calculated by
multiplying the number of gross acres or gross wells in which
that party has an interest by the fractional interest of the
party in each such acre or well.
NET REVENUE INTEREST. "Net Revenue Interest" reflects the percentage of net revenues
generated by operating activities on a property, exclusive of
any royalty or overriding royalty interests which may burden
that property.
OVERRIDING ROYALTY "Overriding Royalty Interest" is the right to share in the
INTEREST. gross revenues generated by a producing property, free of any
costs of exploration, acquisition, development, or operation,
and free of all risks in connection therewith.
PAYOUT. "Payout" refers to the point in time when initial working
interest owners recover a defined portion of acquisition,
exploration, development, and lease operating expenses from the
revenues generated by a property or well.
PRODUCING PROPERTIES OR "Producing Reserves" are Proved Developed Reserves expected to
RESERVES. be produced from existing completion intervals now open for
production in existing wells. A "Producing Property" is a
property to which Producing Reserves have been assigned by an
independent petroleum engineer.
</TABLE>
52
<PAGE>
<TABLE>
<S> <C>
PROVED DEVELOPED NON- "Proved Developed Non-Producing Reserves" (PDNP) are Proved
PRODUCING RESERVES Developed Reserves that are recoverable from zones behind
cemented casing in existing wells which will require additional
completion work or a future recompletion prior to the start of
production. The cost of making such oil reserves available for
production is insignificant relative to the volume of reserves
expected to be recovered from the planned recompletion
programs. The PDNP reserves are supported by actual production
performance from wells completed in the same reservoir
elsewhere in the local area.
PROVED DEVELOPED "Proved Developed Producing Reserves" are Proved Developed
PRODUCING RESERVES. Reserves that are recoverable from completion intervals in
existing wells that are currently open and delivering
commercial volumes of hydrocarbons to market.
PROVED DEVELOPED "Proved Developed Reserves" are Proved Reserves which can be
RESERVES. expected to be recovered through existing wells with existing
equipment and operating methods.
PROVED RESERVES. "Proved Reserves" are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known oil and gas reservoirs
under existing economic and operating conditions, that is, on
the basis of prices and costs as of the date the estimate is
made and any price changes provided for by existing conditions.
PROVED UNDEVELOPED "Proved Undeveloped Reserves" are Proved Reserves which can be
RESERVES. expected to be recovered from new wells on undrilled acreage,
or from existing wells where a relatively major expenditure is
required for recompletion. The offset units containing the
proved-undeveloped reserves are reasonably certain of
commercial production when drilled.
RESERVES. "Reserves" means crude oil and natural gas, condensate and
natural gas liquids, which are net of leasehold burdens, are
stated on a net revenue interest basis, and are found to be
commercially recoverable.
ROYALTY INTEREST. A "Royalty Interest" is an interest in an oil and gas property
entitling the owner to a share of oil and gas production (or
the proceeds of the sale thereof) free of the costs of
production.
SEC METHOD. The "SEC Method" is a method of determining the present value
of proved reserves. Under the SEC method, the future net
revenues from proved reserves are estimated assuming that oil
and gas prices and production costs remain constant. The
resulting stream of revenues is then discounted at the rate of
10% per year to obtain a present value.
SHUT IN. "Shut in" refers to a well or wells which are capable of
producing oil and/ or gas, but which are not currently
operational due to required repairs or prevailing economic
conditions.
UNDEVELOPED ACREAGE. "Undeveloped Acreage" is oil and gas acreage (including, in
applicable instances, rights in one or more horizons which may
be penetrated by existing well bores, but which have not been
tested) to which Proved Reserves have not been assigned by
independent petroleum engineers.
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
WORKING INTEREST. A "Working Interest" is the operating interest under an Oil and
Gas Lease which gives the owner the right to drill, produce and
conduct operating activities on the property and a share of
production, subject to all royalties, overriding royalties and
other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.
</TABLE>
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report--KPMG Peat Marwick LLP........................................................ F-2
Balance Sheets--December 31, 1995 and December 31, 1996.................................................... F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996.............................. F-5
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996.................... F-6
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.............................. F-7
Notes to Financial Statements.............................................................................. F-8
</TABLE>
F-1
<PAGE>
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, 1996 and 1995, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996, in conformity with generally accepted accounting principles.
As discussed in note 2 to the financial Statements, the Company has given
retroactive effect to the change in accounting for oil and gas properties from
the successful efforts method to the full cost method.
KPMG PEAT MARWICK LLP
Houston, Texas
February 27, 1997
F-2
<PAGE>
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995* 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 1,888,000 $ 2,174,000
Accounts receivable............................................................. 1,035,000 695,000
Oil and gas properties held for sale............................................ 1,180,000 --
Prepaid expenses and oil inventory.............................................. 127,000 25,000
-------------- --------------
Total Current Assets............................................................ 4,230,000 2,894,000
-------------- --------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for using the full cost method................ 20,864,000 23,079,000
Automotive, office and other.................................................... 227,000 375,000
-------------- --------------
21,091,000 23,454,000
Less--accumulated depletion, depreciation and amortization...................... (10,922,000) (12,545,000)
-------------- --------------
10,169,000 10,909,000
OTHER ASSETS:
Materials, supplies and other................................................... 62,000 188,000
Bond issuance costs (net of accumulated amortization of $180,000 and $238,000 at
December 31, 1995 and 1996, respectively)..................................... 109,000 51,000
Restricted cash................................................................. 3,230,000 2,293,000
-------------- --------------
3,401,000 2,532,000
-------------- --------------
TOTAL ASSETS...................................................................... $ 17,800,000 $ 16,335,000
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
*Restated.
See accompanying notes to financial statements.
F-3
<PAGE>
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995* 1996
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long term debt............................................... $ 3,208,000 $ 2,253,000
Accounts payable................................................................ 280,000 84,000
Accrued expenses................................................................ 96,000 77,000
Royalties and working interests payable......................................... 94,000 103,000
Accrued interest................................................................ 119,000 101,000
-------------- --------------
Total Current Liabilities....................................................... 3,797,000 2,618,000
-------------- --------------
LONG-TERM DEBT, net of current portion............................................ 1,689,000 680,000
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--11,139,709 and 11,853,663 shares at December 31, 1995
and 1996, respectively...................................................... 111,000 119,000
Capital in excess of par value.................................................. 27,228,000 29,273,000
Accumulated deficit............................................................. (15,025,000) (16,355,000)
-------------- --------------
NET STOCKHOLDERS' EQUITY.......................................................... 12,314,000 13,037,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $ 17,800,000 $ 16,335,000
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
*Restated.
See accompanying notes to financial statements.
F-4
<PAGE>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1994* 1995* 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Sales of oil and gas, net of royalties............................. $ 3,339,000 $ 2,959,000 $ 3,825,000
Other income....................................................... 58,000 184,000 215,000
------------- ------------- -------------
3,397,000 3,143,000 4,040,000
------------- ------------- -------------
OPERATING EXPENSES
Production and operating........................................... 1,090,000 1,514,000 1,172,000
Provision for depletion, depreciation and amortization............. 1,708,000 1,816,000 1,623,000
General and administrative......................................... 1,020,000 1,212,000 1,924,000
Executive severance................................................ 225,000 -- --
Corporate relocation............................................... -- -- 216,000
Interest........................................................... 460,000 870,000 435,000
Loss on sale of oil and gas properties............................. -- 3,607,000 --
Impairment to oil and gas properties............................... 3,347,000 -- --
------------- ------------- -------------
7,850,000 9,019,000 5,370,000
------------- ------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES............................... (4,453,000) (5,876,000) (1,330,000)
PROVISION FOR INCOME TAXES........................................... -- -- --
------------- ------------- -------------
NET LOSS............................................................. $ (4,453,000) $ (5,876,000) $ (1,330,000)
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................. 2,638,672 6,555,875 11,351,211
------------- ------------- -------------
------------- ------------- -------------
NET LOSS PER COMMON SHARE............................................ $ (1.69) $ (0.90) $ (0.12)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
*Restated.
See accompanying notes to financial statements.
F-5
<PAGE>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
----------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993, as previously
reported............................... 2,633,471 $ 26,000 $ 11,258,000 $ (4,671,000) $6,613,000
Cumulative effect of change in accounting
principle, as retroactively applied.... -- -- -- (25,000) (25,000)
----------- -------------- ------------ ------------- ------------
BALANCE, December 31, 1993, as
restated............................... 2,633,471 $ 26,000 $ 11,258,000 $ (4,696,000) $6,588,000
----------- -------------- ------------ ------------- ------------
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*................................ -- -- -- (4,453,000) (4,453,000)
----------- -------------- ------------ ------------- ------------
BALANCE, December 31, 1994*.............. 2,644,032 $ 26,000 $ 11,253,000 $ (9,149,000) $2,130,000
----------- -------------- ------------ ------------- ------------
----------- -------------- ------------ ------------- ------------
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*................................ -- -- -- (5,876,000) (5,876,000)
----------- -------------- ------------ ------------- ------------
BALANCE, December 31, 1995*.............. 11,139,709 $ 111,000 $ 27,228,000 $ (15,025,000) $12,314,000
----------- -------------- ------------ ------------- ------------
----------- -------------- ------------ ------------- ------------
Common stock issued for exercise of stock
options................................ 46,150 1,000 114,000 -- 115,000
Common stock issued for exercise of
warrants............................... 255,638 3,000 813,000 -- 816,000
Common stock issued for directors' fees.. 1,395 -- 4,000 -- 4,000
Common stock canceled and stock issuance
cost................................... (1,227) -- (31,000) -- (31,000)
Common stock issued for stock
offerings.............................. 412,000 4,000 1,145,000 -- 1,149,000
Common stock returned to treasury........ (2) -- -- -- --
Net loss................................. -- -- -- (1,330,000) (1,330,000)
----------- -------------- ------------ ------------- ------------
BALANCE, December 31, 1996............... 11,853,663 $ 119,000 $ 29,273,000 $ (16,355,000) $13,037,000
----------- -------------- ------------ ------------- ------------
----------- -------------- ------------ ------------- ------------
</TABLE>
- --------------------------
*Restated.
See accompanying notes to financial statements.
F-6
<PAGE>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1994* 1995* 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $(4,453,000) $ (5,876,000) $(1,330,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Common stock issued for directors' fees, compensation and
consulting fees................................................. 14,000 39,000 4,000
Depletion, depreciation and amortization.......................... 1,708,000 1,816,000 1,623,000
Amortization of deferred financing cost........................... -- 172,000 74,000
Impairment to oil and gas properties.............................. 3,347,000 -- --
Loss on sale of oil and gas properties............................ -- 3,607,000 --
Provision for executive severance................................. 225,000 (17,000) --
Non-cash compensation expense..................................... -- -- 20,000
Changes in assets and liabilities:
Accounts receivable............................................... 24,000 (485,000) 340,000
Prepaids and oil inventory........................................ (45,000) (13,000) 102,000
Accounts payable and accrued expenses............................. (202,000) (95,000) (215,000)
Payment of executive severance.................................... (66,000) (111,000) --
Royalties and working interest payable............................ (13,000) 41,000 9,000
Accrued interest.................................................. 31,000 (11,000) (18,000)
Materials, supplies and other..................................... (79,000) 189,000 (2,000)
----------- ------------ -----------
Net cash provided by (used in) operating activities................... 491,000 (744,000) 607,000
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties............................... (4,265,000) (5,654,000) (3,232,000)
(Increase) decrease in restricted cash................................ -- (3,230,000) 937,000
Proceeds from sale of properties and equipment........................ 8,000 -- 2,197,000
Expenditures for other property and equipment......................... (30,000) 16,000 (297,000)
----------- ------------ -----------
Net cash used in investing activities................................. (4,287,000) (8,868,000) (395,000)
----------- ------------ -----------
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........................................... (1,326,000) (1,651,000) (1,979,000)
Proceeds from issuance of common stock................................ 12,000 15,220,000 2,168,000
Expenditures for offering costs....................................... (29,000) (2,467,000) (115,000)
Common stock repurchase............................................... (2,000) -- --
----------- ------------ -----------
Net cash provided by financing activities............................. 4,085,000 11,102,000 74,000
----------- ------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................... 289,000 1,490,000 286,000
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................ 109,000 398,000 1,888,000
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.................................. $ 398,000 $ 1,888,000 $ 2,174,000
----------- ------------ -----------
----------- ------------ -----------
Supplemental information:
Interest paid in cash................................................. $ 400,000 $ 692,000 $ 361,000
Common stock issued or issuable as directors' fees.................... 14,000 39,000 4,000
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 properties held
for sale............................................................ -- 1,180,000 --
</TABLE>
- --------------------------
*Restated.
See accompanying notes to financial statements.
F-7
<PAGE>
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 and the Texas and
Louisiana Gulf Coast.
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
During the fourth quarter of 1996, the Company changed its method of
accounting for oil and gas operations from the successful efforts method to the
full cost method (see Note 2). Under the full cost method, all costs associated
with the acquisition, exploration and development of oil and gas reserves,
including non-productive costs, are capitalized as incurred. Internal overhead,
which is directly identified with acquisition, exploration and development is
capitalized. Such overhead has not been material through December 31, 1996.
The capitalized costs of oil and gas properties are accumulated in cost
centers on a country-by-country basis and are amortized using the
unit-of-production method based on proved reserves. All of the Company's
properties are located in the United States. Estimated future development and
abandonment costs are included in the amortization base. Depreciation, depletion
and amortization expense per equivalent MCF was $1.00, $1.22, and $1.14 for the
years ended December 31, 1994, 1995, and 1996, respectively. Capitalized costs
and estimated future development costs associated with unevaluated properties
are excluded from amortization until the quantity of proved reserves
attributable to the property has been determined or impairment has occurred. At
December 31, 1994, 1995, and 1996, the Company excluded $1.0 million, $5.9
million, and $4.9 million, respectively, of capitalized costs from amortization.
These costs will be included in the amortization base as the properties are
evaluated.
Dispositions of oil and gas properties are recorded as adjustments to
capitalized costs, with no gain or loss recognized unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves. See Note 4 regarding the disposition of the California Properties.
The unamortized cost of oil and gas properties less related deferred income
tax may not exceed an amount equal to the tax-effected net present value
discounted at 10% of proved oil and gas reserves plus
F-8
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the lower of cost or estimated fair market value of unevaluated properties. To
the extent the Company's unamortized cost of oil and gas properties exceeded the
ceiling amount, a provision for additional depreciation, depletion and
amortization would be required as an impairment reserve. During 1994, an
impairment of $3.3 million was recorded.
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.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures to employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(2) CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 1996, the Company changed its method of
accounting for oil and gas operations from the successful efforts method to the
full cost method. All prior years' financial statements presented herein have
been restated to reflect the change.
The cumulative effect of the change through December 31, 1993 was not
significant. As a result of the change in accounting method, net loss for the
year ended December 31, 1994 increased $1.5 million ($0.57 per share), and for
the years ended December 31, 1995, and 1996 decreased $0.3 million ($0.05 per
share)
F-9
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
and $2.0 million ($0.18 per share) respectively. The cumulative effect through
December 31, 1996 is to increase both net oil and gas property and shareholders'
equity by $0.8 million.
Management believes the full cost method of accounting is preferable because
it will more accurately reflect the results of the Company's future operations.
In connection with the Company's change in strategy from primarily an
acquisition and production company to an exploration and production company, it
is now focusing its efforts in a single geological basin, the Gulf Coast. The
Company seeks to allocate its capital resources over a diversified portfolio of
exploration and development projects within that basin. It seeks to achieve a
balance between the risks of exploratory drilling and the return on investment
by investing in projects with large potential. Dry holes and abandoned
properties and projects are an inherent part of the exploration process.
However, management believes that it is through disciplined, consistent
application of this balanced portfolio strategy that the desired return on its
entire investment will be achieved. Management believes that the full cost
method of accounting is the method used by many independent oil and gas
companies of comparable size to Fortune and allows investors to better measure
the performance of the Company. Management further believes that advanced three
dimensional seismic and computer-aided exploration technology has become a much
more significant factor in the success of an exploration program than in the
past. Management believes that expensing these costs when incurred, as is
required under successful efforts, is inconsistent with the value they add to
the exploration process.
(3) RESTRICTED CASH
Under the terms of the Company's exploration agreement with Zydeco
Exploration, Inc., Fortune contributed $4.8 million in cash during 1995 for
future lease acquisition and maintenance, seismic acquisition and seismic
processing costs. At December 31, 1996, approximately $2.5 million had been
expended, leaving $2.3 million of restricted cash available for future
expenditures. The Company has joint signature authority with Zydeco on the bank
account containing approximately one-half of these funds, has certain approval
authority over the remainder of the funds and is the recipient of interest
earned on all of the funds. (See Note 4)
(4) 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, South Timbalier
Block 76 (and referred to herein as the "South Timbalier Block"), includes a
producing well, drilling and production platform and transmission line. In
connection with the acquisition, Fortune granted a third party the option,
exercisable until March 11, 1996, to acquire a 4.167% working interest in the
South Timbalier Block for $790,000 and the retention by Fortune of the option
holder's deposit of $150,000. The option was exercised on March 8, 1996 for the
$940,000 consideration discussed above, reducing the Company's interest in the
block to a 12.5% working interest. The proceeds received on this sale were
credited to oil and gas properties in 1996.
F-10
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITIONS AND DISPOSITION OF ASSETS (CONTINUED)
The following pro forma unaudited results reflect the year ended December
31, 1995 as if the South Timbalier Block 76 acquisition had occurred, the option
had been exercised, and the common stock issued in the acquisition of LEX was
issued (See below and Note 10), as of January 1, 1995:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1995
-------------
<S> <C>
Revenues....................................................................... $ 4,451,000
-------------
-------------
Net Loss....................................................................... $ (5,316,000)
-------------
-------------
Net Loss Per Common Share...................................................... $ (0.59)
-------------
-------------
</TABLE>
DISPOSITION OF CALIFORNIA PROPERTIES
During 1995, the Company offered for sale all of its California properties.
In December 1995, the Company entered into a purchase and sale agreement to sell
all but one of its California properties to a private oil and gas producer group
for a price of $840,000. The sale closed in February 1996, with an effective
date of December 31, 1995. The sale of the Company's remaining California
property closed in April 1996, with an effective date of December 1, 1995. The
Company received net proceeds in this transaction of $300,000 after deducting
closing adjustments, primarily consisting of net cash flow received by the
Company between the effective date and the closing date. At December 31, 1995,
the Company classified the $1.2 million of estimated net proceeds to be received
from both of these transactions as oil and gas properties held for sale. The
sale of these properties significantly altered the relationship between
capitalized costs and proved reserves because the properties sold comprised
approximately 53% of the Company's proved reserves at the time of the sales.
Accordingly, the Company recognized a loss in 1995 of $3.6 million, which
represents the excess of 53% of the oil and gas property balance subject to
depreciation, depletion and amortization over the $1.2 million estimated net
sales proceeds to be received from the sale of the properties. During 1994, 1995
and 1996 the operation of these properties did not have a significant impact on
net income.
LAGNIAPPE EXPLORATION CORPORATION/ZYDECO EXPLORATION
On May 12, 1995, Fortune acquired Lagniappe Exploration, Inc. ("LEX") which
had previously entered into an exploration agreement with Zydeco. The Company
acquired 100% 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. The market value of
the shares, when issued, was $2,572,000. At the time of the acquisition, the
only material asset owned by LEX was its right to participate in the Zydeco
exploration agreement in exchange for funding a budget of $4.8 million for
leasehold acquisition and seismic costs. Subsequent to closing the acquisition,
LEX was liquidated and its assets were merged into Fortune. Under the
exploration agreement, Fortune has acquired a 50% interest in each of
approximately 20 seismically defined oil and gas projects identified using
advanced 3D and 2D seismic imaging, visualization and comprehensive well log
analyses and has incurred $2.5 million of the $4.8 million budget. (See Notes 3
and 10)
F-11
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITIONS AND DISPOSITION OF ASSETS (CONTINUED)
The Company does not currently expect to retain a working interest of more
than 25%, except in certain circumstances, in wells drilled on the projects and
intends to farm out its remaining interest to other oil companies. 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 while generally retaining a smaller, and
sometimes non-operating, interest in the prospect. The Company also has a right
under the exploration agreement to farm out 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 farm out to Fortune.
ENRE CORPORATION
On June 24, 1994, the Company acquired a 25% interest in EnRe-1 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 approximately 50,000 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.
(5) OIL AND GAS PROPERTIES AND OPERATIONS
Capitalized costs relating to oil and gas producing activities and related
accumulated depletion, depreciation and amortization at December 31, 1994, 1995
and 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Capitalized costs of oil and gas properties............... $ 18,394,000 $ 20,864,000 $ 23,079,000
Less accumulated depletion, depreciation and
amortization............................................ (9,210,000) (10,730,000) (12,308,000)
------------- ------------- -------------
$ 9,184,000 $ 10,134,000 $ 10,771,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-12
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(5) OIL AND GAS PROPERTIES AND OPERATIONS (CONTINUED)
Of the above capitalized costs, the amount representing unproved properties
was $1.0 million, $5.9 million, and $4.9 million in 1994, 1995 and 1996,
respectively.
Costs incurred in oil and gas producing activities were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Property acquisition.......................................... $ 3,493,000 $ 6,788,000 $ 77,000
Exploration................................................... 231,000 576,000 2,317,000
Development................................................... 541,000 498,000 838,000
------------ ------------ ------------
$ 4,265,000 $ 7,862,000 $ 3,232,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The results of operations from oil and gas producing activities for the
years ended December 31, 1994, 1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from oil and gas producing activities:
Sales to unaffiliated parties......................................... $ 3,339 $ 2,959 $ 3,825
--------- --------- ---------
Production and other taxes.............................................. 1,090 1,514 1,172
Depreciation, depletion and amortization................................ 1,542 1,781 1,576
Loss on sale of oil and gas properties.................................. -- 3,607 --
Impairment to oil and gas reserves...................................... 3,347 -- --
--------- --------- ---------
Total expenses.......................................................... 5,979 6,902 2,748
--------- --------- ---------
Pretax loss from producing activities................................... (2,640) (3,943) 1,077
Income tax (expense) benefit............................................ -- -- --
--------- --------- ---------
Results of oil and gas producing activities (excluding corporate
overhead and interest costs).......................................... $ (2,640) $ (3,943) $ 1,077
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) LONG TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Convertible Subordinated Debentures of $1,725,000 (net of discount of $57,000 and
$42,000 at December 31, 1995 and 1996, respectively) due December 31, 1997,
including interest of 10 1/2% per annum paid semi-annually.......................... $ 1,668,000 $ 1,683,000
Bank One credit facility due October 1, 1997 including interest at 1 1/2% over Bank
One, Texas, NA's prime rate payable monthly......................................... 3,200,000 1,250,000
Other debt with interest ranging from 0% to 9 1/4% per annum due through 1998......... 29,000 --
------------ ------------
Total long-term debt.................................................................. 4,897,000 2,933,000
Less current installments............................................................. 3,208,000 2,253,000
------------ ------------
Long-term debt, excluding current installments........................................ $ 1,689,000 $ 680,000
------------ ------------
------------ ------------
</TABLE>
The 10 1/2% Convertible Subordinated Debentures due December 31, 1997 bear
an effective interest rate of 12.13% and are 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. On, February 26, 1997, the Company closed an
Exchange Offer for these Debentures which resulted in $697,000 ($680,000 net of
discount) principal amount of Debentures being converted to 218,858 shares of
Common Stock. The Company also issued 174,250 Common Stock Warrants to the
Debentureholders who exchanged their Debentures in connection with the Exchange
Offer. The Common Stock Warrants are exercisable for a period of two years,
one-half at $4.00 per share and one-half at $5.00 per share. Susbsequent to the
conversion, the remaining balance due on the Debentures at December 31, 1997 is
$1,028,000. Furthermore, the Company will record a non-cash debt conversion
expense of approximately $316,000 during the first quarter of 1997. The non-cash
debt conversion expense represents the difference between the fair market value
of all of the Common Stock, and Common Stock Warrants issued in connection with
the Exchange Offer and the fair market value of the lower number of Common Stock
that could have been issued upon the conversion of the Debentures under the
Indenture prior to the Exchange Offer. As of December 31, 1996, the Company
classified, as long term liabilities, the portion, net of discount, of the the
Debentures that were converted to common stock in the Exchange Offer.
Under the Bank One, Texas, N.A. (the Bank) credit facility, the Company has
the ability to borrow amounts up to an available borrowing base as defined in
the credit agreement. 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 credit facility
contains various financial covenants, is secured by all of the Company's oil and
gas producing properties and currently requires monthly principal payments of
$75,000. At December 31, 1995, the Company was not in compliance with its cash
flow coverage ratio covenant in the credit agreement. Under the terms of credit
agreement, the bank has the right to demand repayment of the entire loan balance
in the event of covenant defaults. The Company obtained a waiver of this
covenant from the Bank as of December 31, 1995; however, the Company is not able
to borrow additional amounts under the credit facility because the Bank has set
the borrowing base equal to the loan balance, which declines by $75,000 per
month. The Company has
F-14
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) LONG TERM DEBT (CONTINUED)
determined that it is in compliance with the cash flow coverage ratio for the
quarter ended December 31, 1996. At February 18, 1997, the remaining balance
owed on the credit facility was $1,100,000.
All of the Company's debt that was not converted to Common Stock in the
Debenture Exchange Offer is due in 1997.
(7) INCOME TAXES
No provision for income taxes was required for the years ended December 31,
1994, 1995 and 1996. Deferred taxes consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................................... $ 2,976,000 $ 4,354,000
Oil and Gas Properties difference in accumulated depletion................ 1,544,000 586,000
------------ ------------
4,520,000 4,940,000
Less valuation allowance (100%)........................................... 4,520,000 4,940,000
------------ ------------
Net deferred taxes........................................................ $ -- $ --
------------ ------------
------------ ------------
</TABLE>
At December 31, 1996, the Company estimates it had cumulative net operating
loss carryforwards for Federal income tax purposes of $12.8 million 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 2011.
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 income tax 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.
(8) STOCK OFFERINGS
In December 1996, the Company sold 412,000 shares of Common Stock at a price
of $3.00 per share in a private placement. Net proceeds of approximately $1.1
million were received for the sale of these shares. In addition, the Company
issued to the acquiring shareholders one Common Stock Warrant for every two
Common Stock shares acquired. The 206,000 warrants are exercisable for a period
of two years at a price of $3.50 per share.
In June and July 1995, the Company sold 4.6 million shares of the Company's
Common Stock at $2.00 per share in a public offering. 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. The
Company's Common Stock price did fall to a level that would have
F-15
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OFFERINGS (CONTINUED)
required the Company to issue approximately 1,266,000 additional Common Stock
shares to the purchasers; 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. (See Note 9)
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.
(9) COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with its President and Chief
Executive Officer (the "CEO") 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 CEO has a two-year consulting
agreement at 40% of his annual salary. In the event of a termination of
employment after a change of control, and under certain circumstances, the CEO
is entitled to a lump sum payment of two years salary. The Company also has an
employment agreement with its Executive Vice President and General Counsel that
provides for an annual salary of $125,000 through December 31, 1998, and is
subject to renewal upon expiration. In the event of a termination of employment
after a change of control, and under certain circumstances, the Executive Vice
President and General Counsel is also entitled to a lump sum payment of two
years salary.
The Company leases certain office space under non-cancelable operating
leases. Rental expense under the office lease for the years ended December 31,
1994, 1995 and 1996 was $45,000, $53,000 and $75,000, respectively.
Minimum future lease payments under the non-cancelable operating leases are
as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997.................................................... $ 84,000
1998.................................................... 84,000
1999.................................................... 84,000
2000.................................................... 84,000
2001.................................................... 35,000
---------
$ 371,000
---------
---------
</TABLE>
On June 13, 1996, the lawsuit between Fortune and EnRe was settled with an
agreement by each party to drop all of their respective claims. On March 14,
1995, Fortune was served with the 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 at that time, sought recovery of approximately $438,000
allegedly owed by Fortune for the drilling of certain wells on such properties.
On March 24, 1995, Fortune answered EnRe's lawsuit and filed a counterclaim
against EnRe for an indeterminable amount for damages suffered by Fortune for
EnRe's actions in operating the New Mexico properties. On March 30, 1995, a
partial settlement was reached as to payment by Fortune of undisputed well
development costs in the amount of $174,499 in exchange for EnRe's cooperation
in complying with provisions of the operating agreement to report operating
information to Fortune on a timely basis.
F-16
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
In July 1996, the Company received invoices from AMPOLEX (USA), Inc., the
current operator of the Company's New Mexico properties, billing Fortune for
$232,805 of outstanding accounts receivable attributable to two other working
interest owners in the properties which the operator failed to collect from such
owners. The Company is reviewing this matter and has not determined whether it
owes any portion of such amounts.
On March 26, 1996, Fortune was served with a lawsuit which had been filed in
the Federal District Court in Delaware by one of the purchasers of Fortune
Common Stock in an offering in December 1995 under Regulation S. Under the terms
of the subscription agreement pursuant to which the plaintiff acquired his
shares, he was entitled to receive additional shares of Fortune stock if the
market price fell below a stated level during a specified period following the
40-day holding period prescribed by Regulation S. Fortune vigorously contested
this action, believing that plaintiff either participated in a scheme to
unlawfully manipulate the market price of the Common Stock or benefited from
such manipulation by others. On February 3, 1997, the plaintiff voluntarily
dismissed the complaint without prejudice, and the court ordered the return to
Fortune of shares of Common Stock which had been voluntarily placed in escrow by
Fortune. Management does not anticipate that the action will be refiled.
On April 16, 1996, Fortune was advised that similar suits had been filed in
Federal District Court in New York by two other buyers in the same offering.
Fortune responded to the suits, admitting that the stock price declined but
alleged that suspicious trading activity in Fortune stock occurred immediately
prior to and during the time period in which the additional-share allocation was
computed. Fortune believes that it has discovered evidence of active market
manipulation in the Common Stock by these plaintiffs; accordingly, it has
commenced a countersuit for damages suffered by the Company and its shareholders
as a result of these acts. Fortune intends to continue to vigorously defend the
remaining litigation.
(10) RELATED PARTY TRANSACTIONS
As part of the relocation of Fortune'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 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. One-third of such shares and warrants were placed 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.
F-17
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
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. On May 22, 1995, the New York court
granted the Company's motion for summary judgment 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.
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 June 1995 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 permitted 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.
F-18
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
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.
In 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.
Until his employment by the Company effective October 16, 1996, Mr. Dean W.
Drulias was 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 1990 and as Secretary since July 1994. During 1994,
1995 and 1996, his firm billed the Company a total of $110,000, $183,000 and
$152,000, respectively, for legal fees and costs.
On January 22, 1997, the Company's board of directors appointed Daniel R.
Shaughnessy as a director of the Company. Mr. Shaughnessy is a petroleum
geophysicist and geologist and is president and owner of Intepretations(3), an
integrated 3D geophysical interpretation which does geological and geophysical
consulting work for the Company. During 1995 and 1996, Mr. Shaughnessy's firm
billed the Company a total of $1,500, and $45,000, respectively, for geological
and geophysical consulting.
As compensation to outside directors, the Company pays directors' fees of
$2,500 per quarter. Inside directors do not receive such compensation.
(11) 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.
Fortune has three 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 and 1988 plan must be exercised
within ten years of the date of grant or are forfeited. Options granted under
the 1993 plan must be exercised within five years of the date of grant or they
are forfeited. The Company's 1991 Stock Option Plan terminated in 1996 with all
options having been granted.
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" ("FAS 123"). The
Company has not adopted the fair value method for stock-based compensation plans
which is an optional provision of FAS 123. Accordingly, no compensation expense
has been recognized for its stock based compensation plans. Had compensation
cost for the Company's stock option plans been determined based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed under FAS 123, the Company's net loss and loss per share
would have been increased by approximately $0.1 million ($0.02 per share) and
$0.5 million ($0.03 per share) for 1995 and 1996, respectively. The fair value
of the options granted during 1996 is estimated as $1.11 per common stock option
on the date of grant using the Black-Scholes option pricing model with the
F-19
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
following assumptions: dividend yield 0%, volatility of 65%, risk-free interest
rate of 6.14% assumed forfeiture rate of 5%, and an expected life of 2.5 years.
For the purposes of calculating estimated 1995 compensation expense, the
following assumptions were used: dividend yield of 0%, volatility of 65%, risk-
free interest rate of 7.80% assumed forfeiture rate of 5%, and an expected life
of 2.5 years.
Stock option transactions were:
<TABLE>
<CAPTION>
COMMON STOCK WEIGHTED AVERAGE
OPTIONS OF EXERCISE PRICE OF
EXERCISABLE(A) SHARES UNDER PLANS
--------------------- ---------------------
<S> <C> <C>
Balance, December 31, 1993................................... 54,438 $ 2.69
Granted...................................................... 356,000 2.71
Exercised.................................................... (4,688) 2.60
Forfeited.................................................... -- 2.60
-------- -----
Balance, December 31, 1994................................... 405,750 2.71
Granted...................................................... 289,000 2.46
Exercised.................................................... (202,481) 2.26
Forfeited.................................................... -- --
-------- -----
Balance, December 31, 1995................................... 492,269 2.75
Granted...................................................... 505,000 3.07
Exercised.................................................... (46,150) 2.47
Forfeited.................................................... (16,410) 2.75
-------- -----
Balance, December 31, 1996................................... 934,709 $ 2.93
-------- -----
-------- -----
</TABLE>
- ------------------------
(a) Table includes 80,000 Common Stock warrants which were issued to employees
in 1995 and 1996 in lieu of Common Stock options.
All options are immediately exercisable upon grant. At December 31, 1996,
the Company had 16,400 Common Stock options available for grant under the 1993
Stock Option Plan. All options under all other plans have been granted. In
January 1995, the Company reduced the exercise price on 45,000 common stock
options held by Daniel E. Pasquini, the former president of the Company, from
$2.75 per share to $0.58 per share. (See Note 10) On January 12, 1995, the
prices of the options granted in 1991, 1993, 1994, and 1995 were reduced from
$6.00, $5.00, $5.48, $6.03 per share, respectively, to $2.75 per share for all
optionholders who were employees of the Company on that date. Such price
reduction is reflected in the year the options were originally granted in the
above table.
F-20
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICE OUTSTANDING LIFE PRICE
- ------------------- ----------- ----------- -----------
<S> <C> <C> <C>
$2.60 to $3.13 934,709 3.5 years $ 2.93
</TABLE>
At December 31, 1996 the Company's outstanding warrants to purchase Common
Stock consisted of (d):
<TABLE>
<CAPTION>
NUMBER OF WARRANTS EXERCISE PRICE EXPIRATION DATE
- ------------------- -------------- ---------------
<S> <C> <C>
45,000 $ 1.88 - 2.40 1/15/97
150,000 $ 4.63 - 6.00 12/11/97
45,000 $ 3.00 2/15/98
75,000 $ 2.68 8/29/98
138,888 $ 3.89 9/28/98
64,015 $ 4.41 9/28/98(a)
1,982,750 $ 3.75 9/28/98(b)
31,500 $ 11.14 10/05/98(c)
206,000 $ 3.50 12/3/98
35,000 $ 2.75 1/06/00
1,200,000 $ 4.75 5/12/00
400,000 $ 2.40 6/25/00
100,000 $ 4.75 8/01/00
60,000 $ 3.63 9/06/00
30,000 $ 2.44 8/29/01
----------
4,563,153
----------
----------
</TABLE>
- ------------------------
(a) Warrants permit the holder to purchase 88,289 total shares of Common Stock.
(b) Warrants permit the holders to purchase 2,841,610 total shares of Common
Stock.
(c) Each warrant permits the holder to purchase 3.3 shares of Common Stock plus
two stock purchase warrants, expiring September 28, 1998. Each stock
purchase warrant permits the holder to purchase 1.43 additional share of
Common Stock at an exercise price of $3.75.
(d) Table excludes warrants which have been issued to employees in lieu of stock
options.
(12) MAJOR CUSTOMER
The Company sold oil representing 54% of its oil production under contracts
to one customer for the year ended December 31, 1996. 86% of the Company's gas
production was sold to four customers (26%, 23%, 20% and 17%, respectively) for
the year ended December 31, 1996.
F-21
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) MAJOR CUSTOMER (CONTINUED)
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.
(13) 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.
(14) RETIREMENT PLAN
During 1996, the Company adopted the Fortune Petroleum Corporation 401(k)
Profit Sharing Plan for its eligible employees. Under the plan, all employees on
the Company's payroll as of November 1, 1996, and all employees hired after that
date who have attained age 21 and three months of service, are permitted to make
salary deferrals up to the lesser of 15% of their annual compensation or $9,500.
Salary deferrals will be matched 50% by the Company and are 100% vested after
two years of service with the Company. Salary deferrals are 100% vested at all
times. The Company does not make profit sharing contributions to the plan. For
1996, the Company's matching contribution was $14,000, all of which will be paid
in shares of Common Stock.
(15) SUBSEQUENT EVENTS
On February 26, 1997, the Company closed an Exchange Offer which resulted in
a portion of its 10 1/2% Convertible Subordinated Debentures being converted
into Common Stock and Common Stock Warrants. (See Note 6.)
(16) UNAUDITED 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 year ended December 31, 1994, 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 years ended December 31, 1995 and 1996, 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.
F-22
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(16) UNAUDITED OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS COST INFORMATION
(CONTINUED)
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, 1994, 1995,
and 1996, and changes in such quantities during the years, 1994, 1995 and 1996,
were as follows:
<TABLE>
<CAPTION>
CRUDE OIL (BARRELS)
-------------------------------
YEAR 1994 YEAR 1995 YEAR 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
BEGINNING OF PERIOD............................................................ 813 1,647 347
Revisions of previous estimates.............................................. 866 (160) 6
Extensions and discoveries................................................... -- -- 106
Production................................................................... (88) (92) (57)
Purchase of minerals in place................................................ 56 174 --
Sales of minerals in place*.................................................. -- (1,222) (153)
--------- --------- ---
END OF PERIOD.................................................................. 1,647 347 249
--------- --------- ---
--------- --------- ---
Proved developed reserves
Beginning of period........................................................ 666 675 324
--------- --------- ---
--------- --------- ---
End of period.............................................................. 675 324 160
--------- --------- ---
--------- --------- ---
</TABLE>
<TABLE>
<CAPTION>
NATURAL GAS (MCF)
-------------------------------
YEAR 1994 YEAR 1995 YEAR 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
BEGINNING OF PERIOD 5,562 5,911 5,938
Revisions of previous estimates........................................... 533 (388) (753)
Extensions and discoveries................................................ -- -- 85
Production................................................................ (1,017) (909) (1,038)
Purchase of minerals in place............................................. 833 2,934 --
Sales of minerals in place*............................................... -- (1,610) (751)
--------- --------- ---------
END OF PERIOD............................................................... 5,911 5,938 3,481
--------- --------- ---------
--------- --------- ---------
Proved developed reserves
Beginning of period..................................................... 4,221 3,317 4,686
--------- --------- ---------
--------- --------- ---------
End of period........................................................... 3,317 4,686 1,749
--------- --------- ---------
--------- --------- ---------
</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.
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
F-23
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) UNAUDITED OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS COST INFORMATION
(CONTINUED)
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>
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
Future cash inflows............................................................. $ 32,898 $ 19,531 $ 19,751
Future costs:
Production.................................................................... (11,283) (6,050) (4,026)
Development................................................................... (5,683) (881) (1,613)
---------- --------- ---------
Future net inflows before income taxes.......................................... 15,932 12,600 14,112
Future income taxes............................................................. -- -- --
---------- --------- ---------
Future net cash flows........................................................... 15,932 12,600 14,112
10% discount factor............................................................. (7,784) (3,658) (3,292)
---------- --------- ---------
Standardized mesure of discounted net cash flows................................ $ 8,148 $ 8,942 $ 10,820
---------- --------- ---------
---------- --------- ---------
</TABLE>
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 net of production costs" 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
F-24
<PAGE>
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) UNAUDITED OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS COST INFORMATION
(CONTINUED)
effects. "Changes in estimated future development costs" arise from: (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 and (2) new discoveries from which future development must be
performed. 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>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Standarized Measure:
Beginning of period............................................................... $ 8,554 $ 8,148 $ 8,942
Increases (decreases):
Sales and transfers, net of production costs...................................... (2,249) (1,445) (2,653)
Extensions and discoveries........................................................ -- -- 1,532
Net change in sales and transfer prices, net of production costs.................. (1,635) 460 5,233
Changes in estimated future development costs..................................... (4,315) 500 (332)
Revisions of quantity estimates................................................... 6,385 (871) (1,473)
Accretion of discount............................................................. 855 814 894
Net change in income taxes........................................................ -- -- --
Purchases of reserves in place.................................................... 1,464 5,329 --
Sales of reserves in place*....................................................... -- (3,024) (1,612)
Changes in production rates (timing) and other.................................... (911) (969) 289
--------- --------- ---------
Standardized Measure:
End of period..................................................................... $ 8,148 $ 8,942 $ 10,820
--------- --------- ---------
--------- --------- ---------
</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.
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 13
Dilution....................................... 13
Capitalization................................. 14
Dividend Policy................................ 15
Price Range of Common Stock.................... 15
Selected Financial and Operating Data.......... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business and Properties........................ 23
Management..................................... 37
Certain Relationships and Related
Transactions.................................. 41
Principal Stockholders......................... 44
Description of Securities...................... 46
Underwriting................................... 50
Legal Matters.................................. 51
Experts........................................ 51
Available Information.......................... 51
Glossary....................................... 52
Index to Financial Statements.................. F-1
</TABLE>
2,000,000 SHARES
[LOGO]
FORTUNE PETROLEUM CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT
COMPANY, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in the Registration Statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 1,784
Accountants' Fees and Expenses.................................... $ 15,000
Legal Fees and Expenses........................................... $ 50,000
American Stock Exchange fees...................................... $ 17,500
Underwriting Expense Allowance (1)................................ $ 165,000
Printing and Engraving Expenses................................... $ 75,000
Miscellaneous..................................................... $ 15,716
---------
Total......................................................... $ 340,000
---------
---------
</TABLE>
- ------------------------
(1) $189,750 if the over-allotment option is exercised.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits the
indemnification of officers, directors, employees and agents of Delaware
corporations. The Certificate of Incorporation and Bylaws of the Company provide
that the corporation shall, to the fullest extent permitted by Section 145 of
the General Corporation Law of the State of Delaware as it may be amended from
time to time, indemnify and hold harmless each person who was or is a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
whom he or she is a legal representative, is or was a director or officer of the
Company or is or was serving at the request of the Company as director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action or inaction in an
official capacity or in any other capacity while serving as a director, officer,
employee or agent, against all costs, charges, expenses, liabilities and losses
(including attorney's fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith, and such indemnification shall continue as
to person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of his or her heirs, executors and administrators.
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Underwriting Agreement between Registrant and Paulson Investment Company, Inc.
2.1 Letter agreement dated February 13, 1995, between Registrant and Lagniappe Exploration, Inc. and related
Exploration Agreement, as amended (incorporated by reference to Fortune's Registration Statement on Form
SB-2, Regiatration No. 33-88452)
2.2 Agreement of Reorganization and Merger, dated May 12, 1995, among Registrant, Lanacorp, Inc., Lagniappe
Exploration, Inc., William D. Forster and BSR Investments Limited (incorporated by reference to
Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Fortune Petroleum Corporation (incorporated by reference to Fortune's
Registration Statement Form 10, File No. 0-16370)
3.2 Bylaws of Fortune Petroleum Corporation (incorporated by reference to Fortune's Registration Statement
Form 10, File No. 0-16370)
3.3 Certificate of Amendment to Certificate of Incorporation of Registrant increasing authorized capital
stock (incorporated by reference to Fortune's Registration Statement on Form SB-2, Registration No.
33-88452)
4.1 Indenture, dated October 30, 1992, by and between Fortune Petroleum Corporation and IBJ Schroeder Bank &
Trust Company, Trustee, as amended (incorporated by reference to Fortune's Registration Statement on
Form S-1, Registration No. 33-49190)
4.2* Form of Representative Warrant Agreement
4.3* Form of shareholder Rights Plan
5.1* Opinion of Reish & Luftman regarding legality of securities
10.1* Participation Agreement by and between Fortune and Smith Management Company, Inc. et al. to acquire a
12.5% working interest in Espiritu Santo Bay.
10.2* Employment Agreement dated August 1, 1996 by and between Fortune and Dean W. Drulias
18.1* Letter from KPMG Peak Marwick LLP re change in accounting method.
24.1* Consent of KPMG Peat Marwick LLP
24.2* Consent of Huddleston & Co., Inc.
24.3* Consent of Sherwin D. Yoelin
24.4* Consent of Reish & Luftman (included in Exhibit 5.1)
25.1* Power of Attorney (included on signature page)
</TABLE>
- ------------------------
* Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made, a
post effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post
effective amendment thereof) which, individually or in the aggregate
represent fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities
II-2
<PAGE>
offered therein, and the offering of such securities at that time shall be
deemed to be initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering there.
(6) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised 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. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer of controlling person of the registrant
in the successful defense of any action, suit of proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 18. FINANCIAL STATEMENTS AND SCHEDULES
Not applicable.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on February 28, 1997.
FORTUNE PETROLEUM CORPORATION
By: /s/ TYRONE J. FAIRBANKS
-----------------------------------------
Tyrone J. Fairbanks
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ J. MICHAEL URBAN
-----------------------------------------
J. Michael Urban
VICE PRESIDENT AND CHIEF FINANCIAL
AND ACCOUNTING OFFICER
Each person whose signature appears below constitutes and appoints Tyrone J.
Fairbanks and Dean W. Drulias, and each of them, as his true and lawful
attorneys-in-fact with full power of substitution and resubstitution, for him
and his name, place and stead, in any and all capacities, to sign any or all
amendments (including post effective amendments) to this Registration Statement,
and to file the same, with all exhibits hereto, and other documents in
connection therewith, with the Securities and Exchange Commission granting unto
said attorney-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacities
and on the dates stated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ TYRONE J. FAIRBANKS
- ------------------------------ Chief Executive Officer February 28, 1997
Tyrone J. Fairbanks and Director
Executive Vice President,
/s/ DEAN W. DRULIAS General Counsel,
- ------------------------------ Corporate Secretary and February 28, 1997
Dean W. Drulias Director
/s/ GRAHAM S. FOLSOM
- ------------------------------ Director February 28, 1997
Graham S. Folsom
II-4
<PAGE>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ WILLIAM T. WALKER, JR.
- ------------------------------ Director February 28, 1997
William T. Walker, Jr.
/s/ BARRY FEINER
- ------------------------------ Director February 28, 1997
Barry Feiner
/s/ GARY GELMAN
- ------------------------------ Director February 28, 1997
Gary Gelman
/s/ DANIEL SHAUGHNESSY
- ------------------------------ Director February 28, 1997
Daniel Shaughnessy
II-5
<PAGE>
2,000,000 SHARES
OF COMMON STOCK OF
FORTUNE PETROLEUM CORPORATION
UNDERWRITING AGREEMENT
__________, 1997
Paulson Investment Company, Inc.
As Representative of the
Several Underwriters
c/o Paulson Investment Company, Inc.
811 SW Front Avenue
Portland, Oregon 97204
Gentlemen:
Fortune Petroleum Corporation, a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as Representative (the
"Representative") an aggregate of 2,000,000 shares of Common Stock of the
Company (the "Firm Shares"). The respective number of the Firm Shares to be so
purchased by the several Underwriters are set forth opposite their names in
Schedule I hereto. The Company also proposes to grant to the Representative an
option to purchase in aggregate up to 300,000 additional Shares, identical to
the Firm Shares, (the "Option Shares") as set forth below.
As the Representative, you have advised the Company (a) that you are
authorized to enter into this Agreement for yourself as Representative and on
behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the numbers of Firm
Shares set forth opposite their respective names in Schedule I. The Firm Shares
and the Option Shares (to the extent the aforementioned option is exercised) are
herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
-1-
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form S-2 (File No. ) with
respect to the Shares has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary
prospectus included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. The Company, directly or
indirectly wholly owns or has the specified percentage ownership of each of the
corporations or other business entities set forth in Schedule II, attached
hereto (each a "Subsidiary" and, collectively the "Subsidiaries" and, with the
Company, collectively, the "Group") and, except as set forth in Schedule II,
does not own and never has owned a controlling interest in any other corporation
or other business entity that has or ever has had any material assets,
liabilities or operations. Each Subsidiary has been duly organized and is
validly existing as a corporation or other entity in good standing under the
laws of its jurisdiction of organization, with power and authority to own or
lease its properties and conduct its business as described in the Registration
Statement. The Company and each Subsidiary is duly qualified to transact
business in all jurisdictions in which the conduct of its business requires such
qualification.
-2-
<PAGE>
(c) The outstanding shares of Common Stock of the Company and each
Subsidiary have been duly authorized and validly issued and are fully paid and
non-assessable and have been issued and sold by the Company or such Subsidiary,
as the case may be, in compliance in all material respects with applicable
securities laws; the issuance and sale of the Shares have been duly authorized
by all necessary corporate action and, when issued and paid for as contemplated
herein, the Shares will be validly issued, fully paid and non-assessable; and no
preemptive rights of stockholders exist with respect to any security of the
Company or the issue and sale thereof. Neither the filing of the Registration
Statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common Stock or
other securities of the Company.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. The Common Stock conforms to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of Delaware.
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform to, the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter through the Representative, specifically for use in the
preparation thereof.
(f) The consolidated financial statements of the Company and its
consolidated Subsidiaries, together with related notes and schedules as set
forth in the Registration Statement (the "Financial Statements"), present fairly
the financial position and the results of operations and cash flows of the
Company and such Subsidiaries at the indicated dates and for the indicated
periods. The Financial Statements and related schedules have been prepared in
accordance with generally accepted principles of accounting, consistently
applied throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair
-3-
<PAGE>
presentation of results for such periods have been made. The summary
consolidated financial and statistical data of the Company and its Subsidiaries
included in the Registration Statement presents fairly the information shown
therein and such data has been compiled on a basis consistent with the Financial
Statements and the books and records of the Company.
(g) KPMG Peat Marwick LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against any member of the Group before any
court or administrative agency or otherwise which if determined adversely to the
Group might result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Group or to prevent the consummation of the
transactions contemplated hereby, except as set forth in the Registration
Statement.
(i) The Group has title that is defendable or customary in the oil
and gas industry to all properties and assets, tangible and intangible,
reflected in the Financial Statements, or as otherwise described in the
Registration Statement, subject to no material lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in the Financial Statements or as
otherwise described in the Registration Statement. All of the material leases
and subleases under which the Company or any Subsidiary holds properties are in
full force and effect (with only such exceptions as are commonly accepted by
prudent companies in the oil and gas business) and neither the Company nor any
Subsidiary has received notice of any material claim of any sort that has been
asserted by anyone materially adverse to the rights of the Company or such
Subsidiary under any of such leases or subleases, or affecting or questioning
the rights of the Company or such Subsidiary to the continued possession of the
leased or subleased premises or property under any such lease or sublease.
(j) Each of the Company and its Subsidiaries has filed all Federal,
State, local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments received
by it to the extent that such taxes have become due and are not being contested
in good faith. All tax liabilities have been adequately provided for in the
consolidated financial statements of the Company and its consolidated
Subsidiaries.
(k) Since the dates as of which information is given in the
Registration Statement, as it may have been amended or supplemented, there has
not been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise), or
prospects of the Group, whether or not occurring in the ordinary
-4-
<PAGE>
course of business, and there has not been any material transaction entered into
or any material transaction that is probable of being entered into by the Group,
other than transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be amended or
supplemented. The Group has no material contingent obligations which are not
disclosed in the Company's financial statements or elsewhere in the Prospectus
which are included in the Registration Statement.
(l) Neither the Company nor any Subsidiary is, nor, with the giving
of notice or lapse of time or both, will it be, in violation of or in default
under its Charter or By-Laws or under any agreement, lease, contract, indenture
or other instrument or obligation to which it is a party or by which it, or any
of its properties, is bound and which default is of material significance in
respect of the condition, financial or otherwise of the Group or the business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Group. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which any member of
the Group is a party, or of the Charter or by-laws of any member of the Group or
any order, rule or regulation applicable to any member of the Group of any court
or of any regulatory body or administrative agency or other governmental body
having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
National Association of Securities Dealers, Inc. (the "NASD") or such additional
steps as may be necessary to qualify the Shares for public offering by the
Underwriters under state securities or Blue Sky laws) has been obtained or made
and is in full force and effect.
(n) The Group holds all material patents, patent rights trademarks,
trade names, copyrights, trade secrets and licenses of any of the foregoing
(collectively, "Intellectual Property Rights") that are necessary to the conduct
of its businesses; there is no claim pending or, to the best knowledge of the
Company, threatened against any member of the Group alleging any infringement of
Intellectual Property Rights, or any violation of the terms of any licence
relating to Intellectual Property Rights, nor does the Company know of any basis
for any such claim. The Company knows of no material infringement by others of
Intellectual Property Rights owned by or licensed to any member of the Group.
The Group has obtained, is in compliance in all material respect with and
maintains in full force and effect all material licenses, certificates, permits,
orders or other, similar authorizations granted or issued by any governmental
agency (collectively "Government Permits") required to conduct its business as
it is presently conducted. In particular, and without limiting the generality of
the foregoing,
-5-
<PAGE>
the Group is in compliance with all conditions, limitations, restrictions or
other provisions of all Government Permits related to the exploration for,
development of, extraction, transportation or sale of hydrocarbons. All
applications for additional Government Permits described in the Prospectus as
having been made by the Group have been properly and effectively made in
accordance with the applicable laws and regulations with respect thereto and
such applications constitute, in the best judgment of the Company's management,
those reasonably required to have been made in order to carry out the Company's
business plan as described in the Prospectus. No proceeding to revoke, limit or
otherwise materially change any Government Permit has been commenced or, to the
Company's best knowledge, is threatened against the Company or any supplier to
the Group with respect to materials supplied to the group, and the Company has
no reason to anticipate that any such proceeding will be commenced against any
member of the Group or any such supplier. Except as disclosed or contemplated
in the Prospectus, the Company has no reason to believe that any pending
application for a Government Permit will be denied or limited in a manner
inconsistent with the Company's business plan as described in the Prospectus.
(o) The Group is in all material respects in compliance with all
applicable Environmental Laws. The Company has no knowledge of any past,
present or, as anticipated by the Company, future events, conditions,
activities, investigation, studies, plans or proposals that (i) would interfere
with or prevent compliance with any Environmental Law by the Group or (ii) could
reasonably be expected to give rise to any common law or other liability, or
otherwise form the basis of a claim, action, suit, proceeding, hearing or
investigation, involving the Group and related in any way to Hazardous
Substances or Environmental Laws. Except for the prudent and safe use and
management of Hazardous Substances in the ordinary course of the Group's
business, (i) no Hazardous Substance is or has been used, treated, stored,
generated, manufactured or otherwise handled on or at any Facility and (ii) to
the Company's best knowledge, no Hazardous Substance has otherwise come to be
located in, on or under any Facility. No Hazardous Substances are stored at any
Facility except in quantities necessary to satisfy the reasonably anticipated
use or consumption by the Group. No litigation, claim, proceeding or
governmental investigation is pending regarding any environmental matter for
which any member of the Group has been served or otherwise notified or, to the
knowledge of the Company threatened or asserted against any member of the Group,
or the officers or directors of any such member in their capacities as such, or
any Facility or the Group's business. There are no orders, judgments or decrees
of any court or of any governmental agency or instrumentality under any
Environmental Law which specifically apply to any member of the Group, any
Facility or any of the Group's operations. No member of the Group has received
from a governmental authority or other person (i) any notice that it is a
potentially responsible person for any Contaminated site or (ii) any request for
information about a site alleged to be Contaminated or regarding the disposal of
Hazardous Substances. There is no litigation or proceeding against any other
person by the Group regarding any environmental matter. The Company has
disclosed in the Prospectus or made available to the Underwriters and their
counsel true, complete and correct copies of any reports, studies,
investigations,
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audits, analysis, tests or monitoring in the possession of or initiated by the
Company pertaining to any environmental matter relating to the Company, its
past or present operations or any Facility.
For the purposes of the foregoing paragraph, "Environmental Laws"
means any applicable federal, state or local statute, regulation, code, rule,
ordinance, order, judgment, decree, injunction or common law pertaining in any
way to the protection of human health or the environment, including without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Toxic Substances
Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any
similar or comparable state or local law; "Hazardous Substance" means any
hazardous, toxic, radioactive or infectious substance, material or waste as
defined, listed or regulated under any Environmental Law; "Contaminated" means
the actual existence on or under any real property of Hazardous Substances, if
the existence of such Hazardous Substances triggers a requirement to perform any
investigatory, remedial, removal or other response action under any
Environmental Laws or if such response action legally could be required by any
governmental authority; "Facility" means any property currently owned, leased
or occupied by the Company.
(p) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or intends to take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares.
(q) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940 and the rules and regulations
of the Commission thereunder.
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(s) The Group carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of their respective
businesses and the value of their respective properties and as is customary for
companies engaged in similar industries.
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(t) Each member of the Group is in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(u) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the Company
further agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission or
with the Florida Department of Banking and Finance (the "Department"),
whichever date is later, or if the information reported or incorporated by
reference in the Prospectus, if any, concerning the Company's business with Cuba
or with any person or affiliate located in Cuba changes in any material way, the
Company will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
(v) Each member of the Group is in material compliance with all
laws, rules, regulations, orders of any court or administrative agency,
operating licenses or other requirements imposed by any governmental body
applicable to it, including, without limitation, all applicable laws, rules,
regulations, licenses or other governmental standards applicable to the oil and
gas industry; and the conduct of the business of the Group, as described in the
Prospectus, will not cause the Company to be in violation of any such
requirements.
(w) The Representative's Warrants (as defined in Paragraph (d) of
Section 2 hereof) have been authorized for issuance to the Representative and
will, when issued, possess rights, privileges, and characteristics as
represented in the most recent form of Representative's Warrants filed as an
exhibit to the Registration Statement; the securities to be issued upon exercise
of the Representative's Warrants, when issued and delivered against payment
therefor in accordance with the terms of the Representative's Warrants, will be
duly and validly issued, fully paid, nonassessable and free of preemptive
rights, and all corporate action required to be taken for the authorization and
issuance of the Representative's Warrants, and the securities to be issued upon
their exercise, have been validly and sufficiently taken.
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(x) Except as disclosed in the Prospectus, neither the Company nor
any of its officers, directors or affiliates have caused any person, other
than the Underwriters, to be entitled to reimbursement of any kind, including,
without limitation, any compensation that would be includable as underwriter
compensation under the NASD's Corporate Financing Rule with respect to the
offering of the Shares, as a result of the consummation of such offering based
on any activity of such person as a finder, agent, broker, investment adviser
or other financial service provider.
(y) The Company has timely filed with the Commission all reports
required to be filed by it during the last three years under the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") and the rules and
regulations thereunder, including, but not limited to, any such reports
incorporated by reference in the Registration Statement. All such reports
have been in proper form and have included all information required to be
disclosed therein. No such report has contained a misstatement of any
material fact or omitted to state any fact necessary to make the statements
therein not materially misleading. During the last three years, the Company
has complied in all material respects with regulations of the American Stock
Exchange applicable to it as a listed company. The Company has not taken, in
anticipation of the offering of the Shares, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
(z) Huddleston & Co., which has rendered its report with respect to
the net proved oil and gas reserves and the estimated future net revenues from
oil and gas reserves (the "Reserve Information"), is professionally
qualified to issue a report with respect to the Reserve Information and has no
material relationship with the Company or any Subsidiary; the Reserve
Information is fairly presented in a manner consistent with industry practice
with respect to such information; subsequent to the date of the Reserve
Information, and except as disclosed in the Prospectus, there has been no
material adverse change in the net proved oil and gas reserves and the
estimated future net revenues from proved oil and gas reserves of the Company.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $ per Share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made
in New York Clearing House funds and, at the option of the Representative, by
certified or bank cashier's checks drawn to the order of the Company or bank
wire to an account specified by
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the Company against either uncertificated delivery of Firm Shares or of
certificates therefor (which delivery, if certificated, shall take place in
such location in New York, New York as may be specified by the Representative)
to the Representative for the several accounts of the Underwriters. Such
payment is to be made at the offices of Paulson Investment Company, Inc. at
the address set forth on the first page of this agreement, at 7:00 a.m.,
Pacific time, on the third business day after the date of this Agreement or
at such other time and date not later than five business days thereafter as
you and the Company shall agree upon, such time and date being herein referred
to as the "Closing Date." (As used herein, "business day" means a day on
which the New York Stock Exchange is open for trading and on which banks in
New York are open for business and not permitted by law or executive order to
be closed.) Except to the extent uncertificated Firm Shares are delivered at
closing, the certificates for the Firm Shares will be delivered in such
denominations and in such registrations as the Representative request in
writing not later than the second full business day prior to the Closing Date,
and will be made available for inspection by the Representative at least one
business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Representative to purchase the Option
Shares at the price per Share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only
once thereafter within 45 days after the date of this Agreement, by the
Representative to the Company setting forth the number of Option Shares as to
which the Representative is exercising the option, the names and
denominations in which the Option Shares are to be registered and the time
and date at which certificate representing such Shares are to be delivered.
The time and date at which certificates for Option Shares are to be delivered
shall be determined by the Representative but shall not be earlier than three
nor later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein referred
to as the "Option Closing Date"). If the date of exercise of the option is
three or more days before the Closing Date, the notice of exercise shall set
the Closing Date as the Option Closing Date. The option with respect to the
Option Shares granted hereunder may be exercised only to cover over-allotments
in the sale of the Firm Shares by the Underwriters. The Representative may
cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company. To the extent, if any, that the
option is exercised, payment for the Option Shares shall be made on the Option
Closing Date in New York Clearing House funds and, at the option of the
Representative, by certified or bank cashier's check drawn to the order of the
Company for the Option Shares to be sold by the Company or bank wire to an
account specified by the Company against delivery of certificates therefor at
the offices of Paulson Investment Company, Inc. set forth on the first page of
this Agreement.
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(d) In addition to the sums payable to the Representative as
provided elsewhere herein, the Representative shall be entitled to receive at
the Closing, for itself alone and not as Representative of the Underwriters,
as additional compensation for its services, purchase warrants (the
"Representative's Warrants") for the purchase of up to 200,000 shares of
Common Stock at a price of $ per share, upon the terms and subject to
adjustment and conversion as described in the form of Representative's
Warrants filed as an exhibit to the Registration Statement.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representative deems it advisable
to do so. The Firm Shares are to be initially offered to the public at the
initial public offering price set forth in the Prospectus. The Representative
may from time to time thereafter change the public offering price and other
selling terms. To the extent, if at all, that any Option Shares are purchased
pursuant to Section 2 hereof, the Representative will offer them to the public
on the foregoing terms.
It is further understood that you will act as the Representative for
the Underwriters in the offering and sale of the Shares in accordance with an
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A
of the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a
form approved by the Representative containing information previously omitted
at the time of effectiveness of the Registration Statement in reliance on
Rule 430A of the Rules and Regulations, and (B) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representative shall not previously have been advised and furnished with a
copy or to which the Representative shall have reasonably objected in writing
or which is not in compliance with the Rules and Regulations.
(b) The Company will advise the Representative promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C) of
any request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, and (D) of
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the use of the Prospectus or of
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the institution of any proceedings for that purpose. The Company will use its
best efforts to prevent the issuance of any such stop order preventing or
suspending the use of the Prospectus and to obtain as soon as possible the
lifting thereof, if issued.
(c) The Company will cooperate with the Representative in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representative may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the
Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction where it is not
now so qualified or required to file such a consent. The Company will, from
time to time, prepare and file such statements, reports, and other documents,
as are or may be required to continue such qualifications in effect for so
long a period as the Representative may reasonably request for distribution of
the Shares.
(d) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary
Prospectus as the Representative may reasonably request. The Company will
deliver to, or upon the order of, the Representative during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representative may reasonably request. The Company will deliver to the
Representative at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representative such number of
copies of the Registration Statement (including such number of copies of the
exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representative may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution of
the Shares as contemplated in this Agreement and the Prospectus. If during
the period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is necessary
at any time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus so
that the Prospectus as so amended or supplemented will not, in the light of
the circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
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<PAGE>
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date of
the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(g) The Company will, from the Closing Date and thereafter until all
of the Representative's Warrants are exercised or two years from the Closing
Date, whichever is later, deliver to the Representative copies of annual
reports and copies of all other documents, reports and information furnished
by the Company to its stockholders or filed with any securities exchange
pursuant to the requirements of such exchange or with the Commission pursuant
to the Act or the Securities Exchange Act of 1934, as amended. The Company
will deliver to the Representative similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which are
not consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
or exercisable for shares of Common Stock or derivative of
Stock (or agreement for such) will be made for a period of one hundred
days after the date of this Agreement, directly or indirectly, by the
otherwise than hereunder or with the prior written consent of the,
which consent will not be unreasonably withheld.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on The American Stock Exchange.
(j) The Company has caused each officer and director to furnish to
you, on or prior to the date of this agreement, a letter or letters, in form
and substance satisfactory to the Underwriters ("Lockup Agreements"), pursuant
to which each such person shall agree (A) not to offer, sell, sell short or
otherwise dispose of any shares of Common Stock of the Company or other
capital stock of the Company, or any other securities convertible,
exchangeable or exercisable for Common Stock or derivatives of Common Stock
owned by such person or request the registration for the offer or sale of any
of the foregoing (or as to which such person has the right to direct the
disposition of) for a period of 180 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of Paulson
Investment Company, Inc., which consent shall not be unreasonably withheld;
and (B) to give prior written notice to Paulson Investment Company, Inc. for
a period of five years from the effective date of the Registration Statement,
with respect to any sales of Common Stock of the Company pursuant to Rule 144
under the Securities Act or any similar rule.
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<PAGE>
(k) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the
Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
5. COSTS AND EXPENSES.
(a) Paulson Investment Company, Inc. shall be entitled, for itself
alone and not as Representative of the Underwriters, at the Closing Date and
any Option Closing date to a non-accountable expense allowance equal to three
percent of the initial public offering price of the Shares being purchased by
the Underwriters on that date, provided, however, that the sum of $35,000
heretofore paid by the Company to Paulson Investment Company, Inc. shall be
applied as a credit against the non-accountable expense allowance due on the
Closing Date.
(b) In addition to the payment described in Paragraph (a) of this
Section 5, the Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company;
the cost of printing and delivering to, or as requested by, the Underwriters
copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Underwriters' Selling Memorandum, the
Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey
and any supplements or amendments thereto; the filing fees of the Commission;
the filing fees and expenses (including legal fees and disbursements)
incident to securing any required review by the NASD of the terms of the sale
of the Shares; any listing fee or other cost of listing the Shares on the
American Stock Exchange; and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. Any
transfer taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Company. The Company agrees to pay all costs and expenses
of the Underwriters, including the fees and disbursements of counsel for the
Underwriters,
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incident to the offer and sale of directed shares of the Common
by the Underwriters to employees and persons having business
relationships with the Company. The Company shall not, however, be required
to pay for any of the Underwriters' expenses (other than those related to
qualification under NASD regulation and State securities or Blue Sky laws)
except that, if this Agreement shall not be consummated, then the Company
shall reimburse the several Underwriters for accountable out-of-pocket
expenses, including fees and disbursements of counsel, reasonably incurred in
connection with investigating, marketing and proposing to market the Shares
or in contemplation of performing their obligations hereunder.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option Closing
Date are subject to the accuracy, as of the Closing Date or the Option Closing
Date, as the case may be, of the representations and warranties of the Company
contained herein, and to the performance by the Company of their covenants and
obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the and complied with to
its reasonable satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been issued and
no proceedings for that purpose shall have been taken or, to the knowledge of
the Company, shall be contemplated by the Commission and no injunction,
restraining order, or order of any nature by a Federal or state court of
competent jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares.
(b) The Representative shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Reish & Luftman,
counsel for the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; each Subsidiary has been
duly organized and is validly existing as a corporation or other business entity
in good standing under the laws of its jurisdiction of organization, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the Company and each
Subsidiary is duly
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qualified to transact business in all jurisdictions in which
conduct of its business requires such qualification, or in which the failure
qualify would have a materially adverse effect upon the business of the.
(ii) The Company has authorized and outstanding capital stock
as set forth under the caption "Capitalization" in the Prospectus; the
the Company's Common Stock have been duly authorized; the outstanding
of the Company's Common Stock have been duly authorized and validly
are fully paid and non-assessable; all of the securities of the
to the description thereof contained in the Prospectus; the
the Common Stock, assuming they are in the form filed with the,
in due and proper form; the shares of Common Stock to be sold by
Company pursuant to this Agreement, including shares of Common Stock to be
as a part of the Option Shares have been duly authorized and, upon issuance
delivery thereof as contemplated in this Agreement and the Registration
, will be validly issued, fully paid and non-assessable; no preemptive
of stockholders exist with respect to any of the Common Stock of the
or the issuance or sale thereof pursuant to any applicable statute or
provisions of the Company's charter documents or, to such counsel's best
, pursuant to any contractual obligation. The Representative's Warrants
been authorized for issuance to the Representative and will, when issued,
rights, privileges, and characteristics as represented in the most
form of Representative's Warrants filed as an exhibit to the Registration
; the securities to be issued upon exercise of the Representative's
, when issued and delivered against payment therefor in accordance with
terms of the Representative's Warrants, will be duly and validly issued,
paid, nonassessable and free of preemptive rights, and all corporate
required to be taken for the authorization and issuance of the
Warrants, and the securities to be issued upon their exercise,
been validly and sufficiently taken.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
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(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material respects
with the requirements of the Act and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to the
financial statements and related schedules therein).
(vi) The statements under the captions "
in the Prospectus and in Item 15 of the Registration
Statement, insofar as such statements constitute a summary of documents
referred to therein or matters of law, fairly summarize in all material
respects the information called for with respect to such documents and
matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described
in the Registration Statement or the Prospectus which are not so filed or
described as required, and such contracts and documents as are summarized in
the Registration Statement or the Prospectus are fairly summarized in all
material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or by-laws of the Company, or any
agreement or instrument known to such counsel to which the Company is a party
or by which the Company may be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery
of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD or as required by
State securities and Blue Sky laws as to which such counsel need express no
opinion) except such as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement, and
application of the net
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proceeds therefrom as described in the Prospectus, required to register as
an investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters
governed by the laws other than Delaware corporate law and Federal laws on
local counsel in such jurisdictions, provided that in each case such counsel
shall state that they believe that they and the Underwriters are justified in
relying on such other counsel. In addition to the matters set forth above,
the opinion of Reish & Luftman shall also include a statement to the effect
that nothing has come to the attention of such counsel that has caused them
to believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not, and (ii) the Prospectus, or any supplement thereto, on the date it was
filed pursuant to the Rules and Regulations and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make
the statements, in the light of the circumstances under which they are made,
not misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein).
(c) The Representative shall have received from Stoel Rives LLP,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6. In
rendering such opinion Stoel Rives LLP may rely as to all matters governed
other than by the laws of the State of Oregon or Federal laws on the
opinion of counsel referred to in Paragraphs (b) and (c) of this Section 6.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of
such counsel that has caused them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective
under the Act (but after giving effect to any modifications incorporated
therein pursuant to Rule 430A under the Act) as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact, necessary in order to
make the statements, in the light of the circumstances under which they are
made, not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement, Stoel Rives LLP may state that their belief is
based upon the procedures set forth therein, but is without independent
check and verification.
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<PAGE>
(d) The Representative shall have received at or prior to the
Closing Date from Stoel Rives LLP a memorandum or summary, in form and
substance satisfactory to the Representative, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representative may reasonably have designated to the Company.
(e) The Representative, on behalf of the several Underwriters, shall
have received, on each of the dates hereof, the Closing Date and the Option
Closing Date, as the case may be, a letter dated the date hereof, the Closing
Date or the Option Closing Date, as the case may be, in form and substance
satisfactory to the Representative, of KPMG Peat Marwick, LLP confirming that
they are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in
their opinion the financial statements and schedules examined by them and
included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the
related published Rules and Regulations and containing such other statements
and information as is ordinarily included in accountants' "comfort letters"
to Underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration Statement
and Prospectus.
(f) The Representative shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the
case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been
taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing Date
or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration Statement
and Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
and since the effective date of the Registration Statement, no event has
occurred which should have been set forth in a
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<PAGE>
supplement to or an amendment of the Prospectus which has not been so set
forth in such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company,
whether or not arising in the ordinary course of business.
(g) The Company shall have furnished to the Representative such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as
the Representative may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved
for designation upon notice of issuance on the American Stock Exchange.
(j) The Lockup Agreements described in Section 4(j) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representative and to Stoel Rives LLP,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representative by notifying the Company of such termination in writing
or by telegram at or prior to the Closing Date or the Option Closing Date,
as the case may be.
In such event, the Company and the Underwriters shall not be under
any obligation to each other (except to the extent provided in Sections 5 and
8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of
the Shares required to be delivered as and when specified in this Agreement
are subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
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(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to
which such Underwriter or any such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii)
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and will reimburse each Underwriter and each such controlling
person upon demand for any legal or other expenses reasonably incurred by
such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or through
the Representative specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who controls
the Company within the meaning of the Act, against any losses, claims,
damages or liabilities to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or (ii) the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances
under which they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however, that
each Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance
upon and in conformity with written information furnished to the Company by
or through the Representative specifically for use in the preparation
thereof. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.
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<PAGE>
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to
any party who shall fail to give notice as provided in this Section 8(c) if
the party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was materially prejudiced by the
failure to give such notice, but the failure to give such notice shall not
relieve the indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than
on account of the provisions of Section 8(a) or (b). In case any such
proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such
indemnified party and shall pay as incurred the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel at its own
expense. Notwithstanding the foregoing, the indemnifying party shall pay
as incurred (or within 30 days of presentation) the fees and expenses of
the counsel retained by the indemnified party in the event (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them or (iii) the indemnifying party shall have failed to
assume the defense and employ counsel acceptable to the indemnified party
within a reasonable period of time after notice of commencement of the
action. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant
to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the prior
written consent of the indemnified party, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action or
proceeding of which indemnification may be sought hereunder (whether or not
any indemnified party is an actual or potential party to such claim, action
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action or proceeding.
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<PAGE>
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the offering
of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law then each indemnifying
party shall contribute to such amount paid or payable by such indemnified
party in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter
shall be required to contribute any amount in excess of the underwriting
discounts and commissions applicable to the Shares purchased by such
Underwriter, and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom
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<PAGE>
contribution may be sought under this Section 8 hereby consents to the
jurisdiction of any court having jurisdiction over any other contributing
party, agrees that process issuing from such court may be served upon him or
it by any other contributing party and consents to the service of such
process and agrees that any other contributing party may join him or it as an
additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are
incurred. The indemnity and contribution agreements contained in this
Section 8 and the representations and warranties of the Company set forth
in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter, the Company, its directors or
officers or any persons controlling the Company, (ii) acceptance of any
Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be
entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may
be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company),
you, as Representative of the Underwriters, shall use your reasonable
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as
may be agreed upon and upon the terms set forth herein, the Firm Shares or
Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representative, shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then
(a) if the aggregate number of Shares with respect to which such default
shall occur does not exceed 10% of the Firm Shares or Option Shares, as the
case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to purchase hereunder,
to purchase the Firm Shares or Option Shares, as the case may be, which
such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of Firm Shares or Option Shares, as the case may be,
with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or
you as the Representative of the Underwriters will have the right, by
written notice given within the next 36-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the
non-
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<PAGE>
defaulting Underwriters or of the Company except to the extent provided in
Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option
Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, as you, as Representative, may determine in order that
the required changes in the Registration Statement or in the Prospectus or in
any other documents or arrangements may be effected. The term "Underwriter"
includes any person substituted for a defaulting Underwriter. Any action
taken under this Section 9 shall not relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Paulson
Investment Company, Inc., 811 SW Front Avenue, Portland, Oregon 97204,
Attention: Chester L.F. Paulson; with a copy to Stoel Rives LLP, 900 SW 5th
Avenue, Portland, Oregon 97204, Attention: John J. Halle; if to the Company,
to Fortune Petroleum Corporation, 515 West Greens Road, Suite 720, Houston,
Texas 77067 Attention: Tyrone J. Fairbanks, with a copy to Reish & Luftman,
11755 Wilshire Boulevard, 10th Floor, Los Angeles, California 90025,
Attention: Bruce L. Ashton.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following
has occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse change
or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries taken as a whole, whether or
not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the United
States would, in your reasonable judgment, make it impracticable to market
the Shares or to enforce contracts for the sale of the Shares, (iii) the Dow
Jones Industrial Average shall have fallen by 15 percent or more from its
closing price
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<PAGE>
on the day immediately preceding the date that the Registration Statement is
declared effective by the Commission, (iv) suspension of trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or numbers
of days of trading) for securities on either such Exchange, (v) the
enactment, publication, decree or other promulgation of any statute,
regulation, rule or order of any court or other governmental authority which
in your opinion materially and adversely affects or may materially and
adversely affect the business or operations of the Company, (vi) declaration
of a banking moratorium by United States or New York State authorities, (vii)
any downgrading in the rating of the Company's debt securities by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Exchange Act); (viii) the suspension of
trading of the Company's common stock by the Commission on the Nasdaq Stock
Market or (ix) the taking of any action by any governmental body or agency in
respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United States;
or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company
for inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar
as such information relates to the Underwriters), legends required by Item
502(d) of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants
in this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the
Company or its directors or officers and (c) delivery of and payment for the
Shares under this Agreement.
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<PAGE>
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Oregon. All disputes relating to this
Underwriting Agreement shall be adjudicated before a court located in
Multnomah county, Oregon to the exclusion of all other courts that might have
jurisdiction.
If the foregoing letter is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
FORTUNE PETROLEUM CORPORATION
By:____________________________________
Tyrone J. Fairbanks, President and CEO
The foregoing Underwriting Agreement is hereby confirmed and
accepted as of the date first above written.
PAULSON INVESTMENT COMPANY, INC.
As Representative of the several
Underwriters listed on Schedule I
By:___________________________________
Authorized Officer
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<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
Paulson Investment Company, Inc.
Total 2,000,000
---------
---------
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<PAGE>
SCHEDULE II
LIST OF SUBSIDIARIES
Subsidiary Percent Ownership
---------- -----------------
None
*****
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<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
FORTUNE PETROLEUM CORPORATION
PURCHASE WARRANT
Issued to:
PAULSON INVESTMENT COMPANY, INC.
Exercisable to Purchase
200,000 Shares
of
FORTUNE PETROLEUM CORPORATION
Void after October 22, 2001
<PAGE>
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is
entitled to purchase, and the Company promises and agrees to sell and issue
to the Warrantholder, at any time on or after __________, 1997 and on or
before __________, 2001, up to 200,000 Shares (hereinafter defined) at the
Exercise Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, no par value, of the Company.
(e) "Company" means Fortune Petroleum Corporation, a Delaware
corporation.
(f) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in
Section 6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration Statement
is declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one Share upon exercise of Warrants as determined from time to time
pursuant to the provisions hereof. The initial Exercise Price is $____ per
Share.
(i) "Offering" means the public offering of Shares made pursuant to the
Registration Statement.
(j) "Participating Underwriter" means any underwriter participating in
the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(k) "Registration Statement" means the Company's registration statement
(File No. _________) as amended on the Closing Date.
(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
2
<PAGE>
(m) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(n) "Share" means, as the case may require, either one of the Shares of
Common Stock offered to the Public pursuant to the Registration Statement or
one of the Shares of Common Stock obtainable on exercise of a Warrant.
(p) "Warrant Certificate" means a certificate evidencing the Warrant.
(q) "Warrantholder" means a record holder of the Warrant or Securities.
The initial Warrantholder is Paulson Investment Company, Inc.
(r) "Warrantholder's Expenses" means the sum of (i) the aggregate amount
of cash payments made to an underwriter, underwriting syndicate, or agent in
connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the
Securities sold by such underwriter, underwriting syndicate, or agent in such
offering and the denominator of which is the aggregate sales price of all of
the securities sold by such underwriter, underwriting syndicate, or agent in
such offering and (ii) all out-of-pocket expenses of the Warrantholder,
except for the fees and disbursements of one firm retained as legal counsel
for the Warrantholder that will be paid by the Company.
(s) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any
certificate obtained upon transfer or partial exercise of the Warrant
evidenced by any such certificate.
2. EXERCISE OF WARRANTS. All or any part of the Warrant may be exercised
commencing on the first anniversary of the Effective Date and ending at 5 p.m.
Pacific Time on the fifth anniversary of the Effective Date by surrendering
this Warrant Certificate, together with appropriate instructions, duly
executed by the Warrantholder or by its duly authorized attorney, at the
office of the Company, One Commerce Green, 515 W. Greens Rd., Suite 720,
Houston, Texa, or at such other office or agency as the Company may
designate. Upon receipt of notice of exercise, the Company shall immediately
instruct its transfer agent to prepare certificates for the Securities to be
received by the Warrantholder upon completion of the Warrant exercise. When
such certificates are prepared, the Company shall notify the Warrantholder
and deliver such certificates to the Warrantholder or as per the
Warrantholder's instructions immediately upon (i) payment in full by the
Warrantholder, in lawful money of the United States, of the Exercise Price
payable with respect to the Securities being purchased. If the Warrantholder
shall represent and warrant that all applicable registration and prospectus
delivery requirements for their sale have been complied with upon sale of the
Securities received upon exercise of the Warrant, such certificates shall not
bear a legend with respect to the Securities Act of 1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver
to the Warrantholder a new Warrant Certificate (dated the date hereof), in
form and tenor similar to this Warrant Certificate, evidencing that portion
of the Warrant not exercised. The Securities to be obtained on exercise
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<PAGE>
of the Warrant will be deemed to have been issued, and any person exercising
the Warrants will be deemed to have become a holder of record of those
Securities, as of the date of the payment of the Exercise Price.
3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are divided
into a greater number of shares or a dividend in stock is paid on the Common
Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the
number of shares of Common Stock for which the Warrant is then exercisable
will be proportionately reduced and the Exercise Price will be
proportionately increased. The increases and reductions provided for in this
subsection 3(a) will be made with the intent and, as nearly as practicable,
the effect that neither the percentage of the total equity of the Company
obtainable on exercise of the Warrants nor the price payable for such
percentage upon such exercise will be affected by any event described in this
subsection 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or
other change in the capital structure of the Company, then, as a condition of
such change, lawful and adequate provision will be made so that the holder of
this Warrant Certificate will have the right thereafter to receive upon the
exercise of the Warrant the kind and amount of shares of stock or other
securities or property to which he would have been entitled if, immediately
prior to such event, he had held the number of shares of Common Stock
obtainable upon the exercise of the Warrant. In any such case, appropriate
adjustment will be made in the application of the provisions set forth herein
with respect to the rights and interest thereafter of the Warrantholder, to
the end that the provisions set forth herein will thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the exercise of the Warrant. The
Company will not permit any change in its capital structure to occur unless
the issuer of the shares of stock or other securities to be received by the
holder of this Warrant Certificate, if not the Company, agrees to be bound by
and comply with the provisions of this Warrant Certificate.
(c) When any adjustment is required to be made in the number of shares
of Common Stock, other securities, or the property purchasable upon exercise
of the Warrant, the Company will promptly determine the new number of such
shares or other securities or property purchasable upon exercise of the
Warrant and (i) prepare and retain on file a statement describing in
reasonable detail the method used in arriving at the new number of such
shares or other securities or property purchasable upon exercise of the
Warrant and (ii) cause a copy of such statement to be mailed to the
Warrantholder within thirty (30) days after the date of the event giving rise
to the adjustment.
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<PAGE>
(d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant, but the Company will
pay, in lieu of fractional shares, a cash payment therefor on the basis of
the mean between the bid and asked prices of the Common Stock in the
over-the-counter market or the closing price on a national securities
exchange on the day immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of the
Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been exercised prior to the
record date for such distribution. The provisions with respect to adjustment
of the Common Stock provided in this Section 3 will also apply to the
securities to which the Warrantholder or his assignee is entitled under this
subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Common Stock or other
Securities purchasable upon exercise of the Warrant.
4. RESERVATION OF SECURITIES. The Company agrees that the number of
shares of Common Stock or other Securities sufficient to provide for the
exercise of the Warrant upon the basis set forth above will at all times
during the term of the Warrant be reserved for exercise.
5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms,
and the Company will pay all documentary and transfer taxes, if any, in
respect of the original issuance thereof upon exercise of the Warrant.
6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT CERTIFICATE.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary
of the Effective Date (the "Registration Period"). The Company will also
file such applications and other documents necessary to permit the sale of
the Securities to the public during the Registration Period in those states
in which the Shares were qualified for sale in the Offering or such other
states as the Company and the Warrantholder agree to. In order to comply
with the provisions of this Section 6(a), the Company is not required to file
more than one registration statement. No registration right of any kind,
"piggyback" or otherwise, will last longer than five years from the Effective
Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
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<PAGE>
(c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration, will be
entirely in the control and at the discretion of the Company. The Company
will file such post-effective amendments and supplements as may be necessary
to maintain the currency of the registration statement during the period of
its use. In addition, if the Warrantholder participating in the registration
is advised by counsel that the registration statement, in their opinion, is
deficient in any material respect, the Company will use its best efforts to
cause the registration statement to be amended to eliminate the concerns
raised.
(d) The Company will furnish to the Warrantholder the number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably
request in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at least
50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration
pursuant to this Section 6, addressed to the Warrantholders and any
Participating Underwriter, (ii) furnish an appropriate letter from the
independent public accountants of the Company, addressed to the
Warrantholders and any Participating Underwriter, and (iii) make
representations and warranties to the Warrantholders and any Participating
Underwriter. A request pursuant to this subsection (e) may be made on three
occasions. The documents required to be delivered pursuant to this
subsection (e) will be dated within ten days of the request and will be, in
form and substance, equivalent to similar documents furnished to the
underwriters in connection with the Offering, with such changes as may be
appropriate in light of changed circumstances.
7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
(a) If any of the Securities are registered, the Company will indemnify
and hold harmless each selling Warrantholder, any person who controls any
selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating
Underwriter for any legal or other expenses reasonably incurred by the
Warrantholder, controlling person, or Participating Underwriter in connection
with investigating or defending any such loss, claim, damage, liability, or
action, insofar as such losses, claims, damages, or liabilities, joint or
several (or actions in respect thereof), arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained,
on the effective date thereof, in any such registration statement or any
preliminary prospectus or final prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading; PROVIDED, HOWEVER, that the
Company will not be liable in any case to the extent that any loss, claim,
damage, or liability arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in any
registration statement, preliminary prospectus, final prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with
6
<PAGE>
written information furnished by a Warrantholder for use in the preparation
thereof. The indemnity agreement contained in this subparagraph (a) will not
apply to amounts paid to any claimant in settlement of any suit or claim
unless such payment is first approved by the Company, such approval not to be
unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed any registration
statement or other filing or any amendment or supplement thereto, and any
person who controls the Company within the meaning of the Act, against any
losses, claims, damages, or liabilities to which the Company or any such
director, officer, or controlling person may become subject under the Act or
otherwise, and will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer, or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, or action, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in said registration
statement, any preliminary or final prospectus, or other filing, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only to the extent that such untrue statement or alleged untrue statement
or omission or alleged omission was made in said registration statement,
preliminary or final prospectus, or other filing, or amendment or supplement,
in reliance upon and in conformity with written information furnished by such
Warrantholder for use in the preparation thereof; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subparagraph (b) will not apply to
amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Warrantholder, such approval not to be
unreasonably withheld.
(c) Promptly after receipt by an indemnified party under subparagraphs
(a) or (b) above of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, notify the indemnifying party of the commencement
thereof; but the omission to notify the indemnifying party will not relieve
it from any liability that it may have to any indemnified party otherwise
than under subparagraphs (a) and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party; and
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
other than reasonable costs of investigation.
8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned or hypothecated for a one-year period
after the Effective Date except to underwriters of the Offering or to
individuals who are either a partner or an officer of such an
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<PAGE>
underwriter or by will or by operation of law. The Warrant may be divided or
combined, upon request to the Company by the Warrantholder, into a
certificate or certificates evidencing the same aggregate number of Warrants.
9. NO RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to
the Company, be entitled to receive such quarterly or annual reports as the
Company distributes to its shareholders.
10. NOTICE. Any notices required or permitted to be given hereunder will
be in writing and may be served personally or by mail; and if served will be
addressed as follows:
If to the Company:
Fortune Petroleum Corporation
One Commerce Green
515 West Greens Rd., Suite 720
Houston, Texas 77067
Attn: Treasurer
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
Any notice so given by mail will be deemed effectively given 48 hours
after mailing when deposited in the United States mail, registered or
certified mail, return receipt requested, postage prepaid and addressed as
specified above. Any party may by written notice to the other specify a
different address for notice purposes.
11. APPLICABLE LAW. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without
reference to conflict of laws principles thereunder. All disputes relating
to this Warrant Certificate shall be tried before the courts of Oregon
located in Multnomah County, Oregon to the exclusion of all other courts that
might have jurisdiction.
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<PAGE>
Dated as of , 1996
-----------
FORTUNE PETROLEUM CORPORATION
By:
--------------------------------
Tyrone J. Fairbanks
President
Agreed and Accepted as of , 1996
----------
PAULSON INVESTMENT COMPANY, INC.
By:
--------------------------------
Lorraine Maxfield
Senior Vice President -- Research
<PAGE>
________________________
FORTUNE PETROLEUM CORPORATION
and
ABC BANCORP, INC., as Rights Agent
________________________
RIGHTS AGREEMENT
Dated as of ________ __, 1997
________________________
<PAGE>
TABLE OF CONTENTS
PAGE
----
Section 1. Certain Definitions......................................... 1
Section 2. Appointment of Rights Agent................................. 5
Section 3. Issue of Right Certificates................................. 5
Section 4. Form of Right Certificates.................................. 7
Section 5. Countersignature and Registration........................... 7
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right
Certificates.............................................. 8
Section 7. Exercise of Rights, Purchase Price; Expiration Date of
Rights.................................................... 8
Section 8. Cancellation and Destruction of Right Certificates.......... 10
Section 9. Availability of Shares of Preferred Stock................... 10
Section 10. Preferred Stock Record Date................................. 11
Section 11. Adjustment of Purchase Price, Number of Shares and Number
of Rights................................................. 11
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.. 19
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power............................................. 19
Section 14. Fractional Rights and Fractional Shares..................... 22
Section 15. Rights of Action............................................ 23
Section 16. Agreement of Right Holders.................................. 24
Section 17. Right Certificate Holder Not Deemed a Stockholder........... 24
Section 18. Concerning the Rights Agent................................. 24
Section 19. Merger or Consolidation or Change of Name of Rights Agent... 25
Section 20. Duties of Rights Agent...................................... 25
<PAGE>
Section 21. Change of Rights Agent...................................... 27
Section 22. Issuance of New Right Certificates.......................... 28
Section 23. Redemption.................................................. 28
Section 24. Exchange.................................................... 29
Section 25. Notice of Certain Events.................................... 30
Section 26. Notices..................................................... 31
Section 27. Supplements and Amendments.................................. 31
Section 28. Successors.................................................. 32
Section 29. Benefits of this Agreement.................................. 32
Section 30. Determinations and Actions by the Board of Directors........ 32
Section 31. Severability................................................ 32
Section 32. Governing Law............................................... 32
Section 33. Counterparts................................................ 33
Section 34. Descriptive Headings........................................ 33
<PAGE>
RIGHTS AGREEMENT
Rights Agreement, dated as of ________ __, 1997 ("Agreement"), between
Fortune Petroleum Corporation, a Delaware corporation (the "Company"), and ABC
Bancorp, Inc., as Rights Agent (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each share of
Common Stock (as hereinafter defined) of the Company outstanding as of the Close
of Business (as defined below) on ________ __, 1997 (the "Record Date"), each
Right representing the right to purchase one one-thousandth (subject to
adjustment) of a share of Preferred Stock (as hereinafter defined), upon the
terms and subject to the conditions herein set forth, and has further authorized
and directed the issuance of one Right (subject to adjustment as provided
herein) with respect to each share of Common Stock that shall become outstanding
between the Record Date and the earlier of the Distribution Date and the
Expiration Date (as such terms are hereinafter defined); PROVIDED, however, that
Rights may be issued with respect to shares of Common Stock that shall become
outstanding after the Distribution Date and prior to the Expiration Date in
accordance with Section 22.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meaning indicated:
(a) "Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which shall be the Beneficial Owner (as such term is hereinafter
defined) of 15% or more of the shares of Common Stock then outstanding, but
shall not include an Exempt Person (as such term is hereinafter defined);
PROVIDED, HOWEVER, that (i) if the Board of Directors of the Company determines
in good faith that a Person who would otherwise be an "Acquiring Person" became
such inadvertently (including, without limitation, because (A) such Person was
unaware that it beneficially owned a percentage of Common Stock that would
otherwise cause such Person to be an "Acquiring Person" or (B) such Person was
aware of the extent of its Beneficial Ownership of Common Stock but had no
actual knowledge of the consequences of such Beneficial Ownership under this
Agreement) and without any intention of changing or influencing control of the
Company, and if such Person as promptly as practicable divested or divests
itself of Beneficial Ownership of a sufficient number of shares of Common Stock
so that such Person would no longer be an "Acquiring Person," then such Person
shall not be deemed to be or to have become an "Acquiring Person" for any
purposes of this Agreement; (ii) if, as of the date hereof, any Person is the
Beneficial Owner of 15% or more of the shares of Common Stock outstanding, such
Person shall not be or become an "Acquiring Person" unless and until such time
as such Person shall become the Beneficial Owner of additional shares of Common
Stock (other than pursuant to a dividend or distribution paid or made by the
Company on the outstanding Common Stock in shares of Common Stock or pursuant to
a
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split or subdivision of the outstanding Common Stock), unless, upon becoming
the Beneficial Owner of such additional shares of Common Stock, such Person is
not then the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding; and (iii) no Person shall become an "Acquiring Person" as the
result of an acquisition of shares of Common Stock by the Company which, by
reducing the number of shares outstanding, increases the proportionate number of
shares of Common Stock beneficially owned by such Person to 15% or more of the
shares of Common Stock then outstanding, PROVIDED, HOWEVER, that if a Person
shall become the Beneficial Owner of 15% or more of the shares of Common Stock
then outstanding by reason of such share acquisitions by the Company and shall
thereafter become the Beneficial Owner of any additional shares of Common Stock
(other than pursuant to a dividend or distribution paid or made by the Company
on the outstanding Common Stock in shares of Common Stock or pursuant to a split
or subdivision of the outstanding Common Stock), then such Person shall be
deemed to be an "Acquiring Person" unless upon becoming the Beneficial Owner of
such additional shares of Common Stock such Person does not beneficially own 15%
or more of the shares of Common Stock then outstanding. For all purposes of
this Agreement, any calculation of the number of shares of Common Stock
outstanding at any particular time, including for purposes of determining the
particular percentage of such outstanding shares of Common Stock of which any
Person is the Beneficial Owner, shall be made in accordance with the last
sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on the date hereof.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as in effect on the date hereof.
(c) A Person shall be deemed the "Beneficial Owner" of, shall be deemed to
have "Beneficial Ownership" of and shall be deemed to "beneficially own" any
securities:
(i) which such Person or any of such Person's Affiliates or
Associates is deemed to beneficially own, directly or indirectly, within the
meaning of Rule l3d-3 of the General Rules and Regulations under the Exchange
Act as in effect on the date hereof;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights, warrants or options, or otherwise; PROVIDED, HOWEVER, that a
Person shall not be deemed the Beneficial Owner of, or to beneficially own, (x)
securities tendered pursuant to a tender or exchange offer made by or on behalf
of such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase, (y) securities which such Person
has a right to acquire upon the
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exercise of Rights at any time prior to the time that any Person becomes an
Acquiring Person or (z) securities issuable upon the exercise of Rights from
and after the time that any Person becomes an Acquiring Person if such Rights
were acquired by such Person or any of such Person's Affiliates or Associates
prior to the Distribution Date or pursuant to Section 3(a) or Section 22
hereof ("Original Rights") or pursuant to Section 11(i) or Section 11(n) with
respect to an adjustment to Original Rights; or (B) the right to vote
pursuant to any agreement, arrangement or understanding; PROVIDED, HOWEVER,
that a Person shall not be deemed the Beneficial Owner of, or to beneficially
own, any security by reason of such agreement, arrangement or understanding
if the agreement, arrangement or understanding to vote such security (1)
arises solely from a revocable proxy or consent given to such Person in
response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations promulgated under the
Exchange Act and (2) is not also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person and with respect to which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or understanding (other
than customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) for the
purpose of acquiring, holding, voting (except to the extent contemplated by the
proviso to Section 1(c)(ii)(B)) or disposing of such securities of the Company;
PROVIDED, HOWEVER, that no Person who is an officer, director or employee of an
Exempt Person shall be deemed, solely by reason of such Person's status or
authority as such, to be the "Beneficial Owner" of, to have "Beneficial
Ownership" of or to "beneficially own" any securities that are "beneficially
owned" (as defined in this Section l(c)), including, without limitation, in a
fiduciary capacity, by an Exempt Person or by any other such officer, director
or employee of an Exempt Person.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the State of Texas or the city in which the
principal office of the Rights Agent is located are authorized or obligated by
law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M., Houston,
Texas time, on such date; PROVIDED, HOWEVER, that if such date is not a Business
Day it shall mean 5:00 P.M., Houston, Texas time, on the next succeeding
Business Day.
(f) "Common Stock" when used with reference to the Company shall mean the
Common Stock, presently par value $.01 per share, of the Company. "Common
Stock" when used with reference to any Person other than the Company shall mean
the common stock (or, in the case of an unincorporated entity, the equivalent
equity interest) with the greatest voting power of such other Person or, if such
other Person is a subsidiary of another Person, the Person or Persons which
ultimately control such first-mentioned Person.
3
<PAGE>
(g) "Common Stock Equivalents" shall have the meaning set forth in Section
11(a)(iii) hereof.
(h) "Current Value" shall have the meaning set forth in Section 11(a)(iii)
hereof.
(i) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(j) "Equivalent Preferred Shares" shall have the meaning set forth in
Section 11(b) hereof.
(k) "Exempt Person" shall mean the Company or any Subsidiary (as such term
is hereinafter defined) of the Company, in each case including, without
limitation, in its fiduciary capacity, or any employee benefit plan of the
Company or of any Subsidiary of the Company, or any entity or trustee holding
Common Stock for or pursuant to the terms of any such plan or for the purpose of
funding any such plan or funding other employee benefits for employees of the
Company or of any Subsidiary of the Company.
(l) "Exchange Ratio" shall have the meaning set forth in Section 24
hereof.
(m) "Expiration Date" shall have the meaning set forth in Section 7
hereof.
(n) "Flip-In Event" shall have the meaning set forth in Section 11(a)(ii)
hereof.
(o) "Final Expiration Date" shall have the meaning set forth in Section 7
hereof.
(p) "NASDAQ" shall mean The NASDAQ Stock Market.
(q) "New York Stock Exchange" shall mean the New York Stock Exchange, Inc.
(r) "Person" shall mean any individual, firm, corporation, partnership,
limited liability company, trust or other entity, and shall include any
successor (by merger or otherwise) to such entity.
(s) "Preferred Stock" shall mean the Series A Junior Participating
Preferred Stock, par value $1.00 per share, of the Company having the rights and
preferences set forth in the Form of Certificate of Designation attached to this
Agreement as Exhibit A.
(t) "Principal Party" shall have the meaning set forth in Section 13(b)
hereof.
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(u) "Redemption Date" shall have the meaning set forth in Section 7
hereof.
(v) "Redemption Price" shall have the meaning set forth in Section 23
hereof.
(w) "Right Certificate" shall have the meaning set forth in Section 3
hereof.
(x) "Securities Act" shall mean the Securities Act of 1933, as amended.
(y) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(z) "Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
(aa) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the
Company or an Acquiring Person that an Acquiring Person has become such, or such
earlier date as a majority of the Board of Directors shall become aware of the
existence of an Acquiring Person.
(bb) "Subsidiary" of any Person shall mean any corporation or other entity
of which securities or other ownership interests having ordinary voting power
sufficient to elect a majority of the board of directors or other persons
performing similar functions are beneficially owned, directly or indirectly, by
such Person, and any corporation or other entity that is otherwise controlled by
such Person.
(cc) "Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
(dd) "Summary of Rights" shall have the meaning set forth in Section 3
hereof.
(ee) "Trading Day" shall have the meaning set forth in Section 11(d)(i)
hereof.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date be the
holders of Common Stock) in accordance with the terms and conditions hereof, and
the Rights Agent hereby accepts such appointment. The Company may from time to
time appoint such co-Rights Agents as it may deem necessary or desirable.
Section 3. ISSUE OF RIGHT CERTIFICATES.
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(a) Until the Close of Business on the earlier of (i) the tenth day
after the Stock Acquisition Date or (ii) the tenth Business Day (or such
later date as may be determined by action of the Board of Directors prior to
such time as any Person becomes an Acquiring Person) after the date of the
commencement by any Person (other than an Exempt Person) of, or of the first
public announcement of the intention of such Person (other than an Exempt
Person) to commence, a tender or exchange offer the consummation of which
would result in any Person (other than an Exempt Person) becoming the
Beneficial Owner of shares of Common Stock aggregating 15% or more of the
Common Stock then outstanding (the earlier of such dates being herein
referred to as the "Distribution Date", PROVIDED, HOWEVER, that if either of
such dates occurs after the date of this Agreement and on or prior to the
Record Date, then the Distribution Date shall be the Record Date), (x) the
Rights will be evidenced (subject to the provisions of Section 3(b) hereof)
by the certificates for Common Stock registered in the names of the holders
thereof and not by separate Right Certificates, and (y) the Rights will be
transferable only in connection with the transfer of Common Stock. As soon
as practicable after the Distribution Date, the Company will prepare and
execute, the Rights Agent will countersign and the Company will send or cause
to be sent (and the Rights Agent will, if requested, send) by first-class,
insured, postage-prepaid mail, to each record holder of Common Stock as of
the close of business on the Distribution Date (other than any Acquiring
Person or any Associate or Affiliate of an Acquiring Person), at the address
of such holder shown on the records of the Company, a Right Certificate, in
substantially the form of Exhibit B hereto (a "Right Certificate"),
evidencing one Right (subject to adjustment as provided herein) for each
share of Common Stock so held. As of the Distribution Date, the Rights will
be evidenced solely by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the Company
will send a copy of a Summary of Rights to Purchase Shares of Preferred Stock,
in substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Stock as of
the Close of Business on the Record Date (other than any Acquiring Person or any
Associate or Affiliate of any Acquiring Person), at the address of such holder
shown on the records of the Company. With respect to certificates for Common
Stock outstanding as of the Record Date, until the Distribution Date, the Rights
will be evidenced by such certificates registered in the names of the holders
thereof together with the Summary of Rights. Until the Distribution Date (or,
if earlier, the Expiration Date), the surrender for transfer of any certificate
for Common Stock outstanding on the Record Date, with or without a copy of the
Summary of Rights, shall also constitute the transfer of the Rights associated
with the Common Stock represented thereby.
(c) Certificates issued for Common Stock (including, without limitation,
upon transfer of outstanding Common Stock, disposition of Common Stock out of
treasury stock or issuance or reissuance of Common Stock out of authorized but
unissued shares) after the Record Date but prior to the earlier of the
Distribution Date and the Expiration Date shall have impressed on, printed on,
written on or otherwise affixed to them the following legend:
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This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between Fortune
Petroleum Corporation (the "Company") and ABC Bancorp, Inc., as Rights
Agent, dated as of ________ __, 1997 as the same may be amended from
time to time (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal executive offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. The Company will mail to the holder of this
certificate a copy of the Rights Agreement without charge after
receipt of a written request therefor. UNDER CERTAIN CIRCUMSTANCES,
AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS OWNED BY OR TRANSFERRED
TO ANY PERSON WHO IS OR BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE
RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL BECOME NULL AND
VOID AND WILL NO LONGER BE TRANSFERABLE.
With respect to such certificates containing the foregoing legend, until the
Distribution Date the Rights associated with the Common Stock represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate, except as otherwise provided
herein, shall also constitute the transfer of the Rights associated with the
Common Stock represented thereby. In the event that the Company purchases or
otherwise acquires any Common Stock after the Record Date but prior to the
Distribution Date, any Rights associated with such Common Stock shall be deemed
canceled and retired so that the Company shall not be entitled to exercise any
Rights associated with the Common Stock which are no longer outstanding.
Notwithstanding this paragraph (c), the omission of a legend shall not
affect the enforceability of any part of this Agreement or the rights of any
holder of the Rights.
Section 4. FORM OF RIGHT CERTIFICATES. The Right Certificates (and the
forms of election to purchase shares and of assignment to be printed on the
reverse thereof) shall be substantially in the form set forth in Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange or interdealer quotation system on which the Rights may from time to
time be listed or quoted, or to conform to usage. Subject to the provisions of
Sections 11, 13 and 22 hereof, the Right Certificates shall entitle the holders
thereof to purchase such number of one one-thousandths of a share of Preferred
Stock as shall be set forth therein at the price per one one-thousandth of a
share of Preferred Stock set forth therein (the "Purchase Price"), but the
number of such one one-thousandths of a share of Preferred Stock and the
Purchase Price shall be subject to adjustment as provided herein.
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Section 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Right Certificates shall be executed on behalf of the Company by
the President of the Company, either manually or by facsimile signature, shall
have affixed thereto the Company's seal or a facsimile thereof and shall be
attested by the Secretary of the Company, either manually or by facsimile
signature. The Right Certificates shall be manually countersigned by the Rights
Agent and shall not be valid for any purpose unless countersigned. In case any
officer of the Company who shall have signed any of the Right Certificates shall
cease to be such officer of the Company before countersignature by the Rights
Agent and issuance and delivery by the Company, such Right Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the Person who signed
such Right Certificates had not ceased to be such officer of the Company; and
any Right Certificate may be signed on behalf of the Company by any Person who,
at the actual date of the execution of such Right Certificate, shall be a proper
officer of the Company to sign such Right Certificate, although at the date of
the execution of this Agreement any such Person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or cause
to be kept, at an office or agency designated for such purpose, books for
registration and transfer of the Right Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates and the date of each of the Right Certificates.
Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES.
(a) Subject to the provisions of Sections 7(e), 11(a)(ii), 13 and 14
hereof, at any time after the Distribution Date and prior to the Expiration
Date, any Right Certificate or Right Certificates may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase a like number of one one-thousandths
of a share of Preferred Stock as the Right Certificate or Right Certificates
surrendered then entitled such holder to purchase. Any registered holder
desiring to transfer, split up, combine or exchange any Right Certificate or
Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the office or agency of the
Rights Agent designated for such purpose. Thereupon the Rights Agent shall
countersign and deliver to the Person entitled thereto a Right Certificate or
Right Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split up, combination or
exchange of Right Certificates.
(b) Subject to the provisions of Section 11(a)(ii) hereof, at any time
after the Distribution Date and prior to the Expiration Date, upon receipt by
the Company and
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<PAGE>
the Rights Agent of evidence reasonably satisfactory to them of the loss,
theft, destruction or mutilation of a Right Certificate, and, in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory
to them, and, at the Company's request, reimbursement to the Company and the
Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Right Certificate if
mutilated, the Company will make and deliver a new Right Certificate of like
tenor to the Rights Agent for delivery to the registered holder in lieu of
the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. EXERCISE OF RIGHTS, PURCHASE PRICE; EXPIRATION DATE OF RIGHTS.
(a) Except as otherwise provided herein, the Rights shall become
exercisable on the Distribution Date, and thereafter the registered holder of
any Right Certificate may, subject to Section 11(a)(ii) hereof and except as
otherwise provided herein, exercise the Rights evidenced thereby in whole or in
part upon surrender of the Right Certificate, with the form of election to
purchase on the reverse side thereof duly executed, to the Rights Agent at the
office or agency of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of one
one-thousandths of a share of Preferred Stock (or other securities, cash or
other assets, as the case may be) as to which the Rights are exercised, at any
time which is both after the Distribution Date and prior to the time (the
"Expiration Date") that is the earliest of (i) the Close of Business on
________ __, 2007 (the "Final Expiration Date"), (ii) the time at which the
Rights are redeemed as provided in Section 23 hereof (the "Redemption Date") or
(iii) the time at which such Rights are exchanged as provided in Section 24
hereof.
(b) The Purchase Price shall be initially $______ for each one
one-thousandth of a share of Preferred Stock purchasable upon the exercise of
a Right. The Purchase Price and the number of one one-thousandths of a share
of Preferred Stock or other securities or property to be acquired upon
exercise of a Right shall be subject to adjustment from time to time as
provided in Sections 11 and 13 hereof and shall be payable in lawful money of
the United States of America in accordance with paragraph (c) of this Section
7.
(c) Except as otherwise provided herein, upon receipt of a Right
Certificate representing exercisable Rights, with the form of election to
purchase duly executed, accompanied by payment of the aggregate Purchase Price
for the shares of Preferred Stock to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof, in cash or by certified check,
cashier's check or money order payable to the order of the Company, the Rights
Agent shall thereupon promptly (i) (A) requisition from any transfer agent of
the Preferred Stock certificates for the number of shares of Preferred Stock to
be purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) requisition from the depositary agent
depositary receipts representing interests in such number of one one-thousandths
of a share of Preferred Stock as are to be purchased (in which case certificates
for the Preferred Stock represented by such receipts
9
<PAGE>
shall be deposited by the transfer agent with the depositary agent) and the
Company hereby directs the depositary agent to comply with such request, (ii)
when appropriate, requisition from the Company the amount of cash to be paid
in lieu of issuance of fractional shares in accordance with Section 14
hereof, (iii) promptly after receipt of such certificates or depositary
receipts, cause the same to be delivered to or upon the order of the
registered holder of such Right Certificate, registered in such name or names
as may be designated by such holder and (iv) when appropriate, after receipt,
promptly deliver such cash to or upon the order of the registered holder of
such Right Certificate.
(d) Except as otherwise provided herein, in case the registered holder of
any Right Certificate shall exercise less than all of the Rights evidenced
thereby, a new Right Certificate evidencing Rights equivalent to the exercisable
Rights remaining unexercised shall be issued by the Rights Agent to the
registered holder of such Right Certificate or to his duly authorized assigns,
subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder of Rights upon the occurrence of any purported
transfer or exercise of Rights pursuant to Section 6 hereof or this Section 7
unless such registered holder shall have (i) completed and signed the
certificate contained in the form of assignment or form of election to purchase
set forth on the reverse side of the Rights Certificate surrendered for such
transfer or exercise and (ii) provided such additional evidence of the identity
of the Beneficial Owner (or former Beneficial Owner) thereof as the Company
shall reasonably request.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all canceled Right Certificates to the Company, or shall, at the written
request of the Company, destroy such canceled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. AVAILABILITY OF SHARES OF PREFERRED STOCK.
(a) The Company covenants and agrees that it will cause to be reserved and
kept available out of its authorized and unissued shares of Preferred Stock or
any shares of Preferred Stock held in its treasury, the number of shares of
Preferred Stock that will be sufficient to permit the exercise in full of all
outstanding Rights.
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<PAGE>
(b) So long as the shares of Preferred Stock issuable upon the exercise of
Rights may be listed or admitted to trading on any national securities exchange,
or quoted on NASDAQ, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed or admitted to trading on such exchange, or quoted on
NASDAQ, upon official notice of issuance upon such exercise.
(c) From and after such time as the Rights become exercisable, the Company
shall use its best efforts, if then necessary to permit the issuance of shares
of Preferred Stock upon the exercise of Rights, to register and qualify such
shares of Preferred Stock under the Securities Act and any applicable state
securities or "Blue Sky" laws (to the extent exemptions therefrom are not
available), cause such registration statement and qualifications to become
effective as soon as possible after such filing and keep such registration and
qualifications effective until the earlier of the date as of which the Rights
are no longer exercisable for such securities and the Expiration Date. The
Company may temporarily suspend, for a period of time not to exceed 90 days, the
exercisability of the Rights in order to prepare and file a registration
statement under the Securities Act and permit it to become effective. Upon any
such suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained and until a registration statement
under the Securities Act (if required) shall have been declared effective.
(d) The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all shares of Preferred Stock delivered upon
exercise of Rights shall, at the time of delivery of the certificates therefor
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable shares.
(e) The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any shares of Preferred Stock upon the exercise of Rights. The Company shall
not, however, be required to pay any transfer tax which may be payable in
respect of any transfer or delivery of Right Certificates to a Person other
than, or the issuance or delivery of certificates or depositary receipts for the
Preferred Stock in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or deliver
any certificates or depositary receipts for Preferred Stock upon the exercise of
any Rights until any such tax shall have been paid (any such tax being payable
by that holder of such Right Certificate at the time of surrender) or until it
has been established to the Company's reasonable satisfaction that no such tax
is due.
Section 10. PREFERRED STOCK RECORD DATE. Each Person in whose name any
certificate for Preferred Stock is issued upon the exercise of Rights shall for
all purposes be
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<PAGE>
deemed to have become the holder of record of the shares of Preferred Stock
represented thereby on, and such certificate shall be dated, the date upon
which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made;
PROVIDED, HOWEVER, that if the date of such surrender and payment is a date
upon which the Preferred Stock transfer books of the Company are closed, such
Person shall be deemed to have become the record holder of such shares on,
and such certificate shall be dated, the next succeeding Business Day on
which the Preferred Stock transfer books of the Company are open. Prior to
the exercise of the Rights evidenced thereby, the holder of a Right
Certificate shall not be entitled to any rights of a holder of Preferred
Stock for which the Rights shall be exercisable, including, without
limitation, the right to vote or to receive dividends or other distributions,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES AND
NUMBER OF RIGHTS. The Purchase Price, the number of shares of Preferred Stock
or other securities or property purchasable upon exercise of each Right and the
number of Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date of this
Agreement (A) declare and pay a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C)
combine the outstanding Preferred Stock into a smaller number of shares of
Preferred Stock or (D) issue any shares of its capital stock in a
reclassification of the Preferred Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation), except as otherwise provided in this Section 11(a),
the Purchase Price in effect at the time of the record date for such dividend or
of the effective date of such subdivision, combination or reclassification, and
the number and kind of shares of capital stock issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive the aggregate number and kind of shares of
capital stock which, if such Right had been exercised immediately prior to such
date and at a time when the Preferred Stock transfer books of the Company were
open, the holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification; PROVIDED, HOWEVER, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any Person
becomes an Acquiring Person (the first occurrence of such event being referred
to hereinafter as the "Flip-In Event"), then (A) the Purchase Price shall be
adjusted to be the Purchase Price in effect immediately prior to the Flip-In
Event multiplied by the number of one one-thousandths of a share of Preferred
Stock for which a Right was exercisable immediately prior to such Flip-In Event,
whether or not such Right was then exercisable, and (B) each holder of a Right,
except as otherwise provided in this Section 11(a)(ii) and Section 11(a)(iii)
hereof, shall thereafter have the right to receive, upon exercise thereof at
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<PAGE>
a price equal to the Purchase Price (as so adjusted), in accordance with the
terms of this Agreement and in lieu of shares of Preferred Stock, such number
of shares of Common Stock as shall equal the result obtained by dividing the
Purchase Price (as so adjusted) by 50% of the current per share market price
of the Common Stock (determined pursuant to Section 11(d) hereof) on the date
of such Flip-In Event; PROVIDED, HOWEVER, that the Purchase Price (as so
adjusted) and the number of shares of Common Stock so receivable upon
exercise of a Right shall, following the Flip-In Event, be subject to further
adjustment as appropriate in accordance with Section 11(f) hereof.
Notwithstanding anything in this Agreement to the contrary, however, from and
after the Flip-In Event, any Rights that are beneficially owned by (x) any
Acquiring Person (or any Affiliate or Associate of any Acquiring Person), (y)
a transferee of any Acquiring Person (or any such Affiliate or Associate) who
becomes a transferee after the Flip-In Event or (z) a transferee of any
Acquiring Person (or any such Affiliate or Associate) who became a transferee
prior to or concurrently with the Flip-In Event pursuant to either (I) a
transfer from the Acquiring Person to holders of its equity securities or to
any Person with whom it has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (II) a transfer which the
Board of Directors has determined is part of a plan, arrangement or
understanding which has the purpose or effect of avoiding the provisions of
this paragraph, and subsequent transferees of such Persons, shall be void
without any further action and any holder of such Rights shall thereafter
have no rights whatsoever with respect to such Rights under any provision of
this Agreement. The Company shall use all reasonable efforts to ensure that
the provisions of this Section 11(a)(ii) are complied with, but shall have no
liability to any holder of Right Certificates or other Person as a result of
its failure to make any determinations with respect to an Acquiring Person or
its Affiliates, Associates or transferees hereunder. From and after the
Flip-In Event, no Right Certificate shall be issued pursuant to Section 3 or
Section 6 hereof that represents Rights that are or have become void pursuant
to the provisions of this paragraph, and any Right Certificate delivered to
the Rights Agent that represents Rights that are or have become void pursuant
to the provisions of this paragraph shall be canceled. From and after the
occurrence of an event specified in Section 13(a) hereof, any Rights that
theretofore have not been exercised pursuant to this Section 11(a)(ii) shall
thereafter be exercisable only in accordance with Section 13 and not pursuant
to this Section 11(a)(ii).
(iii) The Company may at its option substitute for a share of Common
Stock issuable upon the exercise of Rights in accordance with the foregoing
subparagraph (ii) a number of shares of Preferred Stock or fraction thereof such
that the current per share market price of one share of Preferred Stock
multiplied by such number or fraction is equal to the current per share market
price of one share of Common Stock. In the event that there shall not be
sufficient shares of Common Stock issued but not outstanding or authorized but
unissued to permit the exercise in full of the Rights in accordance with the
foregoing subparagraph (ii), the Board of Directors shall, to the extent
permitted by applicable law and any material agreements then in effect to which
the Company is a party (A) determine the excess (such excess, the "Spread") of
(1) the value of the shares of Common Stock issuable upon the exercise of a
Right in accordance with the foregoing subparagraph (ii) (the "Current Value")
over (2) the Purchase Price (as adjusted in accordance with the foregoing
subparagraph (ii)), and (B) with respect to each Right (other than Rights which
have become void pursuant to the foregoing subparagraph (ii)), make adequate
provision to
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substitute for the shares of Common Stock issuable in accordance with the
foregoing subparagraph (ii) upon exercise of the Right and payment of the
Purchase Price (as adjusted in accordance therewith), (1) cash, (2) a
reduction in such Purchase Price, (3) shares of Preferred Stock or other
equity securities of the Company (including, without limitation, shares or
fractions of shares of preferred stock which, by virtue of having dividend,
voting and liquidation rights substantially comparable to those of the shares
of Common Stock, are deemed in good faith by the Board of Directors to have
substantially the same value as the shares of Common Stock (such shares of
Preferred Stock and shares or fractions of shares of preferred stock are
hereinafter referred to as "Common Stock Equivalents")), (4) debt securities
of the Company, (5) other assets, or (6) any combination of the foregoing,
having a value which, when added to the value of the shares of Common Stock
issued upon exercise of such Right, shall have an aggregate value equal to
the Current Value (less the amount of any reduction in such Purchase Price),
where such aggregate value has been determined by the Board of Directors upon
the advice of a nationally recognized investment banking firm selected in
good faith by the Board of Directors; PROVIDED, HOWEVER, that if the Company
shall not make adequate provision to deliver value pursuant to clause (B)
above within thirty (30) days following the Flip-In Event (the "Section 11(a)
(ii) Trigger Date"), then the Company shall be obligated to deliver, to the
extent permitted by applicable law and any material agreements then in effect
to which the Company is a party, upon the surrender for exercise of a Right
and without requiring payment of such Purchase Price, shares of Common Stock
(to the extent available), and then, if necessary, such number or fractions
of shares of Preferred Stock (to the extent available) and then, if
necessary, cash, which shares and/or cash have an aggregate value equal to
the Spread. If, upon the occurrence of the Flip-In Event, the Board of
Directors shall determine in good faith that it is likely that sufficient
additional shares of Common Stock could be authorized for issuance upon
exercise in full of the Rights, then, if the Board of Directors so elects,
the thirty (30) day period set forth above may be extended to the extent
necessary, but not more than ninety (90) days after the Section 11(a)(ii)
Trigger Date, in order that the Company may seek stockholder approval for the
authorization of such additional shares (such thirty (30) day period, as it
may be extended, is herein called the "Substitution Period"). To the extent
that the Company determines that some action need be taken pursuant to the
second and/or third sentence of this Section 11(a)(iii), the Company (x)
shall provide, subject to Section 11(a)(ii) hereof and the last sentence of
this Section 11(a)(iii) hereof, that such action shall apply uniformly to all
outstanding Rights and (y) may suspend the exercisability of the Rights until
the expiration of the Substitution Period in order to seek any authorization
of additional shares and/or to decide the appropriate form of distribution to
be made pursuant to such second sentence and to determine the value thereof.
In the event of any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii),
the value of the shares of Common Stock shall be the current per share market
price (as determined pursuant to Section 11(d)(i)) on the Section 11(a)(ii)
Trigger Date and the per share or fractional value of any "Common Stock
Equivalent" shall be deemed to equal the current per share market price of
the Common Stock. The Board of Directors of the Company may, but shall not
be required to, establish procedures to allocate the right to receive shares
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<PAGE>
of Common Stock upon the exercise of the Rights among holders of Rights
pursuant to this Section 11(a)(iii).
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Stock (or shares having the same rights,
privileges and preferences as the Preferred Stock ("equivalent preferred
shares")) or securities convertible into Preferred Stock or equivalent preferred
shares at a price per share of Preferred Stock or equivalent preferred shares
(or having a conversion price per share, if a security convertible into shares
of Preferred Stock or equivalent preferred shares) less than the then current
per share market price of the Preferred Stock (determined pursuant to Section
11(d) hereof) on such record date, the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of shares of Preferred Stock and equivalent preferred shares
outstanding on such record date plus the number of shares of Preferred Stock and
equivalent preferred shares which the aggregate offering price of the total
number of shares of Preferred Stock and/or equivalent preferred shares so to be
offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price, and
the denominator of which shall be the number of shares of Preferred Stock and
equivalent preferred shares outstanding on such record date plus the number of
additional shares of Preferred Stock and/or equivalent preferred shares to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible); PROVIDED, HOWEVER, that in no event
shall the consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company issuable
upon exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Shares of Preferred Stock and equivalent preferred
shares owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed; and in the event that
such rights, options or warrants are not so issued, the Purchase Price shall be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Stock) or subscription rights or warrants (excluding those referred to
in Section 11(b) hereof), the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
then current per share market price of the Preferred Stock (determined pursuant
to Section 11(d) hereof) on such record date, less the fair market value (as
determined in good faith by
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the Board of Directors of the Company whose determination shall be described
in a statement filed with the Rights Agent) of the portion of the assets or
evidences of indebtedness so to be distributed or of such subscription rights
or warrants applicable to one share of Preferred Stock, and the denominator
of which shall be such current per share market price (determined pursuant to
Section 11(d) hereof) of the Preferred Stock; PROVIDED, HOWEVER, that in no
event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the
Company to be issued upon exercise of one Right. Such adjustments shall be
made successively whenever such a record date is fixed; and in the event that
such distribution is not so made, the Purchase Price shall again be adjusted
to be the Purchase Price which would then be in effect if such record date
had not been fixed.
(d)(i) Except as otherwise provided herein, for the purpose of any
computation hereunder, the "current per share market price" of any security (a
"Security" for the purpose of this Section 11(d)(i)) on any date shall be
deemed to be the average of the daily closing prices per share of such Security
for the 30 consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date; PROVIDED, HOWEVER, that in the event that the
current per share market price of the Security is determined during a period
following the announcement by the issuer of such Security of (A) a dividend or
distribution on such Security payable in shares of such Security or securities
convertible into such shares, or (B) any subdivision, combination or
reclassification of such Security, and prior to the expiration of 30 Trading
Days after the ex-dividend date for such dividend or distribution, or the record
date for such subdivision, combination or reclassification, then, and in each
such case, the current per share market price shall be appropriately adjusted to
reflect the current market price per share equivalent of such Security. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported by the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Security is not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Security is
listed or admitted to trading or, if the Security is not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the over-the-counter
market, as reported by NASDAQ or such other system then in use, or, if on any
such date the Security is not quoted by any such organization, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the Security selected by the Board of Directors of the
Company. The term "Trading Day" shall mean a day on which the principal
national securities exchange on which the Security is listed or admitted to
trading is open for the transaction of business or, if the Security is not
listed or admitted to trading on any national securities exchange, a Business
Day.
(ii) For the purpose of any computation hereunder, if the Preferred Stock
is publicly traded, the "current per share market price" of the Preferred Stock
shall be determined in accordance with the method set forth in Section 11(d)(i).
If the Preferred
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Stock is not publicly traded but the Common Stock is publicly traded, the
"current per share market price" of the Preferred Stock shall be conclusively
deemed to be the current per share market price of the Common Stock as
determined pursuant to Section 11(d)(i) multiplied by the then applicable
Adjustment Number (as defined in and determined in accordance with the
Certificate of Designation for the Preferred Stock). If neither the Common
Stock nor the Preferred Stock is publicly traded, "current per share market
price" shall mean the fair value per share as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in
a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one hundred-thousandth of a
share of Preferred Stock or one-hundredth of a share of Common Stock or other
share or security as the case may be. Notwithstanding the first sentence of
this Section 11(e), any adjustment required by this Section 11 shall be made no
later than the earlier of (i) three years from the date of the transaction which
requires such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a) hereof,
the holder of any Right thereafter exercised shall become entitled to receive
any shares of capital stock of the Company other than the Preferred Stock,
thereafter the Purchase Price and the number of such other shares so receivable
upon exercise of a Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Stock contained in Sections 11(a), 11(b), 11(c), 11(e),
11(h), 11(i) and 11(m) hereof, as applicable, and the provisions of Sections 7,
9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like
terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and 11(c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence
the right to purchase, at the adjusted Purchase Price, that number of one
one-thousandth of a share of Preferred Stock (calculated to the nearest one
hundred-thousandth of a share of Preferred Stock) obtained by (i) multiplying
(x) the number of one one-thousandths of a share purchasable upon the
exercise of a Right immediately prior to such adjustment by (y) the Purchase
Price in effect immediately prior
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to such adjustment of the Purchase Price and (ii) dividing the product so
obtained by the Purchase Price in effect immediately after such adjustment of
the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price pursuant to Sections 11(b) or 11(c) hereof to adjust the
number of Rights, in substitution for any adjustment in the number of one
one-thousandths of a share of Preferred Stock purchasable upon the exercise
of a Right. Each of the Rights outstanding after such adjustment of the
number of Rights shall be exercisable for the number of one one-thousandths
of a share of Preferred Stock for which a Right was exercisable immediately
prior to such adjustment. Each Right held of record prior to such adjustment
of the number of Rights shall become that number of Rights (calculated to the
nearest one-hundredth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase Price
in effect immediately after adjustment of the Purchase Price. The Company
shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. Such record date may be the
date on which the Purchase Price is adjusted or any day thereafter, but, if
the Right Certificates have been issued, shall be at least 10 days later than
the date of the public announcement. If Right Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section 11(i),
the Company may, as promptly as practicable, cause to be distributed to
holders of record of Right Certificates on such record date Right
Certificates evidencing, subject to Section 14 hereof, the additional Rights
to which such holders shall be entitled as a result of such adjustment, or,
at the option of the Company, shall cause to be distributed to such holders
of record in substitution and replacement for the Right Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Right Certificates evidencing all the Rights to
which such holders shall be entitled after such adjustment. Right
Certificates so to be distributed shall be issued, executed and countersigned
in the manner provided for herein and shall be registered in the names of the
holders of record of Right Certificates on the record date specified in the
public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-thousandths of a share of Preferred Stock issuable upon the
exercise of a Right, the Right Certificates theretofore and thereafter issued
may continue to express the Purchase Price and the number of one one-thousandths
of a share of Preferred Stock which were expressed in the initial Right
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then par value, if any, of the fraction of Preferred
Stock or other shares of capital stock issuable upon exercise of a Right, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable shares of Preferred Stock or other such shares at
such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company
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may elect to defer until the occurrence of such event issuing to the holder
of any Right exercised after such record date the Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such
exercise over and above the Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis
of the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER,
that the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such adjustments in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Stock, issuance
wholly for cash of any shares of Preferred Stock at less than the current market
price, issuance wholly for cash of Preferred Stock or securities which by their
terms are convertible into or exchangeable for Preferred Stock, dividends on
Preferred Stock payable in shares of Preferred Stock or issuance of rights,
options or warrants referred to hereinabove in Section 11(b), hereafter made by
the Company to holders of its Preferred Stock shall not be taxable to such
stockholders.
(n) Anything in this Agreement to the contrary notwithstanding, in the
event that at any time after the date of this Rights Agreement and prior to the
Distribution Date, the Company shall (i) declare and pay any dividend on the
Common Stock payable in Common Stock or (ii) effect a subdivision, combination
or consolidation of the Common Stock (by reclassification or otherwise than by
payment of a dividend payable in Common Stock) into a greater or lesser number
of shares of Common Stock, then, in each such case, the number of Rights
associated with each share of Common Stock then outstanding, or issued or
delivered thereafter, shall be proportionately adjusted so that the number of
Rights thereafter associated with each share of Common Stock following any such
event shall equal the result obtained by multiplying the number of Rights
associated with each share of Common Stock immediately prior to such event by a
fraction the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately following the occurrence of such event.
(o) The Company agrees that, after the earlier of the Distribution Date or
the Stock Acquisition Date, it will not, except as permitted by Sections 23, 24
or 27 hereof, take (or permit any Subsidiary to take) any action if at the time
such action is taken it is reasonably foreseeable that such action will diminish
substantially or eliminate the benefits intended to be afforded by the Rights.
Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Stock and the
Preferred Stock a copy of such certificate and
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(c) mail a brief summary thereof to each holder of a Right Certificate in
accordance with Section 25 hereof (if so required under Section 25 hereof).
The Rights Agent shall be fully protected in relying on any such certificate
and on any adjustment therein contained and shall not be deemed to have
knowledge of any such adjustment unless and until it shall have received such
certificate.
Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING
POWER.
(a) In the event, directly or indirectly, at any time after the Flip-In
Event (i) the Company shall consolidate with or shall merge into any other
Person, (ii) any Person shall merge with and into the Company and the Company
shall be the continuing or surviving corporation of such merger and, in
connection with such merger, all or part of the Common Stock shall be changed
into or exchanged for stock or other securities of any other Person (or of the
Company) or cash or any other property, or (iii) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one or more transactions, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person (other than the Company or one or more
wholly-owned Subsidiaries of the Company), then upon the first occurrence of
such event, proper provision shall be made so that: (A) each holder of a Right
(other than Rights which have become void pursuant to Section 11(a)(ii) hereof)
shall thereafter have the right to receive, upon the exercise thereof at the
Purchase Price (as theretofore adjusted in accordance with Section 11(a)(ii)
hereof), in accordance with the terms of this Agreement and in lieu of shares of
Preferred Stock or Common Stock of the Company, such number of validly
authorized and issued, fully paid, non-assessable and freely tradeable shares of
Common Stock of the Principal Party (as such term is hereinafter defined), not
subject to any liens, encumbrances, rights of first refusal or other adverse
claims, as shall equal the result obtained by dividing the Purchase Price (as
theretofore adjusted in accordance with Section 11(a)(ii) hereof) by 50% of the
current per share market price of the Common Stock of such Principal Party
(determined pursuant to Section 11(d) hereof) on the date of consummation of
such consolidation, merger, sale or transfer; PROVIDED, HOWEVER, that the
Purchase Price (as theretofore adjusted in accordance with Section 11(a)(ii)
hereof) and the number of shares of Common Stock of such Principal Party so
receivable upon exercise of a Right shall be subject to further adjustment as
appropriate in accordance with Section 11(f) hereof to reflect any events
occurring in respect of the Common Stock of such Principal Party after the
occurrence of such consolidation, merger, sale or transfer; (B) such Principal
Party shall thereafter be liable for, and shall assume, by virtue of such
consolidation, merger, sale or transfer, all the obligations and duties of the
Company pursuant to this Rights Agreement; (C) the term "Company" shall
thereafter be deemed to refer to such Principal Party; and (D) such Principal
Party shall take such steps (including, but not limited to, the reservation of a
sufficient number of its shares of Common Stock in accordance with Section 9
hereof) in connection with such consummation of any such transaction as may be
necessary to assure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to the shares of its Common Stock
thereafter deliverable upon the exercise of the Rights; provided that, upon the
subsequent occurrence of any consolidation, merger, sale or
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transfer of assets or other extraordinary transaction in respect of such
Principal Party, each holder of a Right shall thereupon be entitled to
receive, upon exercise of a Right and payment of the Purchase Price as
provided in this Section 13(a), such cash, shares, rights, warrants and other
property which such holder would have been entitled to receive had such
holder, at the time of such transaction, owned the Common Stock of the
Principal Party receivable upon the exercise of a Right pursuant to this
Section 13(a), and such Principal Party shall take such steps (including, but
not limited to, reservation of shares of stock) as may be necessary to permit
the subsequent exercise of the Rights in accordance with the terms hereof for
such cash, shares, rights, warrants and other property.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in (i) or (ii) of the
first sentence of Section 13(a) hereof: (A) the Person that is the issuer of the
securities into which the shares of Common Stock are converted in such merger or
consolidation, or, if there is more than one such issuer, the issuer the shares
of Common Stock of which have the greatest aggregate market value of shares
outstanding, or (B) if no securities are so issued, (x) the Person that is the
other party to the merger, if such Person survives said merger, or, if there is
more than one such Person, the Person the shares of Common Stock of which have
the greatest aggregate market value of shares outstanding or (y) if the Person
that is the other party to the merger does not survive the merger, the Person
that does survive the merger (including the Company if it survives) or (z) the
Person resulting from the consolidation; and
(ii) in the case of any transaction described in (iii) of the first
sentence in Section 13(a) hereof, the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions, or, if each Person that is a party to such
transaction or transactions receives the same portion of the assets or earning
power so transferred or if the Person receiving the greatest portion of the
assets or earning power cannot be determined, whichever of such Persons is the
issuer of Common Stock having the greatest aggregate market value of shares
outstanding;
provided, however, that in any such case described in the foregoing clause
(b)(i) or (b)(ii), if the Common Stock of such Person is not at such time or has
not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, then (1) if such Person is a direct or indirect
Subsidiary of another Person the Common Stock of which is and has been so
registered, the term "Principal Party" shall refer to such other Person, or (2)
if such Person is a Subsidiary, directly or indirectly, of more than one Person,
the Common Stock of all of which is and has been so registered, the term
"Principal Party" shall refer to whichever of such Persons is the issuer of
Common Stock having the greatest aggregate market value of shares outstanding,
or (3) if such Person is owned, directly or indirectly, by a joint venture
formed by two or more Persons that are not owned, directly or indirectly, by the
same Person, the rules set forth in clauses (1) and (2) above shall apply to
each of the owners having an interest in the venture as if the Person owned by
the joint venture was a Subsidiary of both or all of such joint venturers, and
the
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Principal Party in each such case shall bear the obligations set forth in
this Section 13 in the same ratio as its interest in such Person bears to the
total of such interests.
(c) The Company shall not consummate any consolidation, merger, sale or
transfer referred to in Section 13(a) hereof unless prior thereto the Company
and the Principal Party involved therein shall have executed and delivered to
the Rights Agent an agreement confirming that the requirements of Sections 13(a)
and (b) hereof shall promptly be performed in accordance with their terms and
that such consolidation, merger, sale or transfer of assets shall not result in
a default by the Principal Party under this Agreement as the same shall have
been assumed by the Principal Party pursuant to Sections 13(a) and (b) hereof
and providing that, as soon as practicable after executing such agreement
pursuant to this Section 13, the Principal Party will:
(i) prepare and file a registration statement under the Securities
Act, if necessary, with respect to the Rights and the securities purchasable
upon exercise of the Rights on an appropriate form, use its best efforts to
cause such registration statement to become effective as soon as practicable
after such filing and use its best efforts to cause such registration statement
to remain effective (with a prospectus at all times meeting the requirements of
the Securities Act) until the Expiration Date and similarly comply with
applicable state securities laws;
(ii) use its best efforts, if the Common Stock of the Principal Party
shall be listed or admitted to trading on the New York Stock Exchange or on
another national securities exchange, to list or admit to trading (or continue
the listing of) the Rights and the securities purchasable upon exercise of the
Rights on the New York Stock Exchange or such securities exchange, or, if the
Common Stock of the Principal Party shall not be listed or admitted to trading
on the New York Stock Exchange or a national securities exchange, to cause the
Rights and the securities receivable upon exercise of the Rights to be
authorized for quotation on NASDAQ or on such other system then in use;
(iii) deliver to holders of the Rights historical financial
statements for the Principal Party which comply in all respects with the
requirements for registration on Form 10 (or any successor form) under the
Exchange Act; and
(iv) obtain waivers of any rights of first refusal or preemptive
rights in respect of the Common Stock of the Principal Party subject to purchase
upon exercise of outstanding Rights.
(d) In case the Principal Party has provision in any of its authorized
securities or in its certificate of incorporation or by-laws or other instrument
governing its corporate affairs, which provision would have the effect of (i)
causing such Principal Party to issue (other than to holders of Rights pursuant
to this Section 13), in connection with, or as a consequence of, the
consummation of a transaction referred to in this Section 13, shares of Common
Stock or Common Stock Equivalents of such Principal Party at less than the then
current market price per share thereof (determined pursuant to Section 11(d)
hereof) or securities exercisable for, or convertible into, Common Stock or
Common Stock
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Equivalents of such Principal Party at less than such then current market
price, or (ii) providing for any special payment, tax or similar provision in
connection with the issuance of the Common Stock of such Principal Party
pursuant to the provisions of Section 13, then, in such event, the Company
hereby agrees with each holder of Rights that it shall not consummate any
such transaction unless prior thereto the Company and such Principal Party
shall have executed and delivered to the Rights Agent a supplemental
agreement providing that the provision in question of such Principal Party
shall have been canceled, waived or amended, or that the authorized
securities shall be redeemed, so that the applicable provision will have no
effect in connection with, or as a consequence of, the consummation of the
proposed transaction.
(e) The Company covenants and agrees that it shall not, at any time after
the Flip-In Event, enter into any transaction of the type described in clauses
(i) through (iii) of Section 13(a) hereof if (i) at the time of or immediately
after such consolidation, merger, sale, transfer or other transaction there are
any rights, warrants or other instruments or securities outstanding or
agreements in effect which would substantially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights, (ii) prior to,
simultaneously with or immediately after such consolidation, merger, sale,
transfer or other transaction, the stockholders of the Person who constitutes,
or would constitute, the Principal Party for purposes of Section 13(b) hereof
shall have received a distribution of Rights previously owned by such Person or
any of its Affiliates or Associates or (iii) the form or nature of organization
of the Principal Party would preclude or limit the exercisability of the Rights.
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of Rights or to
distribute Right Certificates which evidence fractional Rights (except prior to
the Distribution Date in accordance with Section 11(n) hereof). In lieu of such
fractional Rights, there shall be paid to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid
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and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Board of Directors of the Company. If on any
such date no such market maker is making a market in the Rights, the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Stock (other than fractions which are integral multiples of one one-thousandth
of a share of Preferred Stock) or to distribute certificates which evidence
fractional shares of Preferred Stock (other than fractions which are integral
multiples of one one-thousandth of a share of Preferred Stock) upon the exercise
or exchange of Rights. Interests in fractions of Preferred Stock in integral
multiples of one one-thousandth of a share of Preferred Stock may, at the
election of the Company, be evidenced by depositary receipts, pursuant to an
appropriate agreement between the Company and a depositary selected by it;
PROVIDED, that such agreement shall provide that the holders of such depositary
receipts shall have all the rights, privileges and preferences to which they are
entitled as beneficial owners of the Preferred Stock represented by such
depositary receipts. In lieu of fractional shares of Preferred Stock that are
not integral multiples of one one-thousandth of a share of Preferred Stock, the
Company shall pay to the registered holders of Right Certificates at the time
such Rights are exercised or exchanged as herein provided an amount in cash
equal to the same fraction of the current market value of a whole share of
Preferred Stock (as determined in accordance with Section 14(a) hereof) for the
Trading Day immediately prior to the date of such exercise or exchange.
(c) The Company shall not be required to issue fractions of shares of
Common Stock or to distribute certificates which evidence fractional shares of
Common Stock upon the exercise or exchange of Rights. In lieu of such
fractional shares of Common Stock, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional shares of
Common Stock would otherwise be issuable an amount in cash equal to the same
fraction of the current market value of a whole share of Common Stock (as
determined in accordance with Section 14(a) hereof) for the Trading Day
immediately prior to the date of such exercise or exchange.
(d) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise or exchange of a Right (except as provided above).
Section 15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Stock), on his own behalf and for his own
benefit, may enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Right Certificate (or, prior to
the Distribution Date, such Common Stock) in the manner
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provided therein and in this Agreement. Without limiting the foregoing or
any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at
law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of, the obligations of any Person subject to this
Agreement.
Section 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only
in connection with the transfer of the Common Stock;
(b) after the Distribution Date, the Right Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the office or
agency of the Rights Agent designated for such purpose, duly endorsed or
accompanied by a proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the Person in
whose name the Right Certificate (or, prior to the Distribution Date, the Common
Stock certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Right Certificates or the Common Stock certificate made by anyone other than the
Company or the Rights Agent) for all purposes whatsoever, and neither the
Company nor the Rights Agent shall be affected by any notice to the contrary.
Section 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder,
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Stock or any other
securities of the Company which may at any time be issuable on the exercise or
exchange of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in this Agreement), or to receive dividends or
subscription rights, or otherwise, until the Rights evidenced by such Right
Certificate shall have been exercised or exchanged in accordance with the
provisions hereof.
Section 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent reasonable compensation
for all services rendered by it hereunder and, from time to time, on demand of
the Rights Agent, its reasonable expenses and counsel fees and other
disbursements incurred in the administration and execution of this Agreement and
the exercise and performance of its duties hereunder. The Company also agrees
to indemnify the Rights Agent for, and to hold
25
<PAGE>
it harmless against, any loss, liability or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent,
for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability arising therefrom,
directly or indirectly.
(b) The Rights Agent shall be protected and shall incur no liability for,
or in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Stock or Common Stock or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
Person or Persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
stock transfer or corporate trust powers of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto; PROVIDED, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all
26
<PAGE>
of which the Company and the holders of Right Certificates, by their
acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the President and the Secretary of the
Company and delivered to the Rights Agent; and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good faith
by it under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights provided for in Sections 3, 11, 13, 23 and 24, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Right
Certificates after receipt of a certificate furnished pursuant to Section 12,
describing such change or adjustment); nor shall it by any act hereunder be
deemed to make any representation or warranty as to the authorization or
reservation of any shares of Preferred Stock or other securities to be issued
pursuant to this Agreement or any Right Certificate or as to whether any shares
of Preferred Stock or other securities will, when issued, be validly authorized
and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights
27
<PAGE>
Agent for the carrying out or performing by the Rights Agent of the
provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
person reasonably believed by the Rights Agent to be one of the President or the
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered by it in good faith in accordance with instructions of
any such officer or for any delay in acting while waiting for those
instructions. Any application by the Rights Agent for written instructions from
the Company may, at the option of the Rights Agent, set forth in writing any
action proposed to be taken or omitted by the Rights Agent under this Agreement
and the date on and/or after which such action shall be taken or such omission
shall be effective. The Rights Agent shall not be liable for any action taken
by, or omission of, the Rights Agent in accordance with a proposal included in
any such application on or after the date specified in such application (which
date shall not be less than five Business Days after the date any officer of the
Company actually receives such application unless any such officer shall have
consented in writing to an earlier date) unless, prior to taking any such action
(or the effective date in the case of an omission), the Rights Agent shall have
received written instructions in response to such application specifying the
action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate contained in the form of
assignment or the form of election to purchase set forth on the reverse thereof,
as the case may be, has not been completed to certify the holder is not an
Acquiring Person (or an Affiliate or Associate thereof), the Rights Agent shall
not take any further action with respect to such requested exercise or transfer
without first consulting with the Company.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common
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Stock or Preferred Stock by registered or certified mail, and, following the
Distribution Date, to the holders of the Right Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent
upon 30 days' notice in writing, mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Common
Stock or Preferred Stock by registered or certified mail, and, following the
Distribution Date, to the holders of the Right Certificates by first-class
mail. If the Rights Agent shall resign or be removed or shall otherwise
become incapable of acting, the Company shall appoint a successor to the
Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who
shall, with such notice, submit his Right Certificate for inspection by the
Company), then the registered holder of any Right Certificate may apply to
any court of competent jurisdiction for the appointment of a new Rights
Agent. Any successor Rights Agent, whether appointed by the Company or by
such a court, shall be a corporation organized and doing business under the
laws of the United States or the laws of any state of the United States or
the District of Columbia, in good standing, having an office in the State of
Texas, which is authorized under such laws to exercise corporate trust or
stock transfer powers and is subject to supervision or examination by federal
or state authority and which has at the time of its appointment as Rights
Agent a combined capital and surplus of at least $50 million. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Rights Agent without further act or deed; but the predecessor Rights Agent
shall deliver and transfer to the successor Rights Agent any property at the
time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the
effective date of any such appointment the Company shall file notice thereof
in writing with the predecessor Rights Agent and each transfer agent of the
Common Stock or Preferred Stock, and, following the Distribution Date, mail a
notice thereof in writing to the registered holders of the Right
Certificates. Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of
the resignation or removal of the Rights Agent or the appointment of the
successor Rights Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such forms
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Stock following the Distribution Date and
prior to the Expiration Date, the Company may with respect to shares of Common
Stock so issued or sold pursuant to (i) the exercise of stock options, (ii)
under any employee plan or arrangement, (iii) upon the exercise, conversion or
exchange of securities, notes or debentures issued by the Company or (iv) a
contractual obligation of the Company, in each case existing prior to the
Distribution Date, issue Rights Certificates representing the appropriate number
of Rights in connection with such issuance or sale.
29
<PAGE>
Section 23. REDEMPTION.
(a) The Board of Directors of the Company may, at any time prior to the
Flip-In Event, redeem all but not less than all the then outstanding Rights at a
redemption price of $.01 per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(the redemption price being hereinafter referred to as the "Redemption Price").
The redemption of the Rights may be made effective at such time, on such basis
and with such conditions as the Board of Directors in its sole discretion may
establish. The Redemption Price shall be payable, at the option of the Company,
in cash, shares of Common Stock, or such other form of consideration as the
Board of Directors shall determine.
(b) Immediately upon the action of the Board of Directors ordering the
redemption of the Rights pursuant to paragraph (a) of this Section 23 (or at
such later time as the Board of Directors may establish for the effectiveness of
such redemption), and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right thereafter of the
holders of Rights shall be to receive the Redemption Price. The Company shall
promptly give public notice of any such redemption; PROVIDED, HOWEVER, that the
failure to give, or any defect in, any such notice shall not affect the validity
of such redemption. Within 10 days after such action of the Board of Directors
ordering the redemption of the Rights (or such later time as the Board of
Directors may establish for the effectiveness of such redemption), the Company
shall mail a notice of redemption to all the holders of the then outstanding
Rights at their last addresses as they appear upon the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
transfer agent for the Common Stock. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of redemption shall state the method by which the
payment of the Redemption Price will be made.
Section 24. EXCHANGE.
(a) The Board of Directors of the Company may, at its option, at any time
after the Flip-In Event, exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of Section 11(a)(ii) hereof) for Common Stock at an
exchange ratio of one share of Common Stock per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such amount per Right being hereinafter referred to as the
"Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall
not be empowered to effect such exchange at any time after an Acquiring Person
shall have become the Beneficial Owner of shares of Common Stock aggregating 50%
or more of the shares of Common Stock then outstanding. From and after the
occurrence of an event specified in Section 13(a) hereof, any Rights that
theretofore have not been exchanged pursuant to this Section 24(a) shall
thereafter be exercisable only in accordance with Section 13 and may not be
exchanged pursuant to this Section 24(a). The exchange of the Rights by the
Board of Directors may be made effective at such time, on
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<PAGE>
such basis and with such conditions as the Board of Directors in its sole
discretion may establish.
(b) Immediately upon the effectiveness of the action of the Board of
Directors of the Company ordering the exchange of any Rights pursuant to
paragraph (a) of this Section 24 and without any further action and without any
notice, the right to exercise such Rights shall terminate and the only right
thereafter of a holder of such Rights shall be to receive that number of shares
of Common Stock equal to the number of such Rights held by such holder
multiplied by the Exchange Ratio. The Company shall promptly give public notice
of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange. The Company
shall promptly mail a notice of any such exchange to all of the holders of the
Rights so exchanged at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of exchange will state the method by which the exchange of the
shares of Common Stock for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become void pursuant to the provisions of Section 11(a)(ii)
hereof) held by each holder of Rights.
(c) The Company may at its option substitute, and, in the event that there
shall not be sufficient shares of Common Stock issued but not outstanding or
authorized but unissued to permit an exchange of Rights for Common Stock as
contemplated in accordance with this Section 24, the Company shall substitute to
the extent of such insufficiency, for each share of Common Stock that would
otherwise be issuable upon exchange of a Right, a number of shares of Preferred
Stock or fraction thereof (or equivalent preferred shares, as such term is
defined in Section 11(b)) such that the current per share market price
(determined pursuant to Section 11(d) hereof) of one share of Preferred Stock
(or equivalent preferred share) multiplied by such number or fraction is equal
to the current per share market price of one share of Common Stock (determined
pursuant to Section 11(d) hereof) as of the date of such exchange.
Section 25. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall at any time after the earlier of the
Distribution Date or the Stock Acquisition Date propose (i) to pay any dividend
payable in stock of any class to the holders of its Preferred Stock or to make
any other distribution to the holders of its Preferred Stock (other than a
regular quarterly cash dividend), (ii) to offer to the holders of its Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, (iii) to effect any reclassification of its Preferred Stock
(other than a reclassification involving only the subdivision or combination of
outstanding Preferred Stock), (iv) to effect the liquidation, dissolution or
winding up of the Company, or (v) to pay any dividend on the Common Stock
payable in Common Stock or to effect a subdivision, combination or consolidation
of the Common Stock (by reclassification or
31
<PAGE>
otherwise than by payment of dividends in Common Stock), then, in each such
case, the Company shall give to each holder of a Right Certificate, in
accordance with Section 26 hereof, a notice of such proposed action, which
shall specify the record date for the purposes of such stock dividend, or
distribution of rights or warrants, or the date on which such liquidation,
dissolution or winding up is to take place and the date of participation
therein by the holders of the Common Stock and/or Preferred Stock, if any
such date is to be fixed, and such notice shall be so given in the case of
any action covered by clause (i) or (ii) above at least 10 days prior to the
record date for determining holders of the Preferred Stock for purposes of
such action, and in the case of any such other action, at least 10 days prior
to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Stock and/or Preferred
Stock, whichever shall be the earlier.
(b) In case any event described in Section 11(a)(ii) or Section 13
shall occur then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate (or if occurring prior to the Distribution
Date, the holders of the Common Stock) in accordance with Section 26 hereof,
a notice of the occurrence of such event, which notice shall describe such
event and the consequences of such event to holders of Rights under Section
11(a)(ii) and Section 13 hereof.
Section 26. NOTICES. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent
by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Rights Agent) as follows:
Fortune Corporation
One Commerce Green
515 West Greens Road, Suite 720\
Houston, TX 77067
Attention: Dean W. Drulius, General Counsel
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the
holder of any Right Certificate to or on the Rights Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Company) as
follows:
ABC Bancorp, Inc.
_____________________
_____________________
Attention: _____________________
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the
registry books of the Company.
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Section 27. SUPPLEMENTS AND AMENDMENTS. Except as provided in the
penultimate sentence of this Section 27, for so long as the Rights are then
redeemable, the Company may in its sole and absolute discretion, and the
Rights Agent shall if the Company so directs, supplement or amend any
provision of this Agreement in any respect without the approval of any
holders of the Rights. At any time when the Rights are no longer redeemable,
except as provided in the penultimate sentence of this Section 27, the
Company may, and the Rights Agent shall, if the Company so directs,
supplement or amend this Agreement without the approval of any holders of
Rights in order to (i) cure any ambiguity, (ii) correct or supplement any
provision contained herein which may be defective or inconsistent with any
other provision herein, (iii) shorten or lengthen any time period hereunder,
or (iv) change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable; PROVIDED that no such supplement or
amendment shall adversely affect the interests of the holders of Rights as
such (other than an Acquiring Person or an Affiliate or Associate of an
Acquiring Person), and no such amendment may cause the Rights again to become
redeemable or cause the Agreement again to become amendable other than in
accordance with this sentence. Notwithstanding anything contained in this
Agreement to the contrary, no supplement or amendment shall be made which
changes the Redemption Price. Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement
or amendment is in compliance with the terms of this Section 27, the Rights
Agent shall execute such supplement or amendment.
Section 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Stock) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders
of the Right Certificates (and, prior to the Distribution Date, the Common
Stock).
Section 30. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS. The
Board of Directors of the Company shall have the exclusive power and
authority to administer this Agreement and to exercise the rights and powers
specifically granted to the Board of Directors of the Company or to the
Company, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power to (i)
interpret the provisions of this Agreement and (ii) make all determinations
deemed necessary or advisable for the administration of this Agreement
(including, without limitation, a determination to redeem or not redeem the
Rights or to amend this Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y)
below, all omissions with respect to the foregoing) that are done or made by
the Board of Directors of the Company in good faith, shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights, as
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<PAGE>
such, and all other parties, and (y) not subject the Board of Directors to
any liability to the holders of the Rights.
Section 31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
Section 32. GOVERNING LAW. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 33. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
FORTUNE PETROLEUM CORPORATION
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
ABC BANCORP, INC.,
as Rights Agent
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
35
<PAGE>
EXHIBIT A
FORM OF
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
FORTUNE PETROLEUM CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
Fortune Petroleum Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Certificate of Incorporation of the said
Corporation, the said Board of Directors on _________ __, 1997 adopted the
following resolution creating a series of _________ shares of Preferred Stock
designated as "Series A Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of the
Certificate of Incorporation, a series of Preferred Stock, par value
$1.00 per share, of the Corporation be and hereby is created, and that
the designation and number of shares thereof and the voting and other
powers, preferences and relative, participating, optional or other
rights of the shares of such series and the qualifications,
limitations and restrictions thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. DESIGNATION AND AMOUNT. There shall be a series of Preferred Stock
that shall be designated as "Series A Junior Participating Preferred Stock," and
the number of shares constituting such series shall be _________. Such number
of shares may be increased or decreased by resolution of the Board of Directors;
provided, however, that no decrease shall reduce the number of shares of Series
A Junior Participating Preferred Stock to less than the number of shares then
issued and outstanding plus the number of shares issuable upon exercise of
outstanding rights, options or warrants or upon conversion of outstanding
securities issued by the Corporation.
A-1
<PAGE>
2. DIVIDENDS AND DISTRIBUTION.
(A) Subject to the prior and superior rights of the holders of any
shares of any class or series of stock of the Corporation ranking prior and
superior to the shares of Series A Junior Participating Preferred Stock with
respect to dividends, the holders of shares of Series A Junior Participating
Preferred Stock, in preference to the holders of shares of any class or series
of stock of the Corporation ranking junior to the Series A Junior Participating
Preferred Stock in respect thereof, shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the ____ day of _______,
_______, _______ and _______, in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $____ or (b) the
Adjustment Number (as defined below) times the aggregate per share amount of all
cash dividends, and the Adjustment Number times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock, par value $____ per share, of the Corporation (the "Common Stock")
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Junior Participating Preferred
Stock. The "Adjustment Number" shall initially be 1000. In the event the
Corporation shall at any time after ________ __, 1997 (the "Rights Declaration
Date") (i) declare and pay any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive a
A-2
<PAGE>
quarterly dividend and before such Quarterly Dividend Payment Date, in either
of which events such dividends shall begin to accrue and be cumulative from
such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of holders of
shares of Series A Junior Participating Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date
shall be no more than 60 days prior to the date fixed for the payment thereof.
3. VOTING RIGHTS. The holders of shares of Series A Junior Participating
Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred Stock shall
entitle the holder thereof to a number of votes equal to the Adjustment Number
on all matters submitted to a vote of the stockholders of the Corporation.
(B) Except as required by law and by Section 10 hereof, holders of
Series A Junior Participating Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for taking
any corporate action.
4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Participating
Preferred Stock, except dividends paid ratably on the Series A Junior
Participating Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled; or
(iii) purchase or otherwise acquire for consideration any shares
of Series A Junior Participating Preferred Stock, or any shares of stock ranking
on a parity with the Series A Junior Participating Preferred Stock, except in
accordance with a
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<PAGE>
purchase offer made in writing or by publication (as determined by the Board
of Directors) to all holders of Series A Junior Participating Preferred
Stock, or to such holders and holders of any such shares ranking on a parity
therewith, upon such terms as the Board of Directors, after consideration of
the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series
or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. REACQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired promptly after the acquisition thereof.
All such shares shall upon their retirement become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to any conditions and restrictions on issuance set forth
herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation,
dissolution or winding up of the Corporation, voluntary or otherwise, no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to
the Series A Junior Participating Preferred Stock unless, prior thereto, the
holders of shares of Series A Junior Participating Preferred Stock shall have
received an amount per share (the "Series A Liquidation Preference") equal to
the greater of (i) $___ plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such
payment, or (ii) the Adjustment Number times the per share amount of all cash
and other property to be distributed in respect of the Common Stock upon such
liquidation, dissolution or winding up of the Corporation.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference
and the liquidation preferences of all other classes and series of stock of
the Corporation, if any, that rank on a parity with the Series A Junior
Participating Preferred Stock in respect thereof, then the assets available
for such distribution shall be distributed ratably to the holders of the
Series A Junior Participating Preferred Stock and the holders of such parity
shares in proportion to their respective liquidation preferences.
(C) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this
Section 6.
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<PAGE>
7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
outstanding shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case
each share of Series A Junior Participating Preferred Stock shall at the same
time be similarly exchanged or changed in an amount per share equal to the
Adjustment Number times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which
or for which each share of Common Stock is changed or exchanged.
8. NO REDEMPTION. Shares of Series A Junior Participating Preferred
Stock shall not be subject to redemption by the Company.
9. RANKING. The Series A Junior Participating Preferred Stock shall
rank junior to all other series of the Preferred Stock as to the payment of
dividends and as to the distribution of assets upon liquidation, dissolution
or winding up, unless the terms of any such series shall provide otherwise,
and shall rank senior to the Common Stock as to such matters.
10. AMENDMENT. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner which
would materially alter or change the powers, preferences or special rights of
the Series A Junior Participating Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of two-thirds of the
outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
11. FRACTIONAL SHARES. Series A Junior Participating Preferred Stock
may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of
all other rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
__ day of _________________, 1997.
FORTUNE PETROLEUM CORPORATION
By:
------------------------------------
Name:
Title:
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<PAGE>
EXHIBIT B
Form of Right Certificate
Certificate No. R-______
NOT EXERCISABLE AFTER _________________, 2007 OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO
REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE ON THE TERMS
SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
OWNED BY OR TRANSFERRED TO ANY PERSON WHO IS OR BECOMES AN
ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT) AND
CERTAIN TRANSFEREES THEREOF WILL BECOME NULL AND VOID AND
WILL NO LONGER BE TRANSFERABLE.
RIGHT CERTIFICATE
FORTUNE PETROLEUM CORPORATION
This certifies that ____________________________ or registered assigns,
is the registered owner of the number of Rights set forth above, each of
which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement, dated as of ______________, 1997, as the
same may be amended from time to time (the "Rights Agreement"), between
Fortune Petroleum Corporation, a Delaware corporation (the "Company"), and
ABC Bancorp, Inc., as Rights Agent (the "Rights Agent"), to purchase from the
Company at any time after the Distribution Date (as such term is defined in
the Rights Agreement) and prior to 5:00 P.M., Houston, Texas time, on
_________ __, 2007 at the office or agency of the Rights Agent designated for
such purpose, or of its successor as Rights Agent, one one-thousandth of a
fully paid non-assessable share of Series A Junior Participating Preferred
Stock, par value $1.00 per share (the "Preferred Stock"), of the Company at a
purchase price of $______ per one one-thousandth of a share of Preferred
Stock (the "Purchase Price"), upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly executed. The number
of Rights evidenced by this Rights Certificate (and the number of one
one-thousandths of a share of Preferred Stock which may be purchased upon
B-1
<PAGE>
exercise hereof) set forth above, and the Purchase Price set forth above, are
the number and Purchase Price as of ________________, 1997, based on the
Preferred Stock as constituted at such date. As provided in the Rights
Agreement, the Purchase Price, the number of one one-thousandths of a share
of Preferred Stock (or other securities or property) which may be purchased
upon the exercise of the Rights and the number of Rights evidenced by this
Right Certificate are subject to modification and adjustment upon the
happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions
are hereby incorporated herein by reference and made a part hereof and to
which Rights Agreement reference is hereby made for a full description of the
rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Right Certificates.
Copies of the Rights Agreement are on file at the principal executive offices
of the Company and the above-mentioned office or agency of the Rights Agent.
The Company will mail to the holder of this Right Certificate a copy of the
Rights Agreement without charge after receipt of a written request therefor.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office or agency of the Rights Agent designated for such
purpose, may be exchanged for another Right Certificate or Right Certificates
of like tenor and date evidencing Rights entitling the holder to purchase a
like aggregate number of shares of Preferred Stock as the Rights evidenced by
the Right Certificate or Right Certificates surrendered shall have entitled
such holder to purchase. If this Right Certificate shall be exercised in
part, the holder shall be entitled to receive upon surrender hereof another
Right Certificate or Right Certificates for the number of whole Rights not
exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate (i) may be redeemed by the Company at a redemption price
of $.01 per Right or (ii) may be exchanged in whole or in part for shares of
the Company's Common Stock, par value $.01 per share, or shares of Preferred
Stock.
No fractional shares of Preferred Stock or Common Stock will be issued
upon the exercise or exchange of any Right or Rights evidenced hereby (other
than fractions of Preferred Stock which are integral multiples of one
one-thousandth of a share of Preferred Stock, which may, at the election of
the Company, be evidenced by depository receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise or exchange hereof, nor shall anything contained in
the Rights Agreement or herein be construed to confer upon the holder hereof,
as such, any of the rights of a stockholder of the Company or any right to
vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in the Rights Agreement) or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by this Right Certificate shall have been exercised or exchanged as
provided in the Rights Agreement.
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<PAGE>
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of _________ __, 199_.
FORTUNE PETROLEUM CORPORATION
By:
-----------------------------------
[Title]
ATTEST:
- ----------------------------------
[Title]
Countersigned:
ABC BANCORP, INC., as Rights Agent
By
---------------------------------
[Title]
B-3
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate)
FOR VALUE RECEIVED __________________________ hereby sells, assigns and
transfers unto ______________________________________________________________
_____________________________________________________________________________
(Please print name and address of transferee)
_____________________________________________________________________________
Rights represented by this Right Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
_________________ Attorney, to transfer said Rights on the books of the
within-named Company, with full power of substitution.
Dated:
---------------------------
---------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a bank, trust company, broker, dealer
or other eligible institution participating in a recognized signature
guarantee medallion program.
...............................................................................
(To be completed)
The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by, were not acquired by the
undersigned from, and are not being assigned to an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
---------------------------------------
Signature
B-4
<PAGE>
Form of Reverse Side of Right Certificate - continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate)
To FORTUNE PETROLEUM CORPORATION:
The undersigned hereby irrevocably elects to exercise ________ Rights
represented by this Right Certificate to purchase the shares of Preferred
Stock (or other securities or property) issuable upon the exercise of such
Rights and requests that certificates for such shares of Preferred Stock (or
such other securities) be issued in the name of:
- -----------------------------------------------------------------------------
(Please print name and address)
- -----------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- -----------------------------------------------------------------------------
(Please print name and address)
- -----------------------------------------------------------------------------
Dated:
----------------------------
---------------------------------------
Signature
(Signature must conform to holder specified on Right Certificate)
Signature Guaranteed:
Signature must be guaranteed by a bank, trust company, broker, dealer or
other eligible institution participating in a recognized signature guarantee
medallion program.
B-5
<PAGE>
Form of Reverse Side of Right Certificate - continued
- -----------------------------------------------------------------------------
(To be completed)
The undersigned certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by, and were not acquired by the
undersigned from, an Acquiring Person or an Affiliate or Associate thereof
(as defined in the Rights Agreement).
---------------------------------------
Signature
- -----------------------------------------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to Purchase,
as the case may be, must conform to the name as written upon the face of this
Right Certificate in every particular, without alteration or enlargement or
any change whatsoever.
In the event the certification set forth above in the Form of Assignment
or the Form of Election to Purchase, as the case may be, is not completed,
such Assignment or Election to Purchase will not be honored.
B-6
<PAGE>
EXHIBIT C
UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS
AGREEMENT, RIGHTS OWNED BY OR TRANSFERRED TO ANY PERSON
WHO IS OR BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE
RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL
BECOME NULL AND VOID AND WILL NO LONGER BE TRANSFERABLE.
SUMMARY OF RIGHTS TO PURCHASE
SHARES OF PREFERRED STOCK OF
FORTUNE PETROLEUM CORPORATION
On ___________________, 1997, the Board of Directors of Fortune Petroleum
Corporation (the "Company") declared a dividend of one preferred share purchase
right (a "Right") for each outstanding share of common stock, par value $.01
per share, of the Company (the "Common Stock"). The dividend is payable on
_________ __, 1997 (the "Record Date") to the stockholders of record on that
date. Each Right entitles the registered holder to purchase from the Company
one one-thousandth of a share of Series A Junior Participating Preferred Stock,
par value $1.00 per share, of the Company (the "Preferred Stock") at a price of
$_____ per one one-thousandth of a share of Preferred Stock (the "Purchase
Price"), subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement dated as of ___________________, 1997, as the same
may be amended from time to time (the "Rights Agreement"), between the Company
and ABC Bancorp, Inc., as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (with certain
exceptions, an "Acquiring Person") has acquired beneficial ownership of 15% or
more of the outstanding shares of Common Stock or (ii) 10 business days (or
such later date as may be determined by action of the Board of Directors prior
to such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the outstanding
shares of Common Stock (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
Common Stock certificates outstanding as of the Record Date, by such Common
Stock certificate together with a copy of this Summary of Rights.
The Rights Agreement provides that, until the Distribution Date (or
earlier expiration of the Rights), the Rights will be transferred with and
only with the Common Stock. Until the Distribution Date (or earlier
expiration of the Rights), new Common Stock certificates issued after the
Record Date upon transfer or new issuances of Common
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<PAGE>
Stock will contain a notation incorporating the Rights Agreement by reference.
Until the Distribution Date (or earlier expiration of the Rights), the surrender
for transfer of any certificates for shares of Common Stock outstanding as of
the Record Date, even without such notation or a copy of this Summary of Rights,
will also constitute the transfer of the Rights associated with the shares of
Common Stock represented by such certificate. As soon as practicable following
the Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Stock as of the
close of business on the Distribution Date and such separate Right Certificates
alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on ____________________, 2007 (the "Final Expiration Date"),
unless the Final Expiration Date is advanced or extended or unless the Rights
are earlier redeemed or exchanged by the Company, in each case as described
below.
The Purchase Price payable, and the number of shares of Preferred Stock
or other securities or property issuable, upon exercise of the Rights is
subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend on, or a subdivision, combination or reclassification of,
the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of
certain rights or warrants to subscribe for or purchase Preferred Stock at a
price, or securities convertible into Preferred Stock with a conversion
price, less than the then-current market price of the Preferred Stock or
(iii) upon the distribution to holders of the Preferred Stock of evidences of
indebtedness or assets (excluding regular periodic cash dividends or
dividends payable in Preferred Stock) or of subscription rights or warrants
(other than those referred to above).
The number of outstanding Rights is subject to adjustment in the event
of a stock dividend on the Common Stock payable in shares of Common Stock or
subdivisions, consolidations or combinations of the Common Stock occurring,
in any such case, prior to the Distribution Date.
Shares of Preferred Stock purchasable upon exercise of the Rights will
not be redeemable. Each share of Preferred Stock will be entitled, when, as
and if declared, to a minimum preferential quarterly dividend payment of
$____ per share but will be entitled to an aggregate dividend of 1000 times
the dividend declared per share of Common Stock. In the event of
liquidation, dissolution or winding up of the Company, the holders of the
Preferred Stock will be entitled to a minimum preferential payment of $____
per share (plus any accrued but unpaid dividends) but will be entitled to an
aggregate payment of 1000 times the payment made per share of Common Stock.
Each share of Preferred Stock will have 1000 votes, voting together with the
Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which outstanding shares of Common Stock are converted or
exchanged, each share of Preferred Stock will be entitled to receive 1000
times the amount received per share of Common Stock. These rights are
protected by customary antidilution provisions.
C-2
<PAGE>
Because of the nature of the Preferred Stock's dividend, liquidation and
voting rights, the value of the one one-thousandth interest in a share of
Preferred Stock purchasable upon exercise of each Right should approximate
the value of one share of Common Stock.
In the event that any person or group of affiliated or associated
persons becomes an Acquiring Person, each holder of a Right, other than
Rights beneficially owned by the Acquiring Person (which will thereupon
become void), will thereafter have the right to receive upon exercise of a
Right that number of shares of Common Stock having a market value of two
times the exercise price of the Right.
In the event that, after a person or group has become an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are
sold, proper provisions will be made so that each holder of a Right (other
than Rights beneficially owned by an Acquiring Person which will have become
void) will thereafter have the right to receive upon the exercise of a Right
that number of shares of common stock of the person with whom the Company has
engaged in the foregoing transaction (or its parent) that at the time of such
transaction have a market value of two times the exercise price of the Right.
At any time after any person or group becomes an Acquiring Person and
prior to the earlier of one of the events described in the previous paragraph
or the acquisition by such Acquiring Person of 50% or more of the outstanding
shares of Common Stock, the Board of Directors of the Company may exchange
the Rights (other than Rights owned by such Acquiring Person which will have
become void), in whole or in part, for shares of Common Stock or Preferred
Stock (or a series of the Company's preferred stock having equivalent rights,
preferences and privileges), at an exchange ratio of one share of Common
Stock, or a fractional share of Preferred Stock (or other preferred stock)
equivalent in value thereto, per Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Preferred Stock or Common Stock
will be issued (other than fractions of Preferred Stock which are integral
multiples of one one-thousandth of a share of Preferred Stock, which may, at
the election of the Company, be evidenced by depositary receipts), and in
lieu thereof an adjustment in cash will be made based on the current market
price of the Preferred Stock or the Common Stock.
At any time prior to the time an Acquiring Person becomes such, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right (the "Redemption Price"). The redemption
of the Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right
C-3
<PAGE>
to exercise the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price.
For so long as the Rights are then redeemable, the Company may, except with
respect to the redemption price, amend the Rights Agreement in any manner.
After the Rights are no longer redeemable, the Company may, except with respect
to the redemption price, amend the Rights Agreement in any manner that does not
adversely affect the interests of holders of the Rights.
Until a Right is exercised or exchanged, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated
________________, 1997. A copy of the Rights Agreement is available free of
charge from the Company. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, as the same may be amended from time to time, which is hereby
incorporated herein by reference.
C-4
<PAGE>
Exhibit 5.1
February 26, 1997
01967-660(1B)
Fortune Petroleum Corporation
515 West Greens Road, Suite 720
One Commerce Green
Houston, Texas 77067
Re: REGISTRATION STATEMENT ON FORM S-2
2,000,000 SHARES, COMMON STOCK, $.01 PAR VALUE
Gentlemen:
At your request, we have examined the Registration Statement on Form
S-2 (the "Registration Statement"), as amended, which you (the "Company")
have filed with the Securities and Exchange Commission in connection with
the registration under the Securities Act of 1933, as amended, of
2,000,000 shares of Common Stock, $.01 par value ("Common Stock"). The
Prospectus contained in the Registration Statement relates to the Common
Stock to be offered and sold to the public by Paulson Investment Company,
Inc., acting as Representatives of the several underwriters.
In rendering this opinion, we have examined the Company's Certificate of
Incorporation, as amended, the Company's By-Laws, as amended, the minutes of
the proceedings of the Company's board of directors at which resolutions
pertaining to the Common Stock were adopted, and such other materials as we
deemed relevant.
Based on the foregoing and in reliance thereon, we are of the opinion
that the Common Stock, when issued against receipt by the Company of the
purchase price therefor, will be legally and validly issued, fully paid and
nonassessable.
We hereby consent to the references to this firm in and the inclusion of
this opinion in the Registration Statement and any amendments thereto.
Respectfully submitted,
<PAGE>
PARTICIPATION AGREEMENT
BY AND BETWEEN
SMITH MANAGEMENT COMPANY, INC.,
FAIRFIELD INDUSTRIES, INCORPORATED,
PETRO-GUARD COMPANY, INC.,
CAEX SERVICES, INC.,
LAWTON OIL COMPANY
AND
FORTUNE NATURAL RESOURCES CORPORATION
FEBRUARY 25, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE 1. DEFINITIONS ................................................... 1
ARTICLE 2. IDENTIFICATION OF PROSPECTS AND
PURCHASE TERMS ................................................ 3
2.1 Prospect Identification ..................................... 2
2.2 Phase I: Pre-Shoot Phase ................................... 3
2.3 Phase II: Conduct of 3-D Survey ............................ 3
2.4 Phase III: Lease Acquisition ............................... 6
2.5 Grass Island Field .......................................... 6
ARTICLE 3. OWNERSHIP AND USE OF DATA ..................................... 6
3.1 Smith Data .................................................. 6
3.2 Confidentiality ............................................. 7
3.3 Evaluation of Data .......................................... 7
3.4 Ownership of 3-D Data ....................................... 7
3.5 Use of 3-D Data After Confidentiality Period ................ 8
ARTICLE 4. ACQUISITION OF PROSPECTS ...................................... 8
4.1 Area of Mutual Interest ..................................... 8
4.2 Acquisition of Prospects in the Subject Area ................ 8
ARTICLE 5. TERM .......................................................... 10
5.1 Term ........................................................ 10
5.2 Joint Operating Agreement(s) ................................ 10
ARTICLE 6. MISCELLANEOUS ................................................. 11
6.1 Force Majeure ............................................... 11
6.2 Notices ..................................................... 11
6.3 Amendments .................................................. 12
6.4 Assignments ................................................. 12
6.5 Governing Law ............................................... 12
6.6 Entire Agreement ............................................ 13
6.7 Waivers ..................................................... 13
6.8 Counterparts ................................................ 13
6.9 Relationship of the Parties ................................. 13
6.10 Press Releases and Public Statements ........................ 13
6.11 Execution by Fairfield, Petro-Guard, CAEX
and Lawton for Limited Purposes ............................. 13
ii
<PAGE>
EXHIBITS
Exhibit A - Map of Subject Area
Exhibit B - Cost Estimate for 3-D Survey
Exhibit C - Parameters of 3-D Survey and Plat
Exhibit D - 3-D Survey Plat of Revised Subject Area
Exhibit E - Form of Joint Operating Agreement
iii
<PAGE>
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT ("Agreement") is made and effective February 25,
1997 by and between SMITH MANAGEMENT COMPANY, INC., a New York corporation
("Smith"), FAIRFIELD INDUSTRIES, INCORPORATED, a Delaware corporation
("Fairfield"), PETRO-GUARD COMPANY, INC., a Texas corporation ("Petro-Guard"),
CAEX SERVICES, INC., a Texas corporation ("CAEX"), LAWTON OIL COMPANY, a
Louisiana corporation ("Lawton") and FORTUNE PETROLEUM CORPORATION D/B/A
FORTUNE NATURAL RESOURCES CORPORATION, a _________ corporation ("Participant")
(sometimes individually, a "Party," and collectively, "the Parties").
W I T N E S S E T H
WHEREAS, Smith and Fairfield have entered into a Venture Agreement
effective July 15, 1996 (the "Smith/Fairfield Agreement") to participate
with each other in the identification and acquisition of oil and gas
exploration and development properties within the Subject Area as defined
below, by utilizing Fairfield's geophysical acquisition capabilities and
expertise, certain existing geologic and geophysical data and new three
dimensional geophysical data to be acquired pursuant to the Smith/Fairfield
Agreement;
WHEREAS, Smith and Petro-Guard have entered into an Agreement whereby
Petro-Guard has acquired an undivided 5% working interest out of Smith's
interest in and to the venture established in the Smith/Fairfield
Agreement;
WHEREAS, Smith and CAEX have entered into an Agreement whereby CAEX has
acquired an undivided 2.5% working interest out of Smith's interest in and
to the venture established in the Smith/Fairfield Agreement;
WHEREAS, Smith and Lawton have entered into an Agreement whereby Lawton
has acquired an undivided 10% working interest out of Smith's interest in
and to the venture established in the Smith/Fairfield Agreement;
WHEREAS, Participant desires to participate with Smith, Petro-Guard,
CAEX, Fairfield and Lawton in those efforts pursuant to the terms of this
Agreement; and
WHEREAS, Fairfield, Petro-Guard, CAEX and Lawton have executed this
Agreement for the limited purpose set forth in section 6.11 of this
Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants, obligations,
promises, and benefits set forth below, the Parties agree as follows:
ARTICLE 1. DEFINITIONS
1.1 "Grass Island Field" shall mean the 1,020 acres, more or less,
contained in State Lease Blocks 210, 215 and 216 which are
currently under lease by Smith and others.
1.2 "Parties" shall mean Smith, Fairfield, Petro-Guard, CAEX, Lawton,
Participant and any third party who executes a Participation
Agreement with Smith and Fairfield to participate in the project
described in this Agreement.
1.3 "Seismic Costs" shall have the meaning set forth in Section 2.3(c)
of this Agreement.
1.4 "Smith Data" shall mean the digitized well logs, geologic and area
maps, reprocessed 2-D seismic data as entered on a "Landmark" work
station and available title information on the Subject Area as
prepared by or on behalf of Smith and Fairfield.
1.5 "Subject Area" shall mean approximately 166.5 square miles in
Espiritu Santo Bay, Texas and located from Port O'Connor, Texas on
the Northeast corner extending in a roughly rectangular shape 18
miles to the Southwest parallel to the Intracoastal waterway, and
then 9.25 miles to the Southeast extending to the offshore
boundary of Matagorda Island, then Northeast 18 miles to the
northern end of Matagorda Island and then back to the point of
beginning, being the area depicted on the map attached hereto as
Exhibit A, but specifically excluding the Grass Island Field.
1.6 "3-D Survey" shall mean the new three dimensional seismic survey
to be conducted by Fairfield on the Subject Area in accordance
with the technical parameters set forth in the Smith/Fairfield
Agreement.
1.7 "3-D Data" shall mean the three dimensional seismic data to be
acquired by Fairfield on the Subject Area in accordance with the
Smith/Fairfield Agreement, including one copy of the raw data and
the processed data relating to the 3-D Survey.
1.8 "3-D Survey Project" shall mean all data acquisition, processing
and interpretation activities relating to the 3-D Survey and all
exploration, development or exploitation conducted by the Parties
in the Subject Area during the Confidentiality Period (as defined
in Section 2.2 below).
<PAGE>
ARTICLE 2. IDENTIFICATION OF PROSPECTS AND PURCHASE TERMS
2.1 PROSPECT IDENTIFICATION
(a) The main purpose of this Agreement is to allow Participant to
participate in the identification of oil and gas prospects in the
Subject Area and nomination of the prospective areas for lease in
the Subject Area at one or more of the lease sales to be held by
the State of Texas.
(b) Participant agrees to participate with Smith, Petro-Guard, CAEX,
Fairfield and Lawton on an exclusive basis in a joint attempt to
identify prospects within the Subject Area during the term of
this Agreement through the use of the Smith Data and the 3-D
Survey. The responsibilities of Participant with respect to the
3-D Survey and the prospect identification process are set forth
below. The relationship between the Parties regarding
acquisition of oil and gas leases and drilling, development and
operation of wells within the Subject Area will be governed by
one or more Joint Operating Agreements in accordance with Section
4.2 below.
2.2 PHASE I: PRE-SHOOT PHASE
(a) Participant acknowledges that prior to commencement of field
work on the 3-D Survey, Smith and Fairfield have acquired
information and data relating to the Subject Area, have performed
services necessary for the design and implementation of the 3-D
Survey, and have acquired from private surface or mineral owners
seismic permits or permits with an option to lease to perform the
3-D Survey over the Subject Area. The seismic permits and
options have been and shall be obtained in the name of Fairfield
and/or Petro-Guard, as nominee, or their designees. All of the
foregoing is referred to as the "Pre-Shoot Phase."
(b) Upon execution of this Agreement, Participant shall pay to
Smith: (i) $131,250 as reimbursement to Smith and Fairfield for
the actual costs incurred through the execution date for Pre-
Shoot Phase activities; and (ii) $27,013.75 for its 12.5% share
of lease acquisition costs incurred prior to the effective date
of this Agreement. In addition, Participant shall thereafter pay
25% of the cost of any Pre-Shoot Phase costs incurred after
execution of this Agreement.
2.3 PHASE II: CONDUCT OF 3-D SURVEY
(a) Participant acknowledges that Fairfield shall have the exclusive
right to conduct and shall conduct the 3-D Survey for the joint
account of the Parties in accordance with accepted industry
standards and the parameters set forth on Exhibit B to this
Agreement. Fairfield's obligation to conduct the 3-D Survey
shall include, but not be limited to, providing the crews,
equipment and expertise for the acquisition and processing of
three dimensional seismic data covering approximately 135 square
miles of the
<PAGE>
Subject Area (the "3-D Data"). Fairfield shall obtain and maintain
a comprehensive general liability insurance policy with a policy
limit of not less than $1,000,000 per occurrence including coverage
for sudden and accidental pollution events. Fairfield shall also
obtain and maintain a follow form umbrella liability policy with a
policy limit of not less than $5,000,000 per occurrence. The
policies shall include endorsements extending the coverage to the
Parties and waiving rights of contribution and of subrogation
against the Parties.
(b) Participant acknowledges that its use of the 3-D Survey and the
3-D Data is on an "as is" basis. Participant shall use the 3-D
Survey and 3-D Data at Participant's sole risk and during the
Confidentiality Period as defined in Section 3.2 below, shall use
the 3-D Survey and the 3-D Data solely for the benefit of the 3-D
Survey Project. Fairfield shall not be held liable or
responsible for any results of whatever nature in connection with
the use of the 3-D Survey or 3-D Data and in no event shall
Fairfield be liable for any consequential damages arising from
the use of the 3-D Survey or 3-D Data by Participant. Fairfield
makes no representation or warranty, express or implied, as to
the accuracy of the 3-D Survey or 3-D Data, and disclaims any
express or implied warranties of merchantability or fitness for a
particular purpose in connection with the 3-D Survey and 3-D
Data. Pursuant to Section 1.3 of the Smith/Fairfield Agreement,
Fairfield has agreed to conduct the 3-D Survey in accordance with
accepted industry standards and the parameters set forth in
Exhibit B to the Smith/Fairfield Agreement. Participant is
entitled to rely herein upon Fairfield's obligations and
covenants under the Smith/Fairfield Agreement.
(c) For purposes of this Agreement, "Seismic Costs" shall have the
same meaning as in the Smith/Fairfield Agreement, which are the
costs incurred by Fairfield to acquire and process the 3-D Data
in the 3-D Survey, the salaries and benefits of the Fairfield
employees used in the field on a per diem basis, actual invoice
costs billed to Fairfield by third party contractors and
subcontractors, the invoiced cost of materials and supplies and
any rental equipment, the salaries and benefits of Fairfield
employees used to process the 3-D Data and the supervision and
quality control thereof, costs for 3-D Data storage and
reproduction including workstation time and plotter charges, and
an allocated share of the insurance premiums paid by Fairfield
for the coverage required to be maintained by this Agreement and
of the costs associated with Fairfield's Lafayette, Louisiana
data acquisition and division offices, such share to be allocated
based on the number of crews and number of projects being
supervised out of that office, but in no event more than 1/3 of
the total cost of that division office. The allocation of
division office costs and of insurance premiums shall begin when
field operations relating to the 3-D Survey commence and continue
so long as Fairfield's personnel are conducting operations in the
Subject Area for the 3-D Survey. Seismic Costs shall also
include a component for depreciation of equipment but only for
equipment owned by Fairfield and used to conduct the 3-D Survey.
Depreciation shall be calculated on a straight line 24 month
basis as to geophones and
<PAGE>
hydrophones and a 60 month basis as to all other equipment.
Seismic Costs shall not include a percentage add-on for home office
or corporate allocated overhead unless agreed upon by the Parties
in advance in writing. Participant, in coordination with Smith,
shall have the right during normal business hours and upon not less
than five business days notice, to audit those financial records
and invoices of Fairfield with respect to the 3-D Survey necessary
to verify the Seismic Costs.
(d) Fairfield has estimated that the Seismic Costs will be
approximately $7,900,000 in accordance with the cost breakdown
attached hereto as Exhibit B. Smith shall bear and pay the first
one million dollars ($1,000,000) of the Seismic Costs.
Participant shall thereafter bear and pay 25% of the balance of
the Seismic Costs.
(e) At the beginning of the calendar month in which Fairfield
intends to commence actual field operations, Fairfield will send
an invoice to the Parties for their proportionate share of
Seismic Costs previously incurred and an estimate of the Seismic
Costs to be incurred during that calendar month. On or before
the fifth business day of the following calendar month, each
Party shall pay the invoiced amount to Fairfield. In like
manner, on a monthly basis Fairfield shall invoice each Party at
the beginning of each month for an estimate of the Seismic Costs
to be incurred during that month and each Party shall pay the
invoice by the fifth calendar day of the following calendar
month. To the extent reasonably practical, Fairfield shall
adjust the amount billed in each calendar month to reflect then
known over or under estimates that have been included in prior
billings. This procedure shall be followed until Fairfield has
invoiced the other Parties for 90% of the estimated cost of the
3-D Survey set forth on Exhibit B. A final invoice shall be
submitted by Fairfield within thirty (30) days after Fairfield
has completed the processing of the 3-D Data. The final invoice
shall include a reconciliation of the estimated billings and
payments with the Seismic Costs incurred by Fairfield in
connection with the 3-D Survey. Each Party (including Fairfield
if the final invoice reflects an overcharge) shall pay the amount
shown on the final invoice within twenty (20) days after receipt.
Payment of an invoice, including payment of the final invoice,
shall not constitute a waiver of the audit rights set forth in
Section 2.3(b) above.
(f) The field survey work is projected to commence on or before
April 15, 1997 or, if later, as soon as practical after issuance
of the necessary permits from the State of Texas and any private
landowners and/or lessees in the Subject Area. Fairfield has
estimated that field survey work will require approximately one
month and the data acquisition phase will require approximately
four months, subject to weather delays.
(g) The outline of the 3-D Survey, the design parameters, and
technical specifications of the 3-D Survey acquisition and the
processing technical specifications to be performed on the data
are set forth in Exhibit C and the Exhibit C plat attached
hereto, subject to modification from time to
<PAGE>
time as is necessary in Fairfield's reasonable discretion to
accommodate permit and surface conditions or difficulties.
Fairfield shall keep the Parties reasonably informed as to any such
modifications made in the field.
2.4 PHASE III: LEASE ACQUISITION
Acquisition of oil and gas leases or other interests in the
Subject Area shall be governed by Article 4 of this Agreement.
2.5 GRASS ISLAND FIELD
Smith expressly excludes from this Agreement all ownership rights
in and to the Oil and Gas Leases, wellbores, wellhead equipment,
production facilities, well site pad and pipeline rights of way or
access rights for or related to the Grass Island Field located in
Calhoun County, Texas, together with all hydrocarbon production
from or attributable to the Field. In the event operations within
the Grass Island Field or in the Subject Area are reasonably likely
to result in drainage between the two leasehold areas, the Parties
shall use all commercially reasonable efforts to form or implement
a pooled unit for the affected areas or strata with participation
based on a productive acreage or net acre foot of production
determination.
ARTICLE 3. OWNERSHIP AND USE OF DATA
3.1 SMITH DATA
Smith is the owner, lessee, licensee, or has otherwise acquired an
interest in the Smith Data. To the extent that it may legally do
so, Smith grants to Participant the right to use the Smith Data
during the term of this Agreement for review, analysis and
interpretation in connection with the 3-D Survey. To the extent
Smith is not contractually prohibited from doing so, Smith hereby
grants to Participant a non-exclusive, proprietary license in the
Smith Data by the execution or performance of this Agreement.
Participant acknowledges that its use of the Smith Data is on an
"as is" basis. Participant shall use the Smith Data at its sole
risk and solely for the benefit of the 3-D Survey Project. Smith
shall not be held liable or responsible for any results of whatever
nature in connection with the use of the Smith Data and in no event
shall Smith be liable for any consequential damages arising from
the use of the Smith Data by Participant. Smith makes no
representation or warranty, express or implied, as to the accuracy
of the Smith Data, and disclaims any express or implied warranties
of merchantability or fitness for a particular purpose in
connection with the Smith Data.
<PAGE>
3.2 CONFIDENTIALITY
Participant acknowledges the proprietary nature of the Smith Data
and the 3-D Data to be acquired in the 3-D Survey and agrees that
all of such data (and all copies of such data) and information
derived from such data shall be for the internal use of the
Parties. Participant shall not disclose, show, license, trade,
sell, dispose of, use (except for its own internal use) or
otherwise make available the Smith Data or any 3-D Survey data to
third parties without the prior written consent of the Parties as
provided in Section 3.4 during the term of this Agreement and for a
continuing period of 3 years after termination of this Agreement
("the Confidentiality Period"). The prior consent requirement of
this Section 3.2 shall continue to apply during the Confidentiality
Period even if a portion of the Data enters the public domain so
that the Parties can monitor prospect acquisitions under Article 4
below.
3.3 EVALUATION OF DATA
Smith shall arrange for the 3-D Data and the Smith Data to be
combined in an effort to identify oil and gas prospects in the
Subject Area. Participant agrees to pay 10% of the fees charged by
CAEX (or such other party as may be chosen by Smith) as an
independent contractor to interpret and analyze the 3-D Data. Any
interpretation of such data generated by CAEX or any Party during
the term of this Agreement and which is or will be the basis of a
proposed lease acquisition or disposition or a proposed well
operation shall be promptly shared and conveyed to the other
Parties. Reasonable back up or work papers or documentation
supporting the interpretation will be made available on request.
In addition, upon request from a Party, each Party shall keep the
requesting Party reasonably informed as to the progress and results
of their internal interpretations.
3.4 OWNERSHIP OF 3-D DATA
The 3-D Data shall be owned by the Parties with each Party
entitled to possess, copy and use the 3-D Data, subject to the
terms of this Agreement. Subject to the terms and restrictions of
this Agreement, Fairfield shall deliver to each Party two copies
of all field data, field tapes, and processed tapes of the 3-D Data
with applicable documentation for all such data subject to the
restrictions of Section 3.2. The Party receiving the copies shall
reimburse Fairfield for the cost of reproducing the tapes and data.
The 3-D Data is being acquired primarily for use by the Parties to
acquire oil and gas prospects in the Subject Area. However, the
Parties owning not less than 80% of the working interest specified
in Section 4.2(b) below may also agree from time to time during the
Confidentiality Period specified in Section 3.2 to license or sell
the right to use all or part of the 3-D Data to third parties. In
the event any Party desires to pursue marketing of the data to
third parties, the Parties shall meet to discuss a marketing plan
and the suggested compensation to be received for the data. Any
cost reimbursement or proceeds from the sale, licensing, lease or
other disposition of the 3-D Data shall be divided as follows:
<PAGE>
Fairfield: 22.5 %
Smith: 47.5 %
CAEX: 2.5 %
Petro-Guard: 5.0 %
Lawton: 10.0 %
Participant: 12.5 %
In addition, Fairfield shall have the responsibility to deliver or
cause to be delivered on a timely basis to the applicable permit
grantor any data required by any permit, license or lease following
the processing of the 3-D Data or as provided in any such
agreement, whichever is sooner. Any costs incurred by Fairfield in
delivering such 3-D Data shall be included within the definition of
"Seismic Costs."
3.5 USE OF 3-D DATA AFTER CONFIDENTIALITY PERIOD
After the expiration of the Confidentiality Period specified in
Section 3.2 above, each Party shall each have full and independent
ownership rights to the 3-D Data and, subject to any third party
license or confidentiality restrictions, to the Smith Data. Each
Party shall have the right to use, license or transfer the Data
without the participation of the other Parties.
ARTICLE 4. ACQUISITION OF PROSPECTS
4.1 AREA OF MUTUAL INTEREST
Except as provided below, until July 15, 2002 ("the AMI Period"),
the Subject Area shall be subject to the provisions of Section 4.2
and be deemed an area of mutual interest that is subject to the non-
competition and participation rights set forth below. Upon
completion of the 3-D Survey, a new plat shall be prepared and
attached to this Agreement as Exhibit D to encompass the area on
which 3-D Data was acquired plus an additional area extending one
half mile outside the 3-D Data area. The Subject Area shall
thereafter be limited to the area shown as Exhibit D.
4.2 ACQUISITION OF PROSPECTS IN THE SUBJECT AREA
If any Party or any permitted assignee (an "Acquiring Party")
proposes to acquire or acquires during the AMI Period a leasehold,
mineral, royalty, overriding royalty or other oil and gas interest
in the Subject Area, whether by purchase, farm in, performance of
operations as further described in Sections 4.2(a) and (b) or
otherwise (an "Acquired Interest"), the Acquiring Party shall give
the other Parties identified in the first paragraph of this
Agreement and to any other person who is a participant in the 3-D
Survey Project ("the other Parties") an exclusive option to
participate in such acquisition as set forth below. During the AMI
Period, no Party or Parties shall bid against or attempt to acquire
an Acquired Interest in competition against another Party or
Parties.
<PAGE>
(a) ACQUISITION BY ANY PARTY. The Acquiring Party shall notify
the other Parties in writing of the acquisition of an Acquired
Interest. Such notice shall specifically describe the Acquired
Interest, shall state the terms of acquisition and shall itemize
all costs associated with the acquisition, and include evidence
of actual payment of the costs of such acquisition. The other
Parties shall have a period of ten (10) business days from the
date of receipt of such notice to elect to acquire their
proportionate undivided working interest in the Acquired Interest
(22.5% to Fairfield, 47.5% to Smith, 5% to Petro-Guard, 2.5% to
CAEX, 10% to Lawton and 12.5% to Participant). The other Parties
may elect to participate in such acquisition by notifying the
Acquiring Party in writing of such election and by tendering a
check for its proportionate share of the acquisition costs as
itemized in the notice. If a Party fails to elect to participate
in an acquisition, as provided above, that Party shall have no
rights with respect to the Acquired Interest and the Acquired
Interest shall not be subject to the Operating Agreement. The
other Parties who elect to participate in the acquisition of such
Acquired Interest shall enter into a separate Operating Agreement
for the Acquired Interest substantially in the form of the JOA
attached hereto. Contemporaneously with the receipt of the
written election to participate in an acquisition and the check
for its share of the acquisition costs, the Acquiring Party shall
execute and deliver to the acquiring Parties an assignment of the
appropriate working interest in the Acquired Interest subject to
the Operating Agreement and to a proportionate part of all
existing leasehold or other outstanding burdens against the
Acquired Interest (other than any burdens created or reserved by
the Acquiring Party). The other Parties who are receiving the
Acquired Interest shall have no other obligations or suffer other
burdens on the Acquired Interest of any kind or nature, including
but not limited to other burdens in the form of overriding
royalties to the Acquiring Party's employees or partners. In the
event the Acquired Interest covers less than one hundred percent
(100%) of the minerals in any leasehold, the Assignment to the
other acquiring Parties shall cover an undivided share of the
Acquiring Party's interest in such Leases. The right to
participate in acquisitions by a Party in the Subject Area is a
continuing right and shall apply to any acquisitions in the
Subject Area during the AMI Period.
(b) ACQUISITIONS BY OTHER MEANS. If any interest or other
economic benefit in the AMI is acquired or is to be acquired by
drilling or otherwise, and not for cash, by any Party hereto,
each Party, upon receipt of a written acquisition notice, shall
have the right to participate in such acquisition in the
following working interest percentages:
Fairfield: 22.5%
Smith: 47.5%
CAEX: 2.5%
Petro-Guard: 5.0%
Lawton: 10.0%
Participant: 12.5%
The acquisition notice shall specify the requirements for
participation, which requirements (except for the participation
percentage) shall be equally applicable to each Party. The other
Parties may elect to participate
<PAGE>
in such acquisition by notifying the Acquiring Party in writing of
such Party's election to participate in the required drilling or
other operation within thirty (30) days from receipt of the
acquisition notice. If the Party receiving the acquisition notice
fails to elect to participate in the acquisition, as provided
above, such Party shall have no rights with respect to the
acquisition and such acquisition shall not be subject to the
Operating Agreement. When required by a third party interest owner,
the Parties hereto shall enter into separate operating agreements
when third party interest owners are involved, and any
inconsistency between these third party operating agreements and
the Operating Agreement shall be controlled by the third party
operating agreement.
ARTICLE 5. TERM
5.1 TERM
This Agreement shall remain in effect for a period ending July 15,
2002 (the "Term") subject to earlier termination by the mutual
consent of the Parties or by the terms of this Agreement; provided,
however, Section 3.2 above regarding confidentiality shall survive
for an additional three year period after the Term.
5.2 JOINT OPERATING AGREEMENT(S)
Upon acquisition of a lease or leases in the Subject Area by any
Party in which all Parties elect to acquire an interest under
Article 4, the Parties shall promptly execute a Joint Operating
Agreement substantially in the form attached hereto as Exhibit E
covering such lease or leases. All oil and gas drilling,
completion and exploration operations on specific lease blocks
within the Subject Area shall be conducted pursuant to the terms of
the Operating Agreement (or one or more sub-operating agreements if
additional Parties participate in a part of the Subject Area)
naming Petro Guard Company, Inc. as Operator, or such other entity
as is mutually acceptable to Fairfield, Smith and such other
Parties whose working interest in the specific lease block(s) at
issue in the Operating Agreement or sub-operating agreements, when
totaled together with interest of Smith and Fairfield, equal 55% of
the working interest in said specific lease block(s).
<PAGE>
ARTICLE 6. MISCELLANEOUS
6.1 FORCE MAJEURE
No Party shall be liable to the other or penalized hereunder for
any delays or damage or any failure to act due, occasioned or caused
by reason of any laws, rules, regulations or orders promulgated by
any Federal, State, or Local governmental body or the rules,
regulations, or orders of any public body or official purporting to
exercise authority of control respecting the operations covered
hereby, or due, occasioned or caused by strikes, action of the
elements, water conditions, or other causes beyond the control of
the Party affected thereby not including the payment of reasonable
sums of money, which events shall constitute force majeure under the
terms of this Agreement. In the event that any Party hereto is
rendered unable, wholly or in part, by these causes to carry out its
obligation under this contract, it is agreed that such Party shall
give notice and details of force majeure in writing to the other
Parties as promptly as possible after its occurrence, specifically
outlining the efforts being made or to be made by the affected Party
to remove the force majeure. It is agreed that the affected Party
will move with reasonable diligence to attempt to remove the cause
creating the force majeure.
6.2 NOTICES
All notices provided for or permitted to be given pursuant to
this Agreement must be in writing and shall be deemed to have been
properly given or served if delivered by personal service, telecopy,
telex, overnight mail, or by depositing the same in the United
States mail, postage prepaid, and registered or certified with
return receipt requested at the following addresses:
FAIRFIELD:
---------
Fairfield Industries Incorporated
10627 Kinghurst
Houston, Texas 77099
Telephone: (713) 981-8181
Fax: (713) 879-1472
SMITH:
------
Smith Management Company, Inc.
5858 Westheimer, Suite 400
Houston, Texas 77057
Telephone: (713) 782-5215
Fax: (713) 782-0916
PETRO-GUARD:
------------
Petro-Guard Company, Inc.
5858 Westheimer, Suite 400
Houston, Texas 77057
Telephone: (713) 974-5550
Fax: (713) 974-6818
<PAGE>
CAEX:
CAEX Services, Inc.
5555 San Felipe, Suite 500
Houston, Texas 77056
Telephone: (713) 850-8255
Fax: (713) 850-8256
Lawton:
Lawton Oil Company
Attn: Thad D. Minaldi
101 North Huntington Street
Sulphur, Louisiana 70663-2601
Telephone: (318) 527-5221
Fax: (318) 527-5276 AND (713) 667-8730
Participant:
Fortune Natural Resources Corporation
Attn: Tyrone J. Fairbanks, President
515 West Greens Road, Suite 720
Houston, Texas 77067
Telephone: (281) 872-1170
Fax: (281) 872-1213
6.3 AMENDMENTS
This Agreement may be amended only by an instrument in writing duly
executed by the Parties.
6.4 ASSIGNMENTS
(a) This Agreement and any interest acquired pursuant to this
Agreement may not be assigned to a non-affiliated party without
the prior written consent of the other Parties, which consent
shall not be unreasonably withheld.
(b) Any permissible assignment shall be subject to this Agreement and
shall be binding upon and inure to the benefit of the successors
and assigns of each Party. Each successor or assign shall
expressly assume all of the obligations provided for in this
Agreement and shall be entitled to full rights as a Party to this
Agreement and shall receive all notices separately as a Party as
if mentioned by name in this Agreement. Any proposed assignment
shall be subject to any approval requirements included in the
seismic permits, options or agreements and/or oil and gas leases.
<PAGE>
6.5 GOVERNING LAW
This Agreement shall be construed and enforced in accordance with
and governed by the laws of the State of Texas. Venue for
resolution of any disputes under or in any way relating to or
arising out of this Agreement shall lie exclusively in a court of
competent jurisdiction in Houston, Harris County, Texas.
6.6 ENTIRE AGREEMENT
This Agreement together with the Operating Agreement constitutes
the entire agreement of the Parties with respect to the subject
matter of this Agreement and supersedes all prior agreements and
understandings, oral and written, between the Parties with respect
to the subject matter of this Agreement.
6.7 WAIVERS
The failure at any time of any Party to require performance by any
other Party of any responsibility or obligation required by this
Agreement shall in no way affect a Party's right to require such
performance at any time thereafter, nor shall the waiver by a Party
of a breach of any provision of this Agreement by any other Party
constitute a waiver of any other breach of the same or any other
provision nor constitute a waiver of the responsibility or
obligation itself.
6.8 COUNTERPARTS
This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
6.9 RELATIONSHIP OF THE PARTIES
It is understood that this Agreement is not intended to create a
partnership or a joint venture. To the extent necessary, the
Parties hereby agree to form a tax partnership or to be excluded
from the application of all of the provisions of Subchapter K,
Chapter 1, Subtitle "A" of the Internal Revenue Code of 1986, as
amended, as permitted and authorized by Section 761 of the Code.
Smith shall be designated as the tax matters partner for any tax
partnership formed by the Parties.
6.10 PRESS RELEASES AND PUBLIC STATEMENTS
No Party shall issue any press release or give any interview or
make any public statements in any way relating to the existence of
this Agreement, the 3-D Survey or the 3-D Data without first
consulting with and obtaining the prior consent of the other Parties
as to the release of the information and as to the content of the
proposed release or statement, except as may be required by
applicable law, rule or regulation, or to satisfy any public
disclosure requirements or for routine public notice purposes.
<PAGE>
6.11 EXECUTION BY FAIRFIELD, PETRO-GUARD, CAEX AND LAWTON FOR LIMITED
PURPOSES
This Agreement is being executed by Fairfield, Petro-Guard, CAEX
and Lawton for the limited purposes of: (a) acknowledging
Participant's acquisition of an undivided interest in the 3-D Survey
Project from Smith and the billing and payment responsibilities and
procedures set forth herein; (b) acknowledging and representing to
Participant that Fairfield, Petro-Guard, CAEX and Lawton have
executed agreements with Smith that contain the same provisions
regarding ownership and use of data and acquisition of prospects in
the Subject Area as those provisions contained in Article 3 and
Article 4 of this Agreement; and (c) agreeing that Participant, as a
partial successor in interest to Smith, is entitled to rely upon and
obtain the full benefit of those provisions in the applicable
agreement with Smith. Nothing in this Agreement shall be deemed to
have amended or modified the terms of the Smith/Fairfield Agreement,
the Smith/Petro-Guard Agreement or the Smith/CAEX Agreement unless
specifically agreed in writing between Smith and the appropriate
Party.
IN WITNESS THEREOF, the Parties have executed this Agreement as of the date
first written above.
SMITH MANAGEMENT COMPANY, INC.
By:
---------------------------
Name: Arthur J. Pasmas
-------------------------
Title: Vice President
------------------------
PARTICIPANT:
FORTUNE PETROLEUM CORPORATION
D/B/A FORTUNE NATURAL RESOURCES
CORPORATION
By:
---------------------------
Name:
-------------------------
Title:
------------------------
LAWTON OIL COMPANY
By:
---------------------------
Name: Jack E. Lawton, Jr.
-------------------------
Title: President
------------------------
<PAGE>
FAIRFIELD INDUSTRIES,
INCORPORATED
By:
---------------------------
Name:
-------------------------
Title:
------------------------
PETRO-GUARD COMPANY, INC.
By:
---------------------------
Name: Dewey A. Stringer, III
-------------------------
Title: President
------------------------
CAEX SERVICES, INC.
By:
---------------------------
Name: Timothy S. Brown
-------------------------
Title: President
------------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into effective as of August 1,
1996, by and between Fortune Petroleum Corporation, a Delaware corporation
("Employer") and Dean W. Drulias ("Employee").
WHEREAS, Employee is currently employed in Los Angeles, California as the
vice-president of Burris, Drulias & Gartenberg, counsel to Employer; and
WHEREAS, Employer desires to engage Employee's exclusive business services in
Houston, Texas and Employee desires to provide such services, on a date to
commence in the near future, on the terms and conditions set forth herein; and
WHEREAS, Employer desires to provide to Employee the incentive necessary to
permit Employee to make the commitments that such a move will entail; and
WHEREAS, the Board of Directors of Employer recognizes Employee's general
importance to the ongoing operations of Employer, and the value of his
continuing participation in these operations, and desires to help assure
continuing dedication by Employee to his duties to demonstrate to Employee that
Employer is concerned with Employee's welfare and fair treatment; and
WHEREAS, the parties desire to demonstrate and provide for those concerns and
to facilitate and finance Employee's move to the greater Houston area by
entering into an Employment Agreement on the following terms and conditions:
In consideration of the foregoing and of the mutual and dependent covenants
herein contained, the parties hereto agree as follows:
1. EMPLOYMENT AND DUTIES
Employer hereby employs Employee on the terms and conditions hereinafter
set forth as its executive vice-president and general counsel, and
Employee hereby accepts such employment upon such terms and conditions
for the period hereinafter fixed. Employee shall not be required to
spend any extended periods outside the immediate area surrounding
Employer's headquarter's office, except that Employee agrees to make
routine business trips of reasonable duration for the benefit of Employer
and its business and in the discharge of Employee's duties hereunder.
2. PERFORMANCE
Employee agrees to devote substantially all of his business time and
efforts to the performance of his duties as an executive of Employer as
specified from time to time by the Board of Directors of Employer and
further agrees that he will not engage in any activities in competition
with Employer.
<PAGE>
3. TERM
The duties and obligations of the parties hereunder shall commence as of
the date hereof. Employee's period of employment hereunder shall
commence on the date on which Employee commences full-time employment
with Employer and shall terminate December 31, 1998, unless extended
pursuant to agreement of the parties hereto.
4. COMPENSATION AND EXPENSES
(A) For all the services to be rendered by Employee hereunder, Employer
agrees to pay Employee the sum of $125,000.00 per year, subject to all
legally required deductions. The amount and payment of said
compensation may be reviewed and increased by appropriate action of
the Board of Directors of Employer. In addition to such annual
compensation, Employee will be eligible to receive annual bonuses or
incentives for such reasons and in such amounts as the Board of
Directors of Employer shall determine from time to time. Employee
shall also be entitled to participate in other bonus and option plans
which may be awarded from time to time in the absolute discretion of
the Board of Directors and to cost of living adjustments given to the
employees of Employer. Employee shall also be reimbursed for
reasonable expenses incurred on behalf of Employer upon presentation
to Employer of a reasonably detailed statement of expenses for which
reimbursement is claimed.
(B) Employer shall grant, or otherwise cause to be granted, to Employee
20,000 warrants to purchase one (1) share each of the common stock of
Employer at the price listed for such stock on the American Stock
Exchange at the close of business on the first day of Employee's full-
time employment with Employer. Such warrants shall be issued for a
term of five (5) years but shall not be exercisable by Employee for
the first year after issuance.
5. VACATION
Employee shall have the right to a maximum of four (4) weeks of vacation
each year from his duties as herein described. During such vacation
period, the compensation payable to Employee pursuant to Section 4 hereof
shall continue. Employee's exercise of his rights under this paragraph 5
shall be consistent with all policies of Employer relating to the use of
vacation time.
6. BENEFITS
In addition to the compensation provided for in Section 4, Employee will
also be entitled to participate in all benefits of employment generally
available to all other executives of Employer on a commensurate basis as
may be offered from time to time by Employer to its other employees
similarly situated in experience, including, without limitation, club
membership, group health, disability, and life insurance benefits and
participation in any incentive compensation, bonus, pension, profit
sharing, and stock option plans established by Employer.
<PAGE>
Employee shall be provided with an automobile appropriate for his
executive capacity with Employer. Employer shall pay all costs and
expenses of maintaining said automobile, including upkeep and insurance.
Employer shall also pay the reasonable costs of moving Employee and
Employee's personal household and office effects from Los Angeles,
California to Houston, Texas.
7. PROPRIETARY INFORMATION
(A) Employee will not at any time disclose or use, except in the pursuit
of the business of Employer and any subsidiary thereof, and
proprietary information of Employer without regard to whether such
information is embodied in writing or some other physical form. For
purposes of this Agreement, the phrase "proprietary information of
Employer" means all information which is known only to employees of
Employer or its subsidiaries or others in a confidential relationship
with Employer and relates to specific technical matters or specific
business matters of Employer.
(B) Employee will not at any time remove from the premises of Employer,
except in the pursuit of the business of Employer, any document,
component, device, record, or other information of Employer, such
documents, components, devices, records, or other information, whether
developed by Employee or other employees of Employer, being the
exclusive property of Employer.
8. TERMINATION AND DISABILITY
(A) Employer reserves the right, at its option, to terminate this
Agreement on written notice to Employee for cause or for the breach of
any of the provisions hereof where said breach has not been cured
within thirty (30) days from the date of written notice of such
breach.
(B) This Agreement shall terminate upon the occurrence of (i) completion
of the initial period of this Agreement or any extension thereof; (ii)
Employee's death; (iii) the conditions specified in Section 8(A),
above; or (iv) inability of Employee, because of physical or mental
disability, to perform efficiently all of the duties of his employment
hereunder for an aggregate of six (6) months during any twelve (12)
month period.
(C) During the period of any such disability as referred to in Section
8(B)(iv), and until employment hereunder is terminated pursuant to its
provisions, Employee shall be entitled to all compensation and other
benefits to which he would otherwise be entitled hereunder had such
disability not occurred, less the aggregate amount of any payments
under either disability insurance policies maintained by Employer or
programs of federal or state governments. Employee agrees to apply
for all payments to which he is entitled under said policies or
programs. Employee shall give Employer notice of any disability
hereunder and the receipt of all payments received from said policies
or programs.
<PAGE>
(D) Upon termination of Employee's employment hereunder, Employer shall
have no further obligation to Employee.
(E) In the event that, during the term of this Agreement or any extension
thereof and following a change in control, this Agreement is
terminated by either Employer or Employee for any reason, either
voluntary or involuntary, other than for the reasons set forth in
Section 8(B), above, Employee shall be entitled to receive a single
payment equal to two (2) years' compensation at the rate provided for
in Section 4 hereof, as amended from time to time by the Board of
Directors, and in effect on the date of termination. For the purposes
of this Agreement, a change in control shall be deemed to have
occurred if, as the result of a tender offer, exchange offer, merger,
consolidation, sale of assets, acquisition of assets, or contested
election of directors or any combination of the foregoing (a
"Transaction"), the persons who were directors of Employer immediately
prior to the Transaction shall cease to constitute at least two-thirds
of the membership of the Board of Directors of Employer or of any
parent of, or successor to, Employer within two years after the
Transaction. In addition, in the event of such termination, the
rights of Employee under any applicable retirement, profit sharing, or
stock option plan of Employer shall continue to be governed by the
terms of such plans in existence as of the date of termination, except
that the exercise price of all shares covered by options which are
vested in Employee as of the date of termination shall be reduced to
the par value of Employer's stock, and Employee shall be entitled to
participate in Employer's group health plans or arrangements on a
basis commensurate with Employer's employees similarly situated in
experience until Employee shall reach age 65.
In the event of termination of this Agreement under the circumstances
described in this Section 8(E), the arrangements provided for by this
Agreement, by any stock option or other agreement between Employer or
any of its subsidiaries and Employee in effect at the time and by any
other applicable plan of Employer or any of its subsidiaries,
including participation in Employer's group health plans or
arrangements as specified in this Section 8(E), will constitute the
entire obligation of Employer to Employee and performance thereof will
constitute full settlement of any claim that Employee might otherwise
assert against Employer on account of such termination.
9. INDEMNITY
To the extent permitted by applicable law, Employer agrees to indemnify
Employee and hold him harmless for any acts or decisions made by him in
good faith while performing services for Employer, and shall maintain
coverage for him under liability insurance policies now in effect or
hereafter obtained during the term of this Agreement covering the other
officers and directors of Employer. Employer shall pay all expenses,
including reasonable attorney's fees and the amounts of court approved
settlements, actually incurred by Employee in connection with the defense
of any action, suit, or proceeding, and in connection with any appeal
thereon, which has been or which may be brought against Employee by
reason of Employee's services as an officer or agent of Employer or
subsidiary thereof.
<PAGE>
10. NOTICE
Unless otherwise directed in writing, any and all notices to Employer
referred to herein shall be sufficient if furnished in writing, sent by
certified mail to the following address:
Fortune Petroleum Corporation
515 W. Greens Road, Suite 720
Houston, Texas 77067
and to Employee:
Dean W. Drulias
10476 Ashton Avenue
Los Angeles, California 90024
11. ASSIGNMENT
The rights and benefits of Employer under this Agreement shall only be
transferable by Employer to successors of Employer pursuant to a
corporate reorganization such as a merger or sale of substantially all of
the assets of Employer, and all covenants and agreements hereunder shall
inure to the benefit of, and be enforceable by or against, said
successors-in-interest; provided, however, that Employer shall not enter
into a merger or consolidation with and into another corporation which
results in the termination of Employer's separate corporate existence
unless effective provisions shall have been made with the surviving
corporation for the continued employment of Employee generally upon the
same terms and conditions set forth in this Agreement. Notwithstanding
any such provision, Employee shall be entitled to the rights set forth in
Section 8(E), above.
This Agreement is personal to Employee and cannot be assigned nor may
duties of Employee hereunder be delegated. Any attempted assignment or
delegation by Employee shall render this Agreement null and void at the
option of Employer.
12. BINDING EFFECT
The terms, conditions, covenants, and agreements set forth herein shall
inure to the benefit of, and be binding upon, the heirs, administrators,
successors, and assigns of each of the parties hereto and upon any
corporation, entity, or person with which any of the parties hereto may
become merged, consolidate, combined, or otherwise affiliated.
<PAGE>
13. WAIVER
The waiver of either party of a breach of any provision of this
Agreement by the other party shall not operate or be construed as the
waiver of any subsequent breach of such other party.
14. ATTORNEY'S FEES
In the event that any action is brought to enforce the terms of this
Agreement, the prevailing party shall be entitled to an award of
reasonable attorney's fees and costs.
15. ENTIRE AGREEMENT
This Agreement represents the entire agreement between the parties
hereto, and other or prior understandings, agreements, and contracts are
hereby cancelled without further liability whatsoever as to either party.
16. AMENDMENT
This Agreement shall not be altered or modified except by further
written agreement between the parties.
17. CHOICE OF LAW
This Agreement shall be interpreted, construed, and applied according to
the laws of the State of Texas applicable to contracts made and performed
within such State.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of
the date first above written.
FORTUNE PETROLEUM CORPORATION
By: /s/ Tyrone J. Fairbanks
-----------------------------------------
TYRONE J. FAIRBANKS
President and Chief Executive Officer
/s/ Dean W. Drulias
--------------------------------------------
DEAN W. DRULIAS
<PAGE>
[LETTERHEAD]
February 27, 1997
Fortune Petroleum Corporation
One Commerce Green
515 W. Greens Road, Suite 720
Houston, Texas 77067
Gentlemen:
We have audited the balance sheets of Fortune Petroleum Corporation as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, and have reported thereon under date of
February 27, 1997. The aforementioned financial statements and our auditors'
report thereon are included in the Company's registration statement on Form
S-2 which includes the audited financial statements for the year ended
December 31, 1996. As stated in note 2 in those financial statements, the
Company changed its method of accounting for oil and gas properties and
expenditures to the full cost method from the successful efforts method of
accounting and states that the newly adopted accounting principle is
preferable in the circumstance because management believes the full cost
method better reflects the economics of the Company due to its change in
operating strategy from primarily an acquisition and production company
focused on many geological basins to an exploration and production company
focused on one geological basin. Further, as note 2 indicates, the full cost
method of accounting is the method used by many independent oil and gas
companies of comparable size and allows investors to better measure the
performance of the Company. In accordance with your request, we have reviewed
and discussed with Company officials the circumstances and business
judgment and planning upon which the decision to make this change in the
method of accounting was based.
With regard to the aforementioned accounting method, authoritative criteria
have not been established for evaluating the preferability of one acceptable
method of accounting over another acceptable method. However, for purposes of
Fortune Petroleum Corporation's compliance with the requirements of the
Securities and Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the adoption of the new method of
accounting is preferable in Fortune Petroleum Corporation's circumstances.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fortune Petroleum Corporation:
We consent to the use of our report on the financial statements of the
Company included herein and to the reference to our firm under the heading
"Experts" in the Prospectus.
Our report dated February 27, 1997, refers to a change from the successful
efforts method to the full cost method of accounting for oil and gas properties.
KPMG Peat Marwick LLP
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
February 28, 1997
<PAGE>
EXHIBIT 24.2
HUDDLESTON & CO., INC.
PETROLEUM AND GEOLOGICAL ENGINEERS
1111 FANNIN--SUITE 1700
HOUSTON, TEXAS 77002
------------------------
(281) 658-0248
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
February 26, 1997
Fortune Petroleum Corporation
One Commerce Green
515 W. Greens Rd., Suite 720
Houston, Texas 77067
Dear Sirs:
We hereby consent to the filing of this consent as an exhibit to the
Registration Statement on Form S-2 of Fortune Petroleum Corporation to be filed
with the Securities and Exchange Commission on or about February 28, 1997, to
the use of our name therein, and to the inclusions of or reference to our
reports of estimated future reserves and revenues effective December 31, 1994,
December 31, 1995 and December 31, 1996.
HUDDLESTON & CO., INC.
/s/ Peter D. Huddleston
--------------------------------------
Peter D. Huddleston, P.E.
<PAGE>
EXHIBIT 24.3
SHERWIN D. YOELIN, PETROLEUM ENGINEER INC.
1439 BONNIE JEAN ROAD
LA HABRA HEIGHTS, CALIFORNIA 90631
310/697-3700
February 26, 1997
Fortune Petroleum Corporation
One Commerce Green
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 Prospectus constituting part of the Registration
Statement on Form S-2 to be filed on or about February 28, 1997.
Respectfully,
/s/ Sherwin D. Yoelin
Sherwin D. Yoelin
Registered Petroleum Engineer
State of California
Certificate No. P 1241
