SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 1-12334
FORTUNE NATURAL RESOURCES CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 95-4114732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Green, 515 W. Greens Rd.,
Suite 720, Houston, Texas 77067
(Address of Principal Executive Offices) (Zip Code)
281-872-1170
Issuer's telephone number
N/A
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No | |
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
12,118,982 as of October 31, 1997
----------------------------------------
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 1,239,000 $ 2,174,000
Accounts receivable ........................... 995,000 695,000
Prepaid expenses .............................. 7,000 25,000
------------ ------------
Total Current Assets ...................... 2,241,000 2,894,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the full cost method .................. 26,290,000 23,079,000
Office and other .............................. 374,000 375,000
------------ ------------
26,664,000 23,454,000
Less--accumulated depletion,
depreciation and amortization ................ (17,343,000) (12,545,000)
------------ -----------
9,321,000 10,909,000
------------ ------------
OTHER ASSETS:
Materials, supplies and other ................. 111,000 188,000
Debt issuance costs (net of accumulated
amortization of $303,000 and $238,000
at September 30, 1997 and December 31, 1996,
respectively) ............................... 158,000 51,000
Restricted cash ............................... 0 2,293,000
------------ ------------
269,000 2,532,000
------------ ------------
TOTAL ASSETS .................................... $ 11,831,000 $ 16,335,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt ............ $ 1,022,000 $ 2,253,000
Accounts payable ............................. 498,000 84,000
Accrued expenses ............................. 375,000 77,000
Royalties and working interests payable ...... 51,000 103,000
Accrued interest ............................. 55,000 101,000
------------ ------------
Total Current Liabilities ................ 2,001,000 2,618,000
------------ ------------
LONG-TERM DEBT, net of current portion ........ 865,000 680,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized --2,000,000 shares
Issued and outstanding -- None ........... 0 0
Common stock, $.01 par value :
Authorized --40,000,000 shares
Issued and outstanding 12,128,752 and
11,853,663 at September 30, 1997 and
December 31, 1996, respectively .......... 121,000 119,000
Capital in excess of par value ............... 30,283,000 29,273,000
Accumulated deficit .......................... (21,439,000) (16,355,000)
------------ ------------
NET STOCKHOLDERS' EQUITY ....................... 8,965,000 13,037,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 11,831,000 $ 16,335,000
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
For the Nine Months Ended
----------------------------
September 30, September 30,
1997 1996*
------------- ------------
(Unaudited)
<S> <C> <C>
REVENUES
Sales of oil and gas, net of royalties ....... $ 2,870,000 $ 2,830,000
Other income ................................. 137,000 160,000
------------ ------------
3,007,000 2,990,000
------------ ------------
COSTS AND EXPENSES
Production and operating ..................... 940,000 1,000,000
Provision for depletion, depreciation
and amortization ............................ 1,609,000 1,079,000
Impairment to oil and gas properties ......... 3,200,000 0
General and administrative ................... 1,481,000 1,418,000
Office relocation and severance .............. 0 207,000
Debt conversion expense ...................... 316,000 0
Stock offering cost .......................... 323,000 0
Interest ..................................... 222,000 338,000
------------ ------------
8,091,000 4,042,000
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES ......... (5,084,000) (1,052,000)
PROVISION FOR INCOME TAXES ..................... 0 0
------------ ------------
NET LOSS ....................................... $ (5,084,000) $ (1,052,000)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .................... 12,074,959 11,284,701
============ ============
NET LOSS PER COMMON SHARE ...................... $ (0.42) $ (0.09)
============ ============
</TABLE>
*Restated
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months Ended
----------------------------
September 30, September 30,
1997 1996*
------------- ------------
(Unaudited)
<S> <C> <C>
REVENUES
Sales of oil and gas, net of royalties ....... $ 1,066,000 $ 1,011,000
Other income ................................. 29,000 42,000
------------ ------------
1,095,000 1,053,000
------------ ------------
COSTS AND EXPENSES
Production and operating ..................... 204,000 220,000
Provision for depletion, depreciation
and amortization ........................... 640,000 449,000
General and administrative ................... 467,000 357,000
Office relocation and severance .............. 0 97,000
Stock offering cost .......................... 54,000 0
Interest ..................................... 92,000 105,000
------------ ------------
1,457,000 1,228,000
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES ......... (362,000) (175,000)
PROVISION FOR INCOME TAXES ..................... 0 0
------------ ------------
NET LOSS ....................................... $ (362,000) $ (175,000)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .................... 12,124,862 11,431,665
============ ============
NET LOSS PER COMMON SHARE ...................... $ (0.03) $ (0.02)
============ ============
</TABLE>
*Restated
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Capital in
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit Net
---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996*................ 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 0 115,000
Common stock issued for
exercise of warrants................. 255,638 3,000 813,000 0 816,000
Common stock issued for
directors' fees...................... 1,395 0 4,000 0 4,000
Common stock canceled and
stock issuance cost.................. (1,227) 0 (31,000) 0 (31,000)
Common stock issued for
stock offerings...................... 412,000 4,000 1,145,000 0 1,149,000
Common stock returned to treasury........ (2) 0 0 0 0
Net loss................................. 0 0 0 (1,330,000) (1,330,000)
---------- ---------- ----------- ------------- -----------
BALANCE, December 31, 1996............... 11,853,663 $ 119,000 $29,273,000 $ (16,355,000) $13,037,000
---------- ---------- ----------- ------------- -----------
Common stock issued for
exercise of stock options............ 6,400 0 18,000 0 18,000
Common stock issued for
exercise of warrants................. 45,000 0 89,000 0 89,000
Common stock issued in exchange
for debentures, net of offering costs 218,858 2,000 889,000 0 891,000
Common stock contributed t
Company 401(k) Plan.................. 4,835 0 14,000 0 14,000
Common stock returned to treasury........ (4) 0 0 0 0
Net loss................................. 0 0 0 (5,084,000) (5,084,000)
---------- ---------- ----------- ------------- -----------
BALANCE, September 30, 1997 (unaudited).. 12,128,752 $ 121,000 $30,283,000 $ (21,439,000) $ 8,965,000
========== ========== =========== ============= ===========
</TABLE>
*Restated
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
For the Nine Months Ended
---------------------------
September 30, September 30,
1997 1996*
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................... $(5,084,000) $(1,052,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Common stock issued for directors' fees.... 0 4,000
Depletion, depreciation and amortization... 1,609,000 1,079,000
Non-cash compensation expense ............. 57,000 0
Amortization of deferred financing cost.... 62,000 56,000
Impairment of oil and gas assets .......... 3,200,000 0
Debt conversion expense ................... 316,000 0
Stock offering cost ....................... 323,000 0
Changes in assets and liabilities:
Accounts receivable ....................... (300,000) 488,000
Prepaids .................................. 18,000 65,000
Accounts payable and accrued expenses ..... 713,000 (86,000)
Royalties and working interest payable .... (52,000) (74,000)
Accrued interest .......................... (46,000) (62,000)
----------- -----------
Net cash provided by operating activities ..... 816,000 418,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties ....... (3,414,000) (2,253,000)
Restricted cash used .......................... 138,000 450,000
Return of exploration venture restricted cash.. 2,154,000 0
Proceeds from sale of properties and equipment. 203,000 2,018,000
Expenditures for other property and
equipment and other assets.................. (26,000) (233,000)
----------- -----------
Net cash used in investing activities ......... (945,000) (18,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ...... 65,000 0
Repayment of long term debt ................... (450,000) (1,754,000)
Proceeds from issuance of common stock ........ 103,000 903,000
Expenditures for debenture exchange and stock.. (353,000) (28,000)
Expenditures for debt refinancing ............. (171,000) 0
----------- -----------
Net cash used in financing activities ......... (806,000) (879,000)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....... (935,000) (479,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .. 2,174,000 1,888,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........ $ 1,239,000 $ 1,409,000
=========== ===========
Supplemental information:
Interest paid in cash ......................... $ 160,000 $ 283,000
Non-cash transactions
Common stock issued or issuable as
directors' fees.............................. 0 4,000
Common stock issued for conversion of debt..... 975,000 0
Common stock issued for 401(k)
Plan contribution............................. 14,000 0
</TABLE>
*Restated
See accompanying notes to financial statements.
6
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND PROCEDURES
The condensed financial statements at September 30, 1997, and for the
three months and nine months then ended included herein have been prepared by
Fortune Natural Resources Corporation ("Fortune" or the "Company"), without
audit, pursuant to the Rules and Regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such Rules and
Regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K/A.
Certain reclassifications have been made to prior period amounts to conform to
presentation in the current period. In the opinion of the Company, the financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
as of September 30, 1997 and December 31, 1996, the results of its operations
for the three months and nine months ended September 30, 1997 and September 30,
1996, and cash flows for the nine months ended September 30, 1997 and 1996. The
results of the operations for such interim periods are not necessarily
indicative of the results for the full year.
In the fourth quarter of 1996, the Company changed its method of
accounting for oil and gas operations from the successful efforts to the full
cost method. All prior year financial statements presented herein have been
restated to reflect the change.
The Company has in place a shareholder rights plan which is designed to
distribute preferred stock purchase rights to holders of the Company's Common
Stock in the event a person acquires beneficial ownership of fifteen percent or
more of the Company's stock or commences a tender offer which would result in
ownership of fifteen percent or more of such Common Stock. The plan, which
expires February 28, 2007, provides for the issuance of a fraction of a share of
a new series of junior preferred stock of the Company for each outstanding share
of the Company's stock. Depending on the circumstances, such new preferred stock
will enable the holders to either buy additional shares of Common Stock of the
Company or any acquiring entity at a 50% discount.
(2) LONG-TERM DEBT
At September 30, 1997, a summary of long-term debt is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Convertible Subordinated Debentures of
$1,028,000 at September 30, 1997 and
$1,725,000 at December 31, 1996
(net of discount of $6,000 and $57,000)
due December 31, 1997, including interest
of 10-1/2% per annum paid semi-annually.... $ 1,022,000 $ 1,683,000
Bank credit facility due July 11, 1999,
including interest at 1.25% over bank's
base rate payable quarterly................ 865,000 1,250,000
----------- -----------
Total long-term debt......................... 1,887,000 2,933,000
Less current installments.................... 1,022,000 2,253,000
----------- -----------
Long-term debt, excluding
current installments........................ $ 865,000 $ 680,000
=========== ===========
</TABLE>
7
<PAGE>
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, 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 three years, one-half at $4.00
per share and one-half at $5.00 per share. Subsequent to the conversion, the
remaining balance due on the Debentures at December 31, 1997 is $1,028,000.
Furthermore, the Company recorded a non-cash debt conversion expense of $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. For purposes of calculating the non-cash debt conversion
expense, the Company valued the 218,858 shares of Common Stock issued in
connection with the Exchange Offer at $547,502 ($2.625 per share) based on the
closing price of the Common Stock on the American Stock Exchange on February 26,
1997. The Company estimated the value of the Common Stock Warrants issued to the
Debentureholders at $8,713 ($0.05 per warrant). As of December 31, 1996, the
Company classified, as long term liabilities, the portion, net of discount, of
the Debentures that were converted to Common Stock in the Exchange Offer.
On July 11, 1997, the Company refinanced its bank debt by entering into a
$20 million credit facility with Credit Lyonnais New York Branch ("Credit
Lyonnais"). The Credit Lyonnais facility is due July 11, 1999, extendable for
one year upon mutual consent. Under the new credit facility, the Company may
initially borrow up to a pre-determined borrowing base, for acquisitions and
development projects approved by Credit Lyonnais at either 1.25% above Credit
Lyonnais' base rate or 4% above LIBOR. The borrowing base, currently set at $2
million, was calculated based upon the Company's July 1, 1997 oil and gas
reserves and is subject to semi-annual review. The Credit Lyonnais facility is
secured by a mortgage on all of the Company's existing proved oil and gas
properties. The Company is also required to pay a commitment fee of 0.5% on the
unused portion of the borrowing base. The Company previously had a credit
facility in place with Bank One, Texas, N.A. which was due October 1, 1997, bore
interest at 1.5% over Bank One's prime rate and required monthly principal
payments of $75,000.
The Company's maturities of long-term debt over the next three years are
as follows:
Year Debt
-------- ------------
1997 $ 1,022,000
1998 0
1999 865,000
------------
$ 1,887,000
(3) INCOME TAX EXPENSE
No provision for income taxes was required for the three months and nine
months ended September 30, 1997.
At September 30, 1997, the Company estimates it had cumulative net
operating loss carryforwards for federal income tax purposes of $14 million
which are significantly restricted under IRC Section 382. These carryforwards
are available to offset future federal taxable income, if any, with various
expirations through 2010. The Company is uncertain as to the recoverability of
the above deferred tax assets and has therefore applied a 100% valuation
allowance.
8
<PAGE>
The Company has available IRC Section 29 Tax Credits that may be used to
reduce or eliminate any corporate taxable income in future years. 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.
(4) LEGAL PROCEEDINGS
There are no material pending legal proceedings involving any of the
Company's properties or which involve a claim for damages which exceed 10% of
the Company's current assets.
On April 16, 1996, Fortune was served with two lawsuits which had been
filed in the Federal District Court in New York by 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 plaintiffs acquired their shares,
each was entitled to receive additional shares of Fortune Common 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 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 received leave of court to add third-party defendants whose
actions furthered this market manipulation. Fortune intends to continue to
vigorously defend plaintiff's actions and prosecute its own counterclaims.
Discovery is continuing in these actions and a consolidated trial is expected in
the first quarter of 1998.
(5) COMPUTATION OF LOSS PER SHARE
Primary loss per common share is computed by dividing net loss by the
weighted average number of common and common equivalent shares outstanding.
Common equivalent shares are shares which may be issuable upon exercise of
outstanding stock options and warrants; however, they are not included in the
computation for the nine-month and three-month periods ended September 30, 1997
since they would not have a dilutive effect on earnings per share.
Fully diluted earnings per common share are not presented, since the
conversion of the Company's 10-1/2% Convertible Subordinated Debentures would
have an anti-dilutive effect.
(6) RETURN OF EXPLORATION VENTURE RESTRICTED CASH
On June 4, 1997, the Company exercised its right under the exploration
agreement between it and Zydeco Exploration, Inc. ("Zydeco") to have unexpended
capital contributions returned to Fortune. Under the terms of the February 13,
1995 agreement, Fortune contributed a total of $4,800,000 which was to be
expended for certain leasehold and seismic costs incurred by the venture within
the Transition Zone and Timbalier Trench areas of offshore Louisiana. Of that
total, $2,154,000 remained unspent as of June 4, 1997. This amount was returned
to Fortune in June 1997. Fortune will retain its current undivided 50% working
interest in each of the existing exploration projects that are currently subject
to the agreement. The Company's 50% working interest in each project is subject
to a proportionate reduction in the event that Zydeco expends additional funds
on such project.
9
<PAGE>
(7) IMPAIRMENT TO OIL AND GAS PROPERTIES
In connection with requesting the return of unexpended funds from its
exploration venture with Zydeco, the Company reviewed for impairment its $4.3
million remaining unevaluated investment in the Zydeco exploration venture
properties. The $4.3 million investment includes the value of the Fortune Common
Stock that was issued in 1995 to acquire its interest in the exploration venture
as well as the funds that Fortune has incurred for leases and seismic in the
exploration venture. As a result of this review, Fortune impaired $2.6 million
of costs associated with the Zydeco exploration venture properties during the
second quarter of 1997. At the same time, the Company also impaired its $300,000
remaining unevaluated investment in its New Mexico properties. Furthermore, the
Company's unsuccessful well at South Lake Arthur was charged to the evaluated
property account in the second quarter of 1997. As a result, the Company has
recorded impairments to oil and gas properties through the second quarter of
1997 of $3.2 million.
(8) SUBSEQUENT EVENTS
Through November 13, 1997, the Company has sold $2,800,000 of 12%
Convertible Subordinated Notes due December 31, 2007 (the "Notes") in connection
with a private placement of up to $4.5 million of such Notes. The Notes are
convertible into the Company's Common Stock at a conversion price of $3.00 per
share, subject to adjustment. The Notes are convertible by the holders after May
1, 1999, subject to a one-time option by the holders to convert at a lower
conversion price prior to that date in the event that the Company sells shares
of its Common Stock at a price below the conversion price. The Notes are
redeemable by the Company after May 1, 1999, at a premium that reduces monthly
from 10% to zero over an 18-month period. Any such premium on redemption is
waived in the event that the Company's Common Stock price averages at least
$4.50 per share for 30 consecutive trading days. The holders of the Notes will
be entitled to receive additional shares upon conversion in the event that the
Company's Common Stock price averages less than the conversion price for a
certain period prior to May 1, 1999. The Notes are subordinate to all of the
Company's secured debt, including the credit facility with Credit Lyonnais. The
Notes bear interest at a rate of 12% per year, payable quarterly. The Company
has received proceeds, net of offering fees and commissions, of $2,446,000
through November 13, 1997. The private placement of Notes is set to expire on
November 19, 1997; however, there can be no assurance that the Company will sell
any additional Notes prior to the expiration date. The proceeds of the private
placement will be used to refinance existing debt, including the repayment of
the Company's Debentures that are due December 31, 1997. In connection
therewith, the Company has called for the redemption of those Debentures for
December 5, 1997. Additionally, up to $855,000 of the net proceeds received from
the private placement in excess of $2.5 million will be used to reduce the
Company's $865,000 of borrowings under its credit facility with Credit Lyonnais.
Net proceeds through November 13, 1997 are $2.4 million, thus no reduction to
the credit facility has occurred. All other proceeds from the offering will be
used for general corporate purposes.
The Notes were sold under a placement agreement with J. Robbins
Securities, L.L.C. (the "Placement Agent"). The Placement Agent is receiving a
ten percent sales commission, a three percent non-accountable expense allowance
and warrants to purchase a number of shares of Common Stock determinable by
multiplying the gross proceeds received in the offering by approximately .0278.
The warrants are exercisable over a five-year period at $3.60 per share. Barry
W. Blank, a beneficial owner of more than five percent of the Company's Common
Stock, is a branch manager for the Placement Agent and is marketing
substantially the entire private placement. As such, Mr. Blank will earn 50% of
the fees and commissions paid to the Placement Agent for the Notes sold by him.
Mr. Blank will also receive 20% of the warrants payable to the Placement Agent.
Five hundred thousand dollars of the Notes has been acquired by a trust
established by and, under certain circumstances, for the benefit of Mr. Blank.
Barry Feiner, a director of the Company, is acting as outside counsel for the
Placement Agent in connection with the private placement. If all of the Notes
are sold, Mr. Feiner will earn $45,000 in legal fees from the Placement Agent,
$20,000 of which have been paid to Mr. Feiner as of November 13, 1997.
10
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF 1997 OPERATING RESULTS TO 1996
Third Quarter Ended September 30, 1997 vs. 1996
During the third quarter of 1997, Fortune had a net loss of $362,000
compared to a net loss of $175,000 for the same 1996 period. The increase in
loss in 1997 primarily results from increased depreciation, depletion and
amortization expense in 1997.
In spite of lower oil and gas prices, net oil and gas revenues increased
by $55,000 (5%) in the third quarter of 1997, compared to the same 1996 period.
1997 revenues were higher because they included revenues from the Company's 1996
exploration discovery at East Bayou Sorrel. The discovery well in this field
began producing from permanent production facilities in January 1997 and the
first development well was placed on production June 23, 1997. During the third
quarter of 1997, this field contributed approximately $497,000 of oil and gas
revenues versus none from the field during the same 1996 period. As a result of
the East Bayou Sorrel production, the Company's oil production increased 69%
during the third quarter of 1997 versus 1996. Gas production decreased 19%
during the third quarter of 1997 versus 1996, primarily because of depletion on
the Company's other properties. The East Bayou Sorrel development well, the
Schwing No. 2, was completed as a dual producer and produced as such until
September 19, 1997 when the shallow zone was shut-in to investigate unusual sand
production from the zone. That zone contributed approximately $151,000 to oil
and gas revenues during the third quarter of 1997. If the shallow zone is not
brought back on production soon, the Company may experience lower oil and gas
production during the fourth quarter of 1997. The Company does anticipate higher
oil and gas prices during the fourth quarter which may offset, at least
partially, production declines. Also, see Liquidity and Capital Resources below
for a discussion of the Company's current and future drilling plans.
Natural gas prices on the Company's production averaged $2.36 per MCF for
the third quarter of 1997 as compared to $2.61 per MCF for the same 1996 period
(a 10% decrease). Oil prices averaged $18.46 per barrel for the third quarter of
1997 compared to $21.61 per barrel for the same 1996 period (a 15% decrease).
Interest expense decreased by $13,000 (12%) for the third quarter of 1997
over 1996 due to the lower debt balance. The Company's provision for depletion,
depreciation and amortization (DD&A) increased by $191,000 (43%) in the third
quarter of 1997 as compared to 1996 primarily because of higher property costs
in 1997. Interest expense will increase in future periods as a result of the
convertible debt offering discussed in note 8 to the financial statements.
Nine Months Ended September 30, 1997 vs. 1996
During the nine months ended September 30, 1997, Fortune had a net loss
of $5,084,000 compared to a net loss of $1,052,000 for the same 1996 period. The
increase in loss in 1997 is primarily attributable to the $316,000 non-cash debt
conversion expense incurred in connection with closing the Company's Exchange
Offer on February 26, 1997, the $323,000 of stock offering costs incurred in
1997 for the public offering which was withdrawn in April 1997, the $3,200,000
non-cash impairments to oil and gas properties recorded in 1997 and increased
depreciation, depletion and amortization expense in 1997. (See notes 2, 6 and 7
to the financial statements included herein.)
11
<PAGE>
Net oil and gas revenues in the first nine months of 1997 were comparable
to revenues for the same 1996 period. 1996 revenues included revenues from the
Company's California properties that were sold in February and March 1996 and a
higher ownership interest at South Timbalier Block 76 through March 1996. On
March 8, 1996, the Company sold 25% of its interest in the South Timbalier Block
76 for $940,000 pursuant to a preexisting arrangement. Both 1996 and 1997
revenues were adversely affected by the workovers at South Timbalier Block 76.
Offsetting the above decreases was the commencement of production from the
discovery well at East Bayou Sorrel as discussed above. The Company has a 12.9%
before-payout working interest in this field. Oil production increased 47%
during the first nine months of 1997 versus 1996 as a result of this discovery.
Gas production decreased 19% during the first nine months of 1997 versus 1996,
primarily because of depletion on the Company's properties and the sale of a
portion of South Timbalier Block 76, as discussed above.
For the first nine months of 1997, the Company's natural gas prices
averaged $2.56 per MCF as compared to $2.49 per MCF for the same 1996 period.
Oil prices averaged $19.20 per barrel for the first nine months of 1997 compared
to $19.61 per barrel for the same 1996 period.
The Company incurred non-recurring office relocation and severance cost
of $207,000 in the first nine months of 1996 in connection with the Company's
move to Houston. However, in the first nine months of 1997, the Company expensed
$323,000 of costs associated with a public offering that the Company withdrew on
April 25, 1997 and $316,000 of debt conversion expense associated the Debenture
exchange offer discussed in note 2 to the financial statements included herein.
Interest expense decreased by $116,000 (34%) for the first nine months of
1997 versus 1996 due to the lower debt balance. The Company's provision for
depletion, depreciation and amortization (DD&A) increased by $530,000 (49%) in
the first nine months of 1997 as compared to 1996 because of higher property
costs and lower proved reserves in 1997. See note 7 to the financial statements
included herein for a discussion of the $3.2 million impairment to oil and gas
properties in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash Balance, Working Capital and Cash Flows from Operating Activities
Fortune's cash flow provided by operating activities increased for the
first nine months of 1997 to $816,000 as compared to $418,000 for 1996. Before
considering the effect of changes in assets and liabilities, operating cash flow
was $483,000 for 1997 as compared to $87,000 for 1996. Lower production and
operating expense and interest expense and the absence of office relocation
costs in 1997, as discussed above, contributed to the increase. The Company's
working capital of $240,000 at September 30, 1997 was comparable to December 31,
1996. Working capital at September 30, 1997 is net of $1,022,000 of Debentures
that are due December 31, 1997. The Company plans to repay these Debentures on
December 5, 1997 with a portion of the proceeds from the private placement of
the convertible subordinated Notes due December 2007 discussed in note 8 to the
financial statements, thus converting short-term debt to long-term.
Fortune's internal liquidity and capital resources in the near term will
consist of working capital and cash flow from its oil and gas operations, the
net proceeds from the private placement of Notes discussed above and its unused
borrowing capacity under its new credit facility.
12
<PAGE>
Cash Used in Investing Activities -- Capital Expenditures
Cash expenditures for oil and gas properties for the first nine months of
1997 were $3,414,000 as compared to $1,059,000 for 1996. The 1997 expenditures
include primarily the acquisition of an additional interest at East Bayou
Sorrel, an exploratory well at South Lake Arthur, a development well at East
Bayou Sorrel and seismic and land acquisition at Espiritu Santo Bay. A
significant portion of the Company's 1997 expenditures were funded with the
funds returned by Zydeco under the terms of the Fortune/Zydeco joint venture. In
June 1997, Zydeco returned to the Company $2,154,000 of exploration venture cash
under the terms of the venture agreement, as discussed in Note 6 to the
financial statements. The cash was previously reported on the Company's balance
sheet as restricted cash in other assets. Fortune's net capital expenditures for
all of 1997 are currently estimated to be approximately $4.0 million.
The Company has been involved in two significant proprietary 3D seismic
projects along the Texas coast. The La Rosa project, a 24 square mile
proprietary 3D survey over one of the Company's existing producing fields in
Refugio County, Texas has been shot and is currently being interpreted. The
Company sold one-half of its interest in the non-producing portion of this field
in exchange for the acquiring parties paying 100% of the Company's 3D seismic
costs. The Company is encouraged by the results of the survey thus far and
expects to begin identifying drillable projects during late 1997 and 1998. The
Company holds a 37.5% working interest in the producing wells and an 18.75%
working interest in the prospective projects covered by this 3D survey.
The second project is offshore Texas in the intracoastal waters of
Espiritu Santo Bay, Calhoun County. This involves a 135 square mile proprietary
3D seismic survey in which the Company owns a 12.5% working interest. The area
covered by the survey also includes producing fields. This survey has also been
completed and is being interpreted. The Company is encouraged by the results
thus far and expects to begin identifying drillable projects by early 1998.
The Company is currently participating in a third well at East Bayou
Sorrel and expects to see additional drilling on this project in 1998. This well
was spud on October 8, 1997, however, the Company prepaid its portion of the
drilling costs of the well prior to September 30, 1997. The 3D seismic projects
and the East Bayou Sorrel project are expected to be multi-year projects which,
if successful can have a significant positive impact on the Company's cash flow
and results of operations. The Company intends to provide for these expenditures
with its available cash, its cash flow from operations and the proceeds of the
private placement of convertible Notes discussed above. Should funds not be
available to the Company as required for participation in the projects, the
Company can reduce its working interest share of the projects. Should the
Company's working interest in exploration projects be reduced, the Company would
not derive as great a benefit in the event of an exploration success.
Cash Flows from Financing Activities
On July 11, 1997, the Company refinanced its bank credit facility and
extended the maturity of its bank debt to July 11, 1999. See note 2 to the
financial statements. As discussed above and in note 8 to the financial
statements, the Company has sold $2.8 million ($2.4 million net of fees and
commissions) of 12% convertible subordinated Notes due December 31, 2007. A
portion of the proceeds of these Notes will be used to repay the Debentures due
in December 1997. Furthermore, any net proceeds in excess of $2.5 million will
be used to pay down the bank credit facility.
Oil and Gas Prices
Conditions outside of the Company's control influence the price it
receives for oil and gas. As of November 14, 1997, the Company was receiving an
average of approximately $20.00 per barrel for its oil production and $3.50 per
MCF as an average price for its gas production.
13
<PAGE>
Recently Issued Financial Accounting Statements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 changes the calculation and financial statement
presentation of earnings per share. SFAS 128 requires the restatement of prior
period earnings per share amounts. The Statement will be effective for financial
statements issued for periods beginning after December 15, 1997.
Effective December 1997, the Company will be required to adopt Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"). SFAS 129 requires that all entities disclose in
summary form within the financial statement the pertinent rights and privileges
of the various securities outstanding. An entity is to disclose within the
financial statement the number of shares issued upon conversion, exercise, or
satisfaction of required conditions during at least the most recent annual
fiscal period and any subsequent interim period presented. Other special
provisions apply to preferred and redeemable stock. The Company will adopt SFAS
129 in the fourth quarter of 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components.
The components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with the other financial
statements. The total of other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public enterprises are
to report information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for periods beginning after December 15, 1997.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Forward looking statements
include statements regarding: future oil and gas production and prices, future
exploration and development spending, future drilling and operating plans and
expected results, reserve and production potential of the Company's properties
and prospects and the Company's 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 factors set forth below and
elsewhere in this 10-Q, and in the Company's annual report on Form 10-K/A.
Exploration Risks. The business of exploring for and, to a lesser extent,
of acquiring and developing oil and gas properties is an inherently speculative
activity that involves a high degree of business and financial risk. 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.
14
<PAGE>
Dependence on a Limited Number of Wells. Over 70% of the Company's oil
and gas revenues, cash flow and proved oil and gas reserves is currently
accounted for by three wells, the South Timbalier Block 76 well and the two East
Bayou Sorrel wells. The South Timbalier Block 76 well was recently shut-in for
repairs and was shut-in for over two months during 1996 as the result of a
mechanical failure. A significant curtailment or loss of production from 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.
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.
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.
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.
Operating and Weather Hazards. The cost and timing of drilling,
completing and operating wells is often uncertain. Drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, equipment failures, accidents, adverse weather
conditions, encountering unexpected formations or pressures in drilling and
completion operations, corrosive or hazardous substances, mechanical failure of
equipment, blowouts, cratering and fires. These conditions 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.
Additional factors. Additional factors that could cause actual events to
vary from those discussed above and elsewhere in this report include, among
others: loss of key company personnel; adverse change in governmental
regulation; inability to obtain critical supplies and equipment, personnel and
consultants; and inability to access capital to pursue the Company's plans.
15
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
PART II - OTHER INFORMATION
ITEM 5.
Through November 13, 1997, the Company has sold $2,800,000 of 12%
Convertible Subordinated Notes due December 31, 2007 (the "Notes") in connection
with a private placement of up to $4.5 million of such Notes. The Notes are
convertible into the Company's Common Stock at a conversion price of $3.00 per
share, subject to adjustment. The Notes are convertible by the holders after May
1, 1999, subject to a one-time option by the holders to convert at a lower
conversion price prior to that date in the event that the Company sells shares
of its Common Stock at a price below the conversion price. The Notes are
redeemable by the Company after May 1, 1999, at a premium that reduces monthly
from 10% to zero over an 18-month period. Any such premium on redemption is
waived in the event that the Company's Common Stock price averages at least
$4.50 per share for 30 consecutive trading days. The holders of the Notes will
be entitled to receive additional shares upon conversion in the event that the
Company's Common Stock price averages less than the conversion price for a
certain period prior to May 1, 1999. The Notes are subordinate to all of the
Company's secured debt, including the credit facility with Credit Lyonnais. The
Notes bear interest at a rate of 12% per year, payable quarterly. The Company
has received proceeds, net of offering fees and commissions, of $2,446,000
through November 13, 1997. The private placement of Notes is set to expire on
November 19, 1997; however, there can be no assurance that the Company will sell
any additional Notes prior to the expiration date. The proceeds of the private
placement will be used to refinance existing debt, including the repayment of
the Company's Debentures that are due December 31, 1997. In connection
therewith, the Company has called for the redemption of those Debentures for
December 5, 1997. Additionally, up to $855,000 of the net proceeds received from
the private placement in excess of $2.5 million will be used to reduce the
Company's $865,000 of borrowings under its credit facility with Credit Lyonnais.
Net proceeds through November 13, 1997 are $2.4 million, thus no reduction to
the credit facility has occurred. All other proceeds from the offering will be
used for general corporate purposes.
The Notes were sold under a placement agreement with J. Robbins
Securities, L.L.C. (the "Placement Agent"). The Placement Agent is receiving a
ten percent sales commission, a three percent non-accountable expense allowance
and warrants to purchase a number of shares of Common Stock determinable by
multiplying the gross proceeds received in the offering by approximately .0278.
The warrants are exercisable over a five-year period at $3.60 per share. Barry
W. Blank, a beneficial owner of more than five percent of the Company's Common
Stock, is a branch manager for the Placement Agent and is marketing
substantially the entire private placement. As such, Mr. Blank will earn 50% of
the fees and commissions paid to the Placement Agent for the Notes sold by him.
Mr. Blank will also receive 20% of the warrants payable to the Placement Agent.
Five hundred thousand dollars of the Notes has been acquired by a trust
established by and, under certain circumstances, for the benefit of Mr. Blank.
Mr. Blank's mother has also acquired $50,000 of Notes for which Mr. Blank
disclaims beneficial ownership. Barry Feiner, a director of the Company, is
acting as outside counsel for the Placement Agent in connection with the private
placement. If all of the Notes are sold, Mr. Feiner will earn $45,000 in legal
fees from the Placement Agent, $20,000 of which have been paid to Mr. Feiner as
of November 13, 1997. Mr. Feiner's wife has acquired $50,000 in Notes for which
Mr. Feiner disclaims beneficial ownership. Mr. Feiner has recused himself from
voting on all Company board of director matters associated with the private
placement.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit No. Description
----------- -----------
1.1* Placement Agent Agreement between Registrant and
J. Robbins Securities, L.L.C., including amendments
thereto.
4.1* Form of Note between Registrant and holders of 12%
Convertible Subordinated Notes.
4.2* Form of Placement Agent Warrant Agreement
between Registrant and J. Robbins Securities, L.L.C.
10.1* Amendment dated November 3, 1997 to Credit Agreement
between Registrant and Credit Lyonnais New York Branch
and Certain Lenders.
10.2* Form of Subscription Agreement and Investment Letter
in connection with private placement of 12% Subordinated
Convertible Notes due December 31, 2007.
27.1* Financial Data Schedule.
99.1 Notes to Financial Statements included in the
Registrant's Form 10-K/A filed for the fiscal year
ended December 31, 1996 incorporated herein by reference.
(B) REPORTS ON FORM 8-K / 8K-A
None.
*Filed herewith.
17
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FORTUNE NATURAL RESOURCES 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
Date: November 14, 1997
18
<PAGE>
PLACEMENT AGENT AGREEMENT
Dated as of: October 14, 1997
J. Robbins Securities, LLC
1345 Avenue of the Americas
22 Floor
New York, New York 10105
Attn.: James A. Jedrlinic
Chief Executive Officer
Dear Sirs:
The undersigned, Fortune Natural Resources Corporation (the "Company"), hereby
agrees with J. Robbins Securities, LLC ("Robbins" or the "Placement Agent") as
follows:
1. Placement.
---------
A. The Company, a Delaware corporation, is an independent oil and
natural gas company engaged primarily in exploration for and development of
domestic oil and natural gas.
B. The Company hereby engages Robbins to act as its exclusive placement
agent in connection with the sale by the Company (the "Placement") of up to $3.5
million in aggregate principal amount of convertible subordinated notes (the
"Notes"). The Notes will (i) bear annual interest at the rate of 12%, payable
quarterly; (ii) mature on December 31, 2007; (iii) be convertible into the
Company's common stock (the "Underlying Shares"); and (iv) be subordinated to
"Senior Indebtedness," all as described in the form of Note attached as Exhibit
B to the Subscription Agreement and Investment Letter (the "Subscription
Agreement") which constitutes part of the "Offering Materials" referred to in
PARAGRAPH 3 (C) below. The anticipated use of the Placement proceeds will be as
set forth in the Schedule of Use of Proceeds attached as Exhibit K to the
Subscription Agreement.
2. Offering.
--------
A. The Notes will be offered on a "$1.25 million aggregate principal
amount minimum or none to $3.5 million aggregate principal amount maximum best
efforts basis " for the "Offering Period" as defined below. They will be issued
in denominations of $10,000 or integral multiples thereof in such principal
amounts as shall be determined by the Company.
B. The closing date will occur approximately seven business days (the
"Closing Date") following the acceptance by the Company of subscriptions for a
sufficient aggregate principal amount of Notes offered hereby (as determined
jointly by the Company and Robbins) but in no event less than five business days
or as soon thereafter as funds have cleared the banking system in the normal
course of business and, in any event, will occur on or before October 31, 1997
unless extended by the mutual consent of the Company and the Placement Agent to
no later than December 1, 1997 (such date is hereinafter referred to as the
"Termination Date"; the period commencing on the date hereof and ending on the
Termination Date is sometimes referred to herein as the "Offering Period").
There may be more than one Closing Date in the event that less than $3.5 million
aggregate principal amount of Notes has been sold and paid for on the first
Closing Date.
1
<PAGE>
C. The Notes will be offered by the Company through the Placement
Agent, by means of the "Offering Materials" which shall include such documents
as appropriately describe the Company's business and prospects. A list of the
Offering Materials is attached hereto as EXHIBIT I. Payment for the Notes shall
be made by check or wire transfer as more fully described in the Subscription
Agreement. The Placement will be effected pursuant to the exemption from the
registration provisions of the Securities Act of 1933 (the "Securities Act")
provided by Section 4 (2) thereof and Rule 506 of Regulation D promulgated
thereunder by the Securities and Exchange Commission (the "Commission"). The
Notes will be sold only to "Accredited Investors" within the meaning of Rule 501
(a) of Regulation D ("Accredited Investors").
D. All funds received from subscriptions will be promptly transmitted
pursuant to the terms of an escrow agreement, to a special bank escrow account
at The Chase Manhattan Bank (the "Escrow Agent"). In the event that less than
$1.25 million in aggregate principal amount of Notes are subscribed for during
the Offering Period, all funds will be returned promptly after the Termination
Date in full to subscribers without deduction therefrom or interest thereon. In
the event that $1.25 million or more in aggregate principal amount of Notes are
subscribed for during the Offering Period, the funds therefrom, net of (i) 10%
commissions and 3% expense allowance (the "Expense Allowance") due Robbins (less
$25,000 to be paid to Robbins or for its account upon the execution of this
Agreement pursuant to the terms of Section 7 below, and (ii) bank escrow fees,
will be forwarded to the Company, against delivery of the Notes as soon as the
funds received from such subscriptions have cleared the banking system in the
normal course of business. In addition, Robbins will be granted warrants (the
"Placement Agent's Warrants"), exercisable over a five year period commencing
upon the last Closing Date, to purchase a number of shares of the Common Stock
equal to 10% of the aggregate gross proceeds of the Offering received by the
Company divided by 3.6. The warrant exercise price will be $3.60 per share
adjusted in accordance with anti dilution provisions which shall be the same as
those set forth in the Note.
E. The Company is required to obtain the permission of its primary
lender, Credit Lyonnais New York Branch (the "Bank"), in order to effect the
Placement. Accordingly, no funds will be released from the escrow account to the
Company unless the Bank's permission is obtained or unless the Company
determines to repay the Bank with the Placement proceeds.
F. The Placement Agent shall not be obligated to sell any of the Notes
and shall only be obligated to offer the Notes on a "best efforts" basis.
G. The Company reserves the right to reject any subscriber, in whole or
in part, in its sole discretion. Notwithstanding anything to the contrary
contained in this PARAGRAPH G, the Company's right to reject a subscriber shall
lapse five business days after receipt by the Company of the fully completed and
duly executed subscription documents from the Placement Agent with respect to
such subscriber, unless the Company shall notify the Placement Agent of its
election to reject such subscriber prior thereto.
3. Further Agreements of the Company.
---------------------------------
The Company shall at its sole cost and expense do as follows:
(i) Prior to the earlier of the last Closing Date or
the Termination Date, as soon as the Company is either
informed or becomes aware thereof, advise the Placement Agent
of any material adverse change in the Company's results of
operations, condition (financial or otherwise) or business or
of any development materially affecting the Company; or
rendering untrue or misleading any material statement in the
Offering Materials occurring at any time prior to the
completion or termination of the Placement and upon the
request of the Placement Agent shall confirm the same in
writing.
2
<PAGE>
(ii) Cause the Notes to be qualified or registered
for sale, or to obtain exemptions from such qualification or
registration requirements, on terms consistent with those
stated in the Offering Materials under the securities laws of
such jurisdictions as the Placement Agent shall request;
provided, however, that such states and jurisdictions do not
require the Company to qualify as a foreign corporation or to
file a general consent to service of process. Qualification,
registration and exemption charges and fees as well as all
legal fees and expenses related thereto shall be at the sole
cost and expense of the Company.
(iii) Provide and to continue to provide to each Note
holder, until his Note has been repaid and/or converted,
copies of all quarterly and annual consolidated financial
statements and reports prepared by or on behalf of the
Company, for public disclosure and copies of all documents
delivered to all of the Company's stockholders.
(iv) Deliver, until all of the Notes have been repaid
and/or converted, to the Placement Agent, in the manner
provided in PARAGRAPH 10 (C) of this Agreement: (A) within 55
days after the end of each of the first three quarters of each
fiscal year of the Company or as soon thereafter as is
reasonably practicable, commencing with the first quarter
ending after the Termination Date, the Form 10-Q filed by the
Company with the Commission for each such quarterly period;
(B) within 100 days after the close of each fiscal year, the
Form 10-K filed by the Company with the Commission for such
fiscal year; and (C) a copy of all documents, reports and
information furnished to its respective stockholders generally
at the time such documents, reports and information are
furnished to such stockholders.
4. Representations, Warranties and Covenants of the Placement Agent.
----------------------------------------------------------------
The Placement Agent represents, warrants and covenants as follows:
(i) The Placement Agent has the necessary corporate
power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby.
(ii) The Placement Agent is a limited liability
company duly organized and validly existing under the laws of
the State of New York; the execution and delivery by the
Placement Agent of this Agreement and the consummation of the
transactions herein contemplated will not result in any
violation of, or be in conflict with, or constitute a default
under, any agreement or instrument to which the Placement
Agent is a party or by which the Placement Agent or its
properties are bound, or any judgment, decree, order or, to
the Placement Agent's knowledge, any statute, rule or
regulation applicable to the Placement Agent. This Agreement,
when executed and delivered by the Placement Agent, will
constitute the legal, valid and binding obligation of the
Placement Agent, enforceable in accordance with its terms,
except to the extent that (a) the enforceability hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws from time to time in effect and affecting the
rights of creditors generally, (b) the enforceability hereof
is subject to general principles of equity, or (c) the
indemnification provisions hereof may be held to be violative
of public policy.
3
<PAGE>
(iii) The Placement Agent will deliver to each
purchaser, prior to any submission by such person of a written
offer to purchase any Notes, a copy of the Offering Materials,
as it may have been most recently amended or supplemented by
the Company.
(iv) Upon receipt of an executed Subscription
Agreement and the payments representing subscriptions for such
Notes, the Placement Agent will promptly forward copies of the
subscription documents to the Company and shall forward all
consideration received for such Notes to the Escrow Agent to
be held in escrow.
(v) The Placement Agent will not deliver the Offering
Materials to any person it does not reasonably believe to be
an Accredited Investor.
(vi) The Placement Agent will not intentionally take
any action which it reasonably believes would cause the
Placement to violate the provisions of the Securities Act or
the Securities Exchange Act of 1934 (the "Exchange Act").
(vii) The Placement Agent shall use all reasonable
efforts to determine (a) whether any prospective purchaser is
an Accredited Investor and (b) that any information furnished
by a prospective investor is true and accurate. The Placement
Agent shall have no obligation to insure that (1) any check,
note, draft or other means of payment for the Notes will be
honored, paid or enforceable against the subscriber in
accordance with its terms, or (2) subject to the performance
of the Placement Agent's obligations and the accuracy of the
Placement Agent's representations and warranties hereunder,
(A) that the Placement is exempt from the registration
requirements of the Securities Act or any applicable state
"Blue Sky" law or (B) any prospective purchaser is an
Accredited Investor.
(viii) The Placement Agent is a member of the
National Association of Securities Dealers, Inc. and is a
broker-dealer registered as such under the Exchange Act and
under the securities laws of the States in which the
securities will be offered by the Placement Agent, unless an
exemption for such state registration is available to the
Placement Agent.
5. Representations, Warranties and Covenants of the Company.
--------------------------------------------------------
The Company represents, warrants and covenants as follows:
4
<PAGE>
(i) Each of this Agreement and Subscription
Agreement have been duly and validly authorized by the Company
and are, or with respect to the Subscription Agreements will
be, valid and binding agreements of the Company, enforceable
in accordance with their respective terms, except to the
extent that (a) the enforceability hereof and thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws from time to time in effect and affecting the
rights of creditors generally and (b) the enforceability
hereof or thereof is subject to general principles of equity.
The Notes, Underlying Shares and Placement Agent's Warrants
will be duly authorized and, when issued and paid for in
accordance with the Offering Materials, this Agreement, and
Subscription Agreements, will be (or in the case of the
Underlying Shares, issuable upon conversion of the Notes
and/or exercise of the Placement Agent's Warrants in
accordance with the terms thereof will be), validly issued,
fully paid and non assessable; the holders thereof are not and
will not be subject to personal liability solely by reason of
being such holders; the Underlying Shares, will not be subject
to the preemptive rights of any stockholder of the Company;
and all corporate action required to be taken for the
authorization, issuance of the Notes and the Placement Agent's
Warrants and the sale of the Notes, has been (or with respect
to the Underlying Shares, will be) duly and validly taken by
the Company. The Notes and Placement Agent's Warrants
constitute valid and binding obligations of the Company,
enforceable in accordance with their respective terms, (except
to the extent that the enforceability thereof (1) may be
limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws from time to time in effect and affecting the
rights of creditors generally and (2) is subject to general
principles of equity) to issue and sell, upon exercise
thereof, in accordance with their terms, the number and type
of the Company's securities called for thereby.
(ii) As of September 30, 1997, the authorized capital
stock of the Company consists of 40 million shares of common
stock (the "Common Stock"), $0.01 per share par value, of
which 12,199,163 shares are issued and outstanding, and 2
million shares of preferred stock, $1.00 per share par value,
none of which are outstanding. Additionally, 7,410,224 shares
of Common Stock are reserved for issuance upon exercise of
options and warrants held by current and former employees and
management of the Company and others, and approximately
162,681 shares of Common Stock are reserved for issuance upon
conversion of currently outstanding debentures. All issued and
outstanding shares of Common Stock have been duly authorized
and such shares are validly issued, are fully paid and
non-assessable and the holders thereof have no preemptive
rights, no rights of rescission with respect thereto and are
not subject to personal liability solely by reason of being
such holders. No shares of Common Stock were issued in
violation of the preemptive rights of any holders of any
capital stock of the Company.
(iii) The Company has good and marketable title to,
or valid and enforceable leasehold estates in, all items of
real and personal property stated in the Offering Materials to
be owned or leased by it, free and clear of all liens,
encumbrances, claims, security interests and defects of any
material nature whatsoever, other than those set forth in the
Offering Materials and liens for taxes not yet due and
payable. The Company has no subsidiaries.
(iv) There is no material litigation or governmental
proceeding pending or, to the best of the Company's knowledge,
threatened against, or involving the properties or business of
the Company other than as set forth in the Offering Materials.
(v) The financial statements of the Company included
in the Offering Materials fairly present the financial
position and the results of operations of the Company at the
dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with
generally accepted accounting principles consistently applied
throughout the periods involved.
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(vi) The Company has been duly organized and is
validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Except as set forth
above or in the Offering Materials, the Company does not own
an interest in any corporation, partnership, trust, joint
venture or other business entity. The Company is duly
qualified or licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations
requires such qualification or licensing and where failure to
so qualify would have a material adverse effect on the
Company. The Company has all requisite corporate power and
authority, and all material and necessary authorizations,
approvals, orders, licenses, certificates and permits of and
from all governmental regulatory officials and bodies to own
or lease its properties and conduct its businesses as
described in the Offering Materials, and the Company is doing
business in material compliance with all such authorizations,
approvals, orders, licenses, certificates and permits and all
federal, state, local and foreign laws, rules and regulations
concerning the business in which it is engaged. Any
disclosures in the Offering Materials concerning the effects
of federal, state, local and foreign regulation on the
Company's business as currently conducted and as contemplated
are correct in all material respects and do not omit to state
a material fact. The Company has all corporate power and
authority to enter into this Agreement and the Subscription
Agreements and to carry out the provisions and conditions
hereof and thereof, and all consents, authorizations,
approvals and orders required in connection herewith and
therewith have been obtained or will have been obtained prior
to the Closing Date. No consent, authorization or order of,
and no filing with, any court, government agency or other body
is required by the Company for the issuance of the Notes,
Underlying Shares or the Placement Agent's Warrants except
with respect to applicable federal and state securities laws.
(vii) There has been no material adverse change in
the condition or prospects for commercialization of the
Company, financial or otherwise, from the latest dates as of
which such condition or prospects, respectively, are set forth
in the Offering Materials, and the outstanding debt, the
property and the business of the Company, each conform in all
material respects to the descriptions thereof contained in the
Offering Materials.
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<PAGE>
(viii) The Company is not in violation of any
provision of its incorporating documents or By-Laws. Neither
the execution and delivery of this Agreement, nor the
Subscription Agreements nor the issue and sale or delivery of
the Notes, Underlying Shares or the Placement Agent's Warrants
nor the consummation of any of the transactions contemplated
herein, or in the Subscription Agreements, nor the compliance
by the Company with the terms and provisions hereof or
thereof, has conflicted with or will conflict with, or has
resulted in or will result in a breach of, any of the material
terms and provisions of, or has constituted or will constitute
a default under, or has resulted in or will result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or pursuant to the terms
of any material indenture, mortgage, deed of trust, note, loan
or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company may be bound or
to which any of the property or assets of the Company is
subject except where such default, lien, charge or encumbrance
would not have a material adverse effect on the Company; nor
will such action result in any violation of the provisions of
the incorporating documents or the By-Laws of the Company or
assuming due performance by the Placement Agent of its
obligations hereunder, any statute or any order, rule or
regulation applicable to the Company of any court or of any
federal, state or other regulatory authority or other
government body having jurisdiction over the Company.
(ix) The Notes and the Subscription Agreements shall
conform in all material respects to the descriptions thereof
contained in this Agreement.
(x) There are no claims for services in the nature of
a finder's or origination fee with respect to the sale of the
Notes hereunder.
(xi) To the Company's knowledge, the Company is not
in violation of any agreement pursuant to which it is
obligated to pay royalties or fees of any kind whatsoever to
any third party with respect to technology it has developed,
uses, employs or intends to use or employ.
(xii) Neither the Offering Materials nor any
amendment or supplement thereto nor any document contains any
untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading. All statements of
material facts in the Offering Materials are true and correct
as of the date of the this Agreement and will be true and
correct on the Termination Date and on each Closing Date.
(xiii) All taxes which are due and payable from the
Company have been paid in full and the Company has no tax
deficiency or claim outstanding assessed or proposed against
it.
(xiv) Neither the Company nor any of its officers,
directors, employees or agents, nor any other person acting on
behalf of the Company, have, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than
legal price concessions to customers in the ordinary course of
business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any
governmental agency or instrumentality of any government
(domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who is or may be
in a position to help or hinder the business of the Company
(or assist it in connection with any actual or proposed
transaction) which subjects the Company to any damage or
penalty in any civil, criminal or governmental litigation or
proceeding.
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(xv) There is no strike or other labor dispute
involving the Company pending, or to the knowledge of the
Company threatened, which could have a material adverse effect
on the assets, condition (financial or otherwise), operating
results, or business (or proposed business) of the Company.
The Company has neither received written notice nor has actual
knowledge that any executive officer or key employee, or that
any group of key employees, intends to terminate his or her
employment with the Company, nor does the Company have a
current intention to terminate the employment of any of the
foregoing.
(xvi) Subject to the performance by the Placement
Agent of its obligations hereunder and subject to the
representations and warranties of the subscribers for the
Notes, the offer and sale of the Notes complies, and will
continue to comply, up to the later of all Closing Dates or
the Termination Date, in all material respects with the
requirements of Regulation D and any other applicable federal
and state laws, statutes, rules, regulations and executive
orders.
(xvii) The Company has no employment contracts,
deferred compensation agreements or bonus, incentive,
profit-sharing, or pension plans currently in force and
effect, or any understanding with respect to any of the
foregoing, except as otherwise described in the Offering
Materials.
(xviii) Except as disclosed in the Offering
Materials, the Company is in all material respects in
compliance with all applicable Environmental Laws. The Company
has no knowledge of any past, current 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 Company 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 Company 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 Company'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 Company. No
litigation, claim, proceeding or governmental investigation is
pending regarding any environmental matter for which the
Company has been served or otherwise notified or, to the
knowledge of the Company threatened or asserted against the
Company, or its officers or directors in their capacities as
such, or any Facility or the Company'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 the Company, any Facility or
any of the Company's operations. The Company has not 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 Company regarding any
environmental matter.
8
<PAGE>
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.
(xix) The Company is in compliance in all material
respects with all currently 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.
(xx) Neither the Company nor anyone acting on its
behalf, other than the Placement Agent, has offered any of the
Notes (or substantially similar securities of the Company) for
sale to, or solicited offers to buy any such securities of the
Company from, or otherwise approached or negotiated with
respect thereto with any prospective purchaser except through
the Placement Agent or with the Placement Agent's consent. The
Company agrees that neither it nor anyone acting on its
behalf, other than the Placement Agent, has offered or will
offer such securities of the Company or any part thereof or
any substantially similar securities for issuance or sale to,
or solicit any offer to acquire any of the same from, anyone
so as to make the issuance and sale of the Notes subject to
the registration requirements of Section 5 of the Securities
Act. Except as otherwise specifically disclosed in the
Offering Materials, to the best of the Company's knowledge,
all of the Company's outstanding securities have been offered
and sold in compliance with all applicable federal and state
securities laws and any failure to so offer or sell securities
which is specifically in the Offering Materials has since been
cured as described in the Offering Materials.
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<PAGE>
6. Indemnification.
---------------
A. The Company hereby agrees that it will indemnify and hold the
Placement Agent and each officer, director, shareholder, employee or
representative of the Placement Agent and each person controlling, controlled by
or under common control of the Placement Agent within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act or the rules and
regulations promulgated under the Securities Act and the Exchange Act (the
"Rules and Regulations") harmless from and against any and all loss, claim,
damage, liability, cost or expense whatsoever (including, but not limited to,
any and all reasonable legal fees and other expenses and disbursements incurred
in connection with investigating, preparing to defend or defending any action,
suit or proceeding, including any inquiry or investigation, commenced or
threatened, or any claim whatsoever or in appearing or preparing for appearance
as a witness in any action, suit or proceeding including any inquiry,
investigation or pretrial proceeding such as a deposition) to which such
indemnified person of the Placement Agent may become subject under the
Securities Act, the Exchange Act, the Rules and Regulations, or any other
federal or state statutory law or regulation at common law or otherwise, arising
out of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in (a) this Agreement, (b) the Offering Materials (c)
the Subscription Agreement, or (d) any application or other document or written
communication executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Notes under
the securities laws thereof or filed with the Commission, or any state
securities commission or agency; (ii) the omission or alleged omission from
documents described in clauses (a), (b), (c) or (d) above of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) the breach of any representation or warranty made by the
Company in this Agreement. The Company further agrees that upon demand by an
indemnified person at any time or from time to time, it will promptly reimburse
such indemnified person for any loss, claim, damage, liability, cost or expense
actually and reasonably paid by the indemnified person as to which the Company
has indemnified such person pursuant hereto. Notwithstanding the foregoing
provisions of this Paragraph 6 A, any such payment or reimbursement by the
Company of fees, expenses or disbursements incurred by an indemnified person in
any proceeding in which a final judgment by a court of competent jurisdiction
(after all appeals or the expiration of time to appeal) is entered against such
indemnified person as a direct result of such person's willful misfeasance will
be promptly repaid to the Company, if previously paid. Anything to the contrary
not withstanding, the indemnity set forth in this PARAGRAPH A shall not extend
to liability based upon information provided in writing by the Placement Agent
specifically for use in the documents referred to herein.
B. The Placement Agent hereby agrees that it will indemnify and hold
the Company and each officer, director, shareholder, employee or representative
of the Company and each person controlling, controlled by or under common
control of the Company within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, or the Rules and Regulations harmless from and
against any and all loss, claim, damage, liability, cost or expense whatsoever
(including, but not limited to, any and all reasonable legal fees and other
expenses and disbursements incurred in connection with investigating, preparing
to defend or defending any action, suit or proceeding including any inquiry,
investigation or pretrial proceeding such as a deposition) to which such
indemnified person of the Company may become subject under the Securities Act,
the Exchange Act, the Rules and Regulations or other federal or state statutory
law or regulation at common law or otherwise, based upon the conduct of the
Placement Agent or its employees in its acting as Placement Agent for the
Offering. Notwithstanding the foregoing provisions of this Paragraph 6 B, any
such payment or reimbursement by the Placement Agent of fees, expenses or
disbursements incurred by an indemnified person in any proceeding in which a
final judgment by a court of competent jurisdiction (after all appeals or the
expiration of time to appeal) is entered against such indemnified person as a
direct result of such person's willful misfeasance will be promptly repaid to
the Placement Agent, if previously paid.
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<PAGE>
C. Promptly after receipt by an indemnified party under either
Paragraph A or B hereof, as the case may be, of the notice of commencement of
any action covered by Paragraph A or B hereof, such indemnified party shall
within five (5) business days notify the indemnifying party of the commencement
thereof; the omission by one indemnified party to so notify the indemnifying
party shall not relieve the indemnifying party of its obligation to indemnify
any other indemnified party that has given such notice and shall not relieve the
indemnifying party of any liability outside of this indemnification. In the
event that any action is brought against the indemnified party, the indemnifying
party will be entitled to participate therein and, to the extent it may desire,
to assume and control the defense thereof with counsel chosen by it. After
notice from the indemnified party, the indemnifying party will not be liable to
such indemnified party under such subparagraph for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof, but the indemnified party may, at its own expense, participate in such
defense by counsel chosen by it, without, however, impairing the indemnifying
party's control of the defense. Notwithstanding anything to the contrary
contained herein, the indemnified party shall have the right to choose its own
counsel and control the defense of any action, all at the expense of the
indemnifying party, if: (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action at the expense of the indemnifying party, (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to such
indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying party. No settlement of any action or proceeding against an
indemnified party shall be made without the consent of the indemnifying party.
D. In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Paragraph A of this
Section 6 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company to the Placement Agent on grounds of
policy or otherwise, the Company and the Placement Agent shall contribute to the
aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with the investigation or defense of
same) to which the Company and the Placement Agent may be subject in such
proportion so that the Placement Agent is responsible for that portion
represented by the percentage that the aggregate of its placement commission
under this Agreement bears to the aggregate offering price for all Notes sold in
the Offering and the Company is responsible for the balance, except as the
Company may otherwise agree to reallocate a portion of such liability with
respect to such balance with any other person; provided, however, that no person
guilty of fraudulent misrepresentation within the meaning of Section 11(f) of
the Securities Act shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Paragraph D,
any person controlling, controlled by or under common control with the Placement
Agent, or any partner, director, officer, employee, representative or any agent
of any thereof, shall have the same rights to contribution as the Placement
Agent and each person controlling, controlled by or under common control with
the Company within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act, each officer of the Company and each director of the
Company shall have the same rights to contribution as the Company. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against the other party under this Paragraph D,
notify such party from whom contribution may be sought, but the omission to so
notify such party shall not relieve the party from whom contribution may be
sought from any obligation they may have hereunder or otherwise. The indemnity
and contribution agreements contained in this Section 6 shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified person or any termination of this Agreement.
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7. Payment of Expenses.
-------------------
Whether or not the Placement is successfully completed, the Company
hereby agrees to bear all of the Company's expenses in connection with the
Offering, including, but not limited to the following: filing fees, printing and
duplicating costs, advertisements, postage and mailing expenses with respect to
the transmission of offering material, its marketing and road show expenses,
registrar and transfer agent fees, bank escrow fees and expenses, its counsel
and accounting fees, issue and transfer taxes, if any, and "Blue Sky" counsel
fees and expenses. It is agreed that the Company's counsel shall perform the
required Blue Sky legal services. In this connection, Blue Sky applications for
registration of the Notes or exemption therefrom shall be made in such states
and jurisdictions as shall be reasonably requested by the Placement Agent
provided that such states and jurisdictions do not require the Company to
qualify as a foreign corporation or to file a general consent to service of
process. The Company shall also pay reasonable expenses for travel and lodging
incurred by the Placement Agent in performing its duties hereunder (the
"Placement Agent Offering Expenses"), the amount of such expenses to be deducted
from the Expense Allowance. $12,000 of the $25,000 Expense Allowance advance
referred to in PARAGRAPH 2 D above, shall be retained by the Company to pay
Placement Agent Offering Expenses. The balance shall be paid to the Placement
Agent upon the execution of this Agreement. In no event will the Company be
required to pay more than $25,000 in expenses to the Agent if the Placement is
not consummated.
8. Conditions of the Placement Agent's Obligations.
-----------------------------------------------
The obligations of the Placement Agent hereunder shall be subject to
the continuing accuracy of the representations and warranties of the Company
herein as of the date hereof and as of the Closing Date and each subsequent
Closing Date, if any, as if they had been made on and as of the Closing Date or
each subsequent Closing Date, as the case may be; the accuracy on and as of the
Closing Date or subsequent Closing Date, if any, of the statements of the
officers of the Company made pursuant to the provisions hereof; and the
performance by the Company on and as of the Closing Date and each subsequent
Closing Date, if any, of its covenants and obligations hereunder and to the
following further conditions:
(a) On the Closing Date, the Placement Agent shall receive the
opinion of Reish & Luftman, counsel to the Company, dated the Closing
Date and addressed to the Placement Agent and to each purchaser in form
and substance satisfactory to counsel for the Placement Agent, in
substantially the form set forth below, with such changes as are agreed
upon by Reish & Luftman, the Placement Agent and Counsel for the
Placement Agent:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the
laws of its jurisdiction and is duly qualified to do business
and is in good standing in all jurisdictions in which the
failure to so qualify would have a material adverse effect on
the business of the Company; the Company has full corporate
power and authority and, to the best of such counsel's
knowledge, has all necessary authorizations, approvals,
licenses, certificates and permits of and from all
governmental regulatory officials and bodies to own or lease
its properties and conduct its business as described in the
Offering Materials and is in compliance with (A) all such
authorizations, approvals, orders, licenses, certificates and
permits and (B) all federal, state and local laws, rules and
regulations applicable to the business in which it is engaged.
Subject to state securities law requirements, no consent,
authorization or order of, and no filing with, any United
States Court, government agency or other body is required by
the Company for the issuance of the Notes, Underlying Shares
or the Placement Agent's Warrants. Assuming the accuracy of
the representations and warranties made by each purchaser in
such purchaser's Subscription Agreement and the factual
matters contained in the representations and warranties in
this Placement Agreement, no consent, authorization or order
of, and no filing with any court, government agency or other
body (other than as may be required under state securities
laws) is required by the Company for the issuance of the
Notes, Underlying Shares and the Placement Agent's Warrants.
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(ii) This Agreement, the Subscription Agreement, the
Notes, the Underlying Shares and the Placement Agent's
Warrants have been duly and validly authorized, executed and
delivered by the Company and are valid and legally binding
agreements or obligations of the Company, enforceable in
accordance with their terms, except to the extent that the
enforceability hereof or thereof may be limited by (A)
bankruptcy, insolvency, reorganization, moratorium or similar
laws from time to time in effect and affecting the rights of
creditors generally, (B) limitations upon the power of a court
to grant specific performance or any other equitable remedy,
and (C) a finding by a court of competent jurisdiction that
the indemnification provisions herein are in violation of
public policy.
(iii) The Underlying Shares and the shares underlying
the Placement Agent's Warrants have been duly authorized and
will be, upon the conversion of the Notes and/or exercise of
the Placement Agent's Warrants and payment therefor, validly
issued, fully paid and non-assessable and the holders thereof
will not be subject to personal liability solely by reason of
being such holders; none of the Underlying Shares or the
shares underlying the Placement Agent's Warrants to the best
of such counsel's knowledge, are subject to the preemptive
rights of any stockholder of the Company, and all corporate
action required to be taken for the authorization, issue and
sale of such securities has been duly and validly taken.
(iv) As of September 30, 1997, the authorized capital
stock of the Company consists of 40 million shares of common
stock (the "Common Stock"), $0.01 per share par value, of
which 12,199,163 shares are issued and outstanding, and 2
million shares of preferred stock, $1.00 per share par value,
none of which are outstanding. All issued and outstanding
shares of Common Stock have been duly authorized and such
shares are validly issued, are fully paid and non-assessable
and the holders thereof have no preemptive rights, no rights
of rescission with respect thereto and are not subject to
personal liability solely by reason of being such holders. No
shares of Common Stock were issued in violation of the
preemptive rights of any holders of any capital stock of the
Company. To the best of such counsel's knowledge, there are no
liens, charges, encumbrances, pledges, security interests,
defects, or material equitable rights of any kind to which any
outstanding shares of Common Stock are subject. Except as set
forth in the Offering Materials, there are (A) no outstanding
warrants, options or rights to subscribe for or purchase any
capital stock or other securities of the Company, (B) no
voting trusts or voting agreements among, or irrevocable
proxies executed by, principal stockholders of the Company,
(C) no existing rights of stockholders to require the Company
to register any securities of the Company or to participate
with the Company in any registration by the Company of its
securities, and (D) no agreements between the Company and any
of its stockholders providing for the purchase or sale of the
Company's capital stock.
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(v) To the best of such counsel's knowledge, there is
no litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the
Company which might materially and adversely affect the value
or the operation of the properties or the business of the
Company except as referred to in the Offering Materials.
(vi) Each Note and Placement Agent's Warrant conform
in all material respects to the description thereof contained
in this Agreement.
(vii) To the best of such counsel's knowledge,
neither the execution and delivery of this Agreement, nor the
Subscription Agreement, nor the issue and sale of the Notes,
Underlying Shares or the Placement Agent's Warrants, nor the
consummation of any of the transactions contemplated herein or
therein, nor the compliance by the Company with the terms and
provisions hereof or thereof, has conflicted with or will
conflict with, or has resulted in or will result in a breach
of, any of the terms and provisions of, or has constituted or
will constitute a default under, or has resulted in or will
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company
pursuant to the terms of any indenture, mortgage, deed of
trust, note, loan or credit agreement or any other agreement
or instrument evidencing an obligation for borrowed money, or
any other agreement or instrument to which the Company is a
party or by which the Company may be bound or to which any of
the property or assets of the Company is subject; nor will
such action result in any violation of the provisions of the
incorporation documents or the By-Laws of the Company or,
assuming due performance by the Placement Agent of its
obligations hereunder, any statute or any order, rule or
regulation applicable to the Company of any court or of any
federal, state or other regulatory authority or other
government body having jurisdiction over the Company, subject
to state securities laws exceptions.
(ix) The Subscription Agreement and the Investment
Letter (the Subscription Agreement and the Investment Letter
are referred to collectively as the "Subscription Agreement")
comply as to form in all material respects with the
requirements of Regulation D promulgated by the Commission
pursuant to the Securities Act and assuming without
independent investigation (A) the accuracy and completeness of
all information provided in the Subscription Agreement, (B)
the correctness of the investors' responses set forth in the
Subscription Agreement, and (C) the executed Subscription
Agreement constitute all of the Subscription Agreement, no
registration under the Securities Act is required in
connection with the sale and issuance of the Notes; a
statement that such counsel has reviewed the Offering
Materials and nothing has come to such counsel's attention to
lead them to believe that either the Offering Materials or any
amendment or supplement thereto contain any untrue statement
of a material fact or omits to state a 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 (except for the financial
statements, notes thereto and other statistical and financial
information included therein or omitted therefrom as to which
such counsel need express no opinion).
14
<PAGE>
At each subsequent Closing Date after the Closing Date, if
any, the Placement Agent shall have received the favorable opinions of
Reish & Luftman, counsel to the Company, dated such subsequent Closing
Date, addressed to the Placement Agent and in form and substance
satisfactory to counsel for the Placement Agent.
(b) On or prior to the Closing Date, counsel for the Placement
Agent shall have been furnished such documents, certificates and
opinions as they may reasonably require for the purpose of enabling
them to review or pass upon the matters referred to in SUBPARAGRAPH (A)
of this SECTION, or in order to evidence the accuracy, completeness or
satisfaction of any of the representation, warranties or conditions
herein contained.
(c) On and prior to the Closing Date, (i) there shall have
been no material adverse change nor development involving a prospective
change in the condition or prospects or the business activities,
financial or otherwise, of the Company, or taken as a whole, from the
latest dates as of which such condition is set forth in the Offering
Materials; (ii) there shall have been no transaction, not in the
ordinary course of business, entered into by the Company from the
latest date as of which the financial condition of the Company, is set
forth in the Offering Materials which is material to the Company, which
has not been disclosed to the Placement Agent in writing; (iii) the
Company shall not be in default under any provision of any instrument
relating to any outstanding indebtedness; (iv) since the date of the
Offering Materials, the Company shall not have issued any securities or
declared or paid any dividend or made any distribution of its capital
stock of any class, except for the issuance of Common Stock pursuant to
the exercise of currently existing warrants or options, and there has
not been any material change in the debt (long or short term) or
liabilities or obligations of the Company (contingent or otherwise);
(v) no material amount of the assets of the Company shall have been
pledged or mortgaged, except in the ordinary course of business or as
indicated or contemplated in the Offering Materials; and (vi) no
action, suit or proceeding, at law or in equity, shall have been
pending or threatened against the Company or affecting any of its
properties or businesses before or by any court or federal or state
commission, board or other administrative agency wherein an unfavorable
ruling would materially adversely affect the business, prospects,
financial condition or income of the Company, except as set forth in
the Offering Materials.
(d) At each Closing Date, the Placement Agent shall have
received a certificate of the Company signed by its President and Chief
Executive Officer and by its Vice President and Chief Financial
Officer, dated as of such Closing Date, in the form attached hereto as
EXHIBIT II.
(e) The Company, having obtained all necessary consents and
approvals, shall have authorized a sufficient number of shares of
Common Stock necessary to cover the maximum number of Underlying Shares
that may be issued pursuant to the Offering or otherwise required by
this Agreement.
15
<PAGE>
9. Termination.
-----------
This Agreement shall terminate if the Closing Date does not take place
on or before the Termination Date or as soon thereafter as the funds received
from such subscriptions have cleared the banking system in the normal course of
business. Upon such termination, all subscription documents and payments for
Notes, without interest, or deduction shall be returned to the respective
subscribers, the Placement Agent shall have no further obligation to the
Company, and the Company shall terminate the Placement. In such case, the
Company will have no obligation to pay the Placement Agent for fees covered in
this Agreement, except as otherwise set forth elsewhere in this Agreement.
Either the Placement Agent or the Company may terminate the Placement in its
sole discretion prior to any closing hereunder. In the event that the Company
determines to terminate the Placement from and after the date hereto through the
end of the Offering Period for any reason other than the Placement Agent's
breach of the terms of this Agreement, and the Placement Agent is willing to
proceed, the Company shall remain liable for all fees and expenses of the
Placement Agent's counsel.
10. Miscellaneous.
-------------
A. All covenants, warranties and representations herein contained shall
survive the Closing Date and any subsequent closings, or any investigation made
by the party relying upon such warranty and/or representation subject to
applicable statues of limitations.
B. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all which shall be deemed to be
one and the same instrument
C. All notices and communications required or permitted to be given
hereunder shall be given in writing, effective upon receipt, and sent by United
States certified or registered mail, return receipt requested and postage
prepaid, personally delivered with receipt acknowledged, or by overnight
courier, charges prepaid with receipt acknowledged addressed as follows:
To the Placement Agent:
----------------------
J. Robbins Securities, LLC
1345 Avenue of the Americas
22 Floor
New York, New York 10105
Attn.: James A. Jedrlinic
Chief Executive Officer
with a copy to:
Kenneth W. Leman, Esq.
1345 Avenue of the Americas
22 Floor
New York, New York 10105
To the Company:
--------------
Fortune Natural Resources Corporation
515 West Greens Road
Suite 720
Houston, Texas 77067
Attention: Tyrone J. Fairbanks
President and
Chief Executive Officer
16
<PAGE>
with a copy to:
Bruce Ashton, Esq.
Reish & Luftman
11755 Wilshire Boulevard
10th Floor
Los Angeles, California
or to such other address of which written notice is given to the other party.
D. This Agreement shall be governed by, and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
laws.
E. This Agreement contains the entire understanding between the parties
hereto and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
F. If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
J. ROBBINS SECURITIES, LLC
By: /s/ James A. Jedrlinic, Chief Executive Officer
------------------------------------------------
James A. Jedrlinic, Chief Executive Officer
FORTUNE NATURAL
RESOURCES CORPORATION
By: /s/ Tyrone J. Fairbanks, President
------------------------------------
Tyrone J. Fairbanks, President
and Chief Executive Officer
17
<PAGE>
[LETTERHEAD]
October 27, 1997
To the Recipients of the Information
Documents relating to the Offering of
Notes of Fortune Natural Resources Corporation
Re: Amendment #1 to the Terms of the Offering
Dear Recipient:
The Company and the Placement Agent have mutually agreed to modify the Offering
as follows:
1. The expiration date of the Offering period during which subscriptions for
Notes may be received has been extended to November 7, 1997.
2. The second alternative conversion price for the Note will be 5% instead of
10% above the average daily Closing Price of the Common Stock for the 60
calendar day period immediately preceding May 1, 1999.
3. The demand registration rights referred to in the Subscription Agreement will
also include the Notes and will commence 30 days after the final Closing of the
Offering instead of January 1, 1999.
4. The Notes will be issued in the lower of denominations equal to $50,000 or
integral multiples thereof instead of $10,000 integral multiples thereof or the
lowest principal amount of the Notes purchased in the Offering.
5. The Company's primary lender, Credit Lyonnais New York Branch (the "Bank"),
has requested additional conditions in the Note relating to subordination which
could materially impact the ability of the Note holders to enforce their rights.
Among other restriction, these conditions prohibit Note holders from instituting
legal proceedings for payment of defaulted interest for a period of 90 days
after the occurrence of the default.
Except as expressly provided herein all terms and conditions of the Offering
remain unchanged.
As of the date hereof the Company has received executed subscriptions and
cleared funds for the purchase of $1.25 million in principal amount of Notes.
The Company intends to effect the initial closing of the Offering on Wednesday,
October 29, 1997. In light of the changes in the Offering described herein, any
person who has executed and delivered a Subscription Agreement may withdraw his
subscription by notifying the undersigned on or before 5:00 PM, Eastern Standard
Time, October 28, 1997 by mail addressed to J. Robbins Securities LLC, 1345
Avenue of the Americas, 22nd Floor, New York, New York 10105 or by facsimile
transmission to telephone number (212) 767-7902.
Very truly yours,
J. ROBBINS SECURITIES LLC
James A. Jedrlinic, Chief Executive Officer
cc: Fortune Natural Resources Corporation
<PAGE>
Dated as of: October 28, 1997
J. Robbins Securities, LLC
1345 Avenue of the Americas
22 Floor
New York, New York 10105
Attn.: James A. Jedrlinic
Chief Executive Officer
Dear Sirs:
The Placement Agreement between Fortune Natural Resources Corporation and J.
Robbins Securities, LLC dated as of October 14, 1997 is hereby amended to
increase the amount of the Offering from $3.5 million in aggregate principal
amount of Notes to $4.5 million in aggregate principal amount of Notes.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
the Agreement as of the date first written above.
J. ROBBINS SECURITIES, LLC
By: /s/ James A. Jedrlinic
-------------------------------------------
James A. Jedrlinic, Chief Executive Officer
FORTUNE NATURAL
RESOURCES CORPORATION
By: /s/ Tyrone J. Fairbanks
------------------------------
Tyrone J. Fairbanks, President
and Chief Executive Officer
<PAGE>
[FORTUNE NATURAL RESOURCES CORPORATION LETTERHEAD]
November 7, 1997
James A. Jedrlinic VIA FACSIMILE (212) 767-7902
Chief Executive Officer
J. Robbins Securities, L.L.C.
1345 Avenue of the Americas
New York, NY 10105
Dear Mr. Jedrlinic:
The Placement Agent Agreement governing the private placement of 12%
subordinated notes by Fortune Natural Resources Corporation provides that the
offering shall expire on October 31, 1997 unless extended by the parties. We
have previously agreed to extend the offering period through November 7.
Fortune hereby proposes that the offering period be further extended
through November 19, 1997 on the terms set forth in our letter dated November 3.
If this proposal is acceptable, please so indicate by signing and dating this
letter where indicated and returning it to the undersigned.
Very truly yours,
/s/ J. Michael Urban
- -----------------------
J. Michael Urban
Vice President and Chief Financial Officer
ACCEPTED AND AGREED TO this 7th day of November, 1997.
J. ROBBINS SECURITIES, L.L.C.
By: /s/ James A. Jedrlinic
------------------------------
James A. Jedrlinic
Chief Executive Officer
<PAGE>
FORM OF NOTE
REGISTERED # ____________
FORTUNE NATURAL RESOURCES CORPORATION
12% CONVERTIBLE SUBORDINATED PROMISSORY NOTE
DUE DECEMBER 31, 2007
$______________ November _____, 1997
THIS NOTE IS ISSUED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
PROVISIONS OF THE SECURITIES ACT OF 1933 (THE "ACT") AND QUALIFICATION
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. NEITHER IT NOR THE
SHARES OF COMMON STOCK INTO WHICH IT CAN BE CONVERTED CAN BE SOLD,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED PURSUANT TO THE
ACT AND QUALIFIED UNDER APPLICABLE STATE LAW OR, IN THE OPINION OF
COUNSEL TO MAKER, AN EXEMPTION THEREFROM IS AVAILABLE.
FOR VALUE RECEIVED, the undersigned, FORTUNE NATURAL RESOURCES CORPORATION, a
Delaware corporation with offices at One Commerce Green, 515 West Greens Road,
Suite 720, Houston, Texas 77067 ("Maker"), promises to pay to __________________
__________ with an address at_____________________________ ("Payee"), on
December 31, 2007 except as otherwise provided herein (the "Maturity Date"), the
principal amount of ($____________ ) Dollars in lawful money of the United
States of America (the "Principal) together with all accrued interest.
This Note is one of a series of notes (collectively the "Notes"), all with the
same terms and conditions as those set forth herein, which may be issued by
Maker up to the aggregate principal amount of Four Million Five Hundred Thousand
($4,500,000) Dollars. Each Note is part of an offering of up to Four Million
Five Hundred Thousand ($4,500,000) Dollars in aggregate principal amount of
Notes (the "Offering") being conducted by Maker on a One Million Two Hundred
Fifty Thousand ($1,250,000) Dollars aggregate principal amount minimum or none
to Four Million Five Hundred Thousand ($4,500,000) Dollars aggregate principal
amount maximum best efforts basis. The Offering will terminate on the sooner of
the sale of all of the Notes or October 31, 1997 (unless extended to December 1,
1997).
The Note is (i) subordinated to certain of Maker's indebtedness defined herein
as "Senior Debt" and "Senior Bank Debt"; and (ii) convertible into Maker's
common stock, par value $0.01 per share (the "Common Stock"), all as set forth
below. It bears simple interest (the "Interest") at the annual rate of twelve
percent (12%), payable, in arrears, on the Interest
1
<PAGE>
Payment Dates (as defined in SECTION 1 below), until the Principal and all
accrued Interest thereon (collectively the "Obligations") shall be paid in full.
1. Interest.
--------
Maker will pay Interest on the first day of each January, April, July and
October (the "Interest Payment Dates") commencing on January 1, 1998. Interest
on the Note will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date of delivery of the Note.
Interest will be computed on the basis of a 360-day year of twelve 30 day
months.
2. Method of Payment.
-----------------
Maker will pay Principal and Interest in money of the United States that at the
time of payment is legal tender for the payment of public and private debts.
Maker may, however, pay Principal and Interest by its check, subject to
collection, payable in such money. It may mail an Interest check to Payee's
address as it first appears on this Note or such other address as Payee shall
give by notice to Maker. Payee must surrender this Note to Maker to collect
Principal payments.
3. Conversion.
----------
(a) Payee's right to Convert. Payee shall have the right, at any time commencing
on May 1, 1999 until the close of business on the business day preceding the day
the Obligations are paid in full, to cause the conversion of all or any portion
(if such portion is Fifty Thousand [$50,000] Dollars or a whole multiple of
Fifty Thousand [$50,000] Dollars) of the Principal outstanding at the time such
conversion is effected (the "Convertible Obligations") into shares of Common
Stock (the "Underlying Shares"). Payee shall forfeit all accrued but unpaid
Interest upon conversion. The price for conversion, subject to adjustment as
provided in SECTION 4 below, shall be the lower of (i) $3.00 per share, or (ii)
5% above the average Closing Prices of the Common Stock for the 60 calendar day
period immediately preceding May 1, 1999. Anything to the contrary contained
herein not withstanding, on the first occasion, if at all, that Maker prior to
May 1, 1999, issues any shares of Common Stock (other than for any purpose
listed in Paragraph 4 (a) below, or in satisfaction of any exercise of stock
options or stock purchase warrants) for a per share consideration less than the
conversion price in effect on the date of such issue, it shall, within ten
business days after such issuance, give notice of such issuance to Payee. Payee
shall have the one-time right (the "Alternate Conversion Right"), exercisable
within 20 business days thereafter (the "Alternate Conversion Right Notice
Period") to convert all, but not less than all, the Convertible Obligations into
Underlying Shares at a price equal to the conversion price in effect immediately
prior to such action (the "Existing Conversion Price") reduced by an amount
equal to the number obtained by dividing the number of shares of Common Stock so
issued and outstanding by the total number of shares of Common Stock issued and
outstanding after such issuance, multiplying the quotient by the difference
between the Existing Conversion Price and the price of the shares of Common
Stock so issued and subtracting the result from the Existing Conversion Price.
In the case of an issue of additional shares of Common Stock for cash, the
consideration received by Maker therefor shall be deemed to be the gross cash
proceeds received for such shares. In the case of an issuance of such shares of
Common Stock for other than cash, the value of the consideration received by
Maker therefor shall be deemed to be that placed thereon by the parties to the
transaction or, if no such value is stated, by the Board of Directors of Maker
acting in good faith and with respect to all aspects of the transaction. The
term "issue" shall be deemed to include the sale or other
2
<PAGE>
disposition of shares of Common Stock held in Maker's treasury but not of any
derivative security convertible into Common Stock. The number of shares of
Common Stock outstanding at any given time shall not include shares of Common
Stock in Maker's treasury. The Alternate Conversion Right shall lapse and cease
to exist if not exercised by Payee within the Alternate Conversion Right Notice
Period. No fractional shares shall be issued on conversion.
(b) Definition of Closing Price. The "Closing Price" for each day shall mean the
last reported sales price regular way or, in case no such reported sale takes
place on such day, the closing bid price regular way, in either case on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading or, if the Common Stock is not listed or admitted to trading
on any national securities exchange, the highest reported bid price as furnished
by the National Association of Securities Dealers, Inc. through NASDAQ or
similar organization if NASDAQ is no longer reporting such information, or by
the National Daily Quotation Bureau or similar organization if the Common Stock
is not then quoted on an inter-dealer quotation system. If on any such date the
Common Stock is not quoted by any such organization, the fair value of the
Common Stock on such date, as determined by Maker's Board of Directors, shall be
used.
(c) Manner of Conversion. Payee may exercise his conversion right by giving
notice thereof to Maker setting forth the amount of the Convertible Obligations
to be converted. Within 15 days after the giving of such notice Maker shall
issue the number of Underlying Shares into which the Convertible Obligations are
to be converted in accordance with the conversion price and deliver to Payee a
certificate or certificates therefor, registered in his name, representing such
Shares against delivery to Maker of this Note marked paid in full. If only a
portion of the Convertible Obligations then outstanding is converted, Maker
shall deliver to Payee, together with the aforesaid certificate(s), a new
promissory note, in form and substance identical to this Note, except that the
principal amount thereof shall equal that portion of the Obligations then
outstanding which has not been converted. Payee shall represent in writing to
Maker prior to the receipt of the Underlying Shares that such Shares will be
acquired by him for investment only and not for resale or with a view to the
distribution thereof, and shall agree that any certificates representing the
Shares may bear a legend, conspicuously noting such restriction, as Maker shall
deem reasonably necessary or desirable to enable it to comply with any
applicable federal or state laws or regulations.
(d) Taxes on Shares Issued. The issue of stock certificates on conversions of
this Note shall be made without charge to Payee for any tax in respect of such
issue. Maker shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of Common Stock in
any name other than that of Payee, and Maker shall not be required to issue or
deliver any certificates representing such Common Stock unless and until the
person or persons requesting the issue thereof shall have paid to Maker the
amount of such tax or shall have established to the satisfaction of Maker that
such tax has been paid.
(e) Covenants of Maker Relating to Conversion. Maker covenants and agrees that
from and after the date hereof and until the date of repayment in full of the
Obligations:
(i) it shall provide, free from preemptive rights, out of its
authorized but unissued shares, or out of shares held in its treasury,
sufficient shares to provide for the conversion of this Note from time
to time as the Note presented for conversion;
(ii) all shares which may be issued upon conversion of this Note will
upon
3
<PAGE>
issue be validly issued, fully paid and non-assessable, free from all
taxes, liens and charges with respect to the issue thereof, and will
not be subject to the preemptive rights of any stockholder of Maker;
(iii) if any shares of Common Stock to be provided for the purpose of
conversion of this Note require registration with or approval of any
governmental authority under any federal or state law before such
shares may be validly issued upon conversion, Maker will in good faith
and as expeditiously as possible endeavor to secure such registration
or approval, as the case may be, and Maker's obligation to deliver
shares of the Common Stock upon conversion of this Note shall be abated
until such registration or approval is obtained; and
(iv) if, and thereafter so long as, the Common Stock shall be listed on
any national securities exchange, Maker will, if permitted by the rules
of such exchange, list and keep listed and for sale so long as the
Common Stock shall be so listed on such exchange, upon official notice
of issuance, all Common Stock issuable upon conversion of this Note.
4. Adjustment in Conversion Price.
------------------------------
(a) Adjustment for Change in Capital Stock. Except as provided in PARAGRAPH 4
(M) below, if Maker shall (i) declare a dividend on its outstanding Common Stock
in shares of its capital stock, (ii) subdivide its outstanding Common Stock,
(iii) combine its outstanding Common Stock into a smaller number of shares, or
(iv) issue any shares of its capital stock by reclassification of its Common
Stock (including any such reclassification in connection with a consolidation or
merger in which Maker is the continuing corporation), then in each such case the
conversion privilege and the conversion price in effect immediately prior to
such action shall be adjusted so that if the Note is thereafter converted, Payee
may receive the number and kind of shares which he would have owned immediately
following such action if he had converted the Note immediately prior to such
action. Such adjustment shall be made successively whenever such an event shall
occur. The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification. If after an
adjustment Payee upon conversion of this Note may receive shares of two or more
classes of capital stock of Maker, Maker's Board of Directors shall determine
the allocation of the adjusted conversion price between the classes of capital
stock. After such allocation, the conversion privilege and conversion price of
each class of capital stock shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Stock in this SECTION 4.
(b) Subscription Offerings. In case Maker shall issue to all of its existing
stockholders rights, options, or warrants entitling the holders thereof to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion
price per share, in the case of a security convertible into or exchangeable for
Common Stock) less than the Current Market Price per share (as defined in
PARAGRAPH (D) below) on the record date for the determination of stockholders
entitled to receive such rights, then in each such case the conversion price
shall be adjusted by multiplying the conversion price in effect immediately
prior to such record or granting date by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on such record or
granting date plus the number of shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so to be offered
(or the aggregate initial conversion price of the convertible securities so to
be offered) would purchase at such Current Market Price and
4
<PAGE>
of which the denominator shall be the number of shares of Common Stock
outstanding on such record or granting date plus the number of additional shares
of Common Stock to be offered for subscription or purchase (or into which the
convertible or exchangeable securities so to be offered are initially
convertible or exchangeable). Such adjustment shall become effective at the
close of business on such record date; provided, however, that, to the extent
the shares of Common Stock (or securities convertible into or exchangeable for
shares of Common Stock) are not delivered, the conversion price shall be
readjusted after the expiration of such rights, options, or warrants (but only
to the extent that this Note is not converted after such expiration), to the
conversion price which would then be in effect had the adjustments made upon the
issuance of such rights or warrants been made upon the basis of delivery of only
the number of shares of Common Stock (or securities convertible into or
exchangeable for shares of Common Stock) actually issued. In case any
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 Maker's Board of Directors. Shares of Common Stock
owned by or held for the account of Maker or any majority-owned subsidiary shall
not be deemed outstanding for the purpose of any such computation.
(c) Other Rights to Acquire Common Stock. In case Maker shall distribute to all
holders of its Common stock evidences of its indebtedness or assets (excluding
cash dividends or distributions paid from retained earnings of Maker) or rights
or warrants to subscribe or purchase (excluding those referred to in PARAGRAPH
(B) above), then in each such case the conversion price shall be adjusted so
that the same shall equal the price determined by multiplying the conversion
price in effect immediately prior to the date of such distribution by a fraction
of which the numerator shall be the Current Market Price per share (as defined
in PARAGRAPH (D) below) of the Common Stock on the Record Date mentioned below
less the then fair market value (as determined by the Board of Directors of the
Company) of the portion of the assets or evidences of indebtedness so
distributed or of such rights or warrants applicable to one share of Common
Stock, and the denominator shall be the Current Market Price per share of the
Common Stock. Such adjustment shall become effective immediately after the
Record Date for the determination of shareholders entitled to receive such
distribution.
(d) Current Market Price. For the purpose of any computation under PARAGRAPHS 4
(B) and (C) above, the "Current Market Price" per share of Common Stock on any
date shall be deemed to be the average of the daily Closing Prices for the 30
consecutive trading days commencing 45 trading days before such date.
(e) Action to Permit Valid Issuance of Common Stock. Before taking any action
which would cause an adjustment reducing the conversion price below the then par
value, if any, of the shares of Common Stock issuable upon conversion of the
Notes, the Company will take all corporate action which may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue shares of such Common Stock at such adjusted conversion price.
(f) Minimum Adjustment. No adjustment in the conversion price shall be required
if such adjustment is less than 1% of the Existing Conversion Price; provided,
however, that any adjustments which by reason of this PARAGRAPH 4 (F) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this SECTION 4 shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the case may be.
Anything to the contrary notwithstanding, Maker shall be entitled to make such
reductions in the conversion price, in addition to those required by this
PARAGRAPH 4 (F), as it in its discretion shall determine to be advisable in
order that any
5
<PAGE>
stock dividends, subdivision of shares, distribution of rights to purchase stock
or securities, or distribution of securities convertible into or exchangeable
for stock hereafter made by the Company to its stockholders shall not be
taxable.
(g) Referral of Adjustment. In any case in which this SECTION 4 shall require
that an adjustment in the conversion price be made effective as of a record date
for a specified event, if the Note shall have been converted after such record
date Maker may elect to defer until the occurrence of such event issuing to
Payee the shares, if any, issuable upon such conversion over and above the
shares, if any, issuable upon such conversion on the basis of the conversion
price in effect prior to such adjustment; provided, however, that Maker shall
deliver to Payee a due bill or other appropriate instrument evidencing Payee's
right to receive such additional shares upon the occurrence of the event
requiring such adjustment.
(h) Number of Shares. Upon each adjustment of the conversion price as a result
of the calculations made in PARAGRAPHS 4 (A) through (C) above, the Note shall
thereafter evidence the right to purchase, at the adjusted conversion price,
that number of shares (calculated to the nearest one-hundredth) obtained by
dividing (i) the product obtained by multiplying the number of shares
purchasable upon conversion of the Note prior to adjustment of the number of
shares by the conversion price in effect prior to adjustment of the conversion
price by (ii) the conversion price in effect after such adjustment of the
conversion price.
(i) When No Adjustment Required. No adjustment need be made for a transaction
referred to in PARAGRAPHS 4 (A) through (C) above if Payee is permitted to
participate in the transaction on a basis no less favorable than any other party
and at a level which would preserve Payee's percentage equity participation in
the Common Stock upon conversion of the Note. No adjustment need be made for
sales of Common Stock pursuant to a Company plan for reinvestment of dividends
or interest, the granting of options and/or the exercise of options outstanding
under any of Maker's currently existing stock option plans, the exercise of any
other of Maker's currently outstanding options, or any currently authorized
warrants, whether or not outstanding. No adjustment need be made for a change in
the par value or no par value of the Common Stock. If the Note becomes
convertible solely into cash, no adjustment need be made thereafter. Interest
will not accrue on the cash.
(j) Notice of Adjustment. Whenever the conversion price is adjusted, Maker shall
promptly mail to Payee a notice of the adjustment together with a certificate
from Maker's Chief Financial Officer briefly stating (i) the facts requiring the
adjustment, (ii) the adjusted conversion price and the manner of computing it,
and the date on which such adjustment becomes effective. The certificate shall
be evidence that the adjustment is correct, absent manifest error.
(k) Voluntary Reduction. Maker from time to time may reduce the conversion price
by any amount for any period of time if the period is at least 20 days and if
the reduction is irrevocable during the period. Whenever the conversion price is
reduced, Maker shall mail to Payee a notice of the reduction. Maker shall mail
the notice at least 15 days before the date the reduced conversion price takes
effect. The notice shall state the reduced conversion price and the period it
will be in effect. A reduction of the conversion price does not change or adjust
the conversion price otherwise in effect for purposes of PARAGRAPHS 4 (A)
through (C) above.
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<PAGE>
(l) Notice of Certain Transactions. If (i) Maker takes any action that would
require an adjustment in the conversion price pursuant to this SECTION 4; or
(ii) there is a liquidation or dissolution of Maker, Maker shall mail to Payee a
notice stating the proposed record date for a distribution or effective date of
a reclassification, consolidation, merger, transfer, lease, liquidation or
dissolution. Maker shall mail the notice at least 15 days before such date.
Failure to mail the notice or any defect in it shall not affect the validity of
the transaction.
(m) Reorganization of Company. If Maker and/or the holders of Common Stock are
parties to a merger, consolidation or a transaction in which (i) Maker transfers
or leases substantially all of its assets; (ii) Maker reclassifies or changes
its outstanding Common Stock; or (iii) the Common Stock is exchanged for
securities, cash or other assets; the person who is the transferee or lessee of
such assets or is obligated to deliver such securities, cash or other assets
shall assume the terms of this Note. If the issuer of securities deliverable
upon conversion of the Note is an affiliate of the surviving, transferee or
lessee corporation, that issuer shall join in such assumption. The assumption
agreement shall provide that the Payee may convert the Convertible Obligations
into the kind and amount of securities, cash or other assets which he would have
owned immediately after the consolidation, merger, transfer, lease or exchange
if he had converted the Note immediately before the effective date of the
transaction. The assumption agreement shall provide for adjustments which shall
be as nearly equivalent as may be practical to the adjustments provided for in
this SECTION 4. The successor company shall mail to Payee a notice briefly
describing the assumption agreement. If this Paragraph applies, PARAGRAPH 4 (A)
above does not apply.
(n) Maker Determination Final. Any determination that Maker or its Board of
Directors must make pursuant to SECTION 3 or this SECTION 4 shall be conclusive,
absent manifest error.
5. Right to Registration.
---------------------
(a) Payee's Demand Right to Registration. Upon receipt of notice (the
"Registration Request Notice") requesting registration under the Act of the
Underlying Shares from the holders of the majority of such Shares, on only one
occasion, after December 31, 1997, and through one year after the date on which
all of the Notes have been repaid and/or converted, Maker will offer to Payee
the opportunity to include this Note and his Underlying Shares (the
"Registerable Securities") in such registration. Maker will use its best efforts
to file with the Securities and Exchange Commission (the "Commission") as
promptly as practicable, a registration statement (the "Demand Registration
Statement"), utilizing year end audited financial statements, and will use its
best efforts to have the Demand Registration Statement declared effective and
remain effective until the earliest of two years thereafter, the date all the
Registerable Securities registered thereby have been sold, or, in the reasonable
opinion of maker's counsel, the Registerable Securities may be sold publicly
without registration. Maker will also use its best efforts to qualify the
Registerable Securities under the securities laws of the state where Payee
resides provided Maker is not required to execute a general consent to service
or to qualify to do business in such state. This offer to Payee shall be made
within 20 days after Maker receives the Registration Request Notice. If Payee
elects to include his Registerable Securities in the Demand Registration
Statement, he will, in a timely fashion, provide Maker and its counsel with such
information and execute such documents as Maker's counsel may reasonably require
to prepare and process the Demand Registration Statement. If Payee elects not to
include his Registerable Securities in the "Demand Registration Statement," he
shall have no further rights to the registration of his Registerable Securities
under this PARAGRAPH 5 (A).
7
<PAGE>
(b) Payee's "Piggy Back" Registration Rights. If at any time after the date
hereof, Maker proposes to file a Registration Statement under the Act with
respect to any of its securities (except one relating to stock option or
employee benefit plans), Maker shall give written notice of its intention to
effect such filing to Payee at least 30 days prior to filing such Registration
Statement (the "Piggy-Back Registration Statement"). If Payee desires to include
his Registerable Securities in the Piggy-Back Registration Statement, he shall
notify Maker in writing within 15 days after receipt of such notice from Maker,
in which event Maker shall include Payee's Registerable Securities in the
Piggy-Back Registration Statement. If Payee elects to include his Registerable
Securities in the Piggy-Back Registration Statement as set forth herein, he
shall, in a timely fashion, provide Maker and its counsel with such information
and execute such documents as its counsel may reasonably require to prepare and
process the Piggy-Back Registration Statement. Anything to the contrary not
withstanding, in the event that the offering for which the Piggy-Back
Registration Statement has been filed is to be effected by an underwriter, such
underwriter may exclude the Registerable Securities from the Piggy-Back
Registration Statement.
(c) Copies of Registration Statements and Prospectuses. Maker will provide Payee
with a copy of the Demand Registration Statement or Piggy-Back Registration
Statement, as the case may be, and any amendments thereto, and copies of the
final prospectus included therein in such quantities as may reasonably be
required to permit Payee to sell his Registerable Securities after the Demand
Registration Statement or Piggy-Back Registration Statement, as the case may be,
is declared effective by the Commission.
(d) Maker's Obligation to Bear Expenses of Registration. Maker will bear all
expenses (except underwriting discounts and commission, if any, and the legal
fees and expenses, if any, of counsel to Payee) necessary and incidental to the
performance of its obligations under this SECTION 5.
(e) Indemnification. Maker and Payee, if Payee's Registerable Securities are
included in a Registration Statement pursuant to this SECTION 5, shall provide
appropriate cross indemnities to each other covering the information supplied by
the indemnifying party for inclusion in the Registration Statement.
(f) Cancellation of Registration Rights. Anything to the contrary not
withstanding, Maker shall not be required to register any Underlying Shares
which, in the reasonable opinion of Maker's counsel, may be sold pursuant to the
exemption from registration provided by Section (k) of Rule 144 promulgated
under the Act.
6. Subordination; Pari Passu with other Notes.
------------------------------------------
(a) Senior Debt. This Note is subordinated to Senior Debt, which means (a) all
obligations and indebtedness of Maker, including but not limited to indebtedness
to Credit Lyonnais New York Branch, as agent (the "Agent") for itself and the
other lenders now or hereafter party to that certain Credit Agreement dated as
of July 11, 1997 among Maker, Agent and such lenders, as modified, amended or
supplemented (the "Credit Agreement") and the $1,028,000 in principal amount of
debentures due December 31, 1997 and all accrued interest thereon, whether
outstanding on the date hereof or hereafter created, and all indebtedness
secured by assets of Maker having a value (as determined by the Board of
Directors of Maker) of more than 50% of the outstanding principal amount of such
indebtedness or $100,000, whichever is less, (i) for borrowed money, (ii) for
money borrowed by others and guaranteed, directly or indirectly, by Maker, or
(iii) constituting
8
<PAGE>
purchase money indebtedness for the payment of which Maker is directly or
contingently liable, unless , in any such case, by the express terms of the
instrument creating or evidencing such indebtedness it is provided that such
indebtedness is not superior in right of payment to this Note or to other
indebtedness which is pari passu with, or subordinated to this Note, and (b) any
deferrals, renewals, increases or extensions of any such Senior Debt. As used in
the preceding sentence the term "purchase money indebtedness" shall mean
indebtedness evidenced by a note, debenture, bond or other similar instrument
issued to or assumed for a vendor as all or part of the purchase price of such
asset acquired by Maker. Senior Debt must be paid before the Note may be paid.
This Note shall be paid on a pari passu basis with all other Notes. Upon request
of Maker Payee shall execute such subordination agreements with holders of
Senior Debt as shall be reasonably requested.
(b) Subordination to Senior Bank Debt; Restrictions on Subordinated Debt.
Anything in this Note to the contrary notwithstanding, the indebtedness
evidenced by this Note, including without limitation, principal, premium, if
any, and interest and any and all fees, expenses, indemnities and all other
monies owing at any time pursuant to or in connection with this Note (the
"Subordinated Debt"), shall be subordinate and junior to all Senior Debt
evidenced by the Credit Agreement and the other documents, instruments and
agreements executed in connection therewith, and all modifications and
amendments thereto and all substitutions or replacements thereof (collectively,
the "Senior Bank Debt"), to the extent set forth below:
(i) If a Default (as defined in the Credit Agreement) or a Potential
Default (as defined in the Credit Agreement) shall occur, then, unless
and until such Default or Potential Default shall have been remedied by
indefeasible payment in full of all of the Senior Bank Debt in cash, or
otherwise cured, or expressly waived in writing by all affected holders
of Senior Bank Debt, the Maker shall not make and the holder of this
Note shall not accept or receive, any direct or indirect payment
(whether of principal, interest or other amounts) of or on account of
any Subordinated Debt, whether in cash or other property or by setoff
or in any other manner;
(ii) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceedings, or any receivership
proceedings in connection therewith, relative to the Maker, and in the
event of any proceedings for voluntary liquidation, dissolution or
other winding up of the Maker, whether or not involving insolvency or
bankruptcy proceedings, then all Senior Bank Debt shall first be
indefeasibly paid in full and in cash before any payment is made of, or
on account of, any Subordinated Debt;
(iii) In any of the proceedings referred to in subparagraph (2) above,
the holder of this Note hereby absolutely, irrevocably and
unconditionally assigns and sets over to Agent all of his rights to
vote to approve or reject any plan of reorganization in respect of
Maker or any of its subsidiaries, and any payment or distribution of
any kind or character whether in cash, property, stock or obligations,
which may be payable or deliverable by the Maker in respect of this
Note shall be paid or delivered directly to Agent, for the benefit of
the holders of Senior Bank Debt for the ratable application in payment
thereof in accordance with the priorities then existing among such
holders, unless and until all Senior Bank Debt shall have been
indefeasibly paid in full and in cash;
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<PAGE>
(iv) In the event of any of the proceedings referred to in paragraph
(2) above, the holder of this Note will, at the Agent's request, file
any claim, proof of claim or other instrument of similar character
necessary to enforce the obligation of the Maker in respect of the
Subordinated Debt. In the event that the holder of this Note should
fail to take such action requested by the Agent, the Agent may, as
attorney-in-fact for the holder of this Note, take such action on
behalf of the holder of this Note, and the holder of this Note hereby
irrevocably appoints the Agent as attorney-in-fact for the holder of
this Note to demand, sue for, collect and receive any and all such
moneys, dividends or other assets and give acquittance therefor and to
file any claim, proof of claim or other instrument of similar character
and to take such other proceedings in Agent's own name(s) or in the
name of the holder of this Note as the Agent may deem necessary or
advisable for the enforcement of the terms contained in this Note; and
the holder of this Note will execute and deliver to Agent such other
and further powers of attorney or other instruments as Agent may
request in order to accomplish the foregoing;
(v) Notwithstanding the holder of this Note's rights under applicable
law or any provision of this Note to the contrary, the holder of this
Note hereby acknowledges and agrees that he shall not take, pursue or
engage in, directly or indirectly, any Enforcement Action (hereinafter
defined) unless the Senior Bank Debt has been indefeasably paid in full
(A) if a Default (as defined in the Credit Agreement) or a Potential
Default (as defined in the Credit Agreement) has occurred which has not
been cured or waived by the holders of the Senior Bank Debt and which
Default or Potential Default results in the full amount of the Senior
Bank Debt being declared due and payable, or (B) during the period of
time commencing on the date that Agent obtains actual knowledge that a
Default or Potential Default has occurred which permits the holders of
the Senior Bank Debt to declare any amounts thereof due and payable,
and ending on the earlier of the date on which such Default or
Potential Default shall have been cured or waived by the holders of the
Senior Bank Debt or the 90th day after the commencement of such period.
As used herein the term "Enforcement Action" means any of the
following: (1) the holder of this Note shall (A) accelerate the
Subordinated Debt or any portion thereof, or (B) take any Enforcement
Action or exercise any remedies against Maker to collect or enforce any
of its obligations and indebtedness under this Note; or (2) the holder
of this Note acquiesces in, petitions, or otherwise invokes or causes
any other person to invoke the process of the United States of America,
any state or other political subdivision thereof or any other
jurisdiction, any entity exercising executive, legislative, judicial,
regulatory, or administrative functions of or pertaining to government
for the purpose of commencing or sustaining a case against Maker, under
a federal or state bankruptcy, insolvency, or similar law or appointing
a receiver, liquidator, assignee, trustee, custodian, sequestrator, or
other similar official of Maker or all of any part of its property or
assets or ordering the winding-up or liquidation of the affairs of
Maker. The holder of this Note hereby waives any right it may have to
require that the holders of the Senior Bank Debt marshal any assets of
Maker in favor of the holder of this Note.
(vi) The holder of this Note shall not institute any judicial or
administrative proceeding against Maker or the holders of the Senior
Bank Debt which directly or indirectly would interfere with or delay
the exercise by Agent or the holders of the Senior Bank Debt of their
rights and remedies in respect of any property of Maker or any other
obligor of the Senior Bank Debt constituting collateral security for
the Senior Bank Debt or under the Senior Credit Agreement. Without
limiting the
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<PAGE>
generality of the foregoing, in the event of a bankruptcy or
insolvency of Maker, the holder of this Note shall not object to or
oppose any efforts by the holders of the Senior Bank Debt to obtain
relief from the automatic stay under Section 362 of the United States
Bankruptcy Code or to seek to cause such entity's bankruptcy estate to
abandon property (or any portion thereof) that is subject to liens and
security interests in favor of the Agent or the holders of the Senior
Bank Debt.
(vii) If any payment or distribution of any character, whether in
cash, securities or other property, shall be received by the holder of
this Note (other than payments or distributions consisting of the
Underlying Shares made in exchange for the Convertible Obligations
pursuant to Paragraph 3 of this Note) in contravention of any of the
terms of this Note and before all the Senior Bank Debt shall have been
indefeasibly paid in full and in cash, such payment or distribution
shall be received in trust for the benefit of the holders of the
Senior Bank Debt at the time outstanding and shall forthwith be paid
over or delivered and transferred to the Agent for the ratable
application in payment thereof in accordance with the priorities then
existing among such holders;
(viii) Payment of the Subordinated Debt will not be secured by any
security interest or lien on any assets of, or by a guaranty from, any
obligor of the Senior Bank Debt unless all Senior Bank Debt has been
indefeasibly paid in full and in cash; and
(ix) The amount, the rate of interest charged, or the time, place,
manner, terms or amount of interest payments of this Note, including,
without limitation, the provisions of this Paragraph 6, may not be
altered in any fashion (provided, however, that maker and Payee may
agree to alter the number of Underlying Shares into which the
Convertible Obligations may be converted pursuant to Paragraph 3 of
this Note), and, no portion of the principal owing with respect to
this note may be paid prior to the Maturity Date, without, in each
instance, the prior express written consent of Agent unless all Senior
Bank Debt has been indefeasibly paid in full and in cash.
(x) Notwithstanding anything herein to the contrary, nothing in this
Paragraph 6 shall limit the rights of Maker and the holder of this
Note to agree to any changes in the conversion provisions of this Note
which might result in the issuance of a greater or lesser number of
shares of common stock in satisfaction of Maker's obligations under
this Note or the timing of such conversion of Maker's obligation into
common stock.
(c) Rights of Holders of Senior Bank Debt. The subordination provisions of this
Note shall be deemed a continuing offer to all holders of Senior Bank Debt to
act in reliance on such provisions (but no such reliance shall be required to be
proven to receive the benefits hereof) and may be enforced by such holders, and
no right of Agent or any present or future holder of any senior Bank Debt to
enforce subordination as provided in this Note shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Maker or
by any act or failure to act by Agent or any such holder, or by any
non-compliance by the Maker with the terms, provisions and covenants of this
Note.
Without in any way limiting the generality of the foregoing, the holders of
Senior Bank Debt may, at any time and from time to time, without the consent of
or notice to the holder of this Note, and without impairing or releasing the
subordination provided in this Note or the obligations hereunder of the holder
of this Note to the holders of Senior Bank Debt, do any one or more of the
following: (i) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, or waive defaults under Senior Bank Debt, or
otherwise amend or supplement in any manner the Senior Bank Debt or any
instrument evidencing the same or any agreement under which the Senior Bank Debt
is outstanding; (ii) release any person or entity liable in any manner for the
payment or collection of Senior Bank Debt; (iii) sell, exchange, release or
otherwise deal with all or any part of the property by whomsoever at any time
pledged or mortgaged to secure, or howsoever securing, any of the Senior Bank
Debt; (iv) exercise or refrain from exercising any rights against the Maker and
any other person or entity, including any guarantor or surety; and (v) apply any
sums, by whomsoever paid or however realized, to Senior Bank Debt.
7. Covenants.
---------
Maker covenants and agrees that from and after the date hereof and until the
date of repayment in full of the Obligations it shall comply with the following
conditions:
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(i) Maintenance of Existence and Conduct of Business. Maker shall, and
shall cause each of its subsidiaries, if any, to (A) do or cause to be
done all things necessary to preserve and keep in full force and
effect its corporate existence and rights; and (B) continue to conduct
its business so that the business carried on in connection therewith
may be properly and advantageously conducted at all times.
(ii) Books and Records. Maker shall, and shall cause each of its
subsidiaries, if any, to keep adequate books and records of account
with respect to its business activities.
(iii) Insurance. Maker shall, and shall cause each of its
subsidiaries, if any, to maintain insurance policies insuring such
risks as are customarily insured against by companies engaged in
businesses similar to those operated by Maker or such subsidiaries, as
the cash may be. All such plicies are to be carried with reputable
insurance carriers and shall be in such amounts as are customarily
insured against by companies with similar assets and properties
engaged in a similar business.
(iv) Compliance with law. Maker shall, and shall cause each of its
subsidiaries, if any, to comply in all material respects with all
federal, state and local laws and regulations applicable to it or such
subsidiaries, as the case may be, which if breached would have a
material adverse effect on Maker's or such subsidiaries', as the case
may be, business or financial condition.
8. Representations and Warranties of Maker.
---------------------------------------
Maker represents and warrants that it: (i) is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power to carry on its business as now conducted
and to own its properties and assets it now owns; (ii) is duly qualified or
licensed to do business as a foreign corporation in good standing in the
jurisdictions in which ownership of property or the conduct of its business
requires such qualification except jurisdictions in which the failure to qualify
to do business will have no material adverse effect on its business, prospects,
operations, properties, assets or condition (financial or otherwise); (iii) has
full power and authority to execute and deliver this Note, and that the
execution and delivery of this Note will not result in the breach of or default
under, with or without the giving of notice and/or the passage of time, any
other agreement, arrangement or indenture to which it is a party or by which it
may be bound, or the violation of any law, statute, rule, decree, judgment or
regulation binding upon it; and (iv) has taken and will take all acts required,
including but not limited to authorizing the signatory hereof on its behalf to
execute this Note, so that upon the execution and delivery of this Note, it
shall constitute the valid and legally binding obligation of Maker enforceable
in accordance with the terms thereof.
9. Defaults and Remedies.
---------------------
(a) Events of Default. The occurrence or existence of any one or more of the
following events or conditions (regardless of the reasons therefor) shall
constitute an "Event of Default" hereunder:
(i) Maker shall fail to make any payment of Principal or Interest when
due and payable or declared due and payable pursuant to the terms
hereof and such failure shall remain uncured for a period of 15 days
after notice thereof has been given by Payee to Maker;
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<PAGE>
(ii) Maker shall fail at any time to be in material compliance with
any of the covenants set forth in Paragraph 3 (c) or Section 7 of this
Note, or shall fail at any time to be in material compliance with or
neglect to perform, keep or observe any of the provisions of this Note
to be complied with, performed, kept or observed by Maker and such
failure shall remain uncured for a period of 30 days after notice
thereof has been given by Payee or the Agent to Maker;
(iii) Any representation or warranty made in this Note by Maker shall
be untrue or incorrect in any material respect as of the date when
made or deemed made;
(iv) A case or proceeding shall have been commenced against Maker, or
any of its subsidiaries, if any, in a court having competent
jurisdiction seeking a decree or order in respect of Maker, or any of
its subsidiaries, (A) under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable federal,
state or foreign bankruptcy or other similar law; (B) appointing a
custodian, receiver, liquidator, assignee, trustee or sequestrator (or
similar official) of Maker, or any of its subsidiaries, or any of
their respective properties; or (C) ordering the winding-up or
liquidation of the affairs of Maker, or any of its subsidiaries, and
such case or proceeding shall remain unstayed or undismissed for a
period of 90 consecutive days or such court shall enter a decree or
order granting the relief sought in such case or proceeding; or
(v) Maker, or any of its subsidiaries, if any, shall (A) file a
petition seeking relief under Title 11 of the United States Code, as
now constituted or hereafter amended, or any other applicable federal,
state or foreign bankruptcy or other similar law; or (B) consent to
the institution of proceedings thereunder or to the filing of any such
petition or to the appointment of or the taking of possession by a
custodian, receiver, liquidator, assignee, trustee or sequestrator (or
similar official) of Maker, or any of its subsidiaries, or any of
their respective properties.
(b) Remedies. Upon the occurrence of an event of Default specified in Paragraphs
9 (iv) and (v) above, all Obligations then remaining unpaid hereunder shall
immediately become due and payable without notice. Upon the occurrence of any
other Event of Default, the holders of at least 51% in principal amount of the
Notes may thereafter, at their option immediately by notice to Maker, declare
all Obligations then remaining unpaid hereunder immediately due and payable,
whereupon the same shall forthwith mature and become due and payable, without
any further notice to Maker and without presentment, demand, protest or notice
of protest, all of which are hereby waived by Maker. Upon a declaration of
acceleration, the entire Obligations then remaining unpaid hereunder shall
become immediately due and payable in full plus all reasonable costs and
expenses of the collection and enforcement of this Note, including reasonable
attorney's fees and expenses, all of which shall be added to the amount due
under this Note. The rights, powers, privileges and remedies of Payee pursuant
to the terms hereof are cumulative and not exclusive of any other rights,
powers, privileges and remedies which Payee may have under this Note or any
other instrument or agreement.
10. Maker's Right to Prepay.
-----------------------
Maker may not repay this Note or any portion thereof prior to May 1, 1999.
Thereafter, Maker may prepay this Note or any portion thereof at any time on not
less than 30 nor more than 60 day's notice to Payee together with accrued
Interest to the date fixed for repayment. The repayment price shall be on a
decreasing scale commencing at 110% on May 1, 1999 and decreasing by 0.56% per
month to 100% on November 1, 2000 as follows:
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Percent of Percent of
Date Principal Date Principal
---- --------- ----------------- ---------
May 1, 1999 110.00 February 1, 2000 104.96
June 1, 1999 109.44 March 1, 2000 104.40
July 1, 1999 108.88 April 1, 2000 103.84
August 1, 1999 108.32 May 1, 2000 103.28
September 1, 1999 107.76 June 1, 2000 102.72
October 1, 1999 107.20 July 1, 2000 102.16
November 1, 1999 106.64 August 1, 2000 101.60
December 1, 1999 106.08 September 1, 2000 101.04
January 1, 2000 105.52 October 1, 2000 100.48
Repayment after October 1, 2000 will be at 100% of Principal. Anything to the
contrary not withstanding, Maker may prepay this Note at any time after April
30, 1999 on 30 day's notice without any premium or penalty if the Closing Price
of the Common Stock for 30 consecutive trading days immediately preceding the
day on which the repayment notice is sent equals or exceeds $4.50 per share.
11. Acknowledgment of Payee's Investment Representations.
----------------------------------------------------
By accepting this Note, Payee acknowledges that this Note has not been and,
except as provided herein, will not be registered under the Act or qualified
under any state securities laws and that the transferability thereof is
restricted by the registration provisions of the Act as well as such state laws.
Based upon the representations and agreements being made by him herein, this
Note is being issued to him pursuant to an exemption from such registration
provided by Section 4 (2) of the Act and applicable state securities law
qualification exemptions. Payee represents that he is acquiring the Note for his
own account, for investment purposes only and not with a view to resale or other
distribution thereof, nor with the intention of selling, transferring or
otherwise disposing of all or any part of it for any particular event or
circumstance, except selling, transferring or disposing of it only upon full
compliance with all applicable provisions of the Act, the Securities Exchange
Act of 1934, the Rules and Regulations promulgated by the Commission thereunder,
and any applicable state securities laws. Payee further understands and agrees
that no transfer of this Note shall be valid unless made in compliance with the
restrictions set forth on the front of this Note, effected on Maker's books by
the registered holder hereof, in person or by an attorney duly authorized in
writing, and similarly noted hereon. Maker may charge Payee a reasonable fee for
any re registration, transfer or exchange of this Note.
12. Limitation of Liability.
-----------------------
A director, officer, employee or stockholder, as such, of Maker shall not have
any liability for any obligations of Maker under this Note or for any claim
based on, in respect or by reason of such obligations or their creation. Payee,
by accepting this Note, waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of this Note.
13. Limitation of Interest Payments.
-------------------------------
Nothing contained in this Note or in any other agreement between Maker and Payee
requires Maker to pay or Payee to accept Interest in an amount which would
subject Payee to any penalty or forfeiture under applicable law. In no event
shall the total of all charges payable hereunder, whether of Interest or of such
other charges which may or might be characterized as interest, exceed the
maximum rate permitted to be charged under the laws of the States of New York or
Texas. Should Payee receive any payment which is or would be in excess of that
permitted to be charged under such laws, such payment shall have been and shall
be deemed to have been made in error and shall automatically be applied to
reduce the Principal outstanding on this Note.
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14. Reservation of Shares
---------------------
Maker shall at all times reserve and keep available out of its authorized but
unissued stock, for the purpose of effecting the issuance of stock upon
conversion of this Note, such number of shares as shall from time to time be
sufficient to effect the issuance of shares of Common Stock upon conversion of
this Note.
15. Miscellaneous.
-------------
(a) Effect of Forbearance. No forbearance, indulgence, delay or failure to
exercise any right or remedy by Payee with respect to this Note shall operate as
a waiver or as an acquiescence in any default.
(b) Effect of Single or Partial Exercise of Right. No single or partial exercise
of any right or remedy by Payee shall preclude any other or further exercise
thereof or any exercise of any other right or remedy by Payee.
(c) Governing Law. This Note shall be construed and enforced in accordance with,
and the rights of the parties shall be governed by, the internal laws of the
State of Texas applicable to contracts made and to be performed entirely within
such State.
(d) Headings. The headings and captions of the various paragraphs herein are for
convenience of reference only and shall in no way modify any of the terms or
provisions of this Note.
(e) Loss, Theft, Destruction or Mutilation. Upon receipt by Maker of evidence
reasonably satisfactory to it of loss, theft, destruction or mutilation of this
Note, Maker shall make and deliver or caused to be made and delivered to Payee a
new Note of like tenor in lieu of this Note.
(f) Modification of Note or Waiver of Terms Thereof Relating to Payee. No
modification or waiver of any of the provisions of this Note shall be effective
unless in writing and signed by Payee and then only to the extent set forth in
such writing, nor shall any such modification or waiver be applicable except in
the specific instance for which it is given. This Note may not be discharged
orally but only in writing duly executed by Payee.
(g) Notice. All offers, acceptances, notices, requests, demands and other
communications under this Note shall be in writing and, except as otherwise
provided herein, shall be deemed to have been given only when delivered in
person, via facsimile transmission if receipt thereof is confirmed by the
recipient, or, if mailed, when mailed by certified or registered mail prepaid,
to the parties at their respective addresses first set forth above, or at such
other address as may be given in writing in future by either party to the other.
15
<PAGE>
(h) Successors and Assigns. This Note shall be binding upon Maker, its
successors, assigns and transferees, and shall inure to the benefit of and be
enforceable by Payee and its successors and assigns.
(i) Severability. If one or more of the provisions or portions of this Note
shall be deemed by any court or quasi-judicial authority to be invalid, illegal
or unenforceable in any respect, the invalidity, illegality or unenforceability
of the remaining provisions, or portions of provisions contained herein shall
not in any way be affected or impaired thereby, so long as this Note still
expresses the intent of the parties. If the intent of the parties cannot be
preserved, this Agreement shall either be renegotiated or rendered null and
void.
IN WITNESS WHEREOF, Maker has caused this Note to be executed on its behalf by
an officer thereunto duly authorized as of the date set forth above.
Fortune Natural Resources Corporation
a Delaware corporation
[SEAL]
By:
------------------------------------
Tyrone J. Fairbanks, President
and Chief Executive Officer
ATTEST:
-----------------------------
Dean W. Drulias, Secretary
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE
PLEDGED, HYPOTHECATED, SOLD, TRANS-FERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY
BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER.
FORTUNE NATURAL RESOURCES CORPORATION
WARRANT ______________WARRANTS
CERTIFICATE NO. ______ __________________, 1997
WARRANT TO PURCHASE SHARES OF COMMON STOCK
------------------------------------------
THIS CERTIFIES that, for value received, ____________________, or
registered assigns ("Holder"), is the registered holder of the number of
warrants set forth above (the "Warrants"), each of which entitles Holder to
purchase, subject to the terms and conditions set forth below, one fully paid
and non-assessable share of Common Stock of FORTUNE NATURAL RESOURCES
CORPORATION, a Delaware corporation (the "Company"), at a purchase price of
$______ (the "Purchase Price"), at any time or from time to time after the date
set forth above (the "Exercise Date") and on or prior to 5:00 P.M., Central
Standard Time on ________________, ______ (the "Expiration Date"). The Purchase
Price and the number and kinds of securities of the Company purchasable upon the
exercise of the Warrants represented hereby are subject to modification or
adjustment as provided below. The Purchase Price shall be payable in lawful
funds of the United States. Upon presentation and surrender of this Warrant
Certificate together with the payment of the Purchase Price for the shares of
Common Stock thereby purchased and the Form of Notice of Exercise attached
hereto duly executed, at the place and in the manner specified in Section 4,
below, the Holder shall be entitled to receive a certificate or certificates for
the shares of Common Stock so purchased.
1. Registration and Transfer
-------------------------
1.1 General
-------
The Company shall maintain books for the registration and
transfer of the Warrants. Prior to due presentment for registration of transfer
of the Warrants, the Company may deem and treat the registered Holder as the
absolute owner thereof.
1
<PAGE>
1.2 Transfer
--------
The Warrants may not be assigned, or transferred without the
prior written consent of the Company, in its sole and absolute discretion;
1.3 Registration
------------
Subject to Section 1.1, above, the Company shall register upon
its books any transfer of the Warrants upon surrender of this Warrant
Certificate to the Company accompanied (if so required by the Company) by a
written instrument of transfer duly executed by the registered Holder or by a
duly authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued to the transferee and the surrendered Warrant
Certificate shall be cancelled by the Company. If only a portion of the Warrants
represented by this Warrant Certificate are transferred, a new Warrant
Certificate shall also be issued to the transferor.
2. Loss or Mutilation
------------------
Upon receipt by the Company of reasonable evidence of the
ownership and the loss, theft, destruction or mutilation of this Warrant
Certificate and, in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to the Company, or, in the case of mutilation, upon
surrender and cancellation of the mutilated Warrant Certificate, the Company
shall execute and deliver in lieu thereof a new Warrant Certificate representing
an equal number of Warrants.
3. Adjustments
-----------
The Purchase Price and the number of shares purchasable upon
the exercise of the Warrants shall be subject to adjustment from time to time
upon the occurrence of certain events described herein.
3.1. Purchase Price Adjustment
-------------------------
(a) Split, Subdivision, or Combination of Shares
If the Company at any time while these
Warrants remain outstanding and unexpired shall split, subdivide, or combine the
securities as to which purchase rights hereunder exist, the Purchase Price shall
be proportionately increased or decreased as appropriate.
2
<PAGE>
(b) Common Stock Dividends
----------------------
If the Company at any time while these
Warrants remain outstanding and unexpired shall pay a dividend with respect to
Common Stock payable in, or make any other distribution with respect to, the
shares of Common Stock, then the Purchase Price shall be adjusted, from and
after the date of determination of the shareholders entitled to receive any
dividend or distribution, to that price determined by multiplying the Purchase
Price in effect immediately prior to such date of determination by a fraction,
the numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend or distribution, and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution.
(c) Other Dividends
---------------
If the Company, at any time while these
Warrants remain outstanding and unexpired, shall pay a dividend or make any
other distribution with respect to Common Stock payable in stock (other than
Common Stock) or other securities or property, the Holder hereof shall be
entitled to receive, upon exercise of the Warrants, in addition to the shares of
Common Stock otherwise receivable upon exercise hereof, the same number and kind
of stock other securities and property which the Holder would have received had
the Holder then held the shares of Common Stock receivable on exercise hereof on
and before the record date for such dividend or distribution.
(d) Reclassification and Recapitalization
-------------------------------------
In the event of any reclassification or
recapitalization of the Common Stock, the Purchase Price shall be appropriately
adjusted in good faith by the Board of Directors of the Company to reflect such
reclassification or recapitalization and to protect (i) the rights of the Holder
to receive, upon the exercise hereof, the same amount of securities or property
that it would have received had it exercised the Warrants immediately prior to
the date for determination of Holders of Common Stock entitled to receive
securities or property as a result of such reclassification or recapitalization,
and (ii) the Holder's rights to appropriate adjustment upon any further stock
dividend, stock split, reclassification, or recapitalization.
3.2 Adjustment of Number of Shares
------------------------------
Upon each adjustment in the Purchase Price to Section
3.1(a) or Section 3.1(b) above, the number of shares of Common Stock purchasable
hereunder shall be adjusted to the nearest whole share to the product obtained
by multiplying the number of shares purchasable immediately prior to such
adjustment in the Purchase Price by a fraction, the numerator of which shall be
the Purchase Price immediately prior to such adjustment, and the denominator of
which shall be the Purchase Price immediately after such adjustment.
3
<PAGE>
3.3 Capital Reorganization, Merger, or Sale of Assets
-------------------------------------------------
If, at any time or from time to time, there shall be
a capital reorganization of the Common Stock (other than a subdivision,
combination, reclassification, or exchange of shares provided for elsewhere
herein) or a merger or consolidation of the Company with or into another
corporation, or a sale of all or substantially all of the Company's properties
and assets to any other person, the Holder shall thereafter be entitled to
purchase (and it shall be a condition to the consummation of any such
reorganization, merger, consolidation, or sale, that appropriate provision be
made so that the Holder shall thereafter be entitled to purchase), upon exercise
of the Warrants, the kind and amount of shares of stock or other securities or
property in the Company, or of the successor corporation resulting from such
merger, consolidation, or sale, to which a holder of Common Stock issuable upon
exercise would have been entitled on such capital reorganization, merger,
consolidation, or sale. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Section 3 with respect to the
rights of the Holder after the reorganization, merger, consolidation, or sale to
the end that the provisions of this Section 3 (including adjustment of the
Purchase Price then in effect and the number of shares of Common Stock
purchasable upon exercise of the Warrants) shall be applicable after that event
in as nearly equivalent a manner as may be practicable.
3.4 Certificate as to Adjustment
----------------------------
Upon the occurrence of each adjustment or
readjustment of the Purchase Price and the number of shares of Common Stock
pursuant to this Section 3, the Company, at its expense, shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and cause
its chief financial officer to verify such computation and prepare and furnish
to the Holder a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request at any time of the Holder, furnish
or cause to be furnished to the Holder a like certificate setting forth (a) such
adjustment and readjustment, (b) the Purchase Price at the time in effect, and
(c) the number of shares of Common Stock and the amount, if any, of other
securities and/or property which at the time would be receivable upon the
exercise of the Warrants. Such certificate shall set forth in reasonable detail
such facts as may be necessary to show the reason for and manner of computing
such adjustment.
3.5 No Impairment
-------------
The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance or
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the exercise rights of the Holder against
impairment.
4
<PAGE>
3.6 Notices of Record Date
----------------------
In the event of any taking by the Company of a record
of the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any rights to subscribe for, purchase, or
otherwise acquire any shares of stock of any class or for any securities or
property, or to receive any other right, the Company shall mail to the Holder,
at least thirty (30) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution, or right, in the amount and character of such
dividend, distribution, or right.
3.7 No Fractional Shares
--------------------
No fractional shares shall be issued upon exercise of
the Warrants, and the number of shares of Common Stock to be issued shall be
rounded to the nearest full share. Such rounding shall be determined on the
basis of the total number of Warrants the Holder is at the time exercising and
the number of shares of Common Stock issuable upon such aggregate exercise.
4. Exercise of Warrants
--------------------
The purchase rights represented by these Warrants are
exercisable by the Holder, in whole or in part, at any time and from time to
time on or after the Exercise Date and on or prior to the Expiration Date. The
Warrants may be exercised by surrender of this Warrant Certificate, with the
Notice of Exercise attached hereto duly executed, to the principal executive
office of the Company, presently is located at One Commerce Green, 515 W. Greens
Rd., Suite 720, Houston, Texas, 77067 (or such other office or agency of the
Company as it may designate by notice in writing to the registered Holder hereof
at the address of such Holder appearing on the books of the Company), and shall
be accompanied by payment in cash, check or bank draft, payable to the Company,
in an amount equal to the full purchase price for the shares of Common Stock of
the Company (hereinafter referred to as the "Shares") the Company shall deliver
a certificate or certificates representing the Shares as soon as practical, and,
in any event, within ten (10) days after the notice shall be received. The
certificate or certificates for the Shares shall be registered in the name of
the person or persons exercising the Warrants and shall be delivered, as
provided above, to the written order of the person or persons exercising the
Warrants. All shares of Common Stock which may be issued upon the exercise of
the Warrants as provided herein shall be fully paid and non-assessable and free
from all taxes, liens and charges with respect thereto. Holder shall not be
entitled to the privileges of share ownership as to any shares of Common Stock
not actually issued and delivered to it. Holder hereby certifies that all shares
of Common Stock in the Company purchased or to be purchased by it pursuant to
the exercise of the Warrants are being, or are to be, acquired by it for
investment and not with a view to the distribution thereof.
5
<PAGE>
5. General
-------
The Company shall, at all times during the term of the
Warrants, reserve and keep available out of its authorized but unissued shares
of Common Stock such number of Common Stock as will be sufficient to satisfy the
requirements of this Warrant Certificate; and, if at any time, the number of
authorized but unissued shares of Common Stock shall be insufficient to effect
the exercise of the Warrants, in addition to such other remedies as shall be
available to the Holder, the Company shall take such corporate action as may, in
the opinion of the Company, be necessary to increase its authorized but unissued
shares of Common Stock to such number as shall be sufficient for such purposes.
The Company shall pay all original issue and transfer taxes with respect to the
issue and transfer of shares of Common Stock pursuant hereto and all other fees
and expenses necessarily incurred by the Company in connection therewith, and
will, from time to time, use its best efforts to comply with all laws and
regulations which, in the opinion of the Company, shall be applicable thereto.
6. Legends
-------
It is understood that the certificates evidencing the Shares
may bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN
ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF
EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933
AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER".
7. Notices
-------
Any notice required by the provisions of this Warrant
Certificate to be given to the Holder shall be deemed given three (3) days after
it is deposited in the U.S. mail, certified and return receipt requested,
addressed to the Holder at its address appearing on the books of the Company or
on the date actually delivered in person.
8. Governing Law
-------------
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the state of Texas.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of the date first above written.
FORTUNE NATURAL RESOURCES CORPORATION
By: _____________________________________
TYRONE J. FAIRBANKS, President
and Chief Executive Officer
7
<PAGE>
NOTICE OF EXERCISE
------------------
TO: FORTUNE NATURAL RESOURCES CORPORATION:
The undersigned hereby (1) elects to exercise
_________________ Warrants represented by the attached Warrant Certificate, and
to purchase ___________ shares of Common Stock of Fortune Natural Resources
Corporation issuable upon the exercise of said Warrants, (2) tenders herewith
payment of the Purchase Price of such shares in full, and requests that
certificates representing such shares be issued in the name of and delivered to
the following [please print]:
---------------------------------------------------
Social Security or Other Identification Number
---------------------------------------------------
Name
---------------------------------------------------
Street Address or Post Office Box
---------------------------------------------------
City, State and Zip Code
Date: ____________________ _____________________________________
Print Name of Holder
_____________________________________
Signature
_____________________________________
Title
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT") is entered
into as of November 3, 1997 among Fortune Natural Resources Corporation
(formerly Fortune Petroleum Corporation), a Delaware corporation ("Borrower"),
Credit Lyonnais New York Branch, as Agent (in such capacity, "AGENT"), and
certain LENDERS (herein so called) named on SCHEDULE 2.1 (as amended and
supplemented from time to time) of the Credit Agreement (as hereinafter
defined).
R E C I T A L S
- - - - - - - -
A. Borrower, Lenders, and Agent entered into that certain Credit
Agreement dated as of July 11, 1997 (the "CREDIT AGREEMENT"). Unless otherwise
indicated herein, all terms used with their initial letter capitalized are used
herein with their meaning as defined in the Credit Agreement, and all Section
references are to Sections in the Credit Agreement.
B. Borrower has requested that the Lenders permit Borrower to incur
certain additional Debt in an aggregate principal amount of up to $4,500,000.00
which Debt shall be subordinate and junior in all respects to the Obligation.
C. The Lenders are willing to amend the Credit Agreement, as requested,
to permit such additional subordinated Debt but only upon the condition, that
Borrower and the Lenders shall have executed and delivered this Amendment and
that Borrower shall have fully satisfied the terms and conditions hereof.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower, Agent and the Lenders hereby agree, as follows:
PARAGRAPH 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is hereby
amended, as follows:
1.1 Definitions.
(a) The definition of "SUBORDINATED DEBT" appearing in SECTION
1.1 is amended, in its entirety, to read as follows:
1
<PAGE>
SUBORDINATED DEBT means, at any time, (a) the
Subordinated Debentures (10-1/2%), (b) the
Subordinated Notes (12%), and (c) any Debt that (i)
is used solely for the redemption and repurchase of
(and may never exceed) the Subordinated Notes (12%)
and related, customary transactional expenses, (ii)
is subject to subordination, payment blockage, and
standstill provisions at least as favorable to
Lenders as those applicable to the Subordinated Notes
(12%) under the terms thereof, this agreement or
otherwise, (iii) is subject to representations,
covenants, events of default and other provisions not
significantly more onerous to Borrower than those
applicable to the Subordinated Notes (12%), and (iv)
does not have a net effective interest rate which is
greater than that of the Subordinated Notes (12%) or
any scheduled or mandatory principal or sinking fund
payment due before the Stated-Termination Date.
(b) SECTION 1.1 is further amended by adding the following new
definitions thereto, such definitions to appear in appropriate alphabetical
order therein:
APPROVED ACQUISITION means the acquisition by any
Restricted Company of Mineral Interests in which such
Restricted Company shall acquire from the seller(s)
thereof indefeasible title to such Mineral Interests,
subject to no Liens other than Permitted Liens, and
with respect to which (i) written notice of such
acquisition, together with copies of all material
documents, instruments, reports and agreements
entered or to be entered into or prepared in
connection therewith or relating thereto, including,
without limitation, all material engineering reports,
environmental reports, title reports or opinions, and
other due diligence information related to such
acquisition (collectively, the "Acquisition
Documents") shall have been delivered to the Agent at
least fifteen (15) Business Days prior to the date
that the transactions contemplated by the Acquisition
Documents are to be consummated (the "ACQUISITION
DATE"), and (ii) such Mineral Interests to be
acquired and the terms and provisions of the
Acquisition Documents shall have been approved, in
writing, on or prior to the Acquisition Date by the
Determining Lenders, in the exercise of their sole
discretion.
APPROVED DEVELOPMENT PROJECT means the development
for the production of oil, gas or other hydrocarbons
by any Restricted Company of certain Mineral
Interests in which such Restricted Company owns
indefeasible title, subject to no Liens other than
Permitted Liens, and with respect to which (i)
written notice of such development project, together
with copies of all material documents, instruments,
reports and agreements entered or to be entered into
or prepared in connection therewith or relating
thereto, including, without limitation, all
working-interest owner proposals, authorizations for
expenditure, cost estimates, material engineering
reports, and other due diligence information related
to such development project (collectively, the
"Development Project Documents") shall have been
delivered to the Agent at least fifteen (15) Business
Days prior to the date that such development project
commences (the "Development Commencement Date"), and
(ii) such Development Project Documents shall have
been approved, in writing, on or prior to the
Development Commencement Date by the Determining
Lenders, in the exercise of their sole discretion.
SUBORDINATED DEBENTURES (10-1/2%) means the 10-1/2%
Convertible Subordinated Debentures due December 31,
1997 issued by Borrower, not to exceed an aggregate
principal amount outstanding of $1,028,000.00.
SUBORDINATED NOTES (12%) means (a) the 12%
Convertible Subordinated Promissory Notes dated as of
November 3, 1997 in the aggregate original principal
amount of $1,350,000.00, due December 31, 2007 issued
by Borrower, and (b) any additional Debt incurred by
Borrower on or before December 31, 1997, not to
exceed an aggregate principal amount outstanding of
$3,150,000.00, the terms and provisions of the
instruments and agreements governing such Debt are
the same as those contained in the instruments
described in the immediately preceding clause (a).
2
<PAGE>
1.2 Amendment to SECTION 2.1(C) SECTION 2.1(C) is amended, in its
entirety, to read as follows:
The Commitment Usage may never exceed the lesser of either the
total Commitments for the Revolving Facility or the Borrowing
Base.
1.3 Amendment to SECTION 2.6(B). SECTION 2.6(B) is amended by replacing
the first sentence contained therein, in its entirety, with the following:
The Borrowing Base shall be redetermined by the Lenders
semi-annually through the Termination Date, within four (4)
months after each December 31 and June 30, with the first such
Borrowing Base redetermination under this Agreement to be made
on or before October 31, 1997 for the Mortgaged Properties as
of June 30, 1997, in accordance with the standard engineering
and lending policies and practices customary for loans of this
nature and on the basis of information supplied by the
Borrower in compliance with the provisions of this Agreement,
including, without limitation, the Reserve Reports, and all
other information available to the Lenders.
1.4 Amendment to SECTION 3.2(C). SECTION 3.2(C) is amended, in its
entirety, to read as follows:
(c) Revolving Facility-Mandatory Prepayments.
(1) At any time a Borrowing-Base Deficiency
exists, Borrower shall make prepayments to Agent (with any
related Funding Loss) under the Revolving Facility so that (i)
such Borrowing Base Deficiency has been reduced by at least
50% within 30 days after notice from Agent of the existence of
such Borrowing Base Deficiency, and (ii) such Borrowing-Base
Deficiency no longer exists by the sixtieth (60th) day after
notice from the Agent of the existence of such Borrowing Base
Deficiency.
(2) Borrower shall make prepayments to Agent
(with any related Funding Loss) under the Revolving Facility
in an amount equal to the lesser of (i) the excess, if any, of
(x) the aggregate gross proceeds received from the issuance of
the Subordinated Notes (12%), less all reasonable and
customary out-of-pocket fees and expenses incurred by Borrower
in connection therewith, over (y) $2,500,000.00, and (ii) the
Principal Debt outstanding on October 31, 1997; such
prepayments, if any, being due and payable from time to time
within one Business Day of Borrower's receipt of any such
proceeds from the issuance of the Subordinated Notes (12%) in
excess of $2,500,000.00.
1.5 Amendment to SECTION 7.1. SECTION 7.1(A) is amended, in its
entirety, to read as follows:
(a) Borrower will use LCs for general corporate
purposes and the proceeds of Borrowings under the Revolving
Facility for financing (i) the purchase price of Approved
Acquisitions, and (ii) the development costs incurred in
connection with Approved Development Projects.
3
<PAGE>
1.6 Amendment to SECTIONS 9.2(B) and (C). SECTION 9.2(B) and SECTION
9.2(C) are amended, in their entirety, to read, respectively, as follows:
(b) Pay or cause to be paid any principal of,
or any interest on, any of its Debt except (i) the Obligation,
(ii) any of its other Senior Debt if no Default or Potential
Default exists, (iv) the Subordinated Debentures (10-1/2%) if
no Default or Potential Default exists and regular, scheduled
payments of accrued interest on any other Subordinated Debt if
no Default or Potential Default exists or would result
therefrom, and (v) conversions of Subordinated Debt in
accordance with its terms to equity issued by Borrower.
(c) Amend, modify, renew or extend the terms
of the Subordinated Debentures (10-1/2%), or amend or modify
the terms of any other Subordinated Debt to any extent that
(i) any of the applicable subordination, payment blockage, or
standstill provisions are less favorable to Lenders than exist
for such Subordinated Debt on the date of its issuance, (ii)
the applicable representations, covenants, events of default,
and other provisions are significantly more onerous to
Borrower than exist for such Subordinated Debt on the date of
its issuance, or (iii) the net effective interest rate
applicable to such Subordinated Debt is increased or scheduled
or mandatory principal or sinking fund payment obligations
before the Stated-Termination Date are made applicable to such
Subordinated Debt.
1.7 Amendment to SECTION 10.3. SECTION 10.3 is amended, in its
entirety, to read as follows:
10.3 Coverage of Subordinated Debentures (10-1/2%).
The value of all investments of Borrower permitted pursuant to
paragraphs 1-8 on Schedule 9.8, plus all cash on hand, to be
less than $1,028,000.00 at any time during which any
Subordinated Debentures (10-1/2%) remain outstanding.
1.8 Amendment to Compliance Certificate. The last section (headed
"Section 10.3 Coverage of Subordinated Debt*") of EXHIBIT D-4 to the Credit
Agreement is amended, in its entirety, to read as follows:
4
<PAGE>
<TABLE>
<CAPTION>
COVENANT AT END OF SUBJECT PERIOD
================================================================================
<S> <C> <C>
Section 10.3 COVERAGE OF SUBORDINATED DEBENTURES
(10-1/2%)*
------------------------------------------------ ------------- -------------
(a) Investments (permitted pursuant $
to 1- 8 of Schedule 9.8 to
Credit Agreement) at the end
of the Subject Period ------------- -------------
(b) Cash Balance at the end of $
the Subject Period ------------- -------------
(c) SUM of Line (a) plus Line (b) $
------------- -------------
(d) MINIMUM $1,028,000.00
================================================================================
</TABLE>
* Covenant applicable only if any Subordinated Debentures
(10-1/2%) remain outstanding.
PARAGRAPH 2. AMENDMENT EFFECTIVE DATE. This Amendment shall be binding upon all
parties to the Loan Documents on the last day upon which the following has
occurred:
(a) Borrower shall have delivered to Agent true and
correct copies of (i) all documents evidencing or relating to the
issuance of that portion of the Subordinated Notes (12%) described in
CLAUSE (A) of the definition thereof, together with evidence that such
documents have been filed with all Governmental Authorities as may be
required under applicable Laws and that the transactions contemplated
thereby have been consummated; and
(b) Counterparts of this Amendment shall have been
executed and delivered to Agent by Borrower, Agent, and the Lenders or
when Agent shall have received telecopied, telexed, or other evidence
satisfactory to it that all such parties have executed and are
delivering to Agent counterparts thereof.
Upon satisfaction of the foregoing conditions, this Amendment shall be deemed
effective on and as of November 3, 1997 (the "AMENDMENT EFFECTIVE DATE");
provided, however, that if no portion of the Subordinated Notes (12%) have been
issued, or the foregoing conditions shall not have been fully satisfied, by
November 15, 1997, this Amendment shall be null and void ab initio and shall be
of no further effect.
PARAGRAPH 3. REPRESENTATIONS AND WARRANTIES. As a material inducement to Lenders
to execute and deliver this Amendment, Borrower hereby represents and warrants
to Lenders (with the knowledge and intent that Lenders are relying upon the same
in entering into this Amendment) the following: (a) the representations and
warranties in the Credit Agreement and in all other Loan Documents are true and
correct on the date hereof in all material respects, as though made on the date
hereof; (b) except for matters being waived in this Amendment, no Default or
Potential Default exists under the Loan Documents; and (c) the transactions
regarding the issuance, amount, terms and use of proceeds of the Subordinated
Notes (12%) have been accurately and completely described in the documents
provided to the Agent pursuant to PARAGRAPH 2(A) above.
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<PAGE>
PARAGRAPH 4. MISCELLANEOUS.
4.1 EFFECT ON LOAN DOCUMENTS. The Credit Agreement and all
related Loan Documents shall remain unchanged and in full force and effect,
except as provided in this Amendment, and are hereby ratified and confirmed. On
and after the Amendment Effective Date, all references to the "Credit Agreement"
shall be to the Credit Agreement as herein amended. The execution, delivery, and
effectiveness of this Amendment shall not, except as expressly provided herein,
operate as a waiver of any Rights of the Lenders under the Credit Agreement or
any Loan Documents, nor constitute a waiver under the Credit Agreement or any
other provision of the Loan Documents.
4.2 REFERENCE TO MISCELLANEOUS PROVISIONS. This Amendment and
the other documents delivered pursuant to this Amendment are part of the Loan
Documents referred to in the Credit Agreement, and the provisions relating to
Loan Documents set forth in SECTION 14 are incorporated herein by reference the
same as if set forth herein verbatim.
4.3 COSTS AND EXPENSES. Borrower agrees to pay promptly the
reasonable fees and expenses of counsel to Agent for services rendered in
connection with the preparation, negotiation, reproduction, execution, and
delivery of this Amendment.
4.4 COUNTERPARTS. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original for all
purposes, and all of which constitute, collectively, one agreement; but, in
making proof of this Amendment, it shall not be necessary to produce or account
for more than one such counterpart. It is not necessary that all parties execute
the same counterpart so long as identical counterparts are executed by Borrower,
each Lender, and Agent.
4.5 THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
AMONG THE PARTIES.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW.]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment in
multiple counterparts effective as of the Amendment Effective Date.
FORTUNE NATURAL RESOURCES
CORPORATION, as Borrower
By /s/ Tyrone J. Fairbanks
---------------------------------
Name Tyrone J. Fairbanks
---------------------------------
Title President and CEO
---------------------------------
CREDIT LYONNAIS NEW YORK BRANCH,
as Agent
By /s/ Philippe Soustra
---------------------------------
Name Philippe Soustra
---------------------------------
Title Senior Vice President
---------------------------------
LENDERS:
CREDIT LYONNAIS NEW YORK BRANCH,
as a Lender
By /s/ Philippe Soustra
---------------------------------
Name Philippe Soustra
---------------------------------
Title Senior Vice President
---------------------------------
7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBSCRIPTION AGREEMENT
IN CONNECTION WITH
FORTUNE NATURAL RESOURCES CORPORATION
Offering of
up to $3.5 Million
in Principal Amount of
Subordinated Convertible Promissory Notes
Placement Agent
J. ROBBINS SECURITIES, L.L.C.
1345 AVENUE OF THE AMERICAS
22ND FLOOR
NEW YORK, NEW YORK 10105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBSCRIPTION AGREEMENT
AND INVESTMENT LETTER
October 14, 1997
To the Board of Directors
Fortune Natural Resources Corporation
One Commerce Green
515 West Greens Road
Suite 720
Houston, Texas 77067
Re: Subscription to Purchase Notes of
Fortune Natural Resources Corporation
Gentlemen:
This will acknowledge that the undersigned hereby agrees to irrevocably purchase
from Fortune Natural Resources Corporation (the "Company" or " Fortune"), a
corporation organized under the laws of the State of Delaware, a convertible
subordinated note (the "Note") in the principal amount of $__________ . The Note
to be purchased by the undersigned is part of a private placement of securities
(the "Offering") by the Company of up to $3.5 million in aggregate principal
amount of Notes. The Offering is being made only to "accredited investors" as
defined herein on a $1.25 million aggregate principal amount minimum or none to
a $3.5 million aggregate principal amount maximum best efforts basis through
October 31, 1997. Based thereon, if $1.25 million in aggregate principal amount
of Notes is not sold and paid for on or prior to October 31, 1997 (unless
extended as provided below), the Offering will terminate and all funds collected
from subscribers will be promptly returned to them without interest thereon or
deduction therefrom. The Notes will be issued only in registered form in
denominations of $10,000 or integral multiples thereof and in such principal
amounts as shall be determined by the Company.
All funds collected from subscribers pending consummation or termination of the
Offering as set forth herein will be held in the escrow account described below.
The Company is required to obtain the permission of its primary lender, Credit
Lyonnais New York Branch (the "Bank"), in order to effect this Offering.
Accordingly, no funds will be released from the escrow account to the Company
unless the Bank's written permission is obtained or the Company determines to
repay the Bank in full with the proceeds of this Offering. As of September 30,
1997, the Company owed the Bank $865,000.
If all of the Notes are sold, the Company will receive aggregate gross proceeds
of $3.5 million less the expenses of this Offering which management estimates
will approximate $485,000, including the fee and expense allowance payable to J.
Robbins Securities, LLC (the "Placement Agent") described below. The Placement
Agent, a member of the National Association of Securities Dealers, Inc. (the
"NASD"), is acting as the placement
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<PAGE>
agent for the Company in placing this Offering. The Offering will terminate on
the sooner to occur of the sale of all of the Notes or October 31, 1997, unless
extended through December 1, 1997 by the mutual consent of the Company and the
Placement Agent.
THE UNDERSIGNED UNDERSTANDS THAT THE INFORMATION PROVIDED TO HIM WITH RESPECT TO
THE COMPANY HAS NOT BEEN INDEPENDENTLY VERIFIED BY THE PLACEMENT AGENT.
ACCORDINGLY, THERE IS NO REPRESENTATION BY THE PLACEMENT AGENT AS TO THE
COMPLETENESS OR ACCURACY OF SUCH INFORMATION.
The Placement Agent will receive a fee equal to 10% and a non-accountable
expense allowance equal to 3% of the aggregate principal amount of the Notes
sold. It will also be granted, for nominal consideration, the right, exercisable
over a five year period commencing on the last closing date of the Offering, to
purchase a number of shares of the Common Stock equal to 10% of the aggregate
gross proceeds of the Offering proceeds received by the Company, divided by 3.6.
The exercise price, subject to adjustment, will be $3.60 per share.
Barry W. Blank, who currently owns 279,200 shares of the Company's common stock
and warrants to purchase an additional 432,113 shares, is a registered
representative employed by the Placement Agent as the manager of its Phoenix,
Arizona branch office. Mr. Blank is participating in marketing the Offering.
Neither the Company nor the Placement Agent has obtained any independent opinion
relating to the fairness of the terms of this Offering or the compensation to be
paid to the Placement Agent for the services it will render in connection
herewith.
Barry Feiner, a director of Fortune, is acting as counsel to the Placement Agent
with respect to this Offering. Mr. Feiner has also represented Mr. Blank for
approximately ten years. Because of the possibility that allegations of conflict
of interest could be raised in this situation, Mr. Feiner has recused himself
from voting on all Fortune board of director matters associated with this
Offering.
PAYMENT FOR THE UNITS SHALL BE MADE BY CHECK PAYABLE TO "FORTUNE ESCROW ACCOUNT"
and delivered to the Placement Agent, together with an executed copy of this
Subscription Agreement and Investment Letter and the Purchaser Questionnaire
appended hereto as EXHIBIT A. Payment may be made by wire transfer pursuant to
instructions available on request from the Placement Agent.
The Notes will mature on December 31, 2007. They will bear annual interest at
the rate of 12%, payable quarterly, commencing January 1, 1998. The interest
will be computed on the basis of a 360 day year of twelve 30-day months. The
Notes will be subordinated to "Senior Debt" as defined therein. As of September
30, 1997, Senior Debt aggregated $1,893,000. The Notes will not be personally
guaranteed and there will be no sinking fund, trustee or indenture with respect
thereto.
2
<PAGE>
Each Note will be convertible, unless previously redeemed, into the Company's
common stock, par value $0.01, (the "Common Stock") after April 30, 1999, at a
price equal to the lower of (i) the higher of $3.00 per share or the average of
the daily "Closing Price" of the Common Stock, as defined in the Note, for the
20 consecutive trading days prior to the first closing date of the Offering, or
(ii) 110% above the average daily Closing Price of the Common Stock for the 60
calendar day period immediately preceding May 1, 1999. Each Note holder will
also have, on one occasion only, an "Alternate Conversion Right," as defined in
the Note, in the event that the Company should issue shares below the conversion
price prior to May 1, 1999. The conversion rate will be subject to adjustment in
accordance with appropriate anti-dilution provisions. Notes called for
redemption will be convertible to the close of business on the day before the
date fixed for redemption. Note holders will forfeit the accrued interest for
the then-current period on Notes surrendered for conversion. No cash or
fractional shares will be issued on conversion.
The Notes will be non-redeemable prior to May 1, 1999. Thereafter they will be
redeemable in whole or part on 30 days notice at the option of the Company
commencing at 110% of par, plus accrued interest, and declining at the rate of
.056% per month to par on November 1, 2000, plus accrued interest.
For a complete description of the terms of the Notes, reference is made to the
form of Note attached hereto as EXHIBIT B.
The holders of a majority of the shares of Common Stock into which the Notes may
be converted (the "Underlying Shares") shall have the right, on one occasion
only commencing on January 1, 1999 and terminating one year after the date on
which all of the Notes have been repaid and/or converted, to demand that the
Company register the Underlying Shares with the Securities and Exchange
Commission (the "Commission") and use its best efforts to have such registration
statement declared effective. The Company will also grant the Note purchasers
certain "piggy back" registration rights with respect to the Underlying Shares.
Anything to the contrary not withstanding, the Company shall not be required to
register any Underlying Shares which, in the reasonable opinion of the Company's
counsel, may be sold pursuant to the exemption from registration provided by
Section (k) of Rule 144.
The undersigned acknowledges that the Note he is purchasing, as well as any
Underlying Shares into which the Note may be converted, have not been registered
under the Securities Act of 1933 (the "Securities Act") or qualified under
applicable state securities laws and that the transferability thereof is
restricted by the registration provisions of the Securities Act as well as such
state laws. Based upon the representations and agreements being made by him
herein, the Note is being sold to him pursuant to an exemption from such
registration provided by Section 4 (2) of the Securities Act and applicable
state securities law qualification exemptions. The undersigned further
acknowledges that the basis for these exemptions may not be available if,
notwithstanding such representations, he intends merely acquiring these
securities for a fixed or determinable period in the future, or for a market
rise, or for sale if the market does not rise. The undersigned
3
<PAGE>
represents and warrants that he does not have any such intention. The
undersigned agrees that the documentation representing the Note to be received
by him, as well as the certificates representing any Underlying Shares, will
bear a legend indicating that transfer of these securities is restricted by
reason of the fact that they have not been so registered or qualified.
The undersigned represents that he is acquiring the Note, and will acquire the
Underlying Shares if he should convert the Note, solely for his own account as
principal and not as a nominee or agent, for investment purposes only and not
with a view to resale or other distribution or fractionalization thereof, nor
with the intention of selling, transferring or otherwise disposing of all or any
part of such securities for any particular event or circumstance, except
selling, transferring or disposing of them upon full compliance with all
applicable provisions of the Securities Act, the Securities Exchange Act of 1934
(the "Exchange Act"), the Rules and Regulations promulgated by the Commission
thereunder, and any applicable state securities laws. The undersigned further
understands and agrees that (i) the securities may be sold only if they are
subsequently registered under the Securities Act and qualified under any
applicable state securities laws or, in the opinion of the Company's counsel, an
exemption from such registration and qualification is available; (ii) any
routine sales of securities made in reliance upon Rule 144 can be made only in
the amounts set forth in and pursuant to the other terms and conditions,
including applicable holding periods, of that Rule; and (iii) the Company is
under no obligation to assist him in complying with any exemption from
registration under the Securities Act, or, except as otherwise set forth herein,
to register the Note or Underlying Shares on his behalf.
The undersigned represents and warrants that he has received (i) a copy of the
Form of the Note appended hereto as EXHIBIT B; (ii) a copy of the Company's Form
10-K for the fiscal year ended December 31, 1996 appended hereto as EXHIBIT C;
(iii) a copy of the Company's Form 8-K dated March 24, 1997 appended hereto as
EXHIBIT D; (iv) a copy of the Company's Form 8-K dated April 7 1997 appended
hereto as EXHIBIT E; (v) a copy of the Company's Form 8-K dated April 18 1997
appended hereto as EXHIBIT F; (vi) a copy of the Company's Form 10-Q for the
quarter ended March 31, 1997 appended hereto as EXHIBIT G; (vii) a copy of the
Company's Form 8-K dated June 16, 1997 appended hereto as EXHIBIT H; (viii) a
copy of the Company's Form 10-Q for the quarter ended June 30, 1997 appended
hereto as EXHIBIT I; (ix) a Description of Risk Factors relating to the Company
and this Offering appended hereto as EXHIBIT J; (x) a Schedule of the Use of
Proceeds of this Offering appended hereto as EXHIBIT K; and (xi) a Description
of the Company appended hereto as EXHIBIT L, (all of the foregoing documents and
the Subscription Agreement collectively are hereinafter referred to as the
"Information Documents") and that he has read and understood all of these
documents.
The undersigned also represents and warrants that he (i) has reviewed such other
documents and obtained such other information from the Company as he deems
necessary in order for him to make an informed investment decision; (ii) has had
access
4
<PAGE>
to all relevant documents, instruments, books, and other records of or
pertaining to the Company and has had the opportunity to ask questions of and
receive answers from management and other representatives of the Company; and
(iii) is fully aware of the current business prospects, financial condition, and
operating history as set forth herein and in the Information Documents relating
to the Company. Except as may be provided in this Subscription Agreement and
Investment Letter and in the Information Documents, he warrants that no
representations, statements or inducements were made to him to purchase the
Note.
The undersigned understands that this Subscription agreement and Investment
Letter and the other Information Documents contain forward-looking statements
within the meaning of Section 27A of the Securities Act. 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. They are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties. Accordingly, 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 in the
Description of Risk Factors appended hereto as EXHIBIT J.
THE UNDERSIGNED UNDERSTANDS THAT, BECAUSE OF THE SIGNIFICANT RISK FACTORS SET
FORTH HEREIN OR IN THE OTHER INFORMATION DOCUMENTS, IF THE OFFERING IS
CONSUMMATED, HE COULD LOSE HIS ENTIRE INVESTMENT.
The undersigned also understands the following:
THE NOTES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY STATE
SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM
THE REGISTRATION REQUIREMENTS OF THESE LAWS. THE NOTES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSION OR ANY STATE SECURITIES REGULATORY AUTHORITY NOR
HAS THE COMMISSION OR ANY SUCH AUTHORITY PASSED UPON OR ENDORSED THE MERITS OF
THE OFFERING OR THE ACCURACY OR ADEQUACY OF THIS SUBSCRIPTION AGREEMENT AND
INVESTMENT LETTER AND/OR THE INFORMATION DOCUMENTS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION
OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING,
INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN
RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION
5
<PAGE>
OR REGULATORY AUTHORITY. FURTHERMORE THE FOREGOING AUTHORITIES HAVE NOT
CONFIRMED THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT, AND THE APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT
THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME.
FLORIDA RESIDENTS ARE ADVISED THAT THESE SECURITIES HAVE NOT BEEN REGISTERED
WITH THE STATE OF FLORIDA. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PURSUANT TO SECTION 517.061 (11) (A) OF THE FLORIDA SECURITIES AND INVESTOR
PROTECTION ACT, THE SALE OF SHARES TO A FLORIDA RESIDENT SHALL BE VOIDABLE BY
THE PURCHASER EITHER (I) WITHIN THREE DAYS AFTER THE FIRST TENDER OF
CONSIDERATION IS MADE BY THE PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER OR
AN ESCROW AGENT, OR (II) WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT
PRIVILEGE HAS BEEN COMMUNICATED TO THE PURCHASER, WHICHEVER OCCURS FIRST,
PROVIDED, HOWEVER, THAT THERE ARE MORE THAN FIVE FLORIDA PURCHASERS. TO
ACCOMPLISH SUCH WITHDRAWAL, A FLORIDA RESIDENT NEED ONLY SEND A LETTER OR A
TELEGRAM TO THE COMPANY AT 515 WEST GREENS ROAD, SUITE 720, HOUSTON, TEXAS 77067
INDICATING HIS OR HER INTENTION TO WITHDRAW. SUCH LETTER OR TELEGRAM MUST BE
SENT AND POSTMARKED PRIOR TO THE END OF THE APPLICABLE PERIOD NOTED ABOVE. IF A
LETTER IS SENT, IT IS PRUDENT TO SEND IT BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, TO INSURE THAT IT IS RECEIVED AND ALSO TO EVIDENCE THE TIME AND DATE
OF MAILING. IF A FLORIDA RESIDENT MAKES THIS REQUEST ORALLY, HE OR SHE SHOULD
ASK FOR WRITTEN CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED.
THIS SUBSCRIPTION AGREEMENT AND INVESTMENT LETTER AND THE INFORMATION DOCUMENTS
HAVE NOT BEEN FILED WITH OR REVIEWED BY THE NEW JERSEY BUREAU OF SECURITIES OR
THE DEPARTMENT OF LAW AND PUBLIC SAFETY OF THE STATE OF NEW JERSEY PRIOR TO ITS
ISSUANCE AND USE. NEITHER THE ATTORNEY GENERAL NOR THE BUREAU OF SECURITIES OF
THE STATE OF NEW JERSEY HAS PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
6
<PAGE>
THIS SUBSCRIPTION AGREEMENT AND INVESTMENT LETTER AND THE INFORMATION DOCUMENTS
HAVE NOT BEEN REVIEWED BY THE ATTORNEY GENERAL OF THE STATE OF NEW YORK PRIOR TO
THEIR ISSUANCE AND USE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
THE UNDERSIGNED MAY NOT CONSTRUE THE INFORMATION DOCUMENTS OR ANY COMMUNICATIONS
IN CONNECTION THEREWITH AS LEGAL, TAX OR FINANCIAL ADVICE AND, ACCORDINGLY, MUST
CONSULT HIS OWN LEGAL, ACCOUNTING AND/OR FINANCIAL ADVISERS WITH RESPECT TO
LEGAL, TAX AND RELATED MATTERS CONCERNING THIS INVESTMENT.
NOTES SHOULD NOT BE PURCHASED BY ANY INVESTORS SEEKING TAX ADVANTAGES. THIS
INVESTMENT IS NOT A TAX SHELTER SINCE IT DOES NOT PROVIDE DEDUCTIONS WHICH WOULD
BE AVAILABLE TO REDUCE INCOME FROM OTHER SOURCES. ACCORDINGLY, A DECISION TO
PURCHASE THE NOTES SHOULD BE BASED SOLELY ON THE UNDERSIGNED'S EVALUATION OF THE
ECONOMIC CONSIDERATIONS OF THE TRANSACTION.
In connection with the subscription being made hereby the undersigned also
warrants and represents that:
(a) He has not received any general solicitation or advertising regarding
the Offering or been furnished with any oral representation or oral information
in connection with the Offering which is not set forth herein or in the
Information Documents;
(b) He has sufficient knowledge and experience of financial and business
matters so that he is able to evaluate the merits and risks of purchasing the
Note and has determined that the Note is a suitable investment for him;
(c) He has the means to provide for his personal needs, possesses the
ability to bear the economic risk hereunder indefinitely, and can afford a
complete loss of his investment;
(d) He has carefully read and reviewed this Subscription Agreement and
Investment Letter, the form of Note, and the other Information Documents, and
has asked such questions of the Company's management and received from them such
information as he deems necessary in order for him to make an informed decision
with respect to the purchase of the Note;
7
<PAGE>
(e) He understands the meaning of the 12th and 13th paragraphs of this
Subscription Agreement and Investment Letter and that the Company will prohibit
the transfer of the undersigned's Note and Underlying Shares absent full
compliance with the Securities Act, the Exchange Act and all applicable state
securities laws;
(f) He has had substantial experience in previous private and public
purchases of speculative securities and is not relying on the Company, the
Placement Agent and/or any of their respective affiliates or attorneys with
respect to economic or other considerations involved in this investment; and
(g) He has reviewed carefully the definition of "accredited investor" as
set forth below and is an "accredited investor" within that definition. The
particular subparagraph or subparagraphs by which the undersigned qualifies as
such is (are) filled in by him below.
8
<PAGE>
DEFINITION OF ACCREDITED INVESTOR
The undersigned represents that he is an "accredited investor" as that term is
defined in Rule 501 (a) of Regulation D promulgated under the Securities Act as
follows (CHECK APPLICABLE BOXES):
| | (a) Certain banks, savings and loan institutions,
broker-dealers, investment companies and other entities
including an employee benefit plan within the meaning of Title
I of the Employee Retirement Income Security Act of 1974 with
total assets in excess of $5,000,000; any private business
development company as defined in Section 202 (a) (22) of the
Investment Advisers Act of 1940; any organization described in
Section 501 (c) (3) of the Internal Revenue Code, not formed
for the specific purpose of acquiring the Units, with total
assets in excess of $5,000,000; any director, executive
officer or general partner of the issuer of the securities
being offered or sold, or any director, executive officer or
general partner of a general partner of that issuer; or any
trust with total assets in excess of $5,000,000 not formed for
the specific purpose of acquiring the securities offered,
whose purchase is directed by a sophisticated person as
described in Section 230.506 (b) (2) (ii) of Regulation D
| | (b) Any natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of his
purchase exceeds $1,000,000;
| | (c) Any natural person who had an individual income in excess
of $200,000 or, with that person's spouse a joint income in
excess of $300,000 in each of the two most recent years and
who reasonably expects an income in excess of $200,000, or
$300,000 with that person's spouse, in the current year; or
| | (d) Any entity in which all of the equity owners are
accredited investors under any of the paragraphs above.
In connection with the foregoing representations the undersigned has appended
hereto as EXHIBIT A, a Purchaser Questionnaire which he has completed and
executed. He represents and warrants that the information set forth therein as
well as all other information which he is furnishing to the Company with respect
to his financial condition and business experience is accurate and complete as
of the date hereof and he covenants that, in the event a material change should
occur in such information, he will immediately provide the Company with such
revised or corrected information.
9
<PAGE>
All notices, requests, demands and other communications under this Subscription
Agreement shall be in writing and shall be deemed to have been given only when
delivered in person or, if mailed, when mailed by certified or registered mail
prepaid, to the parties at their respective addresses set forth herein, or at
such other address as my be given in writing in future by either party to the
other.
The undersigned acknowledges and agrees that:
(a) He has full power and authority to enter into this Agreement which,
upon his execution, will constitute a valid and legally binding obligation by
him;
(b) The Company may, in its sole discretion (i) reject this
Subscription Agreement in whole or in part; and (ii) accept subscription
agreements other than in the order received;
(c) If for any reason this Offering does not close or the undersigned's
subscription is not accepted by the Company, the undersigned shall have no
claims against the Company, the Placement Agent, or their respective officers,
directors, employees or affiliates and shall have no interest in the Notes,
Underlying Shares or the Company;
(d) Neither he nor any affiliate of his is an officer, director,
employee or affiliate of any member of the NASD;
(e) He shall indemnify and hold harmless the Company, the Placement
Agent and their respective officers, directors, employees, affiliates and
attorneys against any loss, liability, claim, damage or expense, (including, but
not limited to, any and all expenses reasonably incurred in investigating,
preparing or defending against any litigation commenced or threatened or any
claim) arising out of or based upon any false representation or warranty or
breach or failure by the undersigned to comply with any covenant or agreement
made by him herein or in any other document provided by him to any of the
foregoing in connection with this transaction;
(f) The representations, warranties and agreements made by the
undersigned set forth herein shall survive the closing of the Offering;
(g) Neither this Subscription Agreement nor any provisions hereof shall
be modified, discharged or terminated except by an instrument in writing signed
by the party against whom any waiver, change, discharge or termination is
sought;
(h) The laws of the State of Texas shall govern the interpretation and
enforcement of this Subscription Agreement. In the event of a dispute, the
undersigned agrees that any law suit brought to enforce or interpret the
provisions hereof shall be brought in state or federal courts, as appropriate,
in Harris County, Texas, and the undersigned agrees to submit to the personal
jurisdiction of such court;
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(i) This Subscription Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which shall constitute the same
instrument; and
(j) This Subscription Agreement constitutes the entire agreement of the
parties hereto, and supersedes all prior understandings with respect to the
subject matter hereof.
THE UNDERSIGNED ACKNOWLEDGES THAT THIS SUBSCRIPTION AGREEMENT CONSISTS OF PAGES
AND INCLUDES EXHIBITS A THROUGH L.
11
<PAGE>
A. SUBSCRIPTION;
Principal amount of Notes $_________________
B. MANNER IN WHICH TITLE IS TO BE HELD (Please check One):
1. | | Individual 7. | | Trust/Estate/Pension or
Profit Sharing Plan, and
date Opened:______________
2. | | Joint Tenants with Right of 8. | | As a Custodian for________
Survivorship __________________________
UGMA __________(State)
3. | | Community Property
4. | | Tenants in Common 9. | | Married with
Separate Property
5. | | Corporation/Partnership 10. | | Keogh
6. | | IRA 11. | | Tenants by the Entirety
12. Other _________________________________________________________________
12
<PAGE>
C. TITLE:
PLEASE GIVE THE EXACT AND COMPLETE NAME IN WHICH TITLE TO THE NOTES ARE TO BE
HELD:
IN WITNESS WHEREOF, the Subscriber has executed this Agreement on the ________
day of ________________, 1997.
Signature: ____________________ Signature: _____________________
Name: __________________________ Name: __________________________
Title (if applicable): _________________________________________________
Street Address: _______________________________________________________
City: ______________________ State: ___________ ZIP: __________
Telephone: (___) _____________________
Social Security or Federal Tax ID Number: _____________________________
***DO NOT WRITE BELOW DOTTED LINE***
- --------------------------------------------------------------------------------
ACCEPTED ON BEHALF OF THE COMPANY:
FORTUNE NATURAL RESOURCES CORPORATION
BY: ________________________________ No. of Notes: ____________
Name: Tyrone J. Fairbanks Aggregate Principal
Title: President and Chief Amount of Note: __________
Executive Officer
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