FORM OF CONVERTIBLE SUBORDINATED NOTE

 

 

                          CONVERTIBLE SUBORDINATED NOTE

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITY REPRESENTED BY THIS NOTE NOR THE

SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE BEEN REGISTERED UNDER THE

SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE

SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE

ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE

SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY

ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS

SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE

FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN

ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY

TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE,

INCLUDING SECTIONS 3(c)(iii) AND 13(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED

BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF

MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION

3(c)(iii) OF THIS NOTE.

 

                          CONVERTIBLE SUBORDINATED NOTE

 

Issuance Date: November 17, 2005                       Principal: U.S. $25,000,000

 

      FOR VALUE RECEIVED, DUNE ENERGY, INC., a Delaware corporation (the

"Company"), hereby promises to pay to the order of ITERA HOLDINGS BV, a

Netherlands company, or registered assigns ("Holder") the amount set out above

as the Principal (as reduced pursuant to the terms hereof pursuant to

conversion, the "Principal"), as shall have been advanced from time to time from

the Holder to the Company (as may be set forth in Schedule A to this Note), when

due, whether upon the Maturity Date (as defined below), acceleration or

otherwise (in each case in accordance with the terms hereof) and to pay interest

("Interest") on any outstanding Principal at the rate set forth in Section 2

(the "Interest Rate"), from the date set out above as the Issuance Date (the

"Issuance Date") until the same becomes due and payable, whether upon an

Interest Date (as defined below), the Maturity Date, acceleration, conversion or

otherwise (in each case in accordance with the terms hereof). This Convertible

Subordinated Note (this "Note"), including all Convertible Subordinated Notes

issued in exchange, transfer or replacement hereof, and convertible subordinated

notes issued in connection with the payment of Interest as provided in Section 2

are, collectively, the "Notes". Reference to this "Note" and the "Notes" shall

be used interchangeably in this Note where applicable. Certain capitalized terms

are defined in Section 23.

 

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      1. MATURITY. On the later of the Maturity Date or the date on which all of

the Senior Obligations have been paid in full and all commitments under the

Senior Credit Facility cancelled , the Holder shall surrender this Note to the

Company and the Company shall pay to the Holder an amount in cash representing

all outstanding Principal, accrued and unpaid Interest and accrued and unpaid

Late Charges, if any. The Maturity Date shall be November 17, 2009 (the

"Maturity Date").

 

      2. INTEREST; INTEREST RATE.

 

            (a) The Interest Rate shall be as follows: (a) commencing on the

Issuance Date and continuing to (but not including) the first anniversary

thereof, the rate per annum equal to eleven and one-half percent (11-1/2%); (b)

with respect to the period commencing on the first anniversary of the Issuance

Date and continuing to (but not including) the second anniversary date thereof,

the rate per annum equal to twelve percent (12%); and (c) thereafter until the

Term Loan of the holder of the Senior Credit Facility is paid in full at the

rate per annum equal to twelve and one-half percent (12-1/2%). From the time the

Term Loan of the holder of the Senior Credit Facility is paid in full until the

Maturity Date, the rate per annum shall be equal to the Prime Rate plus five

percent (5%) (but not to exceed the maximum rate of twelve percent (12%) per

annum).

 

            (b) Interest on this Note shall commence accruing on the Issuance

Date and shall be computed on the basis of a 365-day year and actual days

elapsed and shall be payable in arrears on the first day of each Calendar

Quarter and on the Maturity Date during the period beginning on the Issuance

Date and ending on, and including, the Maturity Date (each, an "Interest Date").

Interest shall be payable on each Interest Date as follows: (1) fifty percent

(50%) of the Interest shall be paid in cash and (2) fifty percent (50%) shall be

paid in convertible subordinated notes, each having the same terms and

conditions of this Note, except that the principal amount of such convertible

subordinated notes shall be the amount of interest which is the subject thereof

and all payments thereunder shall be deferred until the Maturity Date. Prior to

the payment of Interest on an Interest Date, Interest on this Note shall accrue

at the Interest Rate and be payable by way of inclusion of the Interest in the

Conversion Amount in accordance with Section 3(b)(i). From and after the

occurrence of an Event of Default, the Interest Rate shall be 14%. In the event

that such Event of Default is subsequently cured, the adjustment referred to in

the preceding sentence shall cease to be effective as of the date of such cure;

provided that the Interest as calculated at such increased rate during the

continuance of such Event of Default shall continue to apply to the extent

relating to the days after the occurrence of such Event of Default through and

including the date of cure of such Event of Default.

 

<PAGE>

 

      3. CONVERSION OF NOTES. This Note and any Notes issued for the payment of

Interest shall be convertible into shares of the Company's common stock, par

value $0.001 per share (the "Common Stock"), on the terms and conditions set

forth in this Section 3.

 

            (a) Conversion Right. Subject to the provisions of Section 3(d), at

any time or times on or after the Issuance Date, the Holder shall be entitled to

convert any portion of the outstanding and unpaid Conversion Amount (as defined

below) in increments of at least $100,000 of Principal (or such lesser amount if

such amount represents the remaining Principal amount) into fully paid and

nonassessable shares of Common Stock in accordance with Section 3(c), at the

Conversion Rate (as defined below). The Company shall not issue any fraction of

a share of Common Stock upon any conversion. If the issuance would result in the

issuance of a fraction of a share of Common Stock, the Company shall round such

fraction of a share of Common Stock up to the nearest whole share. The Company

shall pay any and all taxes that may be payable with respect to the issuance and

delivery of Common Stock upon conversion of any Conversion Amount.

 

            (b) Conversion Rate. The number of shares of Common Stock issuable

upon conversion of any Conversion Amount pursuant to Section 3(a) shall be

determined by dividing (x) such Conversion Amount by (y) the Conversion Price

(as defined below) (the "Conversion Rate").

 

                  (i) "Conversion Amount" means the sum of (A) the portion of

            the Principal to be converted or otherwise with respect to which

            this determination is being made, (B) accrued and unpaid Interest

            with respect to such Principal and (C) accrued and unpaid Late

            Charges with respect to such Principal and Interest.

 

                  (ii) "Conversion Price" means, as of any Conversion Date (as

            defined below) or other date of determination, and subject to

            adjustment as provided herein, the lesser of 2.5 times (X) $1.85 or

            (Y) the price per share of Common Stock sold by the Debtor in the

            first offering of its Common Stock after the Issuance Date.

 

            (c) Mechanics of Conversion.

 

                  (i) Optional Conversion. To convert any Conversion Amount into

            shares of Common Stock on any date (a "Conversion Date"), the Holder

            shall (A) transmit by facsimile (or otherwise deliver), for receipt

            on or prior to 11:59 p.m., Eastern Standard Time, on such date, a

            copy of an executed notice of conversion in the form attached hereto

             as Exhibit I (the "Conversion Notice") to the Company and (B) if

            required by Section 3(c)(iii), surrender this Note to a common

            carrier for delivery to the Company as soon as practicable on or

            following such date (or an indemnification undertaking with respect

            to this Note in the case of its loss, theft or destruction). On or

            before the first Business Day following the date of receipt of a

            Conversion Notice, the Company shall transmit by facsimile a

            confirmation of receipt pursuant to the form attached hereto as

            Exhibit II (the "Acknowledgement") of such Conversion Notice to the

            Holder and the Company's transfer agent (the "Transfer Agent"). On

             or before the second Business Day following the date of receipt of a

 

<PAGE>

 

            Conversion Notice (the "Share Delivery Date"), the Company shall (X)

            credit such aggregate number of shares of Common Stock to which the

             Holder shall be entitled to the Holder's or its designee's balance

            account with Depository Trust Company ("DTC") through its Deposit

            Withdrawal Agent Commission system or (Y) if the Transfer Agent is

            not participating in DTC Fast Automated Securities Transfer Program,

            issue and deliver to the address as specified in the Conversion

            Notice, a certificate, registered in the name of the Holder or its

            designee, for the number of shares of Common Stock to which the

            Holder shall be entitled. If the Note(s) is physically surrendered

            for conversion as required by Section 3(c)(iii) and the outstanding

            Principal of the Note(s) is greater than the Principal portion of

            the Conversion Amount being converted, then the Company shall as

            soon as practicable and in no event later than three Business Days

            after receipt of the Note(s) and at its own expense, issue and

            deliver to the holder a new Note (in accordance with Section 19(d))

            representing the outstanding Principal not converted. The Person or

            Persons entitled to receive the shares of Common Stock issuable upon

            a conversion of the Note(s) shall be treated for all purposes as the

            record holder or holders of such shares of Common Stock on the

            Conversion Date.

 

                  (ii) Company's Failure to Timely Convert. If the Company shall

            fail to issue a certificate to the Holder or credit the Holder's

            balance account with DTC for the number of shares of Common Stock to

            which the Holder is entitled upon conversion of any Conversion

            Amount on or prior to the date which is five Business Days after the

            Conversion Date (a "Conversion Failure"), then (A) the Company shall

            pay damages to the Holder for each date of such Conversion Failure

            in an amount equal to 1.0% of the product of (I) the sum of the

            number of shares of Common Stock not issued to the Holder on or

            prior to the Share Delivery Date and to which the Holder is

            entitled, and (II) the Closing Sale Price of the Common Stock on the

            Share Delivery Date and (B) the Holder, upon written notice to the

            Company, may void its Conversion Notice with respect to, and retain

            or have returned, as the case may be, any portion of the Note(s)

            that has not been converted pursuant to such Conversion Notice;

            provided that the voiding of a Conversion Notice shall not affect

            the Company's obligations to make any payments which have accrued

            prior to the date of such notice pursuant to this Section 3(c)(ii)

            or otherwise.

 

                  (iii) Book-Entry. Notwithstanding anything to the contrary set

            forth herein, upon conversion of any portion of the Note(s) in

            accordance with the terms hereof, the Holder shall not be required

            to physically surrender the Note(s) to the Company unless (A) the

            full Conversion Amount represented by the Note(s) is being converted

            or (B) the Holder has provided the Company with prior written notice

            (which notice may be included in a Conversion Notice) requesting

 

<PAGE>

 

            physical surrender and reissue of the Note(s). The Holder and the

            Company shall maintain records showing the Principal, Interest and

            Late Charges converted and the dates of such conversions or shall

            use such other method, reasonably satisfactory to the Holder and the

            Company, so as not to require physical surrender of the Note(s) upon

            conversion.

 

      4. RIGHTS UPON EVENT OF DEFAULT.

 

            Event of Default. Each of the following events shall constitute an

"Event of Default":

 

            (a) in the event the Senior Obligations have been paid in full and

all commitments under the Senior Credit Facility cancelled,, then the suspension

from trading or failure of the Common Stock to be listed on the Principal Market

for a period of five consecutive Trading Days or for more than an aggregate of

seven Trading Days in any 365-day period;

 

            (b) the Company's (A) failure to cure a Conversion Failure by

delivery of the required number of shares of Common Stock within twenty (20)

Business Days after the applicable Conversion Date or (B) notice, written or

oral, to any holder of the Notes, including by way of public announcement or

through any of its agents, at any time, of its intention not to comply with a

request for conversion of any Notes into shares of Common Stock that is tendered

in accordance with the provisions of the Notes;

 

            (c) the Company's failure to pay to the Holder any amount of

Principal, Interest, Late Charges or other amounts when and as due under the

Notes, the Term Loan Agreement or any other agreement, document, certificate or

other instrument delivered in connection with the transactions contemplated

hereby and thereby to which the Holder is a party, except, in the case of a

failure to pay Interest and Late Charges when and as due, in which case only if

such failure continues for a period of at least five Business Days;

 

            (d) the Company or any of its Subsidiaries, pursuant to or within

the meaning of Title 11, U.S. Code, or any similar Federal or state law for the

relief of debtors (collectively, "Bankruptcy Law"), (A) commences a voluntary

case, (B) consents to the entry of an order for relief against it in an

involuntary case, (C) consents to the appointment of a receiver, trustee,

assignee, liquidator or similar official (a "Custodian"), (D) makes a general

assignment for the benefit of its creditors or (E) admits in writing that it is

generally unable to pay its debts as they become due;

 

            (e) a court of competent jurisdiction enters an order or decree

under any Bankruptcy Law that (A) is for relief against the Company or any of

its Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company

or any of its Subsidiaries or (C) orders the liquidation of the Company or any

of its Subsidiaries;

 

<PAGE>

 

            (f) in the event the Senior Obligations have been paid in full and

all commitments under the Senior Credit Facility cancelled, then a final

judgment or judgments for the payment of money aggregating in excess of $500,000

are rendered against the Company or any of its Subsidiaries and which judgments

are not, within 60 days after the entry thereof, bonded, discharged or stayed

pending appeal, or are not discharged within 60 days after the expiration of

such stay; provided, however, that any judgment which is covered by insurance or

an indemnity from a credit worthy party shall not be included in calculating the

$500,000 amount set forth above so long as the Company provides the Holder a

written statement from such insurer or indemnity provider (which written

statement shall be reasonably satisfactory to the Holder) to the effect that

such judgment is covered by insurance or an indemnity and the Company will

receive the proceeds of such insurance or indemnity within 30 days of the

issuance of such judgment;

 

            (g) any representation or warranty made or deemed made by or on

behalf of the Company or in connection with this Note, the Notes related to the

payment of Interest, the Term Loan Agreement, or any other agreement, document,

certificate or other instrument delivered in connection with the transactions

contemplated thereby and hereby, shall prove to have been materially incorrect

when made or deemed made;

 

            (h) any event or condition occurs that results in the Senior

Obligations becoming due prior to its scheduled maturity or that enables or

permits the holder or holders of the Senior Obligations or any trustee or agent

on its or their behalf (with or without the giving of notice, the lapse of time

or both) to cause all of the Senior Obligations to become due, or to require the

Redemption (as defined in the Credit Agreement) of all of the Senior Obligations

or any offer to Redeem (as defined in the Credit Agreement) to be made in

respect of all of the Senior Obligations, prior to its scheduled maturity or

require the Company to make an offer in respect thereof; provided that to the

extent that any such event or condition is cured or waived under the Senior

Credit Facility, then such event or condition shall not constitute and Event of

Default under this Note (in the event the Senior Obligations have been paid in

full and all commitments under the Senior Credit Facility cancelled, the terms

and conditions set forth in the Credit Agreement shall continue to be applicable

and deemed incorporated herein by reference as if the Senior Obligations were

still outstanding); or

 

            (i) the Company shall fail to observe or perform any covenant,

condition or agreement contained in Sections 5 (so long as the Senior

Obligations have been paid in full and all commitments under the Senior Credit

Facility cancelled), 6, 7 and 8 of this Note or any other provision of this Note

not otherwise encompassed by Section 4 hereof, the Notes related to the payment

of Interest, the Term Loan Agreement, or any other agreement, document,

certificate or other instrument delivered in connection with the transactions

contemplated thereby and hereby to which the Holder is a party, except, in the

case of a breach of a covenant or other term or condition which is curable, only

if such breach continues for a period of at least twenty (20) consecutive

Business Days.

 

<PAGE>

 

      5. RIGHTS UPON CHANGE OF CONTROL.

 

            In the event the Senior Obligations have been paid in full and all

commitments under the Senior Credit Facility cancelled, then the following shall

apply:

 

            (a) Change of Control. Each of the following events shall constitute

a "Change of Control":

 

                  (i) the consolidation, merger or other business combination

            (including, without limitation, a reorganization or

             recapitalization) of the Company with or into another Person (other

            than (A) a consolidation, merger or other business combination

            (including, without limitation, reorganization or recapitalization)

            in which holders of the Company's voting power immediately prior to

            the transaction continue after the transaction to hold, directly or

            indirectly, the voting power of the surviving entity or entities

            necessary to elect a majority of the members of the board of

            directors (or their equivalent if other than a corporation) of such

            entity or entities, or (B) pursuant to a merger effected solely for

            the purpose of changing the jurisdiction of incorporation of the

            Company);

 

                  (ii) the sale or transfer of all or substantially all of the

            Company's assets; or

 

                  (iii) a purchase, tender or exchange offer made to and

            accepted by the holders of more than the 50% of the outstanding

            shares of Common Stock.

 

No sooner than 15 days nor later than 10 days prior to the consummation of a

Change of Control, but not prior to the public announcement of such Change of

Control, the Company shall deliver written notice thereof via facsimile and

overnight courier to the Holder (a "Change of Control Notice"). (b) Assumption.

Prior to the consummation of any Change of Control, the Company will secure from

any Person purchasing the Company's assets or Common Stock or any successor

resulting from such Change of Control (in each case, an "Acquiring Entity") a

written agreement (in form and substance satisfactory to the holders of Notes

representing at least a majority of the aggregate principal amount of the Notes

then outstanding) to deliver to each Holder of Notes in exchange for such Notes,

a security of the Acquiring Entity evidenced by a written instrument

substantially similar in form and substance to the Notes, including, without

limitation, having a principal amount and interest rate equal to the principal

amounts and the interest rates of the Notes held by such holder, and

satisfactory to the holders of Notes representing at least a majority of the

principal amount of the Notes then outstanding. In the event that an Acquiring

Entity is directly or indirectly controlled by a company or entity whose common

stock or similar equity interest is listed, designated or quoted on a securities

exchange or trading market, the Holders of Notes representing at least a

majority of the aggregate principal amount of the Notes then outstanding may

elect to treat such Person as the Acquiring Entity for purposes of this Section

5(b).

 

<PAGE>

 

            (c) Mandatory Prepayment Option. At any time during the period

beginning after the Holder's receipt of a Change of Control Notice and ending on

the date of the consummation of such Change of Control (or, in the event a

Change of Control Notice is not delivered at least 10 days prior to a Change of

Control, at any time on or after the date which is 10 days prior to a Change of

Control and ending 10 days after the consummation of such Change of Control),

the Holder may require the Company to pay the outstanding Principal and all

accrued Interest and Late Charges in full.

 

      6. RIGHTS UPON OTHER CORPORATE EVENTS.

 

      Prior to the consummation of any recapitalization, reorganization,

consolidation, merger, spin-off or other business combination (other than a

Change of Control which shall be applicable in the event the Senior Obligations

have been paid in full and all commitments under the Senior Credit Facility

cancelled) pursuant to which holders of Common Stock are entitled to receive

securities or other assets with respect to or in exchange for Common Stock (a

"Corporate Event"), the Company shall make appropriate provision to insure that

the Holder will thereafter have the right to receive upon a conversion of this

Note, (i) in addition to the shares of Common Stock receivable upon such

conversion, such securities or other assets to which the Holder would have been

entitled with respect to such shares of Common Stock had such shares of Common

Stock been held by the Holder upon the consummation of such Corporate Event or

(ii) in lieu of the shares of Common Stock otherwise receivable upon such

conversion, such securities or other assets received by the holders of Common

Stock in connection with the consummation of such Corporate Event in such

amounts as the Holder would have been entitled to receive had this Note

initially been issued with conversion rights for the form of such consideration

(as opposed to shares of Common Stock) at a conversion rate for such

consideration commensurate with the Conversion Rate. Provision made pursuant to

the preceding sentence shall be in a form and substance satisfactory to the

Holders of Notes representing at least a majority of the aggregate principal

amount of the Notes then outstanding.

 

      7. NONCIRCUMVENTION. The Company hereby covenants and agrees that the

Company will not, by amendment of its Certificate of Incorporation or Bylaws or

through any reorganization, 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 of any of the terms of this Note,

and will at all times in good faith carry out all of the provisions of this Note

and take all action as may be required to protect the rights of the Holder of

this Note.

 

      8. RESERVATION OF AUTHORIZED SHARES.

 

      (a) Reservation. The Company shall initially reserve out of its authorized

and unissued Common Stock a number of shares of Common Stock for each of the

Notes equal to 125% of the Conversion Rate with respect to the Conversion Amount

of each such Note as of the Issuance Date. Thereafter, the Company, so long as

 

<PAGE>

 

any of the Notes are outstanding, shall take all action necessary to reserve and

keep available out of its authorized and unissued Common Stock, solely for the

purpose of effecting the conversion of the Notes, 110% of the number of shares

of Common Stock as shall from time to time be necessary to effect the conversion

of all of the Notes then outstanding; provided that at no time shall the number

of shares of Common Stock so reserved be less than the number of shares required

to be reserved by the previous sentence (without regard to any limitations on

conversions) (the "Required Reserve Amount"). The initial number of shares of

Common Stock reserved for conversions of the Notes and each increase in the

number of shares so reserved shall be allocated pro rata among the Holders of

the Notes based on the principal amount of the Notes held by each Holder at the

time of Issuance Date or increase in the number of reserved shares, as the case

may be (the "Authorized Share Allocation"). In the event that a holder shall

sell or otherwise transfer any of such holder's Notes, each transferee shall be

allocated a pro rata portion of such holder's Authorized Share Allocation. Any

shares of Common Stock reserved and allocated to any Person which ceases to hold

any Notes shall be allocated to the remaining holders of Notes, pro rata based

on the principal amount of the Notes then held by such holders.

 

            (b) Insufficient Authorized Shares. If at any time while any of the

Notes remain outstanding the Company does not have a sufficient number of

authorized and unreserved shares of Common Stock to satisfy its obligation to

reserve for issuance upon conversion of the Notes at least a number of shares of

Common Stock equal to the Required Reserve Amount (an "Authorized Share

Failure"), then the Company shall as soon as practicable take all action

reasonably necessary to increase the Company's authorized shares of Common Stock

to an amount sufficient to allow the Company to reserve the Required Reserve

Amount for the Notes then outstanding. Without limiting the generality of the

foregoing sentence, as soon as practicable after the date of the occurrence of

an Authorized Share Failure, but in no event later than 60 days after the

occurrence of such Authorized Share Failure, the Company shall hold a meeting of

its stockholders for the approval of an increase in the number of authorized

shares of Common Stock. In connection with such meeting, the Company shall

provide each stockholder with a proxy statement and shall use its best efforts

to solicit its stockholders' approval of such increase in authorized shares of

Common Stock and to cause