<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
/ / 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 PETROLEUM CORPORATION
(Exact Name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4114732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30101 Agoura Court, Suite 110 Agoura Hills, California 91301
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(818) 991-0526
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.
9,381,854 as of September 30, 1995
<PAGE> 2
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, December 31,
------------- -----------
1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,670,000 $ 398,000
Accounts receivable 591,000 550,000
Prepaid expenses and oil inventory 170,000 114,000
----------- -----------
Total Current Assets 3,431,000 1,062,000
----------- -----------
PROPERTY AND EQUIPMENT (Note 1):
Oil and gas properties, accounted for
using the successful efforts method 22,264,000 17,912,000
Automotive, office and other 336,000 330,000
----------- -----------
22,600,000 18,242,000
Less--accumulated depletion, depreciation
and amortization (9,100,000) (8,253,000)
----------- -----------
13,500,000 9,989,000
----------- -----------
OTHER ASSETS:
Materials, supplies and other deferred charges 551,000 270,000
Deferred credit facility costs (net of accumulated
amortization of $86,000 and $39,000) 67,000 114,000
Bond issuance costs (net of accumulated
amortization of $166,000 and $122,000)(Note 4) 123,000 167,000
Restricted cash (Note 2) 2,373,000 -
----------- -----------
3,114,000 550,000
----------- -----------
TOTAL ASSETS $20,045,000 $11,601,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
September 30, December 31,
------------- -----------
1995 1994
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long term debt (Note 4) $ 3,608,000 $4,688,000
Accounts payable 204,000 393,000
Accrued expenses 129,000 78,000
Executive severance payable - 96,000
Royalties and working interests payable 72,000 53,000
Accrued interest 76,000 130,000
Notes payable to officers, directors and shareholders 550,000 200,000
----------- -----------
Total Current Liabilities 4,639,000 5,638,000
NOTES PAYABLE TO OFFICERS, DIRECTORS AND SHAREHOLDERS - 550,000
LONG-TERM DEBT, NET OF CURRENT PORTION (Note 4) 1,687,000 1,685,000
EXECUTIVE SEVERANCE PAYABLE - 63,000
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--2,000,000 shares
Issued and outstanding--None - -
Common stock, $.01 par value (Note 1):
Authorized--40,000,000 shares
Issued and outstanding--9,381,854 and
2,644,032 shares at September 30, 1995 and
December 31, 1994, respectively 94,000 26,000
Capital in excess of par value 22,853,000 11,253,000
Accumulated deficit (9,228,000) (7,614,000)
----------- -----------
NET STOCKHOLDERS' EQUITY 13,719,000 3,665,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,045,000 $11,601,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended
--------------------------------------------
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
REVENUES:
Sales of oil and gas, net of royalties $2,030,000 $2,553,000
Other income 153,000 44,000
---------- ----------
2,183,000 2,597,000
DIRECT PRODUCTION EXPENSES 1,037,000 812,000
---------- ----------
REVENUES IN EXCESS OF DIRECT PRODUCTION EXPENSES 1,146,000 1,785,000
---------- ----------
OPERATING EXPENSES
Provision for depletion, depreciation
and amortization expenses 989,000 1,396,000
Geological and geophysical costs 355,000 -
General and administrative expenses 855,000 911,000
Abandoned leasehold costs 28,000 34,000
Dry hole costs - 115,000
Interest expense 533,000 301,000
---------- ----------
2,760,000 2,757,000
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,614,000) (972,000)
PROVISION FOR INCOME TAXES - -
---------- ----------
NET LOSS (1,614,000) (972,000)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,432,712 2,637,055
========== ==========
NET LOSS PER COMMON SHARE (Note 8) $ (0.30) $ (0.37)
========== ==========
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended
-------------------------------------------
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
REVENUES:
Sales of oil and gas, net of royalties $ 675,000 $ 840,000
Other income 74,000 14,000
---------- ----------
749,000 854,000
DIRECT PRODUCTION EXPENSES 399,000 318,000
---------- ----------
REVENUES IN EXCESS OF DIRECT PRODUCTION EXPENSES 350,000 536,000
---------- ----------
OPERATING EXPENSES:
Provision for depletion, depreciation
and amortization expenses 321,000 444,000
Geological and geophysical costs 355,000 -
General and administrative expenses 278,000 255,000
Abandoned leasehold costs 5,000 -
Dry hole costs - -
Interest expense 155,000 145,000
---------- ----------
1,114,000 844,000
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (764,000) (308,000)
PROVISION FOR INCOME TAXES - -
---------- ----------
NET LOSS $ (764,000) $ (308,000)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,270,431 2,637,055
========== ==========
NET LOSS PER COMMON SHARE (Note 8) $ (0.08) $ (0.12)
========== ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Common Stock Capital in
Shares Excess of Accumulated
(Note A) Amount Par Value Deficit Net
-------- ------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 2,633,471 $26,000 $11,258,000 $(4,671,000) $6,613,000
========= ======= =========== =========== ==========
Common stock returned to treasury
(Note 1) (80) - (2,000) - (2,000)
Adjustment to proceeds for
1993 Public Offering - - (29,000) - (29,000)
Common stock issued for
exercise of stock options 4,688 - 12,000 - 12,000
Common stock issued for
directors' fees 5,953 - 14,000 - 14,000
Net loss - - - (2,943,000) (2,943,000)
--------- ------- ----------- ----------- ----------
BALANCE, December 31, 1994 2,644,032 $26,000 $11,253,000 $(7,614,000) $3,665,000
========= ======= =========== =========== ==========
Common stock returned to
treasury (Note 1) (8) - - - -
Common stock issued for
public offerings (Note 6) 5,248,000 52,000 8,490,000 - 8,542,000
Common stock issued for
merger (Note 3) 1,200,000 12,000 2,480,000 - 2,492,000
Common stock and warrants issued for
pre-payment of investment
banking services 100,000 2,000 263,000 - 265,000
Common Stock issued for
conversion of debt (Note 6) 106,667 2,000 198,000 - 200,000
Common stock issued or
issuable for exercise
of stock options 70,766 - 140,000 - 140,000
Common stock issued or
issuable for directors' fees 12,397 - 29,000 - 29,000
Net loss - - - (1,614,000) (1,614,000)
--------- ------- ----------- ----------- -----------
BALANCE, September 30, 1995 9,381,854 $94,000 $22,853,000 $(9,228,000) $13,719,000
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
FORTUNE PETROLEUM CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,614,000) $ (972,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Common stock issued for directors' fees,
compensation and consulting fees 29,000 14,000
Depletion, Depreciation and amortization 989,000 1,396,000
Loss on abandonment 28,000 -
Provision for executive severance (17,000) 225,000
Financing costs incurred by LEX prior to
acquisition/merger 150,000 -
Changes in assets and liabilities:
Accounts receivable (41,000) (50,000)
Prepaids and oil inventory (56,000) (87,000)
Notes receivable 11,000 38,000
Accounts payable and accrued expenses (138,000) (126,000)
Payment on executive severance (91,000) (38,000)
Royalties and working interest payable 19,000 4,000
Accrued interest (54,000) (20,000)
Other assets (28,000) (178,000)
----------- -----------
Net cash provided by (used in) operating activities (813,000) 206,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure for oil and gas properties (1,937,000) (3,331,000)
Expenditures to abandon properties - -
Restricted cash invested (2,373,000) -
Expenditures for other property and equipment (6,000) (33,000)
----------- -----------
Net cash used in investing activities (4,316,000) (3,364,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt - 4,490,000
Repayment of long term debt (1,078,000) (1,311,000)
Proceeds from issuance of common stock 8,869,000 12,000
Expenditures for offering costs (390,000) (29,000)
----------- -----------
Net cash provided by financing activities 7,401,000 3,162,000
----------- -----------
Net increase (decrease) in cash 2,272,000 4,000
----------- -----------
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 398,000 109,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 2,670,000 $ 113,000
=========== ===========
Supplemental information:
Interest paid $ 587,000 $ 301,000
=========== ===========
Supplemental disclosure of significant
non cash transactions:
Common stock issued or issuable as directors' fees $ 29,000 $ 14,000
Common stock issued for payment of executive severance $ 43,000 $ -
Common stock issued to acquire LEX $ 2,492,000 $ -
Common stock and warrants issued for payment of investment banking fees $ 265,000 $ -
Common stock issued for conversion of debt $ 200,000 $ -
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
FORTUNE PETROLEUM CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PROCEDURE
The condensed financial statements at September 30, 1995, and for the three
months and nine months then ended included herein have been prepared by 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-KSB.
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 Fortune Petroleum Corporation as of
September 30, 1995 and December 31, 1994 and the results of its operations for
the three months and nine months ended September 30, 1995 and September 30,
1994 and the cash flows for the nine month periods ended September 30, 1995 and
September 30, 1994. The results of the operations for such interim periods are
not necessarily indicative of the results for the full year.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
SFAS 121 is effective for fiscal years beginning after December 15, 1995. The
Company plans to adopt SFAS 121 on January 1, 1996. The Company is in the
process of analyzing the impact of SFAS 121 on its financial statements and, at
this time has not determined the impact, however it is expected to result in an
additional impairment upon adoption.
(2) RESTRICTED CASH
Under the terms of the Company's exploration agreement with Zydeco
Exploration, Inc. Fortune Petroleum Corporation had contributed $4,050,000 in
cash as of September 30, 1995 for its share of a predetermined lease
acquisition, seismic acquisition and seismic processing cost budget. At
September 30, 1995, approximately $1,677,000 of that budget had been expended
leaving $2,373,000 of restricted cash available for future budgeted
expenditures. The Company has signature authority on the bank account
containing these funds, is the recipient of interest from the bank account and
must jointly approve expenditures from the account.
(3) ACQUISITION OF ASSETS AND MERGER
On May 12, 1995 the Company acquired Lagniappe Exploration Inc. ("LEX") and
its interest in an exploration agreement with Zydeco Exploration, Inc. to
explore for oil and gas in the Gulf Coast area of the United States principally
in Louisiana and offshore state and federal leases. The Company acquired all
of the issued and outstanding equity securities of LEX in exchange for 1.2
million shares of Fortune Petroleum common stock and 1.2 million warrants. The
acquisition has been recorded using the purchase method of accounting effective
May 12, 1995. Upon acquisition, LEX became a wholly-owned subsidiary of the
Company. The market value of the shares, when issued, was $2,572,000. Prior
to the Company's acquisition, LEX did not have day-to-day operations, the only
material asset was it right to participate in the Zydeco 3D Venture. Unaudited
pro forma net loss per common share would have been $.27 for the nine months
ended September 31, 1995, and $.08 and $.25 for the three and nine months ended
September 31, 1994, assuming the acquisition occurred as of the beginning of
the respective periods. Due to LEX's lack of day-to-day operations, there
would have been no other impact on the Company's reported operating results on
a pro forma basis.
7
<PAGE> 8
(4) LONG TERM DEBT
At September 30, 1995 a summary of long-term debt is as follows:
<TABLE>
<CAPTION>
September 30 December 31,
1995 1994
---- ----
<S> <C> <C>
Convertible Subordinated Debentures of $1,725,000 (net of
discount of $61,000 and $72,000) due December 31, 1997,
including interest of 10-1/2% per annum paid semi-annually $1,664,000 $1,653,000
Bank One credit facility due July 1, 1996 including interest
at 1-1/2% over Bank One, Texas, NA's prime rate payable monthly 3,600,000 4,680,000
Other debt with interest ranging from 0% to 9-1/4% per annum
due through 1998 $ 31,000 $ 40,000
---------- ----------
Total long-term debt 5,295,000 6,373,000
Less current installments 3,608,000 4,688,000
---------- ----------
Long-term debt, excluding current installments $1,687,000 $1,685,000
========== ==========
</TABLE>
The 10-1/2% Convertible Subordinated Debentures due December 31, 1997 bear
an effective interest rate of 12.13% and are convertible into shares of the
Company's common stock, after April 1, 1994, at a conversion price of $6.32 per
share or 158 shares per $1,000 Debenture. Therefore, if all $1,725,000 were
converted the number of the Company's common shares then outstanding would
increase by 272,981 shares.
The Company has a $10,000,000 credit facility with Bank One, Texas, N.A.
under which it has the ability to borrow amounts up to an available borrowing
base as defined in the credit agreement. This borrowing base was adjusted to
$4,100,000 at April 1, 1995 due to lower natural gas prices. The credit
facility contains various financial covenants, is secured by all of the
Company's oil and gas properties and currently requires monthly reduction
payments of $100,000. At September 30, 1995, the Company was in compliance
with its credit facility covenants except its cash flow covenant which the Bank
has indicated it will waive.
The Company's maturities of long-term debt over the next five years are as
follows:
<TABLE>
<CAPTION>
Year Long-term debt maturity
---- -----------------------
<S> <C>
1995 8,000
1996 3,608,000
1997 1,672,000
1998 7,000
----------
$5,295,000
</TABLE>
(5) INCOME TAX EXPENSE
No provision for income taxes was required for the three months and nine
months ended September 30, 1995.
At September 30, 1995 deferred taxes consist of the following:
Deferred tax assets:
<TABLE>
<S> <C>
Net operating loss carryforwards $2,499,000
Oil and Gas Properties difference
in accumulated depletion 1,633,000
----------
4,132,000
Less valuation allowance (100%) 4,132,000
----------
Net deferred taxes 0
==========
</TABLE>
8
<PAGE> 9
At September 30, 1995, the Company estimates it had cumulative net
operating loss carryforwards for Federal and State income tax purposes of
$5,939,000 and $3,299,000, respectively which are subject to certain
restrictions under I.R.C. 382 and which are available to offset future Federal
and State taxable income, if any, with various expirations through 2010. Also
at September 30, 1995 the Company had a basis difference of $3,713,000 for
Federal and State purposes which is attributable to write downs of oil and gas
properties in 1993 and 1994 for financial statement purposes. The Company is
uncertain as to the recoverability of the above deferred tax assets and has
therefore applied a 100% valuation allowance.
The Company has available IRC Section 29 Tax Credits that may be used to
reduce or eliminate any corporate 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.
(6) OFFERING OF COMMON STOCK AND CONVERSION OF DEBT TO EQUITY
On June 27, 1995, the Company entered into an Underwriting Agreement with
Coleman and Company Securities, Inc. and Starr Securities, Inc., both New York
Stock Exchange member firms, as Representatives of the Underwriters to sell 4.1
million shares of the Company's common stock at $2.00 per share. On July 3,
1995, Coleman and Company Securities, Inc., representing several underwriters,
advised the Company they were exercising their right to purchase an additional
500,000 shares of common stock of the Company at $2.00 per share under the
overallotment terms of the Underwriting Agreement executed on June 27, 1995.
The net proceeds of $880,000 from the sale of the overallotment shares were
received by the Company on July 7, 1995.
On July 13, 1995, the Company was advised by the Estate of Jack Farber that
it wished to convert the $200,000 Farber Note into unregistered common shares
of the Company under the terms of the note. On July 20, 1995 the Estate of
Jack Farber was issued 106,667 shares as payment in full. Under the terms of
the note, the Company will endeavor to file a Registration Statement to
register such shares by December 31, 1995.
On September 25, 1995, the Company filed a registration statement on Form
SB-2 with the Securities and Exchange Commission to register 3,070,252
additional shares of Fortune Petroleum Common Stock underlying: (i) public
warrants, as adjusted, issued in connection with the Company's 1993 public Unit
Offering; (ii) Representatives' Unit Purchase Warrants issued to
representatives of the underwriters in connection with the Unit Offering; and,
(iii) private warrants issued at various times between 1993 and 1995. As of
November 7, 1995, the registration statement on Form SB-2 has not been declared
effective.
On September 29, 1995, the Company filed a registration statement with the
Commission on Form S-3 to register 1,317,503 shares of Fortune Petroleum Common
Stock issued in connection with the Company's acquisition of assets and issued
to outside directors in lieu of cash in payment of director fees. As of
November 7, 1995, the registration statement on Form S-3 has not been declared
effective.
(7) LEGAL PROCEEDINGS
There are no pending material legal proceedings involving any of the
Company's properties or that involves a claim for damages which exceeds 10% of
the Company's current assets.
(8) COMPUTATION OF EARNINGS (LOSS) PER SHARE
Primary earnings per common share are computed by dividing the Company's
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 three month and nine month periods ended
September 30, 1995 and 1994, since their effect would be to reduce the net loss
per share.
Fully diluted earnings per common share are not presented since the
conversion of the Company's 10-1/2% Convertible Subordinated Debentures and its
publicly traded common stock warrants would have an anti-dilutive effect.
9
<PAGE> 10
(9) UNAUDITED PRO-FORMA OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS COST
INFORMATION
Capitalized costs relating to oil and gas producing activities and related
accumulated depletion, depreciation and amortization for the nine month period
ended September 30, 1995 were as follows:
<TABLE>
<S> <C>
Capitalized costs balance at beginning
of year before accumulated depletion
depreciation and amortization $17,912,000
Property and leasehold acquisition costs -
Oil and Gas acquisition 3,878,000
Development 476,000
Exploration -
Less dispositions and transfers (net) (2,000)
-----------
$22,264,000
Less accumulated depletion,
depreciation and amortization (8,856,000)
-----------
$13,408,000
===========
</TABLE>
Capitalized costs of unproved properties are not significant.
10
<PAGE> 11
FORTUNE PETROLEUM CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS COMPARISONS OF THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1995 TO THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER
30, 1994.
During the three months and nine months ended September 30, 1995 Fortune
had a net loss of $764,000 and $1,614,000 compared to a net loss of $308,000
and $972,000 for the three months and nine months ended September 30, 1994.
Net revenues from sales of oil and gas decreased approximately $165,000
(19%) and $523,000 (20%) in the three months and nine months ended September
30, 1995, respectively, compared to the same 1994 periods. The decrease
resulted primarily from lower natural gas prices combined with shutting in the
Company's Hopper Canyon oil field for 5-1/2 months due to a storm damaged
access road. Natural gas prices averaged $1.50 and $1.54 per MCF for the three
months and nine months ended September 30, 1995 as compared to $1.86 and $2.12
per MCF for the three months and nine months ended September 30, 1994. Oil
prices averaged $14.08 and $14.69 per barrel compared to $15.19 and $13.92 per
barrel for the three month and nine month periods ended September 30, 1994.
In the three months and nine months ended September 30, 1995 other income
consisted primarily of interest income, operator overhead fee revenues being
charged on jointly owned wells and a prospect fee of $50,000 paid to the
Company when it farmed out its 50% interest in its Polaris Prospect offshore
Louisiana.
Direct production expenses increased by $81,000 (25%) and by $225,000 (28%)
in the three months and nine months ended September 30, 1995 compared to the
three months and nine months ended September 30, 1994. The increase in the
nine months is due primarily to the addition of $181,000 of direct operating
expense from the acquired production in Rio Arriba County, New Mexico and
Refugio County, Texas.
Fortune's general and administrative expenses increased by $23,000 (8%) and
decreased by $56,000 (6%) during the three months and nine months ended
September 30, 1995 over the 1994 general and administrative expenses. The
increase during the three months was due in part to the inclusion of expenses
in preparation for the Company's relocation to Houston, Texas. The decrease
during the nine months is due to reduced payroll and benefits costs offset by a
$30,000 fee paid to Bank One to maintain the Company's credit facility and a
$150,000 accelerated amortization charge incurred by Fortune when it paid off
$300,000 in loans assumed by it in the acquisition of Lagniappe Exploration,
Inc. Geological and geophysical expenses were $355,000 for the three months
and nine months ended September 30, 1995 as a result of its activities in the
Gulf of Mexico. Fortune did not incur any geological and geophysical expenses
for the similar periods in 1994. Interest expense increased by $10,000 (7%)
and $232,000 (77 %) for the three months and nine months ended September 30,
1995 over the same 1994 periods as a result of borrowings during the second and
third calendar quarters of 1994 offset by $1,000,000 in principal retirement on
the Bank One Note between June 30, 1995 and September 30, 1995. The Company's
provision for depletion, depreciation and amortization decreased by $123,000
(28%) and $407,000 (29%) in the three months and nine months ended September
30, 1995 compared to 1994 due to impairments taken at year end 1994.
LIQUIDITY AND CAPITAL RESOURCES
For the three months and nine months ended September 30, 1995 Fortune had a
net loss of $764,000 and $1,614,000 as compared to a net loss of $308,000 and
$972,000 for the three months and nine months ended September 30, 1994.
Fortune's operating cash flow decreased for the three months and nine
months ended September 30, 1995 to $(520,000) or (186%) and $(813,000) or
(494%) as compared to the same 1994 periods. This decrease in cash flow was
primarily the result of the effect of lower natural gas prices and the
shutting-in of the Company's Hopper Canyon Field and the incurrence of
geological and geophysical expenses in 1995.
11
<PAGE> 12
Fortune's internal liquidity and capital resources in the near term will
consist of working capital derived from its oil and gas operations. These
items comprise all of Fortune's liquid assets. Fortune's working capital
decreased in the third quarter primarily due to the reclassification of
$3,600,000 of long-term debt (due to Bank One) to short-term portion of
long-term debt, even though such debt is not due until October 1, 1996. The
Company was in breach of its cash flow covenant at September 30, 1995 and Bank
One has waived such breach at September 1995, however because of Bank One's
policy not to waive covenant breaches for one year plus one day the Company
must reclassify the entire Bank One debt to short term for accounting purposes
as it does not believe it will obtain sufficient cash flow, over the next
several months, to avoid a future breach of the covenant. Additionally
$550,000 of Director, Officers and Shareholders Notes were reclassified to
short-term debt. Such debt reclassification, in the three months ended
September 30, 1995, is offset by the receipt of proceeds from the exercise of
the overallotment option on the Company's public common stock offering. At
September 30, 1995, June 30, 1995, March 31, 1995, December 31, 1994, and
September 30, 1994, Fortune reported working capital of $(1,208,000),
$3,785,000, $(5,354,000), $(4,576,000) and $2,000, respectively.
On January 14, 1994, the Company entered into a $10,000,000 secured master
revolving credit facility with Bank One, Texas, N.A. through July 1, 1996.
Under the credit facility, the Company may borrow up to $3.6 million as of
September 30, 1995, for general corporate purposes including the acquisition or
development of oil and gas properties. The amount is subject to semi-annual
review. The credit facility is secured by a mortgage on substantially all of
the Company's existing proved oil and gas properties. Under the terms of the
facility, the Company will be subject to certain covenants, including
restriction or requirements with respect to working capital, net cash flow,
additional debt, asset sales and certain mergers. At September 30, 1995, $3.6
million had been borrowed under the facility at an average interest rate of
10.25%.
Capital expenditures for the three months and nine months ended September
30, 1995 were $656,000 and $1,937,000 as compared to $339,000 and $3,331,000
for the same 1994 periods. The Company estimates it will have an aggregate
commitment to pay $113,000 drilling costs and $80,000 completion costs, if
successful, for its 25% working interest share of an exploratory well scheduled
for 1995 in Rio Arriba County, New Mexico to maintain its interest levels in
the projects. Additionally, it is anticipated the Company will participate in
at least two exploration projects before December 31, 1995 in the Gulf of
Mexico. One project, Polaris, has been farmed out to another oil and gas
company and Fortune has retained a 3.083% overriding royalty and, at its
election, may convert to a 1% overriding royalty interest and a 6.25% working
interest after payout of the well, at no further cost to the Company. The
second exploration project, Aurora, is anticipated to be spudded before
December 31, 1995. Fortune estimates drilling costs of $345,000 and completion
costs of an additional $400,000, if successful, for its 50% working interest
share of this exploratory project. The Company's costs of drilling these wells
will be principally financed through its cash and equity financings.
Conditions outside of the control of Fortune influence the price Fortune
receives for oil and gas. As of November 1, 1995, the Company is receiving
approximately $14.27 per barrel as an average price for its produced oil and
$1.42 per MCF as an average price for its produced gas.
Fortune has limited sources of capital for which to provide itself with
additional liquidity other than its cash, cash flow from operations and its
credit facility with Bank One, Texas. As discussed above, the Note payable to
Bank One, Texas, is secured by substantially all of Fortune's producing oil and
gas properties. Therefore, Fortune is limited in its ability to borrow
additional funds in excess of its borrowing base by utilizing certain oil and
gas assets and at September 30, 1995 there was no availability on the borrowing
base. On August 16, 1995 Fortune engaged Albrecht & Associates of Houston,
Texas, to sell the Company's California oil and gas properties. It is
anticipated that the majority, if not all, of the proceeds from any such
property sale would be used to retire debt to Bank One.
12
<PAGE> 13
FORTUNE PETROLEUM CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
28.1 Notes to Financial Statements included in the Registrant's
Form 10-KSB filed for the fiscal year ended December 31, 1994
incorporated herein by reference.
28.2 Notes to Financial Statements included in the Registrant's
Form 10-QSB filed for the quarter ended March 31, 1995
28.3 Notes to Financial Statements included in the Registrant's
Form 10-QSB filed for the quarter ended June 30, 1995
</TABLE>
(B) REPORTS ON FORM 8-K
A report on Form 8-K was filed with the Commission dated
August 3, 1995 pertaining to the increase of the size of the
Board of Directors from seven to nine seats and the addition
to the Board of two (2) Directors Messrs. Charif Souki and
William D. Forster.
13
<PAGE> 14
FORTUNE PETROLEUM CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORTUNE PETROLEUM CORPORATION
Date: November 8, 1995
By: s/s TYRONE J. FAIRBANKS
----------------------------------
Tyrone J. Fairbanks, President,
Chief Executive Officer,
Chief Accounting Officer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,670,000
<SECURITIES> 0
<RECEIVABLES> 591,000
<ALLOWANCES> 0
<INVENTORY> 170,000
<CURRENT-ASSETS> 3,431,000
<PP&E> 22,600,000
<DEPRECIATION> (9,100,000)
<TOTAL-ASSETS> 20,045,000
<CURRENT-LIABILITIES> 4,639,000
<BONDS> 1,687,000
<COMMON> 23,947,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,045,000
<SALES> 2,030,000
<TOTAL-REVENUES> 2,183,000
<CGS> 0
<TOTAL-COSTS> 1,037,000
<OTHER-EXPENSES> 2,227,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 533,000
<INCOME-PRETAX> (1,614,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,614,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,614,000)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
