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 MARCH 31, 1996
[ ] 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)
Doing business in Texas and Louisiana as
FORTUNE NATURAL RESOURCES CORPORATION
Delaware 95-4114732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Green, 515 W. Greens Rd., Suite 720, Houston, Texas 77067
(Address of Principal Executive Offices) (Zip Code)
(713) 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.
11,171,493 as of March 31, 1996
---------------------------------------
<PAGE>
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents................................................................... $ 1,950,000 $ 1,888,000
Accounts receivable ........................................................................ 1,090,000 1,035,000
Oil and gas properties held for sale ....................................................... 340,000 1,180,000
Prepaid expenses and oil inventory ......................................................... 63,000 127,000
------------ ------------
Total Current Assets ..................................................................... 3,443,000 4,230,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the successful efforts method ...................................................... 18,924,000 18,960,000
Automotive, office and other ............................................................... 272,000 227,000
------------ ------------
19,196,000 19,187,000
Less--accumulated depletion, depreciation
and amortization ........................................................................ (8,141,000) (7,821,000)
------------ ------------
11,055,000 11,366,000
------------ ------------
OTHER ASSETS:
Materials, supplies and other .............................................................. 207,000 62,000
Bond issuance costs (net of accumulated
amortization of $195,000 and $180,000) ................................................... 94,000 109,000
Restricted cash ............................................................................ 2,984,000 3,230,000
------------ ------------
3,285,000 3,401,000
------------ ------------
TOTAL ASSETS ................................................................................. $ 17,783,000 $ 18,997,000
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
CURRENT LIABILITIES:
Current portion of long term debt .......................................................... $ 1,925,000 $ 3,208,000
Accounts payable ........................................................................... 397,000 280,000
Accrued expenses ........................................................................... 65,000 96,000
Royalties and working interests payable .................................................... 52,000 94,000
Accrued interest ........................................................................... 55,000 119,000
------------ ------------
Total Current Liabilities .............................................................. 2,494,000 3,797,000
------------ ------------
LONG-TERM DEBT, net of current portion ...................................................... 1,672,000 1,689,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--2,000,000 shares
Issued and outstanding--None- Common stock, $.01 par value :
Authorized--40,000,000 shares
Issued and outstanding--11,171,493 and
11,139,709 shares at March 31, 1996 and
December 31, 1995, respectively .......................................................... 111,000 111,000
Capital in excess of par value ............................................................. 27,274,000 27,228,000
Accumulated deficit ........................................................................ (13,768,000) (13,828,000)
------------ ------------
NET STOCKHOLDERS' EQUITY ................................................................... 13,617,000 13,511,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................. $ 17,783,000 $ 18,997,000
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
REVENUES
Sales of oil and gas, net of royalties .......... $ 1,225,000 $ 710,000
Gain on sale of oil and gas properties, net ..... 260,000 --
Other income .................................... 65,000 14,000
----------- -----------
1,550,000 724,000
----------- -----------
COSTS AND EXPENSES
Production and operating ...................... 285,000 411,000
Exploration ................................... 102,000 --
Dryhole ....................................... 32,000 --
Provision for depletion, depreciation
and amortization ............................ 283,000 343,000
Impairment to oil and gas properties .......... 37,000 --
General and administrative .................... 526,000 194,000
Office relocation and severance ............... 105,000 --
Interest ...................................... 120,000 185,000
----------- -----------
1,490,000 1,133,000
----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES .............................. 60,000 (409,000)
PROVISION FOR INCOME TAXES ...................... -- --
----------- -----------
NET INCOME (LOSS) ............................... $ 60,000 $ (409,000)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ..................... 11,168,624 3,012,088
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE .............. $ 0.01 $ (0.14)
=========== ===========
See accompanying notes to financial statements.
3
<PAGE>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Common Stock Capital in
Excess Of Accumulated
Shares Amount Par Value Deficit Net
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 2,644,032 $ 26,000 $ 11,253,000 $ (7,614,000) $ 3,665,000
============ =========== ============ ============ ============
Common stock returned to treasury (12) -- -- -- --
Common stock issued for exercise
of stock options .............. 202,481 2,000 500,000 -- 502,000
Common stock issued for
directors fees ................ 14,445 -- 39,000 -- 39,000
Common stock issued for
stock offerings ............... 6,569,117 65,000 11,729,000 -- 11,794,000
Common stock issued for merger ... 1,200,000 12,000 2,480,000 -- 2,492,000
Common stock and warrants issued
for payment of investment
banking services .............. 100,000 2,000 263,000 -- 265,000
Common stock issued for
warrant conversion ............ 115,479 1,000 392,000 -- 393,000
Common stock issued for
note conversion ............... 294,167 3,000 572,000 -- 575,000
Net loss ......................... -- -- -- (6,214,000) (6,214,000)
------------ ----------- ------------ ------------ ------------
BALANCE, December 31, 1995 ....... 11,139,709 $ 111,000 $ 27,228,000 $(13,828,000) $ 13,511,000
------------ ----------- ------------ ------------ ------------
Common stock issued for exercise
of stock options .............. 31,150 -- 71,000 -- 71,000
Common stock issued for
directors' fees ............... 1,860 -- 5,000 -- 5,000
Common stock cancelled and
stock issuance cost ........... (1,226) -- (30,000) -- (30,000)
Net income (loss) ............... -- -- -- 60,000 60,000
------------ ----------- ------------ ------------ ------------
BALANCE, MARCH 31, 1996 .......... 11,171,493 $ 111,000 $ 27,274,000 $(13,768,000) $ 13,617,000
(Unaudited) ============ =========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ............................................ $ 60,000 $(409,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Common stock issued for directors' fees ...................... 5,000 4,000
Depletion, depreciation and amortization ..................... 283,000 343,000
Exploration and dry hole cost ................................ 134,000 --
Gain on disposition of assets ................................ (260,000) --
Amortization of deferred financing cost ...................... 19,000 --
Impairment of oil and gas assets ............................. 37,000 --
Changes in assets and liabilities:
Accounts receivable ....................................... (55,000) 75,000
Prepaids and oil inventory ................................ 64,000 21,000
Accounts payable and accrued expenses ..................... 86,000 74,000
Payment of executive severance ............................ (86,000)
Royalties and working interest payable .................... (42,000) (6,000)
Accrued interest .......................................... (64,000) (44,000)
Other ..................................................... -- 10,000
----------- ---------
Net cash provided by (used in) operating activities ............ 267,000 (18,000)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure for oil and gas properties ....................... (485,000) (876,000)
Exploration and dry hole costs ............................... (134,000) --
Restricted cash used ......................................... 246,000 --
Proceeds from sale of properties and equipment ............... 1,621,000 --
Expenditures for other property and equipment and other assets (193,000) --
----------- ---------
Net cash provided by (used in) investing activities .......... 1,055,000 (876,000)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt .................................. (1,304,000) (80,000)
Proceeds from issuance of common stock ....................... 71,000 821,000
Expenditures for offering cost ............................... (27,000) (108,000)
----------- ---------
Net cash provided by (used in) financing activities .......... (1,260,000) 633,000
----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ......................................... 62,000 (261,000)
----------- ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................. 1,888,000 398,000
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................... $ 1,950,000 $ 137,000
=========== =========
Supplemental information:
Interest paid in cash ....................................... $ 102,000 $ 185,000
Non-cash transactions:
Common stock issued or issuable as directors' fees ........... 5,000 4,000
Common Stock issued for payment of executive severance ....... -- 43,000
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
FORTUNE PETROLEUM CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PROCEDURES
The condensed financial statements at March 31, 1996, and for the three
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 March 31, 1996 and
December 31, 1995 and the results of its operations and cash flows for the three
months ended March 31, 1996 and March 31, 1995. The results of the operations
for such interim periods are not necessarily indicative of the results for the
full year.
(2) DISPOSITION OF ASSETS
In connection with its December 1995 acquisition of a 16.67% working
interest in South Timbalier Block 76, Fortune granted a third party the option,
exercisable until March 11, 1996, to acquire a 4.167% working interest in the
Timbalier Block for $790,000 and the retention by Forutne of the option holder's
deposit of $150,000. The option was exercised on March 8, 1996 for the $940,000
consideration discussed above, reducing the Company's interest in the block to a
12.5%working interest.
During 1995, the Company entered into a purchase and sale agreement to sell
the majority of its California properties consisting of the Hopper Canyon,
Holser Canyon, Oxnard and Shiels Canyon fields in Ventura County and the Bacon
Hills Lease in Kern County, and related equipment. The properties were sold on
February 23, 1996, to a private oil and gas producer group for a combined price
of $840,000 with an effective date of December 31, 1995. The Company signed a
letter of intent to sell its remaining California property to Seneca Resources
Corporation, to be effective December 1, 1995. The transaction closed on April
29, 1996. The company received net proceeds in this transaction of $300,000
after deducting closing adjustments, primarily consisting of net cash flow
received by the Company between the effective date and the closing date. At
December 31, 1995 and March 31, 1996, the Company had classified (as oil and gas
properties held for sale) the estimated net proceeds remaining to be received
from both of these transactions. Further, the Company recorded an impairment
reserve attributable to these properties at December 31, 1995 of $1.4 million.
6
(3) LONG TERM DEBT
At March 31, 1996 a summary of long-term debt is as follows:
March 31, December 31,
1996 1995
---------- ----------
Convertible Subordinated Debentures of $1,725,000
(net of discount of $53,000 and $57,000) due
December 31, 1997, including interest of
10-1/2% per annum paid semi-annually ............ $1,672,000 $1,668,000
BankOne credit facility due July 1, 1997
including interest at 1-1/2% over
Bank One, Texas, NA's prime rate
payable monthly ................................. 1,925,000 3,200,000
Other debt with interest ranging from 0%
to 9-1/4% per annum due through 1998 ............ -- 29,000
---------- ----------
Total Long-term Debt ................................ 3,597,000 4,897,000
Less current installments ........................... 1,925,000 3,208,000
---------- ----------
Long-term debt, excluding current installments ...... $1,672,000 $1,689,000
========== ==========
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 principal amount of 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 $3,200,000 at
December 31, 1995. The credit facility contains various financial covenants, is
secured by all of the Company's oil and gas properties (except South Timbalier
Block 76), and currently requires monthly principal payments of $75,000.
At December 31, 1995, and March 31, 1996, the Company was not in compliance
with its cash flow coverage ratio covenant in the credit agreement. Under the
terms of credit agreeement, the bank has the right to demand repayment of the
entire loan balance in the event of covenant defaults. The Company has obtained
a waiver of this covenant from the bank as of December 31, 1995 and March 31,
1996. During February 1996, the Company made a principal reduction of
$1,100,000, primarily from the proceeds of the sale of its California
properties.
The Company's maturities of long-term debt over the next two years are as
follows:
YEAR LONG-TERM DEBT MATURITY
---- -----------------------
1996 $ 1,925,000
1997 1,672,000
------------
$ 3,597,000
============
7
(4) INCOME TAX EXPENSE
No provision for income taxes was required for the three months ended
March 31, 1996. At March 31, 1996 deferred taxes consist of the following:
Deferred tax assets:
Net operating loss carryforwards $2,899,000
Oil and Gas Properties
Difference in accumulated depletion,
depreciation and amortization 1,742,000
---------
4,641,000
Less valuation allowance (100%) (4,641,000)
---------
Net deferred taxes $ 0
=========
At March 31, 1996, the Company estimates it had cumulative net operating
loss carryforwards for federal income tax purposes of $8,523,000 which is
significantly restricted under IRC Section 382, and is available to offset
future federal taxable income, if any, with various expirations through 2008.
The Company is uncertain as to the recoverability of the above deferred tax
assets and has therefore applied a 100% valuation allowance.
The Company has available IRC Section 29 Tax Credits that may be used to
reduce or eliminate any corporate 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.
(5) 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.
On March 14, 1995, Fortune was served with a lawsuit in the District Court
of Bexar County, Texas, by EnRe Corporation, in which EnRe, as operator of the
Company's New Mexico properties, seeks recovery of approximately $438,000
allegedly owed by Fortune for the drilling of certain wells on such properties.
The lawsuit is the result of disputes between the parties regarding the manner
in which EnRe has conducted operations on the property and the proper
interpretation of the operating agreement among the interest owners on the
property. Fortune management believes that EnRe has operated the property in a
negligent manner, causing loss to Fortune and the other interest owners. In
addition, management believes that the Company was permitted (under the terms of
the operating agreement) to elect not to participate in the drilling operations
for which EnRe sought payment. On March 24, 1995, Fortune answered EnRe's
lawsuit and filed a counterclaim against EnRe for an undeterminable amount for
damages suffered by Fortune for EnRe's actions.
On March 30, 1995, a partial settlement was reached as to payment of
undisputed well development costs in exchange for EnRe's co-operation in
complying with provisions of the operating agreement to report operating
information to Fortune on a timely basis. As of April 24, 1995, the Company had
paid all well development costs which it believed to be undisputed, totalling
$174,499.
In the opinion of management, Fortune has valid defenses to all claims made
by EnRe still in dispute. On March 11, 1996, the Company was advised that its
proposal to EnRe to dismiss its litigation in exchange for the Company's
dismissal of its counterclaim was accepted by EnRe pending the completion of the
appropriate settlement documents.
8
<PAGE>
On March 26, 1996, Fortune was served with a lawsuit which had been filed in
the Federal District Court in Delaware by one of the purchasers of Fortune
common stock in an offering in December 1995 under Regulation S. Under the terms
of the subscription agreement, the plaintiff was entitled to receive additional
shares of Fortune stock if the market price fell below a stated level during a
specified period following the 40-day holding period prescribed by Regulation S.
Plaintiff's complaint alleges that the price during the relevant interval did
fall below the level necessary for plaintiff to receive additional shares, but
that Fortune has failed to issued the stock.
Fortune has responded, admitting the essential allegations of the complaint,
but has pled, by way of affirmative defense, 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 requested, and the
American Stock Exchange commenced, an investigation into such trading
irregularities. That investigation is continuing; Fortune does not intend to
issue any additional shares to plaintiff pending the outcome of the
investigation.
On April 16, 1996, Fortune was advised that similar suits had been filed in
Federal District Court in New York by two other buyers in the same offering. The
allegations parallel those contained in the earlier suit filed in Delaware, and
Fortune intends to respond in the same manner.
(6) COMPUTATION OF EARNINGS (LOSS) PER SHARE
Primary earnings per common share are computed by dividing net income (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 period ended March 31, 1996
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.
(7) SUBSEQUENT EVENTS
On April 17, 1996 the Company entered into a non-binding Letter of Intent
with Texoil, Inc. ("Texoil") pursuant to which Texoil will be acquired through
merger by Fortune in a tax-free transaction. Texoil explores for, develops and
produces oil and natural gas. The Company's common stock and class A and B
warrants are qouted on the NASDAQ smallcap market under the symbols "TXLI",
"TXLIW", and "TXLIZ" respectively.
Texoil's assets include producing oil and gas properties and exploratory
projects. Pending the closing of the transaction, Fortune has agreed to fund
Texoil's share of the cost of shooting 3-D seismic on three exploratory projects
(the 3-D Prospects) and up to $150,000 of Texoil's other reasonable and
necessary costs in exchange for a security interest in a portion of Texoil's
interest in the 3-D Prospects and, under certain circumstances, the right to
earn an interest in the 3-D Prospects should the transaction not close. Texoil's
share of these costs over the next six months are projected to be approximately
$1 million.
In the transaction, the shareholders of Texoil would receive one share of
Fortune common for every 3.2 Texoil shares. Prior to the record date of the
transaction, all Texoil preferred shareholders will exchange their shares and
any accrued dividends into common shares of Texoil at the market price of such
shares on the effective date of the transaction, in a total aggregate amount of
not more than 1,700,000 shares of Texoil common stock. The combined maximum
number of Fortune common shares the Company will issue to the Texoil common and
preferred shareholders is 1,845,000 for all of such outstanding stock. In
addition, approximately $1.1 million of debt owed to certain Texoil shareholders
will be converted to Fortune common shares. Fortune will, thereafter, assist in
the sale of these shares and will guarantee that those shareholders receive at
least the amount of the
9
outstanding debt within the first 15 months after closing the transaction. All
Fortune shares received in the transaction by Texoil's current officers,
directors and principal shareholders, except shares exchanged for debt, will be
subject to a lock-up agreement which will be no shorter than six (6) months and
no more than 15 months.
The transaction is subject to a number of contingencies, including, but not
limited to, entering into a definitive merger agreement, completion of due
diligence by Texoil and Fortune, effectiveness of a registration statement for
the Fortune shares, listing of the Fortune shares that will be issued on the
American Stock Exchange and approval of the merger by the shareholders of both
companies.
(8) 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 three month period
ended March 31, 1996 were as follows:
Capitalized costs balance at beginning
of year before accumulated depletion,
depreciation and amortization .......................... $ 18,960,000
Property and leasehold acquisition costs ................. --
Oil and Gas acquisition .................................. --
Development .............................................. 241,000
Exploration .............................................. 244,000
Less dispositions ........................................ (521,000)
------------
$ 18,924,000
Less accumulated depletion,
depreciation and amortization .......................... 7,938,000
------------
$ 10,986,000
============
Capitalized costs of unproved properties were $ 5,627,000 at March 31, 1996.
10
<PAGE>
FORTUNE PETROLEUM CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS COMPARISONS OF THREE MONTHS ENDED MARCH 31, 1996 TO THE THREE
MONTHS ENDED MARCH 31, 1995.
During the three months ended March 31, 1996, Fortune had net income of
$60,000 compared to a net loss of $(409,000) for the three months ended March
31, 1995.
Net revenues from sales of oil and gas increased $515,000 (73%) in the
three months ended March 31, 1996, compared to the same 1995 period. The
increase resulted primarily from higher natural gas prices, increased production
from South Timbalier Block 76 which was acquired in December 1995, and low 1994
production resulting from shutting in the Company's Hopper Canyon oil field for
5-1/2 months, (2-1/2 months in the first quarter 1995), due to storm damage.
Natural gas prices averaged $2.49 per MCF for the three months ended March 31,
1996 as compared to $1.52 per MCF for the three months ended March 31, 1995. Oil
prices averaged $16.32 per barrel compared to $16.23 per barrel for the three
months period ended March 31, 1995.
In the three months ended March 31, 1996 other income consisted primarily
of interest income and operator overhead fees being charged on jointly owned
wells.
Production and operating expenses decreased by $126,000 (31%) in the three
months ended March 31, 1996 compared to the three months ended March 31, 1995
due primarily to the disposition of the high operating cost California
properties in February 1996.
In the three months ended March 31, 1996, Fortune's general and
administrative expenses increased by $332,000 (171%) over the first quarter
1995. The increase during the three months was due primarily to increased legal
fees resulting from the Regulation S shareholder litigation and the increased
acquisition and disposition activity; increased shareholder reporting expense
due to earlier filing of the Company's annual report and Form 10-KSB; and
increased personnel expense. The company also incurred non-recurring office
relocation and severence cost of $105,000 in the first quarter of 1996 in
connection with the move to Houston. Interest expense decreased by $65,000 (35%)
for the three months ended March 31, 1996 over the same 1995 period due to the
lower debt balance. The lower depletable property balance, resulting from the
year-end 1995 impairment write-off, led to the Company's provision for
depletion, depreciation and amortization decreasing by $60,000 (17%) in the
three months ended March 31, 1996 as compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
Fortune's operating cash flow increased for the three months ended March
31, 1995 to $267,000 as compared to a cash flow deficit of $(18,000) for the
same 1995 period. This increase in cash flow was a result of the effect of
higher natural gas prices and higher production in 1996 as is discussed above.
Fortune's internal liquidity and capital resources in the near term will
consist of working capital derived from its oil and gas operations. Fortune's
working capital increased in the first quarter primarily due to increased cash
flow from operations, and the proceeds received from the sale of oil and gas
properties.
On January 14, 1994, the Company entered into a $10 million secured master
revolving credit facility with Bank One, Texas, N.A. The facility expires, if
not further renewed or extended, on April 1, 1997. The amount the Company may
borrow under the Credit Facility is determined by the borrowing base as
calculated by the Bank semi-annually on the basis of the Company's oil and gas
reserves. The principal balance of the Credit Facility at March
11
<PAGE>
31, 1996 is $1,925,000. The borrowing base continues to decline at the rate of
$75,000 per month. Due to the breach in the cash flow covenant, the Company is
not able to fully utilize this borrowing base capacity at this time. The Credit
Facility is secured by a mortgage on substantially all of the Company's existing
proved oil and gas properties with the exception of the newly acquired South
Timbalier Block 76. Under the terms of the facility, the Company is subject to
certain covenants, including restrictions or requirements with respect to
working capital, tangible net worth, net cash flow, additional debt, asset sales
and certain mergers.
On April 24, 1995, in connection with the Bank One agreement to waive
certain covenant breaches, Bank One required the Company to enter into a lockbox
arrangement pursuant to which its revenues are paid to an account with Bank One.
Bank One instituted the lock box arrangement to monitor the Company's revenues
until such time the Company could demonstrate it could consistently meet the
terms of the principal covenants. There is no limitation placed on any funds
subject to the lock box arrangement.
Capital expenditures for the three months ended March 31, 1996 were $
485,000 as compared to $ 876,000 for the same 1995 period. Fortune's capital
expenditures for 1996 are currently estimated to be approximately $2.7 million
for its exploration activities, including the Texoil 3-D seismic costs which the
Company expects to pay. The Company intends to provide for these expenditures
with its available cash and either the exercise of outstanding warrants, the
recovery of prospect costs advanced by the Company, or a private placement of
equity. Should such funds not be available to the Company as required for timely
drilling, the Company can reduce its working interest participation in the
wells, farm-out additional interests or, with respect to the Zydeco joint
venture projects, put its interest back to Zydeco for an overriding royalty and
after payout working interest. Should the Company's working interest in
exploration projects be reduced, the Company would not derive as great a benefit
as it may have otherwise enjoyed in the event of an exploration success.
Conditions outside of the control of Fortune influence the price Fortune
receives for oil and gas. As of April 26, 1996, the Company is receiving
approximately $21.87 per barrel as an average price for its oil production and
$2.45 per MCF as an average price for its gas production.
12
<PAGE>
FORTUNE PETROLEUM CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
99.1 Notes to Financial Statements included in the Registrant's
Form 10-K filed for the fiscal year ended December 31, 1995
incorporated herein by reference.
(B) REPORTS ON FORM 8-K
A report on Form 8-K was filed with the Commission dated March 8, 1996
to report that the Company completed the sale of all but one of its California
properties and that the Company may be required to issue certain "reset" shares
in connection with its December 1995 Regulation S filing.
A report on Form 8-K was filed with the Commission dated April 29, 1996
to report that the Company had entered into a non-binding Letter of Intent with
Texoil, Inc. pursuant to which Texoil will be acquired through merger by the
Company.
13
<PAGE>
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: May 2, 1996
By: S/S TYRONE J. FAIRBANKS
Tyrone J. Fairbanks, President,
Chief Executive Officer
By: S/S J. MICHAEL URBAN
J. Michael Urban
Vice President and
Chief Financial and
Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,950,000
<SECURITIES> 0
<RECEIVABLES> 1,090,000
<ALLOWANCES> 0
<INVENTORY> 63,000
<CURRENT-ASSETS> 3,443,000
<PP&E> 19,196,000
<DEPRECIATION> (8,141,000)
<TOTAL-ASSETS> 17,783,000
<CURRENT-LIABILITIES> 2,494,000
<BONDS> 1,672,000
0
0
<COMMON> 111,000
<OTHER-SE> 13,506,000
<TOTAL-LIABILITY-AND-EQUITY> 17,783,000
<SALES> 1,225,000
<TOTAL-REVENUES> 1,550,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,370,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,000
<INCOME-PRETAX> 60,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 60,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,000
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
