<PAGE> 1
As filed with the Securities and Exchange Commission on January 8, 1996
Registration Statement No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933, AS AMENDED
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FORTUNE PETROLEUM CORPORATION
(Name of small business issuer in its charter)
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<S> <C> <C>
DELAWARE 1311 95-4114732
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
30101 AGOURA COURT, SUITE 110
AGOURA HILLS, CALIFORNIA 91301
(818) 991-0526
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices and principal place of business)
TYRONE J. FAIRBANKS
FORTUNE PETROLEUM CORPORATION
30101 AGOURA COURT, SUITE 110
AGOURA HILLS, CALIFORNIA 91301
(818) 991-0526
(Name, address including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
Bruce L. Ashton, Esq.
Reish & Luftman
11755 Wilshire Blvd., 10th Floor
Los Angeles, California 90025
(310) 478-5656
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to to be offering price aggregate registration
be registered registered per unit offering price fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 431,250(1) $4.00(1) $ 1,725,000 $595
Common Stock Purchase Warrants 431,250(2) $ - (2) $ - -
Common Stock, $.01 par value 215,625(3) $4.00(3) $ 862,500 297
Common Stock, $.01 par value 215,625(3) $5.00(3) $ 1,078,125 372
Common Stock Purchase Warrants 86,250(4) - - -
Common Stock, $.01 par value 86,250(4) $4.00(4) $ 345,000 119
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(1) Shares issuable upon conversion of outstanding debentures. The proposed
offering price per unit is the minimum conversion price per share of common
stock.
(2) To be issued to debentureholders who elect to convert debentures to shares
of common stock.
(3) Shares of Common Stock issuable upon exercise of warrants to be issued to
debentureholders. One half of such warrants are exerciseable at the conversion
price to the debentureholders. One half will be exerciseable at 125% of such
price.
(4) Warrants to be issued to conversion agent in connection with the conversion
offer. Warrants are exercisable at the conversion price to the
debentureholders.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.
This Registration Statement is comprised of 108 pages. The Exhibit Index
appears on Page 100.
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CROSS REFERENCE SHEET
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ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
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ITEM 1. Front of the Registration Statement and Outside
Front Cover Page of Prospectus . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus
ITEM 2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Page of
Prospectus
ITEM 3. Summary Information and Risk Factors . . . . . . . . . . . . . "Prospectus Summary;" "Risk Factors;"
"Management's Discussion and Analysis of
Financial Condition and Results of Operations"
ITEM 4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . "Prospectus Summary;" "Use of Proceeds;"
"Business and Properties"
ITEM 5. Determination of Offering Price . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus
ITEM 6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . "Dilution"
ITEM 7. Selling Security Holders . . . . . . . . . . . . . . . . . . . Not Applicable
ITEM 8. Plan of Distribution . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus;
"Exchange Offer"
ITEM 9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . "Business and Properties - Legal Proceedings"
ITEM 10. Directors, Executive Officers, Promoters
and Control Persons . . . . . . . . . . . . . . . . . . . . . . "Management"
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . "Principal Stockholders"
ITEM 12. Description of Securities . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus;
"Prospectus Summary;" "Dividend Policy;" "Price
Range of Common Stock;" "Capitalization;"
"Description of Securities"
ITEM 13. Interest of Named Experts and Counsel . . . . . . . . . . . . . "Experts"
</TABLE>
(ii)
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<TABLE>
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ITEM 14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . . . . . . "Description of Securities"
ITEM 15. Organization Within Last Five Years . . . . . . . . . . . . . . Not Applicable
ITEM 16. Description of Business . . . . . . . . . . . . . . . . . . . . "Prospectus Summary;" "Management's Discussion
and Analysis of Financial Condition and Results
of Operations;" "Business and Properties"
ITEM 17. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . . . . . . . . . . "Management's Discussion and Analysis of
Financial Condition and Results of Operations"
ITEM 18. Description of Property . . . . . . . . . . . . . . . . . . . . "Business and Properties"
ITEM 19. Certain Relationships and Related Transactions . . . . . . . . "Certain Relationships and Related Transactions"
ITEM 20. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus; "Price
Range of Common Stock;" Dividends;" "Description
of Securities"
ITEM 21. Executive Compensation . . . . . . . . . . . . . . . . . . . . "Management"
ITEM 22. Financial Statements . . . . . . . . . . . . . . . . . . . . . Financial Statements
ITEM 23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . Not Applicable
</TABLE>
(iii)
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 8, 1996
[LOGO]
FORTUNE PETROLEUM CORPORATION
Shares of Common Stock
Stock Purchase Warrants
EXCHANGE OFFER
Fortune Petroleum Corporation ("Fortune" or the "Company")
hereby offers to holders of its 10-1/2% Subordinated Debentures due December
31, 1997 (the "Debentures") the right to convert such Debentures into ________
shares of the Common Stock, $.01 par value per share (the "Common Stock") and
_________ Common Stock Purchase Warrants (the "Exchange Warrants") for each
$1,000 principal amount of Debentures held on December __, 1995 (the "Record
Date"). The conversion ratio has been determined on the basis of a per share
price of $ (the "Exchange Price"). On December __, 1995, the last reported
sale price of the Common Stock on the the American Stock Exchange (the "AMEX")
was $____ per share. Unless at least 90% in principal amount of the Debentures
are converted in this offering, no Debentures will be converted. See "Terms of
Exchange Offer."
The Exchange Warrants will be exercisable for a period of
three years from the Effective Date at the following exercise prices: one-half
of the Exchange Warrants issued to a Debentureholder will be exercisable at the
Exchange Price of $ and one-half will be exercisable at $ (125% of the
Exchange Price). The Exchange Warrants will be callable by the Company at any
time after the closing price of the Common Stock on the AMEX equals or exceeds
$ (150% of the Exercise Price) for ten (10) consecutive trading days. See
"Description of Securities - Debentures" and "- Exchange Warrants."
The Common Stock is listed and traded on the AMEX under the
symbol FPX. The Debentures are traded in the over-the-counter market. Shares
of Common Stock issuable upon conversion of outstanding Debentures and upon
exercise of the Exchange Warrants have been approved for listing upon notice of
issuance on the AMEX. The Exchange Warrants will NOT be listed or traded on
the AMEX, and no assurance can be given that any market will develop for the
Exchange Warrants. See "Price Range of Common Stock."
Toluca Pacific Securities Corporation will act as the Exchange
Agent in connection with this offering and will be compensated by the Company
for services rendered in this Exchange Offer. Debentureholders will have a
period of 30 days from the date of this prospectus (the "Effective Date") in
which to elect to convert their Debentures into Common Stock and Exchange
Warrants. This offering will expire on ____________, 1996, unless extended by
the Company for up to an additional 30 days. See "Terms of Exchange Offer."
No assurance can be given that any of the Debentures will be
converted in this offering, and the Company will not receive any proceeds from
the conversion of Debentures into shares of Common Stock, although it will be
relieved of $1,725,000 of outstanding long term debt. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Further, no assurance can be given that any of the Exchange
Warrants will be exercised. If all Exchange Warrants were to be exercised, the
Company would receive gross proceeds of $_________. Whether or not any
Debentureholders convert their Debentures into shares of Common Stock and
Exchange Warrants or the Company receives any proceeds from the exercise of
Exchange Warrants, it will pay all costs of this offering, estimated to be
$__________.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7
___________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
___________________________
The date of this Prospectus is , 1996
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements filed
by the Company with the Commission pursuant to the informational requirements
of the Exchange Act may be inspected and copied at the public reference
facilities maintained by the Commission, at Room 1024, Judiciary Plaza
Building, 450 Fifth Street, N.W. Washington, D.C. 20549, and the Regional
offices of the Commission: Seven World Trade Center, Suite 1300, New York, New
York 10048, and Kluczynski Federal Building, 230 South Dearborn Street, Room
3190, Chicago, Illinois 60604. Copies of such material may be obtained at
prescribed rates from the Public Reference Section of the Commission at Room
1025, Judiciary Plaza Building, 450 Fifth St., N.W. Washington, D.C. 20549. In
addition, reports and other information concerning the Company can be inspected
at the offices of the American Stock Exchange, Inc., 86 Trinity Place, New
York, New York 10006-1881, on which the Common Stock is listed.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Act"), with respect to the Common Stock offered hereby. This
Prospectus, filed as part of the Registration Statement, does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement and to the exhibits and schedules thereto, which
may be inspected at the Commission's offices without charge or copies of which
may be obtained from the Commission upon payment of the prescribed fees.
Statements made in the Prospectus as to the contents of any contract, agreement
or document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in the Prospectus. Capitalized terms are used as defined in the
Glossary included elsewhere in this Prospectus. Reserve estimates have been
prepared in accordance with the SEC Method. The Common Stock and Exchange
Warrants offered hereby in exchange for the Debentures involves a high degree
of risk. Prospective investors should carefully consider the matters set forth
under the caption "Risk Factors" in evaluating acquisition of the securities
offered hereby.
THE COMPANY
Fortune Petroleum Corporation ("Fortune" or the "Company") is an
independent public oil and natural gas company whose primary focus is on
exploration for and development of domestic oil and natural gas properties.
During 1995, the Company acquired an interest in 18 exploration projects (the
"Zydeco Projects") which will enable it to participate in exploration for oil
and natural gas in the shallow Gulf Coast waters of Louisiana in a strategic
partnership with Zydeco Exploration, Inc. (the "Zydeco 3D Venture"). On
December 11, 1995, the Company also purchased an interest in a producing oil
and gas property located in the Gulf of Mexico offshore Louisiana for cash.
See "The Company -- Business and Properties - Exploration, Exploitation and
Development Activity - Zydeco 3D Venture" and "Acquisition Activity --
PetroFina Acquisition."
Under its exploration agreement with Zydeco, the Company holds a 50%
interest in each of the Projects currently identified by Zydeco. To obtain its
50% interest, the Company contributed its share of the leasehold acquisition
and seismic costs budget for the Zydeco Projects totalling $4,850,000.
Management believes that the Zydeco 3D Venture has the potential to
add materially to the Company's reserves and, ultimately, its revenues. No
assurance can be given, however, that the drilling of exploratory or
development wells on any of these properties will occur or will result in the
discovery of commercial quantities of oil or natural gas or that the Company
will be able to successfully explore for oil and gas reserves or ever produce
such reserves. See "Risk Factors."
The Zydeco 3D Venture utilizes state-of-the-art three dimensional
("3D") seismic and computer-aided exploration ("CAEX") technology in its
exploration efforts. Zydeco has blended existing 3D seismic and CAEX
technology, production data and characteristics of wells in a particular
geographic area and advanced interpretation techniques (as well as traditional
two-dimensional ("2D") seismic data), to identify the 18 Zydeco Projects. The
Company believes that the use of 3D seismic and CAEX technology provides more
accurate and comprehensive geological data for evaluation of drilling prospects
than 2D and traditional evaluation methods. The Company also believes that the
techniques used by Zydeco in combining existing 3D seismic and CAEX technology
will provide the Zydeco 3D Venture and Fortune with a competitive advantage by
increasing the likelihood of finding commercial quantities of oil and gas at
lower average reserve finding costs.
Zydeco 3D Venture. The Zydeco Projects are primarily located in
geological trends where there have been discoveries of crude oil and natural
gas reserves and where the Company believes that Zydeco's use of advanced 3D
seismic and CAEX technology will be effective in defining exploration risks.
In addition to the 18 Zydeco Projects, the Company and Zydeco have established
areas of mutual interest ("AMI's") adjoining each project and have agreed to
provide each other with a right of first refusal on any other projects
developed along the Gulf Coast of Louisiana until December 31, 1996. The
advantage to Fortune of the establishment of the AMI's and right of first
refusal is that as Zydeco determines new projects within the AMIs, Fortune will
have the right to participate in them, though no assurance can be given that
any new projects will be identified or that Fortune will have the financial
resources to participate in such projects if any are identified. See "Risk
Factors."
The Company does not currently expect to retain a working interest of
more than 25% in each well drilled on the Zydeco Projects, except in certain
circumstances, and intends to "farmout" on a promoted basis its remaining
interest to other oil companies. Under such an arrangement, Fortune would
enter into agreements with one or more other companies to pay part of the
Company's remaining portion of the drilling costs of the well in exchange for a
proportionate interest in the well, but subject to an overriding royalty
interest retained by Fortune which is convertible at Fortune's option into a
working interest after the other company recoups its drilling and completion
costs out of production from the well (which is referred to as "payout").
Fortune may retain larger or smaller working interests in certain of the Zydeco
Projects depending upon capital availability and other factors. The Company
also retains a right under the Zydeco 3D Venture to farmout a portion or all of
its interest in each project to Zydeco under a put arrangement in the
exploration agreement. In the event of such a farmout of a 50% working
interest, Fortune would retain a negotiated overriding royalty convertible into
a working interest or a default arrangement of a two percent overriding royalty
interest in the project, convertible into a 20% working interest after payout
to Zydeco. These default percentages are currently being reviewed by Fortune
and Zydeco and are subject to adjustment. Should Fortune farmout a smaller
working interest to Zydeco, the overriding royalty and after-payout working
interests would be proportionately reduced. The right to put the working
interest between Fortune and Zydeco is reciprocal.
The Zydeco Projects are primarily located in the shallow marine waters
(five to 50 feet) within three to five miles of the Louisiana Coastline (the
"Transition Zone") and in the Timbalier Trench, a pre-historic channel of the
Mississippi River which is now offshore and filled in with sedimentary
deposits. Traditionally, the Transition Zone and Timbalier Trench have been
difficult areas from which to obtain quality seismic data and interpret using
conventional technology. The principals of Zydeco have worked in these two
areas for the past 18 years.
3
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San Juan Basin, New Mexico. In June 1994, the Company acquired
working interests of 21.5% to 25% in 70,000 acres in Rio Arriba County, New
Mexico. 60,000 acres are held under Mineral Development Agreements with the
Jicarilla Apache Indian Tribe and the balance is held under lease or farmout
arrangements to the Company. This acreage lies immediately north of the West
Puerto Chiquito Field. The Company believes that portions of its acreage may
be an extension of that Field. Drilling and completion costs per well in this
area usually range from $750,000 to $1,000,000 each. See "Business and
Properties - Exploration, Exploitation and Development Activity - San Juan
Basin, New Mexico."
Business Strategy. The Company has sought to add reserves in the most
cost efficient and effective manner. Prior to mid-1994, the Company focused
its efforts on the acquisition of producing properties in an effort to take
advantage of competitive prices for proved reserves with development potential
in relation to the cost of reserves discovered through exploration activities.
See "Business and Properties -- Acquisition Activity." In mid-1994, the
Company made a strategic decision to shift its emphasis from the acquisition of
producing properties to exploration for oil and natural gas reserves, although
the Company will continue to examine attractive acquisition opportunities
presented to it. This decision was prompted by increasing price competition
for attractive producing properties (caused by larger and better capitalized
companies moving into the acquisition market) and a general tightening in
available financing for acquisitions. See "Risk Factors."
The Company's decision to shift its emphasis to exploration was
further influenced by several factors which Fortune believes create new
opportunities for exploration. These factors include increased availability of
3D seismic and CAEX technology at competitive prices and the reallocation of
exploration budgets by major oil companies from domestic activity to
international exploration. This move by the major oil companies resulted in
increased access to geological and geophysical information relating to
potential prospects, new opportunities to enter into farmout agreements with
respect to prospects held by the major oil companies and less demand and price
competition for domestic acreage. To help facilitate its exploration strategy
and focus its efforts, the Company has begun efforts to sell all of its
California producing properties and prospects and retiring the debt secured by
such properties from the proceeds of sale. The Company also anticipates that
it will relocate its headquarters to the greater Houston, Texas area within the
next three to six months.
Exploration and Exploitation Projects. The Company is involved in a
number of exploration and exploitation projects, including the 18 Zydeco
Projects and projects in the San Juan Basin, New Mexico and La Rosa Field,
Refugio County, Texas. Additionally, Zydeco is continuing to identify other
potential projects for the Zydeco 3D Venture. The following table sets forth a
summary of certain projects on which the Company expects to conduct exploration
activities over the next 12 to 36 months. In the table, the letter "P"
following the name of the project indicates that it is a "prospect" (a property
in near-drillable condition); the letter "L" indicates that it is a "lead"
(additional seismic work or lease acquisition (or both) is required in order
for exploratory drilling to commence); and "C" denotes a "concept" (a lease has
been acquired but additional seismic and leasehold acquisition must be
undertaken in order to consider exploration drilling). No assurance can be
given that drilling activities will be undertaken on any of these projects or,
if undertaken, that such efforts will be successful in finding commercial
quantities of oil or natural gas. See "Business and Properties -- Current
Exploration Projects."
<TABLE>
<CAPTION>
Maximum
Technology Interest Working Gross
Used or to Owned at Interest Acreage Net
Project Location Partner Be Used Nov 7, 1995 Available Owned(3) Acreage(3)
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<S> <C> <C> <C> <C> <C> <C> <C>
Aurora(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 320 160
Cirrus(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 245 123
Cruiser(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 1,742 871
Everest(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 290 145
E. Thunder(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 950 415
Jade(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 150 75
Jubilee(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 1,050 525
Matador(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 344 172
Mentor(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 5,000 2,500
Obelisk(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 160 80
Opal(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,452 1,226
Orchid(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 154 77
Ovation(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 514 257
Polaris(P)(4) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,500 1,250
Schooner(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 92 46
Sword(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 30 15
Ulysses(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,148 1,074
Valhalla(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 140 70
Jicarilla San Juan Basin Ampolex, EnRe, 2D 21%-25% N/A 70,000 16,515
Apache(P) New Mexico DEP
LaRosa(P) Refugio Co.,Tx LAROCO 3D 50% N/A 3,689 408
------ ------
91,969 27,532
</TABLE>
[footnotes on next page]
4
<PAGE> 8
(1) Prior to entering into the exploration agreement with Fortune, Zydeco
granted to Clayton Williams Energy the right to purchase, prior to the
commencement of drilling, a one-eighth working interest in each project in
exchange for one-eighth of all costs incurred in the project to that time, plus
one-eighth of all future costs which include drilling, completion and operating
costs for any wells drilled on the project. In such event, if Fortune held a
50% interest in a Project, its interest would be reduced to 43.833% in exchange
for a payment to Fortune of 6.166% of the costs incurred to date.
(2) The Company does not currently expect to retain a working interest of more
than 25% in each Project except in certain circumstances. See "Use of
Proceeds" and "Business and Properties - Exploration, Exploitation and
Development Activity - Zydeco 3D Venture."
(3) Represents the maximum working interest acreage which Fortune has acquired
in each Zydeco Project based upon its maximum contribution to the Zydeco 3D
Venture. Net acreage equals the Company's interest assuming it owns the
maximum working interest. See "Risk Factors" and "Use of Proceeds."
(4) On June 1, 1995, Zydeco and Fortune entered into a farmout of 100% of the
working interest to Southern Gas Company of Delaware in exchange for a 6.166%
overriding royalty, a $100,000 bonus and a $32,000 production payment. Under
the agreement, 4.166% of the overriding royalty is convertible to a 12-1/2%
working interest after payout at Zydeco and Fortune's option. Fortune owns 50%
of such compensation and terms. See "Business and Properties - Exploration,
Exploitation and Development Activity - Zydeco 3D Venture."
EXCHANGE OFFER
<TABLE>
<S> <C>
THE OFFER _______ shares of Common Stock and ____ Exchange Warrants for each $1,000 principal amount of 10-1/2%
Convertible Subordinated Debentures due December 31 1997, previously issued by the Company. Cash will be
issued in lieu of fractional shares. See "The Offer to Convert" and "Description of Securities." Unless
at least 90% in principal amount of the Debentures are converted in this offering, no Debentures will be
converted. See "Offer to Convert."
DETERMINATION OF The conversion ratio was determined on the basis of a per share price of $ (the "Exchange
EXCHANGE PRICE Price"). On December 29, 1995, the last reported sale price of the Common Stock on the AMEX was $4.88 per
share.
EXCHANGE WARRANTS The Exchange Warrants will be exercisable for a period of three years from the Effective Date at the
following exercise prices: one-half of the Exchange Warrants issued to a Debentureholder will be
exercisable at $ per share (the Exchange Price) and one-half at $ (125% of the Exchange Price).
The Exchange Warrants will be callable by the Company at any time after the closing price of the Common
Stock on the AMEX equals or exceeds $ (150% of the Exercise Price) for ten (10) consecutive trading
days. See "Description of Securities - Debentures" and "- Exchange Warrants."
MARKET FOR COMMON The Common Stock is listed and traded on the AMEX under the symbol FPX. The Debentures are
STOCK AND WARRANTS traded in the over-the-counter market. Shares of Common Stock issuable upon conversion of outstanding
Debentures and upon exercise of the Exchange Warrants have been approved for listing upon notice of
issuance on the AMEX. The Exchange Warrants will not be listed or traded on the AMEX, and no assurance
can be given that any market will develop for the Exchange Warrants.
CONVERSION AGENT Toluca Pacific Securities Corporation will act as the Conversion Agent in connection with this offering
and will be compensated by the Company for services rendered in this Offer to Convert. Debentureholders
will have a period of 30 days from the date of this prospectus (the "Effective Date") in which to elect to
convert their Debentures into Common Stock and Exchange Warrants.
TERMINATION OF OFFER This offer will expire on ____________, 1996, unless extended by the Company for up to an
additional 30 days. See "Offer to Convert."
FEDERAL INCOME TAX For information regarding the federal income tax consequences of acceptance of the offer to
CONSEQUENCES convert, see "Certain Federal Income Tax Consequences."
USE OF PROCEEDS No assurance can be given that any of the Debentures will be converted in this offering, and the Company
will not receive any proceeds from the conversion of Debentures into shares of Common Stock, although it
will be relieved of $1,725,000 of outstanding long term debt. See "Capitalization" and "Management's
Review and Analysis of Financial Condition and Results of Operations." Further, no assurance can be given
that any of the Exchange Warrants will be exercised. If all Exchange Warrants were to be exercised, the
Company would receive gross proceeds of $_________. Whether or not any Debentureholders convert their
Debentures into shares of Common Stock or the Company receives any proceeds from the exercise of Exchange
Warrants, it will pay all costs of this offering, estimated to be $__________.
</TABLE>
5
<PAGE> 9
SUMMARY FINANCIAL AND OPERATING DATA
The following Summary Condensed Financial Data for the years ended
December 31, 1992, 1993 and 1994, and the unaudited financial information for
the nine months ended September 30, 1994 and 1995, are derived from and
qualified by reference to the Company's financial statements, appearing
elsewhere herein. The statement of operations data for the nine months ended
September 30, 1995, is not necessarily indicative of results for a full year.
The financial information for each nine month period ended September 30, 1994
and 1995 are unaudited and, in the opinion of management, include all
adjustments that are of a normal recurring nature and necessary for a fair
presentation. The Summary Condensed Financial Data should be read in
conjunction with the financial statements and "Managements Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein.
SUMMARY CONDENSED FINANCIAL DATA
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: Nine Months Ended
Years Ended December 31, September 30,
-------------------------------------- ---------------------
1992 1993 1994 1994 1995
---- ---- ---- ---- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Total Revenues $ 2,160 $ 2,834 $ 3,397 $2,597 $ 2,183
Net loss $ (198) $(3,654) $(2,943) $ (972) $(1,614)
Net loss per share $ (0.27) $ (2.06) $ (1.12) $(0.37) $ (0.30)
Weighted average shares
outstanding 714 1,773 2,639 2,637 5,433
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: December 31, September 30,
--------------------------------- -------------
1992 1993 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Assets $ 8,175 $10,454 $11,601 $20,045
Total Debt $ 3,574 $ 3,003 $ 7,123 $ 5,845
Net Stockholders' Equity $ 4,153 $ 6,613 $ 3,665 $13,719
Net Stockholders' Equity Per Share $ 5.22 $ 2.50 $ 1.39 $ 1.46
</TABLE>
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
OPERATING DATA: Nine Months Ended
Years Ended December 31, September 30,
------------------------------------ ---------------------
1992 1993 1994 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Production:
Crude oil, condensate and
gas liquids (Bbl) 87,387 78,737 87,615 63,237 63,348
Natural gas (Mcf) 233,892 723,878 1,016,771 795,730 711,833
Oil equivalent (Bbl) 126,369 199,383 257,077 195,858 181,987
Average sales price:
Crude oil, condensate and
gas liquids ($ per Bbl) $17.57 $14.10 $12.88 $13.74 $14.69
Natural gas ($ per Mcf) $ 2.39 $ 2.28 $ 2.17 $ 2.12 $ 1.54
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------
RESERVES: 1992 1993 1994
---- ---- -----
<S> <C> <C> <C>
Estimated Net Proved Reserves (1):
Crude oil and condensate (MMBbl) 2,066 813 1,647
Natural gas (Bcf) 4.8 5.6 5.9
Estimated future net revenues before
income taxes (in thousands) $20,385 $12,835 $15,932
Present value of estimated future
net revenues before income taxes
(discounted at 10% per annum) $ 8,555 $ 8,554 $ 8,148
Proved Reserves produced during the period 4.4% 11.4% 9.7%
</TABLE>
- ---------------
(1) Estimates of oil and gas reserves in future years are based in part on the
sales price at December 31st, the Company's year-end; and to the extent that
the cost of producing the oil and gas, plus applicable taxes, from any
particular property exceeds the sales price, the quantity of proved reserves is
eliminated. Declines in reserves and reserves value in 1993 and 1994, as
compared to the prior year, despite significant reserve acquisitions, is due
primarily to the difference at December 31 of each year in average crude oil
and natural gas prices received which were used in the reserve engineering
report in calculating reserves. See "Business and Properties -- Oil and Gas
Operations -- Oil and Gas Reserves."
6
<PAGE> 10
RISK FACTORS
An investment in the Common Stock and the Exchange Warrants offered
hereby involves a high degree of risk. Debentures should not be converted by
Debentureholders who cannot afford the loss of their entire investment.
Prospective investors should carefully consider all of the information
contained in this Prospectus, including the following risk factors:
RISKS ASSOCIATED WITH THE COMPANY
Recent Change in Business Strategy. Fortune has recently changed its
business strategy from the acquisition of producing oil and gas properties with
anticipated development potential to a strategy which primarily stresses
exploratory drilling for oil and natural gas. Such a change means that the
Company will no longer be assured of acquiring producing oil and gas wells when
it expends funds for the acquisition of an interest in property. It also means
that when the Company expends funds to drill a well, the risk that the Company
will drill a dry hole and thus be unsuccessful in finding any oil and gas is
substantially increased. In such event, the Company would receive no return on
its investment. Were such a strategy to be pursued long enough, without
success, it could require the Company ultimately to suspend operations.
Working Capital Deficiency. At December 31, 1994, the Company had a
working capital deficit of $4,576,000. The working capital needs of the
Company have increased since its inception. To date, the Company has satisfied
substantially all of its working capital needs through oil and gas revenues,
the public and private sale of common stock and debentures, the Credit Facility
and other borrowings. On June 30, 1995, the Company completed a public
offering of 4,600,000 shares of Common Stock (including the underwriters'
overallotment option), the net proceeds of which were used to pay down debt,
including reductions in the principal balance of the Company's credit facility
with Bank One, Texas and invest in the Zydeco 3D Venture. However, the Company
does not currently have sufficient capital or cash flow to meet all of its
projected capital needs under the Zydeco 3D Venture or other projects.
Substantially all of the Company's producing oil and gas properties are pledged
to secure the Credit Facility. At November 1, 1995, the total amount owed in
the Credit Facility was $3,400,000, and the Company does not have any
additional borrowing capacity under the Credit Facility at the date hereof.
Need for Additional Financing. The Company has incurred net losses for
the years ended December 31, 1992, 1993 and 1994, and the first three quarters
of 1995, and may continue to do so in the future. No assurance can be given
that the Company will be able to meet its working capital needs out of its cash
flow from operations. There can be no assurance that Fortune can attain a
sufficient level of revenues to fund such requirements or that unbudgeted costs
will not be incurred. Future events, including the problems, delays, expenses
and difficulties frequently encountered by similarly situated companies, as
well as changes in economic, regulatory and competitive conditions, may lead to
cost increases that could make the net proceeds of the Offering and cash flow
from operations insufficient to fund the Company's capital requirements for the
next 12 months. The Company may require additional outside financing for the
foreseeable future to fund capital expenditures deemed desirable by management.
No assurance can be given that any such financing will be available on terms
acceptable to the Company, if at all. Additional financings may result in
dilution for then current stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Net Losses Incurred by Company. During its last three fiscal years and
the first three quarters of 1995, the Company has incurred net losses. The
losses equalled $198,000, $3,654,000 and $2,943,000 for the years ended
December 31, 1992, 1993 and 1994, respectively. The net loss through the first
nine months of 1995 totalled $1,614,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Viability as a Going Concern. The Company's viability as a going
concern is dependent upon either restructuring its debt, completion of
additional offerings of equity or drilling and completing one or more wells
which produce significant revenues. No assurance can be given that any of
these events will occur. The opinion of the Company's auditors on the
Company's financial statements states that the 1994 financial statements have
been prepared assuming that the Company will continue as a going concern and
that the recurring losses suffered by the Company and its net working capital
deficiency raise substantial doubt about its ability to continue as a going
concern.
Need to Replace Reserves. Producing oil and gas reservoirs are, in
general, characterized by declining production rates. This decline rate
depends on reservoir characteristics, and varies from the steep decline rate
characteristic of the prolific reservoirs in the Gulf of Mexico to the
relatively slow decline rate characteristic of the long-lived (but less
prolific) fields on the Company's California properties. The Company's future
oil and natural gas reserves and production, and thus cash flow and income, are
highly dependent on the Company's ability in finding or acquiring additional
reserves. During
7
<PAGE> 11
the three years ended December 31, 1994, the Company replaced 95.16% of
reserves depleted through production. Without adding new reserves in the
future, the Company's oil and gas reserves and production will decline over the
long term. There can be no assurance that the Company will be able to find and
develop or acquire additional reserves. See "Business and Properties -- Oil
and Gas Operations -- Oil and Gas Reserves."
Need to Acquire Additional Leases or Seismic Data on Zydeco Projects.
Only five of the 18 Zydeco Projects can be considered to be prospects, which
means that they are in a near-drillable status with substantially all seismic
work completed and all leases needed to drill a well have been acquired. On
all of the remaining projects, leases have been taken however, it will be
necessary to acquire either additional leases or seismic data in order to
consider conducting drilling operations. No assurance can be given that the
necessary leases or seismic data will be acquired. If such additional leases
or seismic data are not acquired on a particular project, it is likely that
Zydeco and Fortune will lose the funds expended on the project unless some
other party desires to drill a well and include the Zydeco Venture leases in
its operations.
Limited Short-term Impact of Zydeco 3D Venture. It is anticipated that
wells may be drilled on one or two of the Zydeco projects in early 1996, though
no assurance can be given that any wells will be drilled. Even if such wells
are drilled and are successful, it is extremely unlikely that Fortune would
receive any revenues from wells drilled on any of these projects until mid-
1996. Therefore, investors should be aware that the Zydeco 3D Venture did not
have any impact on the Company's revenues or cash flow during 1995, if at all;
and any impact during 1996 will be limited to the second half of the year. No
assurance can be given that Fortune will ever receive any revenues from any of
the Zydeco projects.
Intention to Farmout Properties. As described under "Business and
Properties -- Zydeco 3D Venture," the Company generally does not intend to
retain a full 50% working interest in any of the Zydeco Projects until it has
adequate capital to place at risk. Further, Fortune may not be the operator of
any of such projects and will thus be dependent on other oil and gas companies
to conduct operations in a prudent and competent manner. In such a situation,
Fortune will have little or no control over the way in which operations are
conducted. If the entity selected to act as operator proves incompetent.
Fortune could be forced to incur additional costs to conduct remedial
procedures and could lose its investment in a property altogether.
Properties Pledged to Secure Debt. Substantially all of the Company's
properties (other than its interest in the 18 Zydeco Projects and the recently
acquired Petrofina interest in South Timbalier Block 76) are pledged to secure
the Credit Facility. A failure to pay the principal or interest or breaches of
financial covenants under the Credit Facility could cause the Company to lose
all or part of its interest in its principal producing properties currently
pledged to secure the Credit Facility. The entire principal balance of the
Credit Facility is due July 1, 1996, and the Company does not currently have
the financial resources necessary to repay the Credit Facility in full at that
time without selling certain assets. While management intends to seek a
modification or waiver of this covenant as well as an extension of the payment
date for the principal balance of the Credit Facility, no assurance can be
given that Fortune will be able to obtain any relief from Bank One. It is,
therefore, possible that substantially all of Fortune's productive properties
could be seized by the Bank through a foreclosure. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Notes 3 and 5 of Notes to Financial Statements.
Financial Impairments. The Company uses the successful efforts method
of accounting. Due to depressed gas prices at the end of 1994, the Company was
required to take an impairment of approximately $1.0 million against its oil
and gas assets as a charge against earnings. Similarly, the Company took a
$2.7 million impairment at the end of 1993 due to depressed oil prices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Years Ended December 31, 1994 and 1993." 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 but has not determined its
impact at the date hereof. However, it is expected that adoption of SFAS 121
will result in an additional impairment.
Dependence on Key Officer. The Company depends to a large extent on
the abilities and continued participation of its key employee, Tyrone J.
Fairbanks, President, Chief Executive and Chief Financial Officer. The loss of
Mr. Fairbanks could have a material adverse effect on the Company. In an
effort to reduce the risk, the Company has entered into an employment agreement
with Mr. Fairbanks which expires December 31, 1997. See "Management." The
Company has obtained $500,000 of key man life insurance on the life of Mr.
Fairbanks.
8
<PAGE> 12
RISKS ASSOCIATED WITH OIL AND GAS INDUSTRY
Risks Related to Current Oil and Gas Markets. There is substantial
uncertainty as to the prices at which oil and gas produced by the Company may
be sold, and it is possible that if product prices decline to a low enough
level, the cost of operating some or all of the Company's properties may not be
economical. The availability of a ready market for oil and gas and the prices
obtained for such oil and gas depend upon numerous factors beyond the control
of the Company, including competition from other oil and gas suppliers, and
national and international economic and political developments. The price for
oil of equal gravity in California is generally lower than in the
mid-continent. Substantially all of the Company's oil reserves are in
California. See "Business and Properties -- Oil and Gas Operations." The
Company is not subject to any natural gas price controls.
Uncertainty of Estimates of Proved Reserves and Future Net Revenues.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. The
reserve data set forth in this Prospectus represent only estimates. Estimating
quantities of proved reserves is inherently imprecise. Such estimates are
based upon certain assumptions about future production levels, future natural
gas and crude oil prices and future operating costs made using currently
available geologic engineering and economic data, some or all of which may
prove to be incorrect over time. As a result of changes in these assumptions
that may occur in the future, and based upon further production history,
results of future exploration and development, future gas and oil prices and
other factors, the quantity of proved reserves may be subject to upward or
downward adjustment. In addition, the estimates of future net revenues from
proved reserves of the Company and the present value thereof are based on
certain assumptions about future production levels, prices, and costs that may
not prove to be correct over time. The rate of production from oil and gas
properties declines as reserves are depleted. Except to the extent the Company
acquires additional properties containing proved reserves, conducts successful
exploration and development activities or, through engineering studies,
identifies additional behind-pipe zones or secondary recovery reserves, the
proved reserves of the Company will decline as reserves are produced. Future
oil and gas production is, therefore, highly dependent upon the Company's level
of success in acquiring or finding additional reserves. See "Business and
Properties -- Oil and Gas Operations -- Oil and Gas Reserves."
Volatility of Oil and Gas Prices. Oil and gas prices have been and may
be expected to continue to be quite volatile. This volatility depends on
numerous factors, including steps taken by OPEC, tensions in the Middle East
and weather conditions. The average gas prices received by the Company were
$2.39, $2.28, $2.17 and $1.50 per Mcf in 1992, 1993 and 1994 and for the nine
months ended September 30, 1995, respectively. The average oil prices received
by the Company were $17.57, $14.10, $12.88 and $14.69 per Bbl in 1992, 1993 and
1994 and for the nine months ended September 30, 1995, respectively. At
December 22, 1995, the Company was receiving an average of $2.05 per Mcf for
its gas production and $15.45 per Bbl for its oil production.
Drilling Risks. Drilling for oil and natural gas involves numerous
risks, including the risk that no commercially productive hydrocarbon
reservoirs will be encountered. The cost of drilling, completing and operating
wells is often uncertain and drilling operations may be curtailed, delayed or
canceled as a result of a variety of factors, including unexpected drilling
conditions, equipment failures or accidents and adverse weather conditions.
The Company's future drilling activities may not be successful and if
unsuccessful, such failure will have an adverse effect on the Company's future
results of operations and financial condition.
Operating Hazards. The Company's operations are subject to all of the
risks normally incident to the operation and development of oil and gas
properties and the drilling of oil and gas wells, including encountering
unexpected formations or pressures, blowouts, cratering and fires, which could
result in damage or injury to, or destruction of, formations, producing
facilities or other property or could result in personal injuries, loss of life
or pollution of the environment. Any such event could result in substantial
loss to the Company which could have a material adverse effect on the Company's
financial condition. Operations on its California properties are also subject
to the risk of direct or incidental damage caused by earthquakes. In addition,
because of the Company's strategy of acquiring interests in underdeveloped oil
and gas fields that have been operated by others for many years, the Company
may be liable for any damage or pollution caused by any prior operations on
such oil and gas fields. Although such operational risks and hazards may to
some extent be minimized, no combination of experience, knowledge and
scientific evaluation can eliminate the risk of investment or assure a profit
to any company engaged in oil and gas operations.
Uninsured Risks. Under the terms of operating agreements entered into
with the operator of wells in which the Company has an interest, it is
anticipated that the operators will carry insurance against certain risks of
oil and gas
9
<PAGE> 13
operations. The Company would normally be required to pay its proportionate
share of the premiums for such insurance and be named as an additional insured
under the policy. However, the Company may not be fully insured against all
risks, either because such insurance is not available or because of premium
costs.
Weather Hazards. Weather conditions, including severe rains and winter
conditions, have adversely impacted the Company's oil and gas operations.
Heavy rains during the winter of 1995 washed out a road to the Company's Hopper
Canyon, California property, which required the producing wells on the property
to be shut in. Severe winter conditions on the San Juan Basin, New Mexico
property caused a curtailment of operations, including attempts to complete
wells which have been drilled. The inability to produce existing wells and to
complete wells which may yield commercial quantities of oil or gas has an
adverse impact on the Company's cash flow and financial condition. Further,
weather conditions in the future, including hurricanes in the Gulf of Mexico,
could interrupt or prevent exploration drilling activities on the Zydeco
Projects and, if such projects prove to be productive of oil and natural gas,
could interrupt production activities by damaging surface facilities needed to
produce the wells.
Environmental Hazards. Oil and gas operations present risks of
environmental contamination from drilling operations and leakage from oil field
storage or transportation facilities. The Company has never experienced a
significant environmental mishap, but spills of oil could occur which could
create material liability to the Company for clean-up expenses. Environmental
contamination has occurred on the San Juan Basin, New Mexico property prior to
the Company's acquisition of its interest but has been cleaned up at no cost to
the Company. Although there can be no assurance of any third party recovery in
the event of a material liability, the Company generally seeks an indemnity
from the Seller against claims for environmental hazards on properties acquired
through its acquisition program. In addition, the Company carries $2,000,000
of primary environmental insurance per occurrence with a $2,500 deductible plus
umbrella liability coverage for an additional $4,000,000 per occurrence with a
$10,000 deductible to cover potential liability. See "Business and Properties
- -- Governmental Regulation."
Competition. The oil and gas exploration, production and acquisition
business is highly competitive. A large number of companies and individuals
engage in acquiring properties or drilling for oil and gas, and there is a high
degree of competition for desirable oil and gas properties. There is also
competition between the oil and gas industries and other industries in
supplying the energy and fuel requirements of industrial, commercial,
residential and other consumers. Many of the Company's competitors have
greater financial and other resources than does the Company, and no assurance
can be given that the Company will be able to compete successfully in acquiring
desirable properties. See "Business and Properties -- Competition."
Government Regulation. The Company's business is regulated by certain
federal, state and local laws and regulations relating to the development,
production, marketing and transmission of oil and gas, as well as environmental
and safety matters. There is no assurance that laws and regulations enacted in
the future will not adversely affect the Company's exploration for, or the
production and marketing of, oil and gas. From time to time, proposals are
introduced in Congress or by the Administration which could affect the
Company's oil and gas operations. See "Business and Properties -- Governmental
Regulation."
RISKS ASSOCIATED WITH INVESTMENT IN THE COMMON STOCK
Loss of Status as Debt. Debentureholders who convert their Debentures
into shares of Common Stock and Exchange Warrants will no longer hold debt
securities of the Company. While the Debentures are unsecured, they do bear
interest which is paid semiannually and are due and payable December 31, 1997.
No assurance can be given that the Company will have the financial resources to
repay the Debentures at maturity, but in the event of a default, the
Debentureholders have the right to elect two directors to the Board of
Directors of the Company. The Common Stock does not afford similar rights to
the stockholders of the Company. It is unlikely that the Company will pay
dividends on the Common Stock in the foreseeable future, and there is no
obligation to redeem any of the Common Stock. Therefore, unless stockholders
are able to sell their shares of Common Stock on the AMEX or other market, they
may not be able to recoup their investment.
No Proceeds to Fortune. Fortune will not receive any proceeds from
this offering, though it will be relieved of long term debt. Nevertheless, the
Company will be required to pay all expenses of the offering estimated to be
$50,000. If the Company receives any proceeds from the exercise of Warrants,
it will retain such proceeds irrespective of the amount raised.
Market Price Volatility. The market price of the Common Stock and the
Company's warrants may be subject to significant fluctuations in response to
drilling results in the Zydeco 3D Venture, the San Juan Basin or other
properties owned
10
<PAGE> 14
by the Company and the financial results of operations. Developments affecting
the oil and gas industry generally, including national and international
economic conditions and government regulation, could also have a significant
impact on the market price of the Common Stock and warrants. In addition, the
stock market in recent years has experienced significant price and volume
fluctuations that often have been unrelated or disproportionate to the
operating performance of companies, and the price of the Common Stock and
warrants could be affected by such fluctuations.
Securities Market Factors. The markets for equity securities have been
volatile and the price of the Company's Common Stock has in the past been, and
could in the future be, subject to wide fluctuations in response to quarter to
quarter variations in operating results, news announcements, trading volume,
general market trends and other factors. There can be no assurance that the
Common Stock exchanged in this offering will trade in the future at market
prices in excess of the conversion price of this offering.
Absence of Dividends. The Company has not paid dividends since its
inception, and it does not anticipate paying dividends on its Common Stock in
the foreseeable future. Under the Credit Facility, the Company may not pay
dividends on its capital stock without the prior written consent of the bank.
In addition, the indenture under which the Company's outstanding debentures
were issued restricts the payment of dividends. See "Dividend Policy,"
"Management's Discussion and Analysis of Financial condition and Results of
Operations" and "Description of Securities -- Common Stock."
Shares Eligible for Future Sale. Sales of substantial amounts of the
Common Stock in the public market could adversely affect the market price of
the Company's Common Stock. At December 21, 1995, the Company had outstanding
options and warrants to purchase an aggregate of 5,476,040 shares of Common
Stock which are currently exercisable and 431,250 shares of Common Stock
issuable upon conversion of the Company's outstanding Debentures. At December
21, 1995, there were 11,058,761 shares of Common Stock outstanding, of which
8,671,530 shares are freely tradeable and 2,387,231 shares are restricted from
sale by lockup agreement or under Rule 144 adopted by the Commission under the
Act. In connection with the Company's recently concluded offering of Common
Stock, all of the Company's directors and certain principal stockholders of the
Company entered into "lockup" agreements with the Representatives of the
Underwriters not to dispose of any shares of Common Stock held by them until
July 31, 1996, without the prior consent of the Representatives. No notice
will be given to the stockholders or the market if the Representatives grant
such consent. At the conclusion of such "lockup" period, approximately
1,388,000 currently outstanding shares of Common Stock will become eligible for
sale subject to Commission Rule 144.
In connection with the Company's acquisition of its interest in the
Zydeco 3D Venture, Fortune issued 1,200,000 shares of Common Stock and
1,200,000 five year stock purchase warrants exercisable at $4.75 per share.
Pursuant to court order, Fortune has placed in escrow 400,000 shares of Common
Stock and 400,000 warrants due to the stockholders of LEX until a dispute which
has arisen among them is resolved. See "Business and Properties -- Legal
Proceedings." Even if such dispute is resolved, 400,000 shares and warrants
will remain in escrow pending the satisfaction of certain conditions. See
"Business and Properties - Zydeco 3D Venture." Financing of subsequent
contributions to the Zydeco 3D Venture and funding of the Company's share of
drilling costs on the Zydeco Projects could require the issuance of additional
securities.
Anti-Takeover Provisions. Section 203 of the Delaware General
Corporation Law could have the effect of delaying, deferring or preventing a
change of control of the Company. Section 203 prevents an "interested
stockholder" (generally, any person owning 15% or more of a corporation's
outstanding voting stock) from engaging in a "business combination" (as
defined) for three years following the date such person became an interested
stockholder unless certain exceptions are met. In addition, the Company has a
substantial amount of authorized but unissued Common Stock and preferred stock.
The Commission has indicated that the use of authorized but unissued shares of
voting stock, including both common stock and preferred stock the terms of
which may be established by the board of directors, could have an anti-takeover
effect. See "Description of Securities -- Certain Anti-Takeover Provisions."
11
<PAGE> 15
USE OF PROCEEDS
If all of the Debentures are converted, the Company will be relieved of
$1,725,000 of long term debt. The Company will not receive any proceeds from
such conversion, however; and it will still be obligated to pay the expenses of
this offering, estimated to be $__________, whether or not this Exchange Offer
is successful. In the Exchange Offer, the Company will issue _______ Exchange
Warrants. If all such Warrants were exercised, the net proceeds to the Company
would be $_________. No assurance can be given that the Company will receive
any proceeds from the exercise of Exchange Warrants. To the extent the Company
receives any such proceeds, they will be used to provide working capital and
pay drilling costs on future projects, but the Company has not identified any
specific expenses which will be paid. Pending application of any such
proceeds, the Company would make temporary investments in interest-bearing
savings accounts, certificates of deposit, U.S. government obligations, money
market accounts or other short-term, interest-bearing securities.
DILUTION
The net tangible book value of the Company at September 30, 1995, was
$13,529,000 or $1.44 per share of Common Stock. Net tangible book value per
share represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding.
Assuming conversion of all of the Debentures, the net tangible book value of
the Company at September 30, 1995 would have been $__________ or $____ per
share. See "Exchange Offer." This represents a substantial increase in net
tangible book value to existing stockholders and a substantial dilution to new
investors acquiring Common Stock through the conversion of their Debentures.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1995, and as adjusted to reflect the conversion of all of the
Debentures to Common Stock. No assurance can be given that any of the
Debentures will be converted, although this offer to convert will not close
unless at least 90% in principal amount of the Debentures are converted. The
following table should be read in conjunction with the Financial Statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1995
----------------------------------
Actual As Adjusted(1)
------ --------------
<S> <C> <C>
Current liabilities (including current portions of
long term debt) $ 4,639,000 $4,639,000
=========== ==========
Long-term debt (excluding current portion) $ 1,687,000 -
Stockholders' equity
Preferred stock, $1.00 par value, 2,000,000
shares authorized, none outstanding
Common stock, $.01 par value, 40,000,000
shares authorized, 9,381,854 shares outstanding $ 94,000 $
Additional paid-in capital $22,853,000 $
Accumulated deficit (9,228,000) $
----------- ----------
Net stockholders' equity $13,719,000 $
=========== ==========
Total capitalization $15,406,000 $
=========== ==========
</TABLE>
- ----------------
(1) Assumes conversion of all Debentures but not the exercise of any of the
Exchange Warrants.
12
<PAGE> 16
DIVIDEND POLICY
The Company has not paid dividends since its inception, and it does not
anticipate paying any dividends on its Common Stock in the foreseeable future.
Under the Company's line of credit, the Company may not pay dividends on its
capital stock without the prior written consent of the bank. The Indenture
under which the Company's outstanding Debentures were issued restricts the
payment of dividends in the event the Company is in default on the Debentures;
and Delaware law prevents the payment of dividends unless the Company meets
certain financial tests. See "Description of Securities -- Common and
Preferred Stock" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
Prior to September 28, 1993, the Company's Common Stock was traded in
the over-the-counter market and quoted on the National Association of
Securities Dealers Automated Quotation System Small Cap Market. On September
28, 1993, trading in the Common Stock commenced on the AMEX. Trading in the
Warrants on the AMEX began on April 18, 1994. The following table sets forth
the high and the low quarterly closing prices of the Common Stock and Warrants
on the AMEX for the periods indicated and the high and low bid prices as quoted
on the NASDAQ system (which reflect inter-dealer quotations that do not
necessarily represent actual transactions and are exclusive of retail mark up,
mark down and commissions). (All share amounts and per share prices have been
adjusted to reflect a one-for-four reverse stock split effective June 16,
1993.)
<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1995
Fourth Quarter $4-15/16 $3-3/8 $3-3/8 $2-3/4
Third Quarter 3-15/16 3-5/16 2-1/2 1
Second Quarter 3-5/16 1-3/8 1 3/8
First Quarter 2-5/8 1-5/8 7/8 1/2
1994
Fourth Quarter 3-9/16 1-7/8 1-11/16 7/16
Third Quarter 3-1/4 2 3/4 5/16
Second Quarter 2-3/8 1-3/8 5/8 3/16
First Quarter 2-11/16 2-1/8
1993
Fourth Quarter 3-3/4 2-1/8
Third Quarter (commencing
September 28, 1993) - AMEX 4 3-3/4
Third Quarter (through
September 27, 1993) - NASDAQ 5-7/8 3-3/4
Second Quarter 5-3/4 4
First Quarter 5-1/2 5
</TABLE>
The high and low closing prices of the Common Stock during the fourth
quarter of 1995 (through December 29, 1995) have been $4.94 and $3.375,
respectively. At December 29, 1995, the closing price of the Common Stock was
$4.88. At December 21, 1995, there were 11,058,761 shares of the Company's
Common Stock outstanding held of record by approximately 1,500 stockholders.
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the
Company's Financial Statements, related notes and other financial information
included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Fortune's primary focus is domestic exploration for, and development
of, oil and natural gas. The Company expects in the future to make use of
advanced 3D and 2D seismic technology, beginning with the Zydeco 3D Venture.
Prior to June 1994, Fortune had been an oil and gas acquisition and development
company seeking to acquire proved reserves and development opportunities on
proven properties. Fortune encountered losses during the past three years,
some of which were generated by conditions such as commodity price induced
impairments and key non-operated wells which had production curtailed to meet
government maximum field allowable levels. The Company initiated the change
from an acquisition based, to an advanced technology exploration based, plan of
operation to attempt to reduce potential finding costs of oil and gas reserves
to an amount which is less than the cost per BOE to acquire them. There can be
no assurance that such a strategy will be effective.
Revenues and Production
Over the three years ended December 31, 1994, the Company increased its
oil and gas revenues by about 62.6%, to $3,339,000 from $2,093,000.
During the three years ended December 31, 1994, Fortune's production of
crude oil remained relatively constant despite the Company's emphasis on
acquiring gas reserves. At the same time, natural gas production grew for the
same three year period almost 4.4 times to 1,016,771 Mcf from 233,892 Mcf with
1994 natural gas production surpassing the Company's natural gas production for
1993 and 1992 combined.
Direct Production Expenses per BOE
Over the three years ended December 31, 1994, the Company decreased its
direct production expense per equivalent barrel by 36% to $4.24 per BOE from
$6.62 per BOE through improved operating techniques, reduced operating costs on
its California properties and increased production volumes.
The following table presents, as a percentage of net sales, certain
financial data for the Company for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31, September 30,
------------------------------------ -------------
1992 1993 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Revenues 100% 100% 100% 100%
Direct Production Expense 39% 33% 32% 48%
--- ---- --- ---
Revenue in Excess of Direct
Production Expense 61% 67% 68% 52%
Operating Results
Depletion, depreciation
and amortization 22% 61% 61% 45%
Geological and geophysical - - - 16%
General and administrative
expenses 30% 28% 30% 39%
Interest expense 11% 11% 14% 24%
Other expenses 4% 6% 20% 2%
Loss (gain) on sale of assets 3% (5%) - -
Impairment to oil and
gas reserves - 95% 30% -
--- ---- --- ---
Net Loss (9%) (129%) (87%) (74%)
</TABLE>
14
<PAGE> 18
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 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 $13.74 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, 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%) an $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.
As previously discussed, 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. 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 its right to participate in
the Zydeco 3D Venture. Unaudited proforma net loss per common share would have
been $.27 for the 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 proforma basis. Future results
will be determined by the degree of exploration success, if any, the Company
attains from its involvement in the Zydeco 3D Venture, offset, on a per share
basis, by 1.2 million shares issued to the principals of LEX.
YEARS ENDED DECEMBER 31, 1994 AND 1993
During the year ended December 31, 1994 Fortune had a net loss of
$2,943,000, compared to a net loss of $3,654,000 for the year ended December
31, 1993. The loss for the period ended December 31, 1994 was primarily due to
higher depletion expense, lower natural gas prices received by the Company
during the period and higher lease operating costs attributed to the properties
acquired earlier this year. The loss for the year ended December 31, 1994
period also
15
<PAGE> 19
includes a $1,031,000 impairment against oil and gas reserves, a one time
charge of $225,000 for a severance package, to be paid over a two year period,
to Daniel E. Pasquini, the Company's former president who resigned on June 23,
1994, and a $315,000 charge for the Company's interest in a Webb County, Texas,
exploration project. The $315,000 Webb County loss consisted of $115,000 in
dry hole costs and a $200,000 non-cash impairment which was included in
abandoned leasehold expense.
Net revenues from sales of oil and gas increased $577,000 (21%) in the
year ended December 31, 1994, compared to the same 1993 period. The increase
resulted primarily from production from wells acquired and recompletion
activities at the La Rosa Field. Oil prices the Company received averaged
$12.88 per barrel for the year ended December 31, 1994 as compared to $14.10
per barrel for the year ended December 31, 1993. Gas prices averaged $2.17 per
Mcf for the period ended December 31, 1994 as compared to $2.28 for the year
ended December 31, 1993. Also, in the year ended December 31, 1994 other
income consisted primarily of operator overhead fee revenues being charged on
joint owned wells.
Direct production expenses increased by $144,000 (15%) in the year
ended December 31, 1994, compared to 1993. The increase was primarily due to
the increase in direct operating expense from the acquired production and
additional wells put on production as a result of recompletions and facility
installations in Refugio County, Texas and Rio Arriba County, New Mexico, net
of expense reductions in California operations due to improved operating
methods and lower electrical costs.
During 1994, Fortune's general and administrative expenses increased
by $229,000 (29%), over 1993 general and administrative expenses. The increase
was due primarily to increased insurance costs, legal fees, public relations
expenses, stockholder expense and expense attributed to a failed merger attempt
during the year. Interest expense increased by $149,000 (48%) for the year
ended December 31, 1994, due to increased interest bearing debt from the
Refugio County, Texas and Rio Arriba County, New Mexico acquisitions. The
Company's provision for depletion, depreciation and amortization increased by
$351,000 (20%) in the year ended December 31, 1994, compared to the same 1993
period because of depletion related to the additional acquired oil and gas
properties and lower gas prices at year end. During 1994, the Company also had
an impairment against its oil and gas assets as a charge against earnings (as
it had for 1993, as discussed below) and abandoned leasehold costs totaling
$1,280,000 on the Company's oil and gas properties.
YEARS ENDED DECEMBER 31, 1993 AND 1992
During the year ended December 31, 1993 Fortune had a net loss of
$3,654,000 compared to net loss of $198,000 for the year ended December 31,
1992.
The lower oil prices at December 31, 1993 shortened, for the Company's
reserve report purposes, the economic life of its proved producing reserves and
almost eliminated its proved undeveloped oil reserves in California. For this
reason the Company was required to take an impairment against its oil and gas
assets as a charge against earnings. The Company elected to use the more
conservative "Present Discounted Value" ceiling test method which amounted to
an impairment at December 31, 1993 of $2,682,000.
Net revenues from sales of oil and gas increased approximately
$669,000 (32%) in the year ended December 31, 1993, compared to the same 1992
period. The increase resulted primarily from the net effect of increased
natural gas revenues from properties acquired in Webb County, Texas, effective
July 1, 1993 and decreased revenues from lower oil prices. Oil prices averaged
$14.10 per barrel for the year ended December 31, 1993 as compared to $17.57
per barrel for the year ended December 31, 1992. Gas prices averaged $2.28 per
Mcf for the year ended December 31, 1993 as compared to $2.39 per Mcf for 1992.
For the years ended December 31, 1993 and 1992 other income consisted
primarily of operator overhead fee revenues being charged on joint owned wells.
Direct production expenses increased by $109,000 (13%) in the year
ended December 31, 1993 compared to the year ended December 31, 1992. The
increase during the 1993 year was primarily due to increased costs of workover
and repairs to maintain production from the Company's Hopper, Holser and Sespe
properties in Ventura County and the additional operating expenses for the July
1, 1993 to December 31, 1993 period for the acquired Webb County, Texas
production.
In the year ended December 31, 1993, Fortune's general and
administrative expenses increased by $137,000 (21%) over 1992 general and
administrative expenses. The increase during the year was due primarily to
increased stockholder
16
<PAGE> 20
expense for the two additional Company Stockholders' meetings on March 12, 1993
and August 10, 1993, increased insurance costs and higher payroll and payroll
taxes. Interest expense increased by $77,000 (33%) for the year ended December
31, 1993 due to a full year of interest bearing debt from the Hinkle
acquisition and the Company's Debentures. The Company also established a
reserve for doubtful debt of $101,000 for the year ended December 31, 1993
marking down a note receivable to the market value of its collateral. The
Company's provision for depletion, depreciation and amortization increased by
$1,237,000 (257%) in the year ended December 31, 1993 compared to 1992 because
of the acquisition of additional natural gas properties in Texas and the
dramatic effect of lower 1993 year end oil prices on the calculation of
depletion under the "Units of Production" method.
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.
On June 30, 1995, the Company closed an underwriting of 4,100,000
shares of Common Stock at a price of $2.00 per share. On July 5, 1995, the
underwriters exercised their overallotment option for an additional 500,000
shares. Total gross proceeds in the offering were $9,200,000 and the Company
netted approximately $8,169,000 after deduction of underwriting discounts and
costs of the offering. On December 11, 1995, the Company closed a private
placement of approximately 1,320,000 shares to acquire a producing property and
raise additional capital. From this sale, the Company netted approximately
$3,602,000 after payment of expenses of the offering. See "Business and
Properties -- Acquisition Activity -- PetroFina Acquisition."
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.
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 30, 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.
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 October 1, 1996. The amount
the Company may borrow under the Credit Facility is determined by the borrowing
base as calculated by the Bank on semi-annually on the basis of the Company's
oil and gas reserves. The principal balance of the Credit Facility at November
1, 1995 is $3,400,000. At February 1, 1995, the borrowing base under the
Credit Facility was $4,700,000 but was reduced to $4,100,000 at April 1, 1995.
The borrowing base continues to decline at the rate of $100,000 per month.
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 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. The three principal
covenants are (i) maintain positive working capital exclusive of the Bank One
debt; (ii) maintain a tangible net worth in excess of $5,000,000; and (iii)
have twelve month rolling average cash flow, as adjusted, equal to not less
than 25% of the outstanding principal on the credit facility.
At November 1, 1995, Fortune reduced the principal balance to
$3,400,000 to bring the loan into compliance with the borrowing base at that
date. The borrowing base is currently being recalculated by the Bank as of
November 1, 1995, and may increase or be further reduced, depending on the oil
and natural gas prices used in calculating the Company's reserves, however the
Company has not been informed by Bank One of any change. Even if the borrowing
base is increased by the Bank above the then current balance as of November 1,
1995, the Company may continue to be required to pay down
17
<PAGE> 21
the principal balance at the rate of $100,000 per month to the extent the
borrowing base is equal to or less than the outstanding principal balance in
light of the monthly decline in the borrowing base as described above.
At December 31, 1994, March 31, 1995, June 30, 1995 and September 30,
1995 the Company was in breach of certain covenants under the Credit Facility.
The bank has waived such covenant breaches. See Notes 5 and 14 of Notes to
Financial Statements set forth elsewhere herein. On April 24, 1995, the Bank
agreed to waive such covenant breaches but 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. In addition, the
Company agreed to consider selling its California properties, which represent
approximately $1.5 million of the borrowing base under the Credit Facility
although, this was not a requirement of the bank. The Company has begun
efforts to sell the California properties, though no assurance can be given
that it will be able to do so or, if successful, that such sale will be at or
greater than the book value for such properties.
The entire principal balance of the Credit Facility is due July 1,
1996, and the Company does not currently have the financial resources necessary
to repay the Credit Facility in full at that time. The Company and Bank One
are in negotiations at the date of this prospectus to obtain a further waiver
or modification of the cash flow covenant and to restructure the repayment of
the Credit Facility to reduce the required principal payments and extend the
due date of the loan beyond July 1, 1996. There can be no assurance that such
negotiations will prove successful.
Although the Company had a positive cash flow during 1994 from
operating activities of $491,000, the Company had negative working capital at
December 31, 1994 of $4,576,000 due to reclassification of the Credit Facility
to current portion of long-term debt. Current low gas prices have had a
negative impact on the Company's cash flow and terms of its Credit Facility.
Therefore, the Company's viability as a going concern is dependent upon either
restructuring its debt, completion of this offering or other offerings of
equity or equity-linked securities, pledge of additional collateral, higher
commodity prices or a combination of the foregoing which would be adequate to
provide sufficient cash flow to meet its obligations. No assurance can be
given that the Company's efforts to cure its liquidity concerns will be
successful.
Fortune's internal liquidity and capital resources 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 during the year
ended December 31, 1994 primarily due to decreased cash flow from operations as
a result of lower natural gas prices. 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), and $2,000,
respectively.
Total capital expenditures for the nine months ended September 30,
1995, including expenditures for property acquisition and drilling and
completion costs, were $1,937,000 as compared to $3,331,000 for the comparable
1994 period. Capital expenditures for the year ended December 31, 1994 were
$4,065,000, as compared to $6,750,000 for the same 1993 period. It is
anticipated that the Company's costs of drilling wells in 1995 and 1996 will be
paid out of general working capital provided by the proceeds of its June 1995
Common Stock offering, the exercise of warrants (of which there can be no
assurance that any such exercise will occur) and by internally generated cash
flow. See "Use of Proceeds." If oil or natural gas prices increase
sufficiently to cause an increase in the Company's proved reserves used to
calculate the borrowing base, the Company may have additional bank borrowings
available under the Credit Facility. Further, if additional oil or natural gas
reserves are discovered on any of the Company's properties and Bank One
increases the borrowing base under the Credit Facility as a result, this would
also permit the Company to pay drilling costs with bank borrowings. No
assurance can be given that product prices will increase, that any such
additional reserves will be discovered or that Bank One will agree to increase
the borrowing base under the Credit Facility.
The Company had capital expenditures for the last quarter of 1995 of
approximately $600,000 in exploration costs and an additional $400,000 in
completion costs, if such exploration is successful. Fortune's capital
expenditures for 1996 are currently estimated to be approximately $2,500,000
for its exploration activities. The Company intends to provide for these
expenditures with its available cash and either the exercise of outstanding
warrants, as described herein, 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 interest or
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, then the Company would not derive as great a benefit as
18
<PAGE> 22
it may have otherwise enjoyed in the event of an exploration success.
Exploration results do vary, therefore it is both impossible at this time to
quantify an exploration success, if any, or its impact on the Company.
As of December 31, 1994 the Company was receiving approximately $14.41
per barrel as an average price for its produced oil and $1.69 per Mcf as an
average price for its produced gas. At December 22, 1995, the Company was
receiving an average of $2.05 per Mcf for its gas production and $15.45 per Bbl
for its oil production.
Fortune has limited sources of capital that provide it with additional
liquidity other than its cash flow from operations. As discussed above, the
Credit Facility is secured by substantially all of Fortune's oil and gas
properties (other than the Zydeco Projects). There was no available credit on
the Credit Facility at November 1, 1995. Therefore, Fortune is unable to
borrow additional funds in excess of its borrowing base by utilizing certain of
its oil and gas assets. This condition is not expected to improve in the near
future due to the continued depressed condition of oil and gas prices, which
has the effect of reducing Fortune's borrowing base.
In order to provide capital for development activities, in December
1994, the Company borrowed an aggregate of $750,000 from certain principal
stockholders and members of management. For additional information regarding
the terms of these loans, see "Certain Relationships and Related Transactions."
In 1994, cash flows provided by operating activities were
$491,000,used in investing activities were $4,287,000 and provided by financing
activities were $4,085,000. Net cash provided by operating activities
decreased by $481,000 from 1993 and reflects the result of higher revenues from
oil and gas production activities, offset by cash used to reduce liabilities
from 1993 balances. Net cash used in investing activities increased by
$2,171,000 from 1993 due to decreased expenditures for property and equipment.
Net cash provided by financing activities decreased by $1,356,000 from 1993 as
a net result of the proceeds provided by the Company's Credit Facility, offset
by the retirement of the Klein and Halliburton notes in comparison to 1993's
Common Equity offering proceeds.
In 1993, cash flows provided by operating activities were $980,000,
used in investing activities were $6,458,000 and provided by financing
activities were $5,441,000. Net cash provided by operating activities
increased by $783,000 from 1992 and reflects significantly higher revenues and
year-end receivables and inventories from oil and gas production activities,
offset by cash used to pay down current portions of long-term debt. Net cash
used in investing activities increased by $6,222,000 from 1992 due to increased
expenditures for property and equipment. Net cash provided by financing
activities increased by $5,413,000 from 1992 as a net result of the proceeds
provided by the Company's public equity offering of Units, offset by the
retirement of the Hinkle and Halliburton Notes, payments on debt incurred in
the Webb County properties' acquisition and the Company's costs of the public
equity offering.
Fortune has obtained updated oil and gas reserve reports from
Huddleston & Co. Inc., of Houston, Texas, and Sherwin Yoelin, its independent
engineers, dated March 2, 1995 and February 27, 1995, respectively. These
reports indicated a net present value discounted at ten percent of the
Company's proved reserves equal to $8.1 million at December 31, 1994, compared
to a $8.6 million discounted value at December 31, 1993. Of that total value,
the proved developed producing wells had a discounted value of $5.7 million at
December 31, 1994 compared to $6.5 million at December 31, 1993. Total net
proved recoverable reserves at December 31, 1994 increased to 1,647,000 barrels
of oil and 5.9 billion cubic feet of natural gas from 813,000 barrels of oil
and 5.6 billion cubic feet of natural gas at December 31, 1993. The increase
in natural gas was primarily attributable to the acquisition of the Refugio
County, Texas producing assets, though the increase was only .3 billion cubic
feet due to significantly lower gas prices at December 31, 1994 on which the
reserve report is calculated.
If all of the Debentures are converted into shares of Common Stock,
the Company will be relieved of interest expense totalling $182,000 per year.
As a result, Fortune will experience an increase in cash flow as a result of
the closing of this offer to convert.
CAPITAL EXPENDITURES
The capital expenditures of the Company for the nine months ended
September 30, 1995, and for the years ended December 31, 1994, 1993 and 1992,
excluding properties purchased, were $1,937,000, $1,283,000, $346,000, and
$217,000, respectively. The increase in capital expenditures for the nine
months ended September 30, 1995 relate to the
19
<PAGE> 23
contributions to the Zydeco 3D Venture, and in 1994 was principally
attributable to capital expended to acquire, explore and develop the Company's
acquired interests in Rio Arriba County, New Mexico and Refugio County, Texas.
PLAN OF OPERATION
The Company has sought to add reserves in the most cost-efficient and
effective manner. Prior to mid-1994, the Company focused its efforts on the
acquisition of producing properties in an effort to take advantage of
competitive prices for proved reserves with development potential in relation
to the cost of reserves discovered through exploration activities. See
"Business and Properties -- Acquisition Activity." In mid-1994, the Company
made a strategic decision to shift its emphasis from the acquisition of
producing properties to exploration for oil and natural gas reserves. This
decision was prompted by increasing price competition for attractive producing
properties (caused by larger and better capitalized companies moving into the
acquisition market) and a general tightening in available financing for
acquisitions. It is the Company's belief that the change from an acquisition
based, to an advanced technology exploration based, plan of operation to
attempt to reduce potential finding costs of oil and gas reserves to an amount
which is less than the cost per BOE to acquire them, is appropriate. However,
there can be no assurance that such a strategy will be effective. See "Risk
Factors - Risks Associated with Oil and Gas Industry."
The Company's decision to shift its emphasis to exploration was
further influenced by several factors which Fortune believes create new
opportunities for exploration. These factors include increased availability of
3D seismic and CAEX technology at competitive prices and the reallocation of
exploration budgets by major oil companies from domestic activity to
international exploration. This move by the major oil companies resulted in
increased access to geological and geophysical information relating to
potential prospects, new opportunities to enter into farmout agreements with
respect to prospects held by the major oil companies and less demand and price
competition for domestic acreage. To help facilitate its exploration strategy
and focus its efforts, the Company has begun efforts to sell all of its
California producing properties and prospects and retiring the debt secured by
such properties from the proceeds of such sale. The Company will be relocating
its headquarters to the greater Houston, Texas area in early 1996.
The Company would expect to continue to review acquisition
opportunities which may be presented to it and to conclude acquisitions which
further its business objectives. For information regarding a recent
acquisition, see "Business and Properties -- Acquisition Activity -- PetroFina
Acquisition." Of course, no assurance can be given that any such opportunities
will present themselves or that the Company will be able to conclude any
transactions if they arise. The Company is not now in discussions with any
other party regarding and has no arrangements or agreements respecting any
potential acquisition.
[this space left blank intentionally]
20
<PAGE> 24
BUSINESS AND PROPERTIES
GENERAL
Fortune is an independent public oil and natural gas company whose
primary focus is on exploration for and development of domestic oil and natural
gas properties. The Company has recently acquired an interest in the Zydeco
Projects which will enable it to participate in exploration for oil and natural
gas in the shallow Gulf Coast waters of Louisiana in a strategic partnership
with Zydeco Exploration, Inc. referred to as the Zydeco 3D Venture. At the
date of this Prospectus, the Zydeco Projects are at various stages of
preparation for drilling. Leases have been acquired on all of the Zydeco
Projects. While management believes that the Zydeco 3D Venture has the
potential to add materially to the Company's reserves and, ultimately, its
revenues, no assurance can be given that the drilling of exploratory wells on
any of the Zydeco Projects will occur or will result in the discovery of
commercial quantities of oil or natural gas, or that the Company will be able
to successfully explore for oil and gas reserves or ever produce such reserves.
The Zydeco 3D Venture utilizes advanced three dimensional (3D) seismic
and computer-aided exploration ("CAEX") technology in its exploration efforts.
Zydeco has blended existing 3D seismic and CAEX technology, production data and
characteristics of wells in a particular geographic area and advanced
interpretation techniques (as well as traditional two-dimensional (2D)
seismic), to identify the initial Zydeco Projects. The Company believes that
the use of 3D seismic and CAEX technology provides more accurate and
comprehensive geological data for evaluation of drilling prospects than 2D and
traditional evaluation methods. Similarly, the Company believes that the
techniques used by Zydeco in combining existing 3D seismic and CAEX technology
will provide the Zydeco 3D Venture and Fortune with a competitive advantage by
increasing the likelihood of finding commercial quantities of oil and gas and
achieving lower average reserve finding costs. See "Risk Factors."
The Company's principal executive offices are currently located at
30101 Agoura Court, Suite 110, Agoura Hills, California 91301 and its telephone
number at that address is (818) 991-0526.
BUSINESS STRATEGY
The Company has sought to add reserves in the most cost efficient and
effective manner. The Company previously focused its efforts on the
acquisition of producing properties in an effort to take advantage of what it
believed to be competitive prices for proved reserves with development
potential in relation to the cost of reserves discovered through exploration
activities. See " -- Acquisition Activity." In mid-1994, the Company made a
strategic decision to shift its emphasis away from the acquisition of producing
properties to exploration for oil and natural gas reserves. This decision was
prompted by increasing price competition for attractive producing properties
(caused by larger and better capitalized companies moving into the acquisition
market) and a general tightening in available financing for acquisitions.
The Company's decision to shift its emphasis to exploration was
further influenced by several factors which Fortune believes create new
opportunities for exploration. These factors include increased availability of
3D seismic and CAEX technology at competitive prices and the reallocation of
exploration budgets by major oil companies from domestic activity to
international exploration. This move by the major oil companies resulted in
increased access to geological and geophysical information relating to
potential prospects, new opportunities to enter into farmout agreements with
respect to prospects held by the major oil companies and less demand and price
competition for domestic acreage. To help facilitate its exploration strategy
and focus its efforts, the Company is intends to begin efforts to sell all of
its California producing properties and prospects and retiring the debt secured
by such properties from the proceeds of such sale. Fortune has not taken any
significant actions with respect to disposing of such properties. The Company
will be relocating its headquarters to the greater Houston, Texas area in early
1996.
The Company would expect to continue to review acquisition
opportunities which may be presented to it and to conclude acquisitions which
further its business objectives. Of course, no assurance can be given that any
such opportunities will present themselves or that the Company will be able to
conclude any transactions if they arise. The Company is not now in discussions
with any other party regarding and has no arrangements or agreements respecting
any potential acquisition.
21
<PAGE> 25
EXPLORATION, EXPLOITATION AND DEVELOPMENT ACTIVITY
Exploration and Exploitation Projects
The Company is involved in a number of exploration and exploitation
projects, including the Zydeco 3D Venture projects and projects in the San Juan
Basin, Rio Arriba County, New Mexico and La Rosa Field, Refugio County, Texas.
Additionally, Zydeco is continuing its work to identify other potential
projects for the Zydeco 3D Venture.
The following table sets forth a summary of certain projects on which
the Company expects to conduct exploration activities over the next 12 to 36
months. In the table, the letter "P" following the name of the project
indicates that it is a "prospect;" the letter "L" indicates that it is a
"lead;" and "C" denotes a "concept." No assurance can be given that drilling
activities will be undertaken on any of these projects or, if undertaken, that
such efforts will be successful in finding commercial quantities of oil or
natural gas.
EXPLORATION AND EXPLOITATION PROJECTS
<TABLE>
<CAPTION>
Maximum
Technology Interest Working Gross
Used or to Owned at Interest Acreage Net
Project Location Partner Be Used Nov. 7, 1995 Available Owned(3) Acreage(3)
- ------- -------- ------- ---------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Aurora(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 320 160
Cirrus(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 245 123
Cruiser(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 1,742 871
Everest(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 290 145
E. Thunder(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 950 415
Jade(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 150 75
Jubilee(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 1,050 525
Matador(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 344 172
Mentor(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 5,000 2,500
Obelisk(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 160 80
Opal(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,452 1,226
Orchid(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 154 77
Ovation(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 514 257
Polaris(P)(4) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,500 1,250
Schooner(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 92 46
Sword(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 30 15
Ulysses(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,148 1,074
Valhalla(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 140 70
Jicarilla San Juan Basin Ampolex, EnRe, 2D 21%-25% N/A 70,000 16,515
Apache(P) New Mexico DEP
LaRosa(P) Refugio Co.,Tx LAROCO 3D 50% N/A 3,689 408
------ ------
91,969 27,532
</TABLE>
________________
(1) Prior to entering into the exploration agreement with Fortune, Zydeco
granted to Clayton Williams Energy the right to purchase, prior to the
commencement of drilling, a one-eighth working interest in each project in
exchange for one-eighth of all costs incurred in the project to that time, plus
one-eighth of all future costs which include drilling, completion and operating
costs for any wells drilled on the project. In such event, if Fortune held a
50% interest in a Project, its interest would be reduced to 43.833% in exchange
for a payment to Fortune of 6.166% of the costs incurred to date.
(2) The Company does not currently expect to retain a working interest of more
than 25% in each Project except in certain circumstances. See "Use of
Proceeds" and "Business and Properties - Exploration, Exploitation and
Development Activity - Zydeco 3D Venture."
(3) Represents the maximum working interest acreage which Fortune has acquired
in each Zydeco Project based upon its maximum contribution to the Zydeco 3D
Venture. Net acreage equals the Company's interest assuming it owns the
maximum working interest. See "Risk Factors" and "Use of Proceeds."
(4) On June 1, 1995, Zydeco and Fortune entered into a farmout of 100% of the
working interest to Southern Gas Company of Delaware in exchange for a 6.166%
overriding royalty, a $100,000 bonus and a $32,000 production payment. Under
the agreement, 4.166% of the overriding royalty is convertible to a 12-1/2%
working interest after payout at Zydeco and Fortune's option. Fortune owns 50%
of such compensation and terms. See "Business and Properties - Exploration,
Exploitation and Development Activity - Zydeco 3D Venture."
22
<PAGE> 26
Zydeco 3D Venture
On May 12, 1995, Fortune acquired Lagniappe Exploration, Inc. ("LEX")
which had previously entered into the exploration agreement with Zydeco. As a
result, Fortune acquired LEX's right to participate in the Zydeco 3D Venture.
Fortune paid the LEX stockholders an aggregate of 1,200,000 shares of Common
Stock and 1,200,000 five year stock purchase warrants exercisable at $4.75 per
share. A portion of such shares and warrants remain in escrow pending the
resolution of a dispute which has arisen among the former LEX stockholders and
others regarding who is entitled to the shares of Common Stock and stock
purchase warrants issued by Fortune at the closing of the LEX acquisition. See
"- Legal Proceedings."
The only material asset of LEX was its right to participate in the
Zydeco 3D Venture. Under the exploration agreement with Zydeco, Fortune has
acquired a 50% interest in each of 18 seismically defined oil and gas projects
identified by Zydeco using advanced 3D seismic imaging, visualization and
comprehensive well log analyses in exchange for funding a budget of $4,850,000
for leasehold acquisition and seismic costs. Fortune has funded $4,850,000 to
maintain a 50% interest in all of the projects. Of these 18 initial projects,
five constitute "prospects" which are in near-drillable condition, six
constitute "leads" on which additional seismic work or lease acquisition (or
both) is required in order for exploration drilling to commence and seven
constitute "concepts," which means that substantial additional seismic and
leasehold acquisition must be undertaken in order to consider exploration
drilling. These 18 Zydeco Projects are primarily located in geological trends
in the "Transition Zone" and the "Timbalier Trench" areas of the Gulf Coast of
Louisiana, where there have been discoveries of crude oil and natural gas
reserves and where advanced 3D seismic and CAEX technology is considered by the
Company and Zydeco to be effective in better defining exploration risks. In
addition to the initial 18 Zydeco Projects, the Company and Zydeco have
established areas of mutual interest ("AMIs") adjoining each prospect and
Zydeco has agreed to provide Fortune with a right of first refusal on any new
projects developed along the Gulf Coast of Louisiana until December 31, 1996.
The advantage to Fortune of the establishment of the AMIs and right of first
refusal is that as Zydeco determines new projects within the AMIs, Fortune will
have the right to participate in them, though no assurance can be given that
any new projects will be identified or that Fortune will have the financial
resources to participate in such projects if any are identified. See "Risk
Factors."
The 18 Zydeco Projects are primarily located in the shallow marine
waters (five to 50 feet) within three to five miles of the Louisiana Coastline
(the "Transition Zone") and in the Timbalier Trench, a pre-historic channel of
the Mississippi River which is now offshore and covered in sedimentary
deposits. The Transition Zone and Timbalier Trench have been difficult areas
from which to obtain quality seismic data and to interpret using conventional
technology. The principals of Zydeco have worked in these two areas for the
past 18 years.
The Company does not currently expect to retain a working interest of
more than 25%, except in certain circumstances, in each well drilled on the
Zydeco Projects and intends to "farmout" its remaining interest to other oil
companies on a "promoted" basis. Fortune may retain larger or smaller working
interests in certain projects depending upon capital availability and other
factors. Under a farmout arrangement, the Company would be relieved of its
obligation to pay, or could recover already paid, acquisition and exploration
costs but would wind up with a smaller interest in any given prospect. For
example, in a typical promoted farmout, the party to which the interest is
farmed out would pay all of Fortune's working interest share of the acquisition
and exploration costs in the project. Fortune would attempt to retain a two to
five percent overriding royalty interest but would not be required to pay any
of the project acquisition and lease operating costs. Under such an
arrangement, Fortune would also normally have a right to convert its overriding
royalty interest into a 10-25% working interest in the project after the
promoted party recovered all of its costs from revenues derived from the
particular well. Fortune would exercise this right to convert its overriding
royalty into a working interest if the project proved to be productive and
Fortune had the financial resources at that time to pay its working interest
share of the costs of further development. No assurance can be given that
Fortune will be able to farmout any of the projects on a promoted basis or
that, if it is successful in doing so, that the farmout will be on the exact
terms described above. In any case, it is Fortune's intention to participate
in the drilling of Zydeco 3D Venture projects as they are completed and
permitted for drilling.
The Company also has a right under the Zydeco 3D Venture to "farmout"
a portion or all of its interest in each prospect to Zydeco under a put
arrangement in the exploration agreement. Zydeco has an identical right to
farmout to Fortune. In the event of such a farmout of a 50% working interest,
Fortune or Zydeco would retain a negotiated overriding royalty convertible into
a working interest or a default arrangement of a two percent overriding royalty
interest in the project, convertible into a 20% working interest after Zydeco
or Fortune recouped its drilling costs of the well from production. Should
either Fortune or Zydeco farmout a smaller working interest to one another, the
overriding royalty and after-payout working interests would be proportionately
reduced. The default percentages are currently being reviewed by Fortune and
Zydeco and are subject to adjustment.
Zydeco and Fortune entered into a farmout of the Polaris Project to
Southern Gas Company of Delaware ("Southern") on May 31, 1995. Under the terms
of the farmout, Southern paid Zydeco and Fortune an aggregate of $100,000 in
exchange for 100% of the working interest in the Project. Zydeco and Fortune
also retained a 6.166%
23
<PAGE> 27
overriding royalty interest of which 4.166% is convertible to a 12-1/2% working
interest after Southern receives payout from a completed well. Zydeco and
Fortune would also receive a payment out of production of approximately
$32,500. Southern is required to commence drilling a well on the Project on or
before March 31, 1996 and will earn an interest in the Project to a depth of
100 feet below the deepest depth drilled if Southern completes a commercially
productive well. This means that Zydeco and Fortune will retain the right to
explore the Project at deeper depths. No assurance can be given that such
farmout will be entered into, that Southern will drill the required well or
that any drilling conducted by Southern will be successful.
At the date of this prospectus, Zydeco is working on obtaining permits
to drill wells on the Aurora and East Thunder projects. Zydeco has indicated
that it does not wish to participate in the drilling of the Aurora well.
Fortune has elected to proceed with the drilling of the well and intends to
spud the well as soon as a drilling rig capable of completing the well becomes
available, which is expected to be in January 1996. Although no contracts have
been executed for the drilling of the well, Fortune has obtained a commitment
from a drilling contract with experience in offshore Gulf Coast drilling to
drill the Aurora well for a fixed price (a "turnkey" arrangement). The dry
hole cost for drilling the well would be $740,000. If the well were
successful, the cost to complete the well would be approximately $300,000 to
$400,000 plus an additional $200,000 to $250,000 to lay a pipeline to a
drilling platform in order to be able to produce the well.
It is currently anticipated that the the East Thunder prospect would
be spudded in February 1996. Drilling locations have been determined on the
prospects and all leasing has been completed. It is further anticipated that
several prospects will follow East Thunder in the second and third quarter of
1996 including Ulysses, Cruiser and Cirrus, for permitting and exploratory
drilling.
Although not part of the Zydeco 3D Venture AMI, the principals of
Zydeco has offered to Fortune the opportunity to participate in the
recompletion of a well on the DABM prospect and the drilling of a second well
through the same wellbore (referred to as a "sidetrack" well). The DABM
prospect is owned by Neomar Resources, an entity owned by Sam Meyers and Steve
Knecht, two of the shareholders of Zydeco. The parties have reached an
agreement in principal under which Fortune would pay 25% of the recompletion
costs (estimated to be $20,000) and of the drilling and completion costs of the
sidetrack well in exchange for an 18.75% working interest in the prospect. The
dry hole costs of the sidetrack payable by Fortune are estimated to be $300,000
and the cost of completion payable by Fortune are estimated to be an additional
$100,000. Recompletion work on the existing well has been completed, and the
existing well is currently producing at the rate of about 2.2 million Mcf of
gas and 100 Bbls of condensate per day. No assurance can be given that Fortune
and Neomar will enter into an agreement to effectuate the arrangement discussed
in principle between the parties, nor can any assurance be given that the
existing recompleted well will continue to produce at current levels.
Of the 1,200,000 shares and 1,200,000 warrants issued by Fortune in
connection with the LEX acquisition, 400,000 shares and 400,000 warrants
pending resolution of a pending lawsuit regarding who the stockholders of LEX
are and who is entitled to receive the Common Stock and warrants issued in the
LEX acquisition. See " - Legal Proceedings." Fortune is not a party to such
litigation and has been indemnified from any costs it may incur in connection
with the suit by the former LEX shareholders. Fortune has retained in escrow
16,000 shares to secure such indemnification obligation.
San Juan Basin, New Mexico
On June 24, 1994, the Company acquired non-operating working
interests, ranging from 21.5625% to 25% in 70,000 producing, development and
exploratory acres in Rio Arriba County, New Mexico. Of this amount, 60,000
acres are held under three Mineral Development Agreements ("MDAs"), of 20,000
gross acres each, from the Jicarilla Apache Indian Tribe (the "Tribe"). See
also "Business and Properties -- Historical Acquisition Activity -- EnRe
Corporation." Under these MDAs, certain development activities are required to
maintain each of the acreage blocks.
The acreage in the San Juan Basin properties lies immediately north of
the West Puerto Chiquito Field. The Company believes its acreage may be an
extension of that Field. Drilling and completion costs per well in the Mancos
Trend Formation usually range from $750,000 to $1,000,000 each.
Since June 1994, Fortune has participated in drilling seven wells and
shooting approximately 70 miles of new seismic data. Fortune's capital
expenditures for the six wells drilled in 1994, the seismic projects, lease
bonuses and other activities, including pipelines and facilities, was
approximately $1.1 million. The costs for drilling and completion of one well
and the completion of two additional wells in 1995 was approximately $375,000.
The first well, a 4,500 foot Entrada formation exploratory test, was
drilled in September 1994 on the 10,000 acre Entrada Prospect but was not
completed and was abandoned in December 1994. Two 3,500 foot developmental
wells were drilled and cased on the Leavry Canyon MDA acreage block during
November and December 1994 and are each currently producing approximately 200
Mcf of gas per day.
24
<PAGE> 28
One 8,500 foot horizontal well was drilled on the Cedar Canyon MDA
acreage. This well was drilled, then re-drilled and then the operator elected
to attempt further re-drill operations. The Company decided not to participate
in these further re-drill operations. Under the non-consent provisions of the
Operating Agreement, should the well prove commercially productive, the Company
would begin receiving revenues, if at all, after the consenting partners has
received a return of 400% of their investment incurred after the Company's
non-consent. The Company is currently involved in litigation affecting this
well. See " - Legal Proceedings."
Two wells were drilled on the Los Indios MDA acreage. These wells
were spudded in late December 1994. Casing was installed on both wells, and
both have been perforated. One well, the Los Indios 15-J was fracture
stimulated in the Mancus "C" zone in late November 1995 and as of December 29,
1995, is flowing back frac oil. The Los Indios 11-J well was perforated in
December 1995 and is awaiting perforation and testing. The Company also
participated in the drilling of the Cedar Canyon 22-K well which has been cased
but has not yet been perforated or tested.
A meeting of the operating committee for this development area, which
includes representatives of the Company, took place in November 1995 to
consider the development schedule for 1996. The committee decided to defer any
additional drilling activity in 1996 pending the results of completion activies
on the three wells described above. Under the MDAs, one well is required to be
drilled in 1996. The Company estimates that, if such drilling were to occur,
its share of the 1996 capital costs attributable to its interests would be
approximately $193,000. The Company is not obligated to participate in these
operations and would not be obligated to pay these expenses if it elected not
to participate. However, management currently contemplates that the Company
would participate and pay its share of the costs if the operations are
undertaken.
Webb County, Texas
The Company has a 20% interest in a proved undeveloped infill location
within the Belle Pepper Field, located in Webb County in South Texas. In June
1994, the Company participated in the drilling of a 10,000 foot exploratory
test well to the Lobo sand which was determined to be commercially
unproductive. Fortune had a 25% working interest in this well, and its dry
hole costs were $115,000. Additionally, the Company took a writedown of
$200,000 for its acreage cost in this exploration project. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Refugio County, Texas
Between February 7, 1994 and December 31, 1994 the Company
participated in 23 natural gas and two oil recompletions in new zones of
shut-in wells of which 18 were successful. As of December 31, 1994, the
Company added a total of 1,000 Mcf per day net natural gas production and 40
Bbls per day net oil production from the La Rosa Field at a total net expense
of $438,000. Additionally, the Company plans to participate in a 3D seismic
program over the 989 productive acres and the 2,700 undeveloped acres held by
production and offsetting the proved productive acreage.
AWP Field, McMullen County, Texas
Two development wells were drilled in 1993 as required by a continuous
drilling provision for its oil and gas interest in the AWP field located in
McMullen County, in South Texas. The Company has a 10% interest in each well.
The Company has fulfilled all of its drilling obligations in the AWP field.
There are 11 proved developed locations remaining to be drilled on either 40 or
80 acre spacing and the operator is currently in discussion with the landowners
to reduce their royalty from 35% to 25% on several of the remaining locations.
The Company's estimated share of the drilling and completion costs for each of
these wells is $43,000 each. It is anticipated that further drilling
operations will commence before the end of 1996.
Hopper Canyon and Holser Canyon Fields, Ventura County, California
In June 1994 the Company undertook efforts to improve the production
at its Hopper, Holser and Sespe fields. Activities in 1994 included workovers
and recompletions of existing wells. Within these three fields, Fortune owns
10 proven undeveloped infill locations. Fortune engages in development
drilling when oil prices create the economic incentives necessary to drill and
when the Company has the available capital to pursue this type of drilling.
However, California oil prices would need to reach a stable level above $20.00
per Bbl (an increase of approximately 35% over current prices) for the Company
to justify economically proceeding with such drilling operations. The Company
would have to improve its operating capital significantly to drill development
wells considering the median price to drill and complete a well is
approximately $500,000 in this area and Fortune owns 100% of these fields.
Additionally, during the rainstorms in Ventura County during January
1995 a section of the access road into the Hopper Canyon Field was washed out.
Fortune elected to shut-in its Hopper Canyon production in February pending the
end of the rain season (April) before commencing repair of the road. Such
repairs, which cost $48,000, were completed in mid-June 1995. Production from
the shut-in wells recommenced in late June 1995.
25
<PAGE> 29
Exploration drilling activities may require substantial outlays of
capital and involve a great amount of risk. There can be no assurance at this
time that the Company will be able to raise the capital or find the joint
venture partners required to explore these projects.
Drilling Activities
The following table sets forth information regarding development and
exploratory wells drilled by Fortune in the years ended December 31, 1992, 1993
and 1994:
WELL DRILLING ACTIVITY
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Gross Wells
-----------
Productive 2.00 3.00 5.00
Dry 1.00 0.00 3.00
---- ---- ----
Total 3.00 3.00 8.00
==== ==== ====
Net Wells
---------
Productive 0.20 0.40 1.18
Dry 0.10 0.00 0.47
---- ---- ----
Total 0.30 0.40 1.65
==== ==== ====
</TABLE>
ACQUISITION ACTIVITY
PetroFina Acquisition
Asset Acquired. On December 11, 1995, Fortune Petroleum Corporation
("Fortune" or the "Company") acquired a 16-2/3% working interest (12-1/2% net
revenue interest) in a 5,000 acre producing oil and gas property offshore
Louisiana. The property, known as the South Timbalier Block 76 (and referred
to herein as the "Timbalier Block"), includes a producing well, drilling and
production platform and transmission line. The acquisition has an effective
date for oil and gas purposes of July 1, 1995, with Fortune being entitled to
receive the net cash flow from the well to its interest from that date; the
effective date for financial reporting purposes is November 1, 1995.
The well on the Timbalier Block has been on production since 1990 and
is currently producing approximately 16,000 Mcf of natural gas per day plus
1,150 Bbls of oil per day. To date, the well has produced approximately 30 Bcf
of natural gas and 2 million Bbls of high gravity oil. Consolidated Natural
Gas is the operator of the property and owns a 50% working interest in the
block; Oryx Energy Company owns the remaining 33-1/3% working interest in the
block.
The well was originally drilled based upon a 2-D seismic survey.
Through the application of advanced 3-D seismic and computer aided exploration
technology, management of Fortune believes the Timbalier Block has additional
exploration and development potential.
Parties to Transaction. The interest acquired by Fortune was owned by
PetroFina, Inc., which had agreed to sell the interest to Northport Production
Company. In turn, Northport had agreed to sell the property to Mr. Donald L.
Walker. In order to secure the right to purchase the interest, Mr. Walker gave
PetroFina a non-refundable security deposit of $150,000. In order to step into
Mr. Walker's position, Fortune paid Mr. Walker $100,000 in cash, agreed to
issue stock purchase warrants for 150,000 shares of Common Stock and granted
Mr. Walker the option referred to below. (The warrants are exercisable for two
years at the following prices: 50,000 shares at $4.00 per share and 100,000
shares at $6.00 per share.) In addition, Fortune gave an additional security
deposit to PetroFina of $100,000.
Purchase Price. Fortune paid a total of $2.9 million for its interest
in the Timbalier Block. Of that amount, approximately $560,000 was paid out of
the net cash flow from Fortune's interest in the property between the July 1
effective
26
<PAGE> 30
date and approximately mid-October 1995. In addition, the $150,000 deposit
paid by Mr. Walker and the $100,000 deposit paid by Fortune were applied to the
purchase price. At the closing of the transaction, the net cash paid by
Fortune for its interest in the Timbalier Block was approximately $2,090,000.
Fortune has granted Pendragon Resources, a Texas limited liability
company owned by Donald L. Walker, the right, exercisable until March, 1996, to
acquire a 4-1/6% working interest in Block 76 for approximately $790,000. If
Pendragon does not exercise its option, Fortune will reimburse Mr. Walker for
his $150,000 deposit given to PetroFina (and which was applied to the purchase
price for the property).
In order to finance the acquisition of the Timbalier Block and also to
provide the Company with additional working capital, Fortune issued 1,321,117
shares of its Common Stock to a group of European investors in a transaction
which qualified for an exemption from the registration requirements of the
Securities Act of 1933 under Regulation S. The shares were sold for an average
price of $3.22 per share, approximately 75% of the average closing bid price of
the Common Stock on the two trading days prior to the financing. From this
sale, the Company netted approximately $3,602,000 after payment of expenses of
the offering. The balance of approximately $1,306,000 remaining after payment
of the purchase price for the Timbalier Block interest has been added to
working capital and will be used for general corporate purpose.
San Juan Basin, New Mexico
On June 24, 1994, Fortune concluded the purchase of a 25% interest in
EnRe-1, LLC, a newly formed Texas Limited Liability Company, of which EnRe
Corporation is the manager. EnRe-1, LLC owns three Jicarilla Apache Minerals
Development Agreements covering 60,000 producing, development and exploratory
acres in Rio Arriba County, New Mexico and associated tangible property. At
the same time, the Company acquired an approximately 22% working interest in
certain mineral, oil and gas leasehold interests in an additional 10,000
exploratory acres in Rio Arriba County, New Mexico, from EnRe Corporation.
(The 25% interest in EnRe-1, LLC and an approximately 22% working interest in
the 10,000 exploratory acres are collectively referred to as the "EnRe
Assets.")
The EnRe Assets were acquired in exchange for $1,375,000 in cash. The
effective date under the purchase method of accounting for transferring
revenues and expenses on these properties was determined to be June 1, 1994.
See "Legal Proceedings" for information regarding litigation between the
Company and the operator of the EnRe Assets.
Brooklyn Union Exploration Company, Inc.
On February 8, 1994, the Company completed an acquisition of a 50%
working interest in a 3,689 acre lease in the La Rosa Natural Gas Field in
Refugio County, Texas from Brooklyn Union Exploration Company, Inc. for
$750,000. The effective date of the transaction using the purchase method of
accounting was February 1, 1994. The acquisition consisted of 12 producing
wells, four saltwater producing wells and 35 shut-in wells with total new
proved reserves to the Company of one BCFE and additional probable reserves
behind pipe. There is also an additional 2,700 undeveloped acres adjacent to
production which was acquired for future exploration. The Company plans to
participate in a 3D seismic program which is contemplated during 1996 to help
define exploration projects within the undeveloped acreage and the potential
for other undiscovered reserves within the productive field limits. As of
December 31, 1994 the Company has participated in 18 successful recompletions
into new natural gas zones in previously shut-in wells yielding an approximate
net increase in production to the Company of 1,000 Mcf per day and 40 barrels
of oil per day.
cBase Group
Effective December 31, 1993, the Company purchased additional working
interests in the Holser Field, California, for $138,000 from cBase Group.
Additionally the Company sold its interest in the Ramona Field in Ventura
County, California to cBase Group for $13,000. The transaction was consummated
on January 31, 1994. See "-- Properties."
Michael Petroleum, et al.
On October 5, 1993, the Company completed the acquisition of certain
mineral, oil and gas leasehold interests and associated tangible property in
exchange for an adjusted price of $6,457,386 in cash and 195,000 common stock
purchase warrants from Michael Petroleum Corporation, Brazos Resources, Inc.,
Pioneer Drilling Company and Endowment Energy
27
<PAGE> 31
Partners. The common stock purchase warrants are exercisable at $4.13 and
expire on February 15, 1996. The effective date under the purchase method of
accounting for transferring revenue and expense on these properties, however,
was determined to be July 1, 1993. The mineral, oil and gas leasehold
interests include working interests in producing and non-producing oil and gas
properties located in Webb County, Texas. The Lobo sand in this area has very
low permeability (under one millidarce) which has qualified all the acquired
production as a "tight" gas sand. As a tight gas sand, the production, from
wells drilled before January 1, 1993, is exempt from Texas State severance tax
on the gas production and qualifies for the Federal Section 29 tax credit worth
approximately $.52 per Mcf produced.
Benton Oil and Gas Co.
On April 30, 1992 Fortune acquired a 100% working interest in the oil
and gas producing Hopper 12-1 well from Benton Oil and Gas Company for $5,000
in cash, 6,325 shares of Common Stock and a production payment of $42,500. The
principal balance of the production payment at December 30, 1994 was $9,800.
Hinkle Exploration, Limited, San Francisco Energy Corporation
On April 10, 1992, Fortune acquired certain oil and gas producing
properties located in the Sespe Field in Ventura County, California and the
Bracken Lease in the AWP Field, in McMullen County, Texas from Hinkle
Exploration, Limited, San Francisco Energy Corporation and each of its
respective limited partnerships and Klein Bros. Inc. (together referred to as
"Hinkle"). The transaction was accounted for as a purchase as of February 1,
1992 with the acquisition price of $3,741,000 based on the market value of
Fortune's Common Stock and debt assumed. The Company issued 243,153 shares of
Fortune Common Stock, assumed $391,000 of debt incurred against the oil and gas
properties by Hinkle and issued a note for $2,000,000 (the "H&B Note") in
exchange for the assets acquired plus revenues and expenses since August 1,
1991. Additionally, 138,888 and 13,255 common stock purchase warrants
exercisable at $7.20 and $0.04, respectively, were issued to Hinkle. The
13,255 stock purchase warrants were registered on December 2, 1992 and
exercised on December 11, 1992. The 138,888 stock purchase warrants were
adjusted to reflect an exercise price of $3.89 and their expiration extended to
September 28, 1998 in exchange for extending the final payment of $1,000,000 of
the H&B Note to July 1, 1995. On January 26, 1994, the Company retired the
remaining $2,000,000 on the H&B Note and the $391,000 of assumed debt using the
Credit Facility.
Fairbanks & Haas, Inc.
Fortune acquired substantially all of the assets (primarily California
oil and gas properties) of Fairbanks & Haas, Inc. (FHI) and its joint venture
partners effective November 1, 1990, for 143,674 unregistered shares of Common
Stock in 1990 and 10,732 shares in 1991, assumption of $103,301 of FHI's joint
venture partners' debt secured by the properties and $23,424 in cash, and
repurchased 5,708 shares of common stock originally issued in the transaction
for $50,000. The acquisition was accounted for as a purchase with the
acquisition price of $1,196,000 based on the estimated market value of the
Common Stock at November 1, 1990 and the other consideration. Tyrone J.
Fairbanks, Fortune's president, CEO and CFO, was a principal stockholder,
president and director of FHI.
OIL AND GAS OPERATIONS
Oil and Gas Reserves
The Company's reserves are located in Texas, offshore Louisiana, New
Mexico and California. Proved reserves represent estimated quantities of crude
oil and natural gas which geological and engineering data demonstrate to be
reasonably certain to be recoverable in the future from known reservoirs under
existing economic and operating conditions. Proved developed oil and gas
reserves are proved reserves that can be expected to be recovered through
existing wells using existing equipment and operating methods.
The oil and gas reserve estimates at December 31, 1993 and 1994, were
reviewed by Huddleston & Co., Inc., Houston, Texas, independent petroleum
engineers, and Sherwin D. Yoelin, Los Angeles, California, independent
petroleum engineer. For the year ended December 31, 1992, the oil and gas
reserve estimates were reviewed by Mr. Yoelin.
28
<PAGE> 32
Such estimates are subject to numerous uncertainties inherent in the
estimation of quantities of proved reserves and in the projection of future
rates of production, prices and the timing of development expenditures. The
accuracy of any reserve estimate is a function of available data and of
engineering and geological interpretation and judgment. The future cash
inflow, as reflected in the "Standardized Measure of Discounted Future Net Cash
Flows Relating to Proved Oil and Gas Reserves", determined from such reserve
data are estimates only, and the present values thereof should not be construed
to be the current market values of the Company's oil and gas reserves or the
costs that would be incurred to obtain equivalent reserves. While the reserve
estimate presented herein is believed to be reasonable, it should be viewed
with the understanding that subsequent production of oil and gas from each
reservoir, the timing and success of future development drilling and changes in
pricing structure or market demand will affect the reserve estimate. See "Risk
Factors -- Risks Associated with the Company -- Engineers' Estimates of
Reserves and Future Net Revenue."
The following sets forth information with respect to estimated proved
oil and gas reserves as determined by Fortune's independent petroleum engineers
attributable to the Company's interests in oil and gas properties as of
December 31, 1992, 1993 and 1994.
ESTIMATED NET RESERVE QUANTITIES
<TABLE>
<CAPTION>
at December 31,
-------------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Total Proved Reserves(1):
Oil (Bbls) 2,066,000 813,000 1,647,000
Natural Gas (Mcf) 4,795,000 5,562,000 5,911,000
--------- --------- ---------
Equivalent Bbls(BOE)(2) 2,865,000 1,740,000 2,632,000
========= ========= =========
Total Proved Developed Reserves:
Oil (Bbls) 983,000 666,000 675,000
Natural Gas (Mcf) 2,582,000 4,221,000 3,317,000
--------- --------- ---------
Equivalent Bbls(BOE)(2) 1,414,000 1,370,000 1,228,000
========= ========= =========
</TABLE>
____________
(1) Estimates of oil and gas reserves in future years are based in part on the
sales price at December 31st, the Company's year-end; and if the cost of
producing the oil and gas, plus applicable taxes, from any particular property
exceeds the sales price, the quantity of "proved reserves" is eliminated. The
decline in reserves from December 31, 1992 to December 31, 1993 was primarily
due to the difference in the average oil price received by the Company at those
dates ($14.62 per barrel compared to $10.21 per barrel, respectively) and the
resulting decline in overall economically recoverable quantities. The decline
in reserves from December 31, 1993 to December 31, 1994 is primarily due to the
decrease in the average gas price received by the Company for that period
($2.28 per MMBTU compared to $1.39 per MMBTU, respectively) and the resulting
decline in economically recoverable quantities offset by increases in reserves
from higher year end oil prices in 1994 as compared to 1993 year end of $14.41
and $10.21, respectively.
(2) After conversion (6:1); six units of natural gas to one unit barrel of
crude oil.
Discounted Present Value of Future Net Revenues
The following table represents the estimated future net revenues
(unescalated and discounted at 10% per annum) and the present value of the
future estimated net reserves from the proved developed producing, proved
developed non-producing and the proved undeveloped reserves at December 31,
1992, 1993 and 1994.
29
<PAGE> 33
DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES
<TABLE>
<CAPTION>
at December 31,
---------------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Cumulative Future Net Revenue(1) $ 20,385,000 $12,835,000 $15,932,000
less adjustment to give effect to a
10% annual discount (11,830,000) (4,281,000) (7,784,000)
------------ ----------- -----------
8,555,000 8,554,000 8,148,000
less discounted present value of
future income taxes (2,909,000) (2,907,000) (2,770,000)
------------ ----------- -----------
$ 5,646,000 $ 5,647,000 $ 5,378,000
============ =========== ===========
</TABLE>
- -------------------
(1) The decline in future net revenue from December 31, 1992, to December 31,
1993 is primarily due to the difference in the average oil price received by
the Company at those dates ($14.62 per barrel compared to $10.21, respectively)
and the resulting decline in quantities. The decline in the 10% discounted
value of future net revenue from December 31, 1993, to December 31, 1994 is
primarily due to the difference in the average gas price received by the
Company at those dates ($2.28 per MMBTU compared to $1.39 per MMBTU,
respectively) and the resulting decline in quantities offset by increases in
reserves from higher oil prices in 1994 as compared to 1993 year end of $14.41
and $10.21, respectively.
Production
The approximate net production data related to the Company's
properties for the periods ended December 31, 1992, 1993 and 1994 from the
Company's properties are set forth below:
NET PRODUCTION DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Oil (Bbls) 87,387 78,737 87,615
Gas (Mcf) 233,892 723,878 1,016,771
</TABLE>
The Company has been able to maintain relatively constant oil
production and increase its natural gas production as shown in the table due to
the acquisitions described above under the heading "- Acquisition Activity."
Prices and Production Costs
The following table sets forth the approximate average sales prices
and production (lifting) costs per barrel of oil and per Mcf of gas produced
and sold in the United States from the Company's oil and gas leases for the
years ended December 31, 1992, 1993 and 1994:
AVERAGE SALES PRICES AND PRODUCTION COSTS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Average Sale Price Received:
Oil (per barrel) $17.57 $14.10 $12.88
Gas (per Mcf) $ 2.39 $ 2.28 $ 2.17
Average Production Cost
per Equivalent Barrel $ 6.62 $ 4.84 $ 4.24
</TABLE>
30
<PAGE> 34
Producing Wells
The following table lists the total gross and net producing oil wells
in which Fortune had an interest at December 31, 1994:
PRODUCING WELLS
<TABLE>
<CAPTION>
Gross Net
-------------------- ----------------------
Oil Gas Oil Gas
--- --- --- ---
<S> <C> <C> <C> <C>
Texas 59 30 7.39 9.87
New Mexico 4 2 .68 .38
California 39 0 29.92 0
--- -- ----- -----
Total 102 32 37.99 10.25
=== == ===== =====
</TABLE>
An additional 28 gross and 9.59 net wells owned by the Company are
either shut-in, awaiting recompletion or are used for waste water injection.
Principal Customers
For the year ended December 31, 1992, the Company sold approximately
65% of its oil production to Texaco Transportation and Trading, Inc. and
approximately 14% to Enron Energy. Approximately 63% of its natural gas
production was sold to Enron Energy during 1992, 10% was sold to Unocal and 10%
to Shell. During the year ended December 31, 1993, approximately 68% of the
Company's produced oil was sold to Texaco Transportation and Trading, Inc. and
14% was sold to Enron. During 1993, the Company sold approximately 64% of its
natural gas production to Michael Gas Marketing Co., Inc. and 26% to Enron
Energy. For the year ended December 31, 1994, approximately 72% of its
produced oil was sold to Texaco Transportation and Trading and 8% to Enron, and
48% of the Company's produced gas was sold to Michael Gas Marketing Co., Inc.,
25% to Tenneco and 15% to Enron Energy.
The Company believes that the loss of any of these customers should
not have any material adverse effect on the Company, since there are a large
number of companies which purchase crude oil and natural gas in the areas in
which the Company operates. The Company does not currently engage in any
marketing activities for its oil and gas, because it believes there is
sufficient demand among purchasers to acquire all of the Company's available
production.
PROPERTIES
Leasehold Acreage
Fortune's holdings of developed and undeveloped leasehold acreage as
of December 31, 1994 were approximately as follows:
LEASEHOLD ACREAGE
<TABLE>
<CAPTION>
Developed Undeveloped
------------------ ---------------------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Texas 5,544 1,120 3,960 1,468
New Mexico 1,800 405 68,200 16,106
California 992 970 6,004 4,094
Oklahoma 80 5 - -
----- ---- ------ ------
Total 8,416 2,500 78,164 21,668
===== ===== ====== ======
</TABLE>
This table does not reflect acreage acquired through the Zydeco 3D
Venture. See "-- Development and Exploration -- Exploration and Exploitation
Projects."
31
<PAGE> 35
Texas Properties
At December 31, 1994, Fortune owned an interest in 113 gross and 26.73
net oil wells located in Texas. During 1994, approximately 19,348 net barrels
of oil and 930,448 net Mcf of gas were produced from the Texas properties as
compared to approximately 16,433 net barrels of oil and 651,201 net Mcf of gas
in 1993.
The Texas properties, which are primarily non-operated, comprised
approximately 69% of Fortune's net proven gas reserves and seven percent of
Fortune's net proven oil reserves at December 31, 1994.
New Mexico Properties
At December 31, 1994, Fortune owned an interest in six gross and 1.07
net oil and gas wells located in New Mexico. During 1994, approximately 5,246
net Bbls of oil and 17,697 Mcf of gas were produced from the New Mexico
properties acquired as of June 1, 1994. Properties located in New Mexico,
which are all non-operated, comprised a negligible portion of Fortune's net
proven gas reserves and one percent net proven oil reserves at December 31,
1994.
California Properties
At December 31, 1994, Fortune owned and operated 39 gross and 29.92
net wells located in California. Production in California during 1994 totaled
approximately 63,021 net barrels of oil and 68,626 net Mcf of gas,
respectively. Production from California during 1993 totaled approximately
61,217 net barrels of oil and 66,017 net Mcf of gas, respectively. The
increase in California oil production in 1994 is attributed primarily to the
recompletion of certain wells in the Hopper and Holser fields. The wells on
the Company's Hopper Canyon Field were shut in as a result of road damages
incurred from severe flooding during January 1995. The effect of shutting in
these wells has been to reduce the Company's monthly net revenues by about
$25,000 or seven percent. The work to repair the road was completed in
mid-June, and the wells were put back into production in late June 1995.
Properties located in California, which are all operated by the
Company, comprised approximately 92% of Fortune's net proven oil reserves and
31% of Fortune's net proven gas reserves as of December 31, 1994.
Oklahoma Properties
At December 31, 1994, Fortune owned non-operated interests in two
gross and .11 net wells located on 80 gross (5 net) acres in Oklahoma. These
two wells were not in production during 1994. For the year ended December 31,
1993, net production from Oklahoma properties was 1,087 barrels of oil and
6,660 Mcf of gas. For the year 1992 the Company's production was 2,753 barrels
of oil and 18,508 Mcf of gas from Oklahoma properties. No oil or gas reserves
were attributed to the Company's Oklahoma properties at December 31, 1994.
Title to Properties
Detailed title examinations were performed for many of the Company's
properties in December 1993 and January 1994 in conjunction with the Credit
Facility, and title opinions were issued. The Company believes it holds valid
title on all its properties, free and clear of any liens or encumbrances except
for the lien held by Bank One, Texas on substantially all of the Company's
proven properties, as described herein. Title opinions are obtained on newly
acquired properties as of the date of the closing. As is customary in the oil
and gas industry, the Company performs only a perfunctory title examination at
the time exploratory oil and gas properties are acquired. Prior to the
commencement of drilling operations, a thorough title examination is conducted
and any significant defects are remedied before proceeding with operations.
Transfers of many of the Company's properties are subject to various
restrictions, including the requirement of obtaining the consent of the
landowner in many instances.
Office Facilities
The Company leases office space in Agoura Hills, California. Rent for
the 3,950 square feet which the Company occupies was $43,000 in 1993, $45,000
in 1994 and is expected to be $52,000 in 1995. The Company will be relocating
its headquarters to Texas in early 1996. See Note 8 of Notes to Financial
Statements.
32
<PAGE> 36
COMPETITION
Fortune competes with numerous other companies and individuals in the
acquisition of oil and gas properties, the marketing of oil and gas and the
recruitment of experienced personnel. Fortune's competitors include major oil
companies, other small producers, investment groups and individuals, many of
which have financial resources and facilities substantially greater than those
of the Company. However, the major oil companies are selling many of their
smaller or marginal domestic properties, primarily in California. Many
operating companies interested in acquiring properties have greater capital
resources than the Company. The Company's acquisition approach is to
concentrate on the properties of smaller independents and it has had
acquisition discussions with several of these companies involving property
acquisition for stock.
EMPLOYEES
Fortune has a total of nine employees, six of whom are in management
and administration and three in its oil and gas operations. In addition, the
Company utilizes the services of outside consultants in certain technical
aspects of the Company's business. Fortune utilizes these consultants to aid
in the evaluation of Company projects and to evaluate oil and gas assets for
potential acquisitions.
GOVERNMENTAL REGULATION
Environmental laws and regulations are having an increasing impact on
Fortune's operations in nearly all the properties where it has production.
Drilling activities and the production of oil and gas are subject to
regulations under federal and state pollution control and environmental laws
and regulations. It is impossible to predict accurately the effect that
additional environmental requirements may have on future earnings and
operations, but it will continue to be necessary to incur costs in complying
with these laws and regulations. Fortune spent approximately $10,000 and
$14,000 in environmental compliance costs in 1993 and 1994, respectively.
The Company is not currently involved in any judicial or
administrative proceedings and believes that it is in substantial compliance
with applicable environmental regulations. The Company believes that it is
reasonably likely that the trend in environmental legislation and regulations
will continue toward stricter standards. The Company is unaware of future
environmental standards that are reasonably likely to be adopted that will have
a material effect on the Company's financial position or results of operations,
but cannot rule out the possibility.
The Company has never had a material environmental problem, but if a
property in which Fortune has an interest is found to be contaminated, the
Company could be required to participate in a "clean up" program. Such a clean
up, depending on its magnitude and the Company's ownership interest therein,
could require undetermined amounts of capital and exceed the Company's ability
to pay. The Company has obtained primary insurance against oil spills
providing $2,000,000 of coverage per occurrence with a $2,500 deductible and an
umbrella policy for an additional $4,000,000 per occurrence with a $10,000
deductible. See "Risk Factors -- Risks Associated with Oil and Gas Industry --
Risk of Oil and Gas Operations."
The operations of oil and gas properties covered by leases in which
the Company has or may acquire an interest will require compliance with spacing
and other conservation rules of various state commissions and of the United
States Geological Survey and the Bureau of Land Management with respect to
federal oil and gas acreage. Further, production may be limited under state
regulations for the prevention of waste. At the present time, the Company has
no operations which are adversely affected by well permitting, spacing
regulations or production limitations.
LEGAL PROCEEDINGS
EnRe Litigation
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 on-going 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. Management of Fortune 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
33
<PAGE> 37
in the drilling operations for which EnRe now seeks 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 by
Fortune 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. Thus, the remaining amount in dispute is $263,000 which
the Company does not believe it will ultimately be required to pay.
In the opinion of management, Fortune has valid defenses to all claims
still in dispute made by EnRe. The Company intends to vigorously defend the
litigation and pursue appropriate affirmative relief against EnRe for its
actions as operator.
Under mutual agreement of the non-operators, EnRe was asked to resign
as operator of these properties. EnRe has agreed to do so subject to approval
of the Jicarilla Apache tribe. In the interim, for purposes of field
operations, AMPOLEX USA, Inc., the project's largest working interest owner, is
acting as contract operator. It is anticipated that AMPOLEX USA, Inc. will
become the official operator for the project at some point during 1995.
LEX Litigation
In initially entering into the LEX acquisition, Fortune was advised
that the stockholders of LEX would include only William D. Forster, BSR
Investments, a British Virgin Islands corporation ("BSR"), and Ensign Financial
Group Limited, a British Virgin Islands corporation ("Ensign"). At the time
Fortune issued its proxy statement for the special meeting of stockholders
called to vote on the LEX acquisition, Fortune was advised that the ownership
of the Fortune Common Stock and warrants to be issued in the acquisition was to
be allocated one-third each to Forster, BSR and Ensign. In preparing for the
closing of the acquisition, however, Fortune was advised that the only
stockholders of LEX were Forster and BSR and that they were the only persons or
entities entitled to vote on the merger of LEX with Fortune's subsidiary.
Fortune obtained a written representation from Forster and BSR to this effect
and received a legal opinion from LEX's counsel confirming these
representations and confirming that all corporate action on the part of LEX
necessary to authorize the merger had occurred.
On May 11, 1995, Baytree Associates, Inc. ("Baytree") and Ensign
commenced litigation in the Supreme Court of New York against Forster, BSR,
Charif Souki (the son of Samyr Souki, president of BSR), LEX and Fortune
seeking to enjoin the closing of the LEX acquisition by Fortune on the grounds
that Ensign was entitled to a one-third interest in the proceeds of the
transaction, namely the Common Stock and warrants to be issued by Fortune.
Baytree also sought $1,000,000 in damages from Fortune for allegedly providing
investment banking services to Fortune in connection with the Regulation S
offering made by the Company in February 1995 and this Offering.
At a hearing on May 12, 1995, the New York court dissolved the
temporary restraining order issued on May 11 which had prohibited the
acquisition and stated affirmatively that Fortune could proceed with the
transaction. Since it was clear from the Ensign lawsuit that Forster and BSR
owned at least two-thirds of the stock of LEX and could bind that corporation
to proceed with the transaction and since most of the Common Stock and warrants
issued by Fortune would remain in escrow following the closing, Fortune
proceeded with the acquisition, which closed on its scheduled closing date of
May 12, 1995. In issuing its Common Stock and warrants to complete the
transaction, Fortune was required to accept the representations made by Forster
and BSR that they were the only stockholders of LEX, but Fortune did not then,
has not since and will continue not to take any position on who constituted the
stockholders of LEX and who was entitled to the shares and warrants issued by
Fortune in the acquisition. Further, Fortune advised Forster and BSR that the
issues raised by Ensign would need to be resolved by them and obtained from
Forster and BSR an agreement to indemnify Fortune against any claims from any
third party asserting an ownership interest in LEX.
At a subsequent hearing on May 22, 1995, the New York court granted
the Company's motion for summary judgment and dismissed the $1,000,000 claim
against Fortune and dismissed Fortune and LEX from the suit with prejudice
based on an agreement of all parties. Forster, BSR and Souki are now the only
remaining defendants in the action. At the hearing, the parties agreed that
the escrow agent would retain and hold in escrow not less than 400,000 shares
and 400,000 warrants, representing one-third of the total shares of Common
Stock and warrants issued in the transaction, pending further order of the
court. Fortune agreed to participate in the discovery process in the action as
if it were a party to the action and, as a matter of convenience to the court,
agreed that the New York court would retain jurisdiction over Fortune and LEX
for purposes of enforcing the provisions of the stipulation.
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<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Director and/or
Executive Officer Age Title
----------------- --- -----
<S> <C> <C>
Charles A. Champion(3) 64 Chairman of the Board
Tyrone J. Fairbanks(1) 39 President, Chief Executive Officer, and
Chief Financial Officer and Director
Dean W. Drulias(1)(2) 48 Director and Secretary
Graham S. Folsom(1)(3) 38 Director
William T. Walker, Jr.(1)(2) 63 Director
Barry Feiner(1)(2) 61 Director
Gary Gelman(3) 29 Director
Charif Souki(4) 43 Director
William D. Forster(4) 49 Director
John L. Collins 50 Vice President of Investor Relations
</TABLE>
- ------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Appointed by the Board of Directors on July 27, 1995, to fill newly
created vacancies on the Board of Directors. See "Certain
Relationships and Related Transactions."
Mr. Charles A. Champion joined Fortune's Board of Directors in March
1994 and was elected Chairman in July 1994. Mr. Champion also serves as
President and Chief Executive Officer of Tower Petroleum Corporation, a
privately held oil and gas producer, operator and petroleum consulting firm
which he founded in 1983. Mr. Champion is a certified petroleum engineer in
the States of California and Alaska and his career includes positions of
increasing responsibility with Richfield Oil Corporation (later known as
Atlantic Richfield Company), Mobil Oil Corporation and Husky Oil. Mr. Champion
was appointed by the Governor of Alaska in 1972 to serve as State Pipeline
Coordinator and to lead an agency to oversee the construction of the
Trans-Alaska pipeline. He served in that capacity until the pipeline's
completion in 1977. Mr. Champion has served as adjunct Associate Professor of
Petroleum Engineering to the University of Alaska at Anchorage and has
published a number of technical papers for the oil and gas industry. Mr.
Champion was awarded the Distinguished Achievement Medal from the Colorado
School of Mines in 1981. Mr. Champion has been a member of the Society of
Petroleum Engineers since 1954 and is currently Secretary of the Conservation
Committee of California Oil Producers, and a member of the Los Angeles Basin
Chapter of the American Petroleum Institute and the California Independent
Petroleum Association. Mr. Champion holds a B.S. degree from the Colorado
School of Mines and an M.S. degree in petroleum engineering from the University
of Southern California.
Mr. Tyrone J. Fairbanks has served as a Director of Fortune since
January 1991. Mr. Fairbanks also serves as President, Chief Executive Officer
and Chief Financial Officer of the Company. Prior to joining Fortune, Mr.
Fairbanks served as President, Chief Executive Officer and Director of
Fairbanks & Haas, Inc. from January 1990 to January 1991. Fairbanks and Haas,
Inc. was an oil and gas exploration, production, acquisition and operations
company located in Ventura, California. Mr. Fairbanks co-founded Fairbanks &
Haas, Inc. and served in the capacity of Director and Executive Vice-President
from February 1987 to January 1990. See "Business and Properties - Acquisition
Activity - Fairbanks & Haas, Inc." Prior to Fairbanks & Haas, Inc., Mr.
Fairbanks served in positions of increasing responsibility in the area of
accounting, finance, administration and operations within various segments of
the oil and gas industry. Mr. Fairbanks attended California State University
at Northridge and continued his education with courses in finance and
accounting at the University of California at Los Angeles extension and the
University of Pennsylvania - Wharton Business School extension.
Mr. Dean W. Drulias is a stockholder of and a practicing attorney at
the law firm of Burris, Drulias & Gartenberg, a Professional Corporation, which
has served as counsel to the Company since its incorporation in May 1987. Mr.
Drulias has served as a director since 1991 and as Secretary since July 1994.
During 1993 and 1994, his firm billed the Company a total of $117,357 and
$94,806, respectively, for legal fees and costs. As of September 30, 1995, Mr.
Drulias' firm has billed $65,000 for legal services in 1995. He has practiced
law in the Los Angeles area since 1977 after graduating from
35
<PAGE> 39
Loyola Law School and specializes in areas of energy, environmental and real
property law. Mr. Drulias is chairman of the Company's Compensation Committee.
Mr. Drulias received his B.A. degree from the University of California at
Berkeley in 1971.
Mr. Graham S. Folsom has served as the Chief Financial Officer of
Klein Ventures, Inc. since April 1987. Klein Ventures, Inc. is a diversified
investment company. Mr. Folsom has been active in the oil investments of such
company and its affiliates since 1987. Mr. Folsom has been licensed as a
Certified Public Accountant in the State of California since 1982 and is
responsible for all of the accounting and financial affairs of Klein Ventures
and its affiliates. Mr. Folsom is chairman of the Company's Audit Committee.
Mr. Folsom is a graduate of University of the Pacific with a B.S. degree in
business administration.
Mr. William T. Walker, Jr. joined Fortune's Board after the successful
completion of Fortune's $7.425 million secondary equity offering in October
1993. Mr. Walker founded Walker Associates, a corporate finance consulting
firm for investment banking, in 1985 and has participated in or been
instrumental in completing over $250,000,000 in public and private offerings
since its inception. Prior to forming Walker Associates, Mr. Walker served as
Executive Vice President, Manager of Investment Banking, Member of the Board
and Executive Committee and Chairman of the Underwriting Committee for Bateman
Eichler Hill Richards, a New York Stock Exchange Member firm from 1969 to 1985
when Bateman Eichler Hill Richards was purchased by Kemper Group. Prior to
joining Bateman Eichler Hill Richards, Mr. Walker served in various executive
capacities and was a partner with the investment banking firm of Glore Forgan,
William R. Staats & Co. in New York. Mr. Walker attended Stanford University.
He also serves on the boards of directors of Go Video, Inc. (AMEX) and
Ameriquest, Inc. (NYSE).
Mr. Charif Souki was appointed to the Board of Directors on July 27,
1995, to fill a vacancy created by the expansion of the board from seven to
nine members. Mr. Souki is the son of Samyr Souki, the President of BSR
Investments, Ltd. which is a substantial owner of the Common Stock. Mr. Souki
disclaims beneficial ownership of the securities held by BSR Investments, Ltd.
Mr. Souki was retired during 1990, 1991 and 1992 and a private investor and
restaurant owner during 1993, 1994 and 1995.
Mr. William D. Forster was also appointed to the Board of Directors on
July 27, 1995, to fill a vacancy created by the expansion of the board. Mr.
Forster is the chairman of W. Forster & Co., a New York-based private
investment banking firm. Prior to forming that company, Mr. Forster was a
managing director of Lehman Bros. for approximately 11 years.
Mr. Barry Feiner was elected to the Company's Board of Directors on
January 20, 1995. The Company agreed to elect him pursuant to an arrangement
with Mr. Jack Farber, now deceased, formerly a principal stockholder of the
Company. See "Certain Relationships and Related Transactions" and "Principal
Stockholders." Mr. Feiner graduated from Columbia Law School and is a member
of the Bar of the State of New York. He has practiced law in the State of New
York since 1965. His practice concentrates on the areas of corporate and
securities law. Prior to beginning private practice, Mr. Feiner served on the
staff of the Securities and Exchange Commission. Mr. Feiner holds a B.A.
degree from Brandeis University.
Mr. Gary Gelman was elected to the Company's Board of Directors on
January 20, 1995. The Company agreed to elect him pursuant to an arrangement
with Mr. Jack Farber, now deceased, formerly a principal stockholder of the
Company. See "Certain Relationships and Related Transactions" and "Principal
Stockholders." Mr. Gelman graduated from San Diego State University in 1989
and has served as president of GAR-COR Holding Corporation, a real estate
management and brokerage firm, since that time. Mr. Gelman also serves as a
loan consultant with National Bank of New York City and is a principal partner
of Hands-on Management, a property management and brokerage company managing
approximately 400 apartments in 15 buildings. Mr. Gelman is the grandson of
Mr. Jack Farber.
Mr. John L. Collins was hired by the Company as Vice President of
Investor Relations effective May 30, 1995. Mr. Collins will serve at the
pleasure of the Board of Directors. He formerly served as Vice President of
Investor Relations with Texas Meridian Resources Corporation, a Texas based oil
and gas company, a position he held from January 1991 until his resignation to
join Fortune in May 1995. Mr. Collins became a registered representative with
Merrill Lynch in 1970 and spent 20 years in the securities industry, serving as
Vice President-Investments with A.G. Edwards & Company from 1980 to 1989.
During 1990, he held a sales position with Frontier Directory.
36
<PAGE> 40
Director Compensation
As compensation to outside directors, the Company pays directors' fees
equal to $2,500 per quarter, one half in shares of Fortune common stock valued
at $1,250 based on the value of the stock on the last day of each quarter and
$1,250 in cash. Inside directors do not receive any compensation for serving
as directors.
Committees of the Board
During the year ended December 31, 1994, the Board of Directors met
eighteen times and the compensation committee met one time. Each director
attended all Board meetings and each member of a Board committee attended all
committee meetings.
The audit committee consists of three outside directors. Currently,
Graham Folsom is the chairman of the committee. It also meets separately with
representatives of the Company's independent auditors and with representatives
of senior management. The committee reviews the scope of audit coverage, the
fees charged by the independent auditors, matters relating to internal control
systems and the expenses of senior executives.
The compensation committee consists of three outside directors. Barry
Feiner is the chairman of the Committee. The compensation committee met once
during 1994. The committee proposes and administers the Company's stock option
plans, long-term incentive plans and executive incentive plans. In this
capacity, the committee recommends all option grants or awards to Company
officers and executives. The committee also recommends the establishment of
policies dealing with various compensation, pension and profit sharing plans,
although at this time no such plans have been created.
On December 14, 1995, Fortune established an Executive Committee
consisting of five directors to review significant matters affecting the
Company. The Committee has no authority to approve any transaction involving
the expenditure of funds in excess of the spending authority granted to the
Chief Executive Officer. It is anticipated that the Executive Committee will
meet at least monthly but more often as necessary.
EXECUTIVE COMPENSATION
The following table lists the total compensation paid by the Company
to persons who served in the capacity of chief executive officer during the
periods indicated and to the only other executive officer who received annual
compensation in excess of $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
NAME AND PRIN- SECURITIES UNDERLYING
CIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS
- -------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Charles A. Champion(1) 1994 $ 36,000 - 50,975
Chairman and CEO
Daniel E. Pasquini(2) 1994 $105,000 $15,000 78,900
President 1993 $ 96,000 - 22,500
1992 $ 92,000 - -
Tyrone J. Fairbanks(3) 1994 $102,500 $15,000 78,900
President and CFO
</TABLE>
- ---------------
(1) Mr. Champion was elected Chief Executive Officer on June 23, 1994,
concurrently with the resignation of Daniel E. Pasquini as president.
Mr. Champion did not previously serve as an executive officer of
Fortune.
(2) Mr. Pasquini served as president of Fortune from the inception of the
Company in 1987 until his resignation on June 23, 1994. See also the
following paragraph for information concerning severance paid to Mr.
Pasquini.
(3) The only year in which Mr. Fairbanks received salary and bonus
exceeding $100,000 was 1994. Mr. Fairbanks was elected President of
Fortune on June 23, 1994, and became Chief Executive Officer on
January 5, 1995. Prior to his election as President, he served as a
Vice President and Chief Financial Officer.
37
<PAGE> 41
In June 1994, Daniel E. Pasquini, formerly President and a director of
the Company, resigned. At the time of his resignation, Mr. Pasquini was
employed under an employment agreement with terms similar to Mr. Fairbanks'
agreement. In connection with the cancellation of the agreement, Mr. Pasquini
and the Company negotiated a buyout arrangement under which Mr. Pasquini was to
be paid a total severance benefit of $225,000, of which approximately one-half
was deferred until January 1995. To assist the Company's cash flow
requirements, Mr. Pasquini agreed to accept $85,000 in cash, the exercise price
of certain stock options held by him was reduced to $.575 per share and the
Company agreed to issue stock purchase warrants to him in the future to
purchase 45,000 shares of Common Stock at $2.75 per share. The reduction in
exercise price of the options had no financial statement impact, since the
Company had previously expensed the entire amount of the severance benefits
payable to Mr. Pasquini.
The following table lists the outstanding options held by the
Company's Chief Executive Officer and Chief Financial Officer under Company's
Stock Option Plans:
AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options in-the-Money Options
at FY-End (#) at FY-End (#)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized ($) Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles A. Champion - - 24,195/0 $0/0
Tyrone J. Fairbanks - - 111,400/0 $0/$0
</TABLE>
- ---------------
(1) Based on the closing price of the Common Stock on December 31, 1994.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Tyrone J.
Fairbanks, its President, Chief Executive Officer and Chief Financial Officer.
The agreement provides that if employment is terminated for any reason other
than for cause, death or disability within two years following a change in
control (which for purposes of this Agreement means a change in the majority of
the Board of Directors following certain special events) Mr. Fairbanks is
entitled to receive a single payment equal to two year's compensation and all
shares of Common Stock subject to stock options then held by him without
payment of the exercise price therefor. Mr. Fairbanks' agreement also provides
for two (2) years of consulting services upon the completion of the primary
term of his contract at forty percent (40%) of the last compensation
thereunder. Mr. Fairbanks' current employment agreement provides for an annual
salary of $150,000. The term of Mr. Fairbanks' employment contract expires
December 31, 1997.
The Company has entered into an employment agreement with John L.
Collins, its newly appointed Vice President of Investor Relations, pursuant to
which he will receive a salary of $96,000 per year. Pursuant to that
agreement, on May 30, 1995, Fortune issued to Mr. Collins 25,000 stock purchase
warrants exercisable at $3.25 (the market price of the Common Stock on May 30,
1995, the date of issue) and expiring May 30, 2000. The contract will be
terminable at will by either party. Mr. Collins is also entitled to receive,
without payment, shares underlying stock options then held by him in the event
of a termination by reason of a change in control.
STOCK OPTIONS
Fortune has four Stock Option Plans. The plans cover all officers and
employees of the Company. Three of the plans also provide for options for
directors of the Company. Awards are made by the Board of Directors upon
recommendations of its Compensation Committee. There is no performance formula
or measure. Options granted under the 1987 plan must be exercised within ten
years of the date of grant or they are forfeited. Options granted under the
1988 plan, the 1991 plan and a multi-year plan adopted in 1993 must be
exercised within five years of the date of grant or they are forfeited. No
future options will be granted under existing option plans at less than 85% of
the fair market value of the Common Stock. In addition, for a period of one
year following the date of this Prospectus, the Company will not grant any
38
<PAGE> 42
options or warrants, other than options or warrants issued or granted in bona
fide financing transactions, which would result in the aggregate number of
options and warrants exceeding 10% of the then outstanding Common Stock.
All options available under the 1987, 1988 and 1991 plans have been
granted, and no shares remain under any of these plans on which options may be
granted. Options under the 1993 plan available for grant in 1993, 1994 and
1995 have been granted; additional options may be granted under the 1993 plan
in 1996 and 1997. Options have been granted as follows: (1) under the 1987
plan, options for 12,500 shares at a price of $2.60 per share; (2) under the
1988 plan, options for 27,500 shares at $2.60 per share; under the 1991 plan,
options for 32,500 shares at $6.00 per share; and (4) under the 1993 plan,
options for 75,000 shares at $5.00 per share granted in 1993, options for
263,000 shares at $5.48 per share granted in 1994 and options for 264,000
shares at $6.03 per share granted in 1995. The prices of the options granted
in 1991, 1993, 1994 and 1995 were reduced to $2.75 on January 12, 1994.
The following table shows the grants of stock options to each of the
executives named in the Summary Compensation Table during 1994. No options
were exercised by any of these individuals during 1994.
OPTION GRANTS IN 1994
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted Fiscal Year Price ($/Sh) Date
---- ------------- ------------ ---------------- ----------
<S> <C> <C> <C> <C>
Charles A. 18,000 100.0% $1.94 12/23/99
Champion 6,575 2.5% $5.48(1) 3/1/99
Daniel E. 78,900 30.0% $5.48(1) 3/1/99
Pasquini
Tyrone J. 78,900 30.0% $5.48(1) 3/1/99
Fairbanks
</TABLE>
- -----------------
(1) The exercise price of these options was reduced to $2.75 per share on
January 12, 1994. This reduction had no financial statement impact because the
exercise price after the reduction was still higher than the market price of
the Common Stock at that date.
In the event of a change in control of the Company, the shares of the
Company's common stock subject to options granted to all option holders under
the Company's stock option plans will be issued to them without further action
on their part or the payment of the exercise price for such shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Subsequent to the consummation of the acquisition of LEX, Messrs.
Forster and Souki were elected to the Board of Directors of the Company. Their
election to the Board was not a term or condition of the transaction. For
information regarding the consideration received by Mr. Forster and BSR in the
transaction, see "Business and Properties - Exploration, Exploitation and
Development Activity - Zydeco 3D Venture." BSR is a corporation owned by
members of the family of Mr. Souki. In connection with the acquisition, Mr.
Forster and BSR agreed to indemnify Fortune against costs and expenses in
connection with the Baytree litigation and are currently indebted to the
Company in the amount of approximately $30,000 for expenses incurred by Fortune
in the litigation. See "Business and Properties - Legal Proceedings - LEX
Litigation."
On April 24, 1995, the Company obtained a $300,000 "bridge" loan to
enable it to pay certain expenses, including $100,000 on its Credit Facility.
The loan was obtained from LEX, which in turn had borrowed the funds from
several individuals. Upon the consummation of the Company's acquisition of
LEX, it became liable on such loans. The loans were repaid out of the proceeds
of the Company's recently concluded Common Stock offering. Among the
individuals who loaned funds to LEX were Mrs. William H. Forster, mother of
William D. Forster, a principal of LEX and now a director and principal
stockholder of Fortune, and John E. McConnaughy, Jr., formerly a principal
stockholder of the Company. See "Principal Stockholders." Each of Mrs.
Forster and Mr. McConnaughy loaned LEX $100,000 and received from LEX, as an
inducement to make the loan, 33,333 shares of Common Stock and 33,333 stock
purchase warrants out of 170,000 shares and 170,000 warrants issued to LEX
prior to the closing of the acquisition. W. Forster & Co., Inc., a corporation
wholly
39
<PAGE> 43
owned by William D. Forster, received a $30,000 placement fee from the Company
for assistance in arranging the $300,000 bridge loan. As a result of its
acquisition of LEX, Fortune was required, at the time the bridge loan was
repaid, to accelerate the amortization of the value of the shares paid by LEX
to the lenders in connection with the bridge loan in the amount of $150,000.
In order to provide additional capital for development activities, on
December 19 and 20, 1994, the Company borrowed an aggregate of $750,000 from
certain principal stockholders and from each of its directors then serving
(Messrs. Champion, Drulias, Fairbanks, Folsom and Walker). The directors
loaned $175,000 to the Company in the aggregate; $375,000 was obtained from
Klein Ventures, Inc.; and $200,000 was obtained from Jack Farber. See
"Security Ownership of Certain Beneficial Owners and Management." The notes are
unsecured, currently bear interest at 11% per annum (1.5% above the Bank One,
Texas, prime rate), interest is payable monthly, and the notes were due six
months from their respective dates of issue. The due date of the loans from
each of the directors and Klein Ventures, Inc. is July 15, 1996.
Both the Klein Ventures, Inc. and Farber notes permit the holder to
elect to exchange their notes for shares of Common Stock at the price on the
date the notes were issued ($2.00 and $1.875 per share, respectively), and
Fortune reserved 294,166 shares of common stock for such purpose. On or about
June 30, 1995, the estate of Mr. Farber converted its note into 106,667 shares
of Common Stock. As additional consideration for making the loan, Klein
Ventures, Inc. received 10,000 stock purchase warrants with an exercise price
of $2.40 per share, and Mr. Farber received 35,000 stock purchase warrants with
an exercise price of $1.875 per share. The Company also agreed to name two
individuals nominated by Mr. Farber to fill vacancies on the Board of
Directors. Barry Feiner, Esq., who served as counsel to Mr. Farber prior to
the latter's death on May 5, 1995 and to Barry Blank, another principal
stockholder of the Company, and Mr. Gary Gelman, Mr. Farber's grandson, were
elected to the Board of Directors in January 1995 pursuant to this agreement.
Both Mr. Feiner and Mr. Gelman were re-elected to the board by the stockholders
at the 1995 annual meeting.
On April 10, 1992, the Company consummated the acquisition of certain
oil and gas interests from Hinkle Exploration Limited ("Hinkle Exploration")
and San Francisco Energy Corporation. In the Hinkle acquisition, Fortune
issued 243,153 shares of common stock and 152,142 stock purchase warrants in
exchange for the acquired assets. Of those amounts, 129,973 shares and 138,888
warrants were issued to Klein Ventures and its affiliates and 35,933 shares and
13,254 warrants were issued to entities in which Charles Hinkle owns an
interest or to members of Mr. Hinkle's family. The 13,254 warrants were
exercised on December 4, 1992. Mr. Hinkle was elected a director of Fortune,
but resigned in 1993. In the acquisition, Fortune also assumed $391,000 of
payables owed by Hinkle Exploration to trade creditors, which amounts have been
paid. Hinkle Exploration was owned 50% by Mr. Hinkle and 50% by Robert
Bianchi. The payables assumed by the Company included approximately $175,000
owed to Halliburton Services, Inc. which had been guaranteed by H&B Resources
(owned 50% each by Mr. Hinkle and Mr. Bianchi) and by Messrs. Hinkle and
Bianchi individually. H&B and Mr. Hinkle remained liable on such debt, and as
a result of payments made by the Company on such obligations, Mr. Hinkle
received a personal benefit.
See "Management - Directors and Officers" for information regarding
legal services performed by Burris, Drulias & Gartenberg, A Professional
Corporation, for the Company and the Representatives. Dean Drulias, a director
of the Company, is a stockholder of such law firm.
All of the foregoing transactions between the Company and members of
management or principal stockholders were, and any future transactions will
be, on terms no less favorable to the Company than those which could be
obtained from unaffiliated third parties. In addition, no future transaction
will be entered into between the Company and members of management or principal
stockholders unless such transactions are approved by a majority of the
directors who are not members of management or principal stockholders.
LIMITED LIABILITY OF DIRECTORS
In accordance with the Delaware General Corporation Law, the Company
has included a provision in its Certificate of Incorporation to limit the
personal liability of its directors for violations of their fiduciary duties.
The provision eliminates such directors' liability to the Company or its
stockholders for monetary damages, except (i) for any breach of the directors'
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payment of dividends or unlawful stock
purchases or redemptions or (iv) for any transaction from which any director
derived an improper personal benefit.
This provision protects the Company's directors against personal
liability for monetary damages arising from breaches of their duty of care.
Directors remain liable for breaches of their duty of loyalty to the Company
and its
40
<PAGE> 44
stockholders and for the specific matters set forth above, as well as for
violations of the federal securities laws. The provision has no effect on the
availability of equitable remedies such as injunction or rescission.
Additionally, these provisions do not protect a director from activities
undertaken in any capacity other than that of director.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's bylaws provide for indemnification of its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law in effect at the time of a claim for indemnification. Such indemnification
applies to any threatened, pending or contemplated suit or proceeding arising
by reason of such person acting as an officer or director of the Company or its
affiliates.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
[this space left blank intentionally]
41
<PAGE> 45
PRINCIPAL STOCKHOLDERS
The following table contains information at December 21, 1995, as to
all persons who, to the knowledge of the Company, were the beneficial owners of
five percent (5%) or more of the outstanding shares of the Common Stock of the
Company and of all officers and directors.
<TABLE>
<CAPTION>
Amount and Nature Percent
Name Of Beneficial Ownership Of Class(1)
- ---- ----------------------- --------
<S> <C> <C>
William D. Forster, 30101 Agoura Ct.,
Agoura Hills, CA (Director)(2) 1,097,023(3) 9.4%
BSR Investments, Inc., Paris, France(2) 1,030,000(4) 8.9%
Klein Ventures, Inc., 710,803(5) 6.3%
1307 E. Pine St., Lodi, CA
Barry Blank, 5353 N. 16th St., Phoenix, AZ 641,200(6) 5.6%
Tyrone J. Fairbanks (Director, President,
CEO and CFO) 30101 Agoura Ct.,
Agoura Hills, CA 238,440(7) 2.1%
William T. Walker, Jr. (Director)
30101 Agoura Ct., Agoura Hills, CA 152,992(7) 1.4%
John L. Collins (Vice President)
30101 Agoura Ct., Agoura Hills, CA 100,000(7) 1.0%
Charles A. Champion (Director)
30101 Agoura Ct., Agoura Hills, CA 64,416(7) *
Graham S. Folsom (Director)
30101 Agoura Ct., Agoura Hills, CA 58,384 *
Dean W. Drulias (Director and Secretary)
30101 Agoura Ct., Agoura Hills, CA 49,520 *
Gary Gelman (Director)
30101 Agoura Ct., Agoura Hills, CA 19,112 *
Barry Feiner (Director)
30101 Agoura Ct., Agoura Hills, CA 13,612 *
Charif Souki (Director)
30101 Agoura Ct., Agoura Hills, CA 357(4) *
All Officers and Directors
as a group of ten (10) persons 1,793,356(7) 14.4%
</TABLE>
- ---------------
(1) The asterisk (*) indicates less than 1%.
(2) Forster and BSR are the record holders of these shares issued in
connection with the LEX acquisition. Ensign Financial Group Limited claims a
one-third interest in such shares and the stock purchase warrants issued in the
acquisition. In light of the dispute which has arisen over the ownership of
these shares and warrants, the Company is unable to state the beneficial
ownership of such shares and warrants. See "Business and Properties - Legal
Proceedings." If Ensign's position is upheld by the New York courts and it is
awarded one-third of the securities issued in the LEX acquisition, to the best
of the Company's knowledge, the ownership, including shares underlying the
stock purchase warrants and other securities noted in footnote (3), would be as
follows:
<TABLE>
<CAPTION>
Amount and Nature of Percent
Beneficial Ownership of Class
-------------------- --------
<S> <C> <C>
Ensign Financial Group Limited, NY, NY 800,000 7.0%
William D. Forster, New York, NY 696,666 6.0%
BSR Investments, Inc., Paris, France 630,000 5.4%
</TABLE>
(3) Includes 515,000 shares of Common Stock underlying stock purchase warrants
exercisable at $4.75 per share and expiring April 2000. Also includes 33,333
shares of Common Stock and 33,333 shares of Common Stock underlying stock
purchase warrants held by Mr. Forster's mother, as to which Mr. Forster
disclaims beneficial ownership.
42
<PAGE> 46
(4) Includes 515,000 shares of Common Stock underlying stock purchase warrants
exercisable at $4.75 per share and expiring April 2000. Based on information
provided to the Company by BSR, voting and dispositive power is exercised by
Samyr Souki, the president of BSR. Charif Souki, a director of the Company and
son of Samyr Souki, disclaims any ownership interest in or dispositive power
over such shares.
(5) Klein Ventures, Inc. is owned by Mr. Bud Klein. The number of shares
shown includes 138,888 shares underlying stock purchase warrants issued to
Klein Ventures, Inc. in the Hinkle acquisition, 80,000 shares underlying stock
purchase warrants acquired in the Company's 1993 public equity offering
exercisable at $3.75 per share and an aggregate of 88,629 shares of stock owned
by Klein Bros. Holdings, Ltd. Company on December 19, 1994, and 10,000 shares
issuable upon exercise of stock purchase warrants with an exercise price of
$2.40 per share which will be issued to Klein Ventures, Inc. in connection with
such note. See "Certain Relationships and Related Transactions." Each record
owner possesses sole voting and disposition power over such shares, and Klein
Ventures, Inc. and Mr. Bud Klein disclaim beneficial ownership of shares owned
by Klein Bros. Holdings, Ltd. which is owned by Klein Ventures, Inc. and five
of Mr. Klein's children and relatives. However, Klein Ventures, Inc., Klein
Bros. Holdings, Ltd. and Bud Klein may be considered a "group" under
regulations of the Securities and Exchange Commission.
(6) Includes 310,600 shares of Common Stock and an additional 330,600 of which
are shares underlying stock purchase warrants held by Mr. Blank and exercisable
at $3.75 per share. Mr. Blank is a Vice President and registered
representative with Coleman and Company Securities, Inc., one of the
Representatives of the Underwriters. See "Underwriting."
(7) Includes 216,999 shares issuable to Mr. Fairbanks upon the exercise of
stock options granted to him under the Company's various stock option plans,
exercisable at $2.75 per share; an aggregate of 139,801 shares issuable upon
exercise of stock options granted to other officers and directors under the
Company's various stock option plans, exercisable at $2.75 per share; 18,000
shares issuable upon exercise of stock options granted to Charles A. Champion
exercisable at $1.94; 88,289 shares issuable upon exercise of common stock
purchase warrants (at $4.41 per warrant) and 22,264 shares issuable upon
exercise of 3,600 warrants (at $11.14 each for 3.3097 shares of Common Stock
and two stock purchase warrants exercisable at $3.75 each for 1.4375 shares)
issued in connection with the Company's 1993 equity offering to William T.
Walker, Jr. prior to becoming a director of the Company; and 25,000 shares
issuable upon the exercise of common stock purchase warrants (at $3.25 per
share) issued to John L. Collins on May 30, 1995.
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<PAGE> 47
EXCHANGE OFFER
By this Prospectus, each Debentureholder is offered the opportunity to
convert some or all of his Debentures into ____ shares of Common Stock and ____
Exchange Warrants for each $1,000 principal amount of Debentures.
Debentureholders wishing to accept this offer must tender the certificates
evidencing their Debentures and a completed Transmittal Letter in the form
accompanying this Prospectus to _________________ on or before the close of
business on ________________, 1996. Tenders received after that date will not
be accepted, provided that the Company reserves the right to extend the
conversion period for up to an additional 30 days upon written notice to all
Debentureholders.
Tenders once made are irrevocable, except that if Debentureholders
holding less than 90% in principal amount of the Debentures fail to tender
their Debentures for conversion, no tenders will be accepted and all tendered
Debentures will be returned.
Certificates evidencing the shares of Common Stock and Exchange
Warrants issued to each converting Debentureholder will be transmitted by the
Company's transfer agent by certified mail, return receipt requested, as soon
as practicable following the termination of the tender period.
Debentureholders tendering their Debentures whose tenders are accepted
will be entitled to receive accrued interest on the Debentures through December
31, 1995. In the event the conversion occurs after December 31, 1995,
Debentureholders will not be entitled to receive interest for the period
between January 1, 1996 and the date the conversion occurs. Debentureholders
not tendering their Debentures will continue to receive interest on the
Debentures, in accordance with the terms of the Debentures.
For its services as Conversion Agent, Toluca Pacific Securities
Corporation will receive warrants to purchase 50 shares of the Common Stock for
each $1,000 principal amount of Debentures tendered. If all Debentures are
tendered, the Conversion Agent will receive warrants to purchase a total of
86,250 shares at the Exchange Price.
The Company reserves the right to determine the validity and
timeliness of all tenders, and its determination shall be final.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a discussion of certain federal income tax
consequences to persons exchanging their Debentures for Common Stock and
Exchange Warrants pursuant to this offering. This discussion summarizes the
opinion of Reish & Luftman, Los Angeles, California, delivered to the Company
in connection with this offering. The discussion sets for the material tax
consequences to investors in this offering but does not purport to deal with
all aspects of federal taxation (or with any aspect of state, local or foreign
taxation) that may be relevant to investors in light of their personal
investment and tax circumstances. Certain investors (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States) may be subject to special rules not discussed below. HOLDERS OF
DEBENTURES DESIRING TO ACCEPT THE OFFER TO CONVERT ARE ADVISED TO CONSULT WITH
THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF ACCEPTING THE OFFER TO CONVERT AND CONVERTING THEIR DEBENTURES
INTO COMMON STOCK AND EXCHANGE WARRANTS.
ACCRUED BUT UNPAID INTEREST
A Debentureholder who reports his income on the cash basis of
accounting for tax purposes, who receives a payment of accrued but unpaid
interest in cash in the Exchange Offer, will be required to include the
interest income in his taxable income to the extent of the cash payment of
interest. A Debentureholder who reports his income on the accrual basis of
accounting for tax purposes, who receives a payment of accrued but unpaid
interest in cash in the Exchange Offer, will have already included this accrued
interest in its taxable income and thus will not be required to include any
cash payment received in its taxable income, except to the extent that the
entire amount of such cash payment has not already been included in its
taxable income.
44
<PAGE> 48
CONVERSION OF DEBENTURES
Generally no gain or loss will be recognized upon the conversion of a
Debenture into solely Common Stock (except with respect to cash received in
lieu of factional shares or any accrued interest received on the Debentures).
However, Exchange Warrants do not qualify for the nonrecognition of gain or
loss. The amount of the gain or loss on the transaction will be equal to the
difference between the cost or basis of the Debentures surrendered and the sum
of the cash (other than accrued interest) and the fair market values of the
Common Stock and Exchange Warrants received; however, gain will be recognized
(i.e. included in taxable income) only to the extent of the cash and fair
market value of the Exchange Warrants received.
If a Debenture being converted into Common Stock is one as to which
there is accrued market discount, such accrued market discount will carry over
to the Common Stock (to the extent that such accrued market discount has not
previously been included in the holder's income) and any gain realized upon the
subsequent disposition (including a gift) of such Common Stock, to the extent
of such accrued market discount, may be taxable as ordinary interest income.
See "Market Discount on Sale of Common Stock".
BASIS OF COMMON STOCK AND EXCHANGE WARRANTS
The basis of the Exchange Warrants received on the exchange will be
equal to their fair market value.
The basis of the Common Stock received on the exchange will equal the
basis of the Debenture in the hands of the exchanging Debentureholder, reduced
by (i) the fair market value of the Exchange Warrants received, (ii) the amount
of any money received by the exchanging Debentureholder and (iii) the amount of
any loss recognized by the exchanging Debentureholder on the exchange, and
increased by the amount of any gain recognized by the exchanging
Debentureholder. In most cases, the exchanging Debentureholder's basis in the
Common Stock received on the exchange will equal the basis of the Debenture,
less the portion of such basis allocated to the Exchange Warrants received and
the portion of such basis allocated to portion of the Debentures for which cash
was received in lieu of fractional shares.
HOLDING PERIOD OF COMMON STOCK AND EXCHANGE WARRANTS
The holding period of the Exchange Warrants for holders of the
Exchange Warrants who hold the Exchange Warrants as capital assets, for
purposes of determining whether gain or loss on the disposition of the Exchange
Warrant is long term or short term capital gain or loss, commences with the
date the Exchange Warrants are issued in connection with the Exchange Offer and
terminates on the date of disposition of the Exchange Warrant in a taxable
transaction. If the Exchange Warrant is exercised, the holding period of the
Common Stock acquired upon such exercise will include the period the
Warrantholder held the Exchange Warrant.
The holding period of the Common Stock acquired in the Exchange Offer
for holders of the Common Stock who hold the Common Stock as capital assets,
for purposes of determining whether gain or loss on the disposition of the
Common Stock acquired in the Exchange Offer is long term or short term capital
gain or loss, will be deemed to include the time period that the shareholder
owned the Debenture.
DISPOSITION OF THE COMMON STOCK AND EXCHANGE WARRANTS
On the sale, redemption or other disposition of the Common Stock
acquired in the exchange, a holder will recognize gain or loss measured by the
difference between the amount of cash and the fair market value of the property
received and the holder's tax basis in the Common Stock sold, exchanged or
otherwise disposed of. Except as set forth in the second paragraph of
"Conversion of Debentures", such gain or loss will be a capital gain or loss,
provided the Common Stock was held as a capital asset, and will be long term
gain or loss if the Common Stock were held for more than one year, including
the period that the Debenture was held.
On the sale, redemption or other disposition of the Exchange Warrants
acquired in the exchange, other than by exercise of the Exchange Warrants and
their conversion into Common Stock, the holder will recognize gain or loss
measured by the difference between (a) the amount of cash and the fair market
value of the property received and (b) the holder's tax basis in the Exchange
Warrants sold, exchanged or otherwise disposed of. Such gain or loss will be a
capital gain or loss, provided the Exchange Warrants were held as a capital
asset, and will be long term gain or loss if the Exchange Warrants were held
for more than one year.
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<PAGE> 49
On the exercise of the Exchange Warrants and their conversion into
Common Stock, generally no gain or loss will be recognized by the holder of the
Exchange Warrants (except with respect to cash received in lieu of fractional
shares). The holder of Exchange Warrants converted into Common Stock will
generally have the same basis for the Common Stock as for the Exchange
Warrants, less that portion of the basis of the Exchange Warrants allocable to
any fractional share for which cash is received. With respect to holders of
the Common Stock acquired on the conversion of the Exchange Warrants, who holds
the Exchange Warrants and Common Stock as capital assets, for purposes of
determining whether gain or loss on the disposition of the Common Stock
acquired through the exercise of the Exchange Warrants is long term or short
term capital gain or loss, the holding period of the Common Stock acquired on
the conversion of the Exchange Warrants will include the time period that the
shareholder owned the Exchange Warrant. Such gain or loss will be a capital
gain or loss, provided the Common Stock was held as a capital asset, and will
be long term gain or loss if the Common Stock were held for more than one year,
including the period that the Exchange Warrants were held.
MARKET DISCOUNT ON SALE OF COMMON STOCK
If the Debentureholder purchased such Debenture at a market discount,
the accrued market discount will carry over to the Common Stock acquired on the
exchange (see second paragraph of "Conversion of Debentures"). If the holder
of such Common Stock subsequently recognizes gain upon a disposition (including
a gift) of the Common Stock, the lesser of such gain (or appreciation, in the
case of a gift) or the portion of the market discount which accrued while the
Debenture was held by such holder will be treated as ordinary interest income
at the time of the disposition. The rules also provide that a subsequent
holder of any Debenture who acquired it at a market discount will be required
to defer the deduction of the interest on any indebtedness incurred or
maintained to purchase or carry the Debenture until the Debenture (or the
Common Stock for which it is exchanged) is disposed of in a taxable
transaction.
Holders of Debentures acquired at a market discount may elect to
include market discount in income as the discount accrues, either on a ratable
basis or on a constant interest rate basis. The current inclusion election,
once made, applies to all market discount obligations acquired on or after the
first day of the first taxable year to which the election applies, and may be
revoked without the consent of the Internal Revenue Service ("IRS"). If a
Debentureholder so elected to include market discount in income, the foregoing
rules with respect to (i) the recognition of ordinary market discount income on
sales or certain other dispositions of the Common Stock acquired in exchange
for the Debenture and (ii) the deferral of interest deductions on indebtedness
related to such Debenture would not apply.
BACKUP WITHHOLDING
Under the backup withholding rules, a holder of a Debenture or Common
Stock may be subject to backup withholding at the rate of 20% with respect to
interest or dividends, respectively, paid on, and the cash proceeds of the
sale, redemption or other disposition of, the Debentures or Common Stock unless
such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates that fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. If no such exemption applies, interest paid on
Debentures converted will be subject to backup withholding but no withholding
will be due on the conversion of the Debentures to Common Stock. Backup
withholding should not be required for the value of the Exchange Warrants
received. Backup withholding may be required for the amount received for
fractional shares, depending upon the amount so received. If holders of
Debentures have not already done so, they will be required to complete an IRS
Form W-9 in order to provide the required information to the Company or its
agent. A holder of a Debenture or Common Stock who does not provide the
Company or its agent with the holder's correct taxpayer identification number
may be subject to penalties imposed by the IRS.
The Company will report to the holders of the Debentures and/or Common
Stock and the IRS the amount of any "reportable payments" for each calendar
year and the amount of tax withheld, if any, with respect to payments on the
Debentures or Common Stock.
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<PAGE> 50
DESCRIPTION OF SECURITIES
COMMON AND PREFERRED STOCK
The following description is qualified in all respects by reference to
the Company's Certificate of Incorporation and all amendments thereto and the
Company's Bylaws, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
The Company's certificate of incorporation, as amended, currently
authorizes 40,000,000 shares of Common Stock, $.01 par value and 2,000,000
shares of preferred stock, $1.00 par value. Of this total, 16,534,801 shares
of common stock have been issued or are issuable under options and warrants and
are outstanding at December 21, 1995. Additionally, the Company has reserved
431,250 shares of the Company's Common Stock for issuance upon the conversion
of outstanding Debentures. No preferred stock is currently outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to dividends when and
as declared by the Board of Directors from funds legally available therefor and
upon liquidation are entitled to share ratably in any distribution to
stockholders. All holders of Common Stock are entitled to one vote per share
on any matter coming before the stockholders for a vote, including the election
of directors. In keeping with stockholder democracy rights, Fortune's
Certificate of Incorporation permits the stockholders to remove any director or
the entire board of directors, with or without cause, upon a vote of a majority
of the outstanding shares.
All issued and outstanding share of Common Stock are validly issued,
fully paid and non-assessable, and shares issued upon conversion of the
Debentures will be validly issued, fully paid and non-assessable. Holders of
the Common Stock do not have pre-emptive rights or other rights to subscribe
for unissued or treasury shares or securities convertible into shares.
Additionally, under Section 145 of the Delaware General Corporation
Law, the Company has availed itself of the provisions permitting the limitation
of liability through the indemnification of officers, directors, employees and
agents of Delaware corporations. See "Certain Relationships and Related
Transactions -- Limited Liability of Directors" and " -- Indemnification of
Officers and Directors."
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to
establish and designate the classes, series, voting powers, designations,
preferences and relative, participating, optional or other rights, and such
qualifications, limitations and restrictions of the preferred stock as the
Board, in its sole discretion, may determine without further vote or action by
the stockholders.
The rights, preferences, privileges and restrictions or qualifications
of different series of preferred stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions, and other matters. The
issuance of preferred stock could decrease the amount of earnings, and assets
available for distribution to holders of Common Stock or could adversely affect
the rights and powers, including voting rights, of holders of Common Stock.
The existence of the Preferred Stock, and the power of the Board of
Directors of the Company to set its terms and issue a series of Preferred Stock
at any time without stockholder approval, could have certain anti-takeover
affects. These effects include that of making the Company a less attractive
target for a "hostile" takeover bid or rendering more difficult or discouraging
the making of a merger proposal, assumption of control through the acquisition
of a large block of Common Stock or removal of incumbent management, even if
such actions could be beneficial to the stockholders of the Company.
DEBENTURES
The Debentures were issued under an Indenture between the Company and
IBJ Schroder Bank & Trust Company, as Trustee (the "Trustee"), and are
unsecured convertible subordinated obligations of the Company. They were
issued in
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<PAGE> 51
fully registered form, without coupons, in denominations of $1,000 and integral
multiples thereof. The Debentures bear interest at the rate of 10-1/2% per
annum, payable semiannually on January 1 and July 1 of each year.
The Debentureholders have the right, at the holder's option, to
convert any portion of the principal amount in integral multiples of $1,000,
into shares of Common Stock at any time prior to the close of business on the
business day preceding maturity at a conversion price of $_____ per share. The
conversion price is subject to adjustment in certain events, including: the
issuance of Common Stock as a dividend on any class of capital stock of the
Company; subdivisions and combinations of the Common Stock; the issuance to all
holders of Common Stock of certain rights or warrants to subscribe for or
purchase Common Stock at less than the current market price (as defined in the
Indenture) thereof; and, with certain exceptions, the distribution to all
holders of Common Stock of shares of its capital stock (other than shares of
Common Stock), evidences of its indebtedness, assets (excluding cash dividends
or distributions paid out of the Company's current or retained earnings) or
rights or warrants other than those mentioned above.
The payment of the principal, premium, if any, and interest on, and
redemption of, the Debentures will be subordinated in right of payment to the
extent set forth in the Indenture to the payment of the current portion of the
Senior Indebtedness of the Company, whether outstanding on the date of the
Indenture or thereafter created. The principal amount of Senior Indebtedness
at September 30, 1995 was $3,100,000. The term "Senior Indebtedness" means (a)
all indebtedness of the Company, whether outstanding on the date of the
Indenture or thereafter created, secured by assets of the Company having a
value (as determined by the Board of Directors of the Company) of more than 50%
of the outstanding principal amount of such indebtedness or $100,000, whichever
is less, (i) for borrowed money, (ii) for money borrowed by others and
guaranteed, directly or indirectly, by the Company, or (iii) constituting
purchase money indebtedness for the payment of which the Company is directly or
contingently liable, unless, in any such case, by the terms of the instrument
creating or evidencing such indebtedness it is provided that such indebtedness
is not superior in right of payment to the Debentures or to other indebtedness
which is pari passu with, or subordinated to, the Debentures, and (b) any
deferrals, renewals or extensions of any such Senior Indebtedness, or
securities, notes or other evidences of Indebtedness issued in exchange for
such Senior Indebtedness. As used in the preceding sentence the term "purchase
money indebtedness" means indebtedness evidenced by a note, debenture, bond or
other similar instrument issued to or assumed for a vendor as all or part of
the purchase price of such assets acquired by the Company.
No payment on account of principal, premium, if any, or interest on,
or repurchase of, the Debentures may be made by the Company if there is a
default in the payment of principal, premium, if any, or interest with respect
to any Senior Indebtedness or if any event of default with respect to any
Senior Indebtedness, permitting the holders thereof to accelerate the maturity
thereof, shall have occurred and shall not have been cured or waived or shall
not have ceased to exist after written notice to the Company and the Trustee by
any holder of Senior Indebtedness. However, failure to pay the principal,
interest or premium, if any, on the Debentures, on the due dates set forth in
the Indenture, constitutes a default under the Debentures. Upon any
acceleration of the principal due on the Debentures or payment or distribution
of assets of the Company to creditors upon any dissolution, winding up,
liquidation or reorganization, whether voluntary or involuntary, or in
bankruptcy, insolvency, receivership or other proceedings, all principal,
premium, if any, and interest due on all Senior Indebtedness must be paid in
full before the Holders of the Debentures are entitled to received any payment.
By reason of such subordination, in the event of insolvency, creditors of the
Company who are holders of Senior Indebtedness may recover more, ratably, than
the Holders of the Debentures, and may result in a reduction or elimination of
payments to the Holders of the Debentures.
The Indenture does not limit the Company's ability to incur Senior
Indebtedness. In addition, the Indenture does not limit the ability of the
Company's subsidiaries to incur indebtedness, which effectively is senior to
the Debentures with respect to assets of the respective subsidiary.
The Debentures are redeemable at the Company's option, as a whole or
in part, upon not less than 30 nor more than 60 days notice mailed to each
Debentureholder at the following Redemption Prices (expressed as percentages of
the principal amount) together in each case with accrued interest to the date
fixed for redemption; provided, that if the date fixed for redemption is an
Interest Payment Date, the interest payable on such date shall be paid to the
holders of record at the close
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<PAGE> 52
of business on the applicable Record Date subject to the provisions of the
Indenture. If redeemed during the 12-month period beginning April 1, of the
following years:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ---------
<S> <C>
1995 102%
1996 101%
1997 100%
</TABLE>
and thereafter at 100% of the principal amount. Upon receipt of a notice of
redemption, the Holder may convert the Debentures called for redemption until
the close of business on the Redemption Date (and if such day is not a business
day, then the immediately preceding business day).
The following are Events of Default under the Indenture: (a) failure
to pay principal of or premium, if any, on any Debenture when due, whether or
not such payment is prohibited by the subordination provisions of the
Indenture; (b) failure to pay any interest on any Debenture when due,
continuing for 15 days, whether or not such payment is prohibited by the
subordination provisions of the Indenture; (c) failure to perform any other
covenant of the Company in the Indenture, continuing for 30 days after written
notice as provided in the Indenture by the Trustee or at least 25% in
aggregate principal amount at Stated Maturity of the Debentures; (d) certain
events in bankruptcy, insolvency or reorganization. Subject to the provisions
of the Indenture relating to the duties of the Trustee, in case an Event of
Default shall occur and be continuing, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, and other conditions set forth in the
Indenture, the Holders of a majority in aggregate principal amount of the
Debentures will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee; otherwise, the Trustee will have
the right to exercise such powers under the Indenture and to pursue such
remedies and procedures as it considers necessary or appropriate. Upon the
occurrence of an Event of Default, the maturity of the full amount of the
Debentures may be accelerated and becomes due, subject to the rights of the
Senior Indebtedness, and subject to the notice provisions contained in the
Indenture.
If an Event of Default shall occur or be continuing, either the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Debentures outstanding may accelerate the maturity of all Debentures; provided,
however, that after such acceleration, but before a judgment or decree is
obtained by the Trustee based on that default, Holders of a majority in
aggregate principal amount of Debentures outstanding may, under certain
circumstances, rescind and annul such acceleration. Further, prior to any
acceleration of the maturity of the Debentures, the holders of a majority in
aggregate principal amount of Debentures outstanding may waive any past default
or Event of Default except (1) default in the payment of principal, premium, if
any, or interest on any of the Debentures or (2) in respect of a covenant or
provision of the Indenture which, under Article 11, may not be modified or
amended without the consent of the holder of each outstanding Debenture. For
information as to waiver of defaults, see "Modification and Waiver."
No Debentureholder will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing Event
of Default and unless also the Holders of at least 25% in aggregate principal
amount of the Debentures shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Debentures a direction inconsistent with such
request and shall have failed to institute such proceeding within 30 days.
However, such limitations do not apply to a suit instituted by a Holder of a
Debenture for the enforcement of payment of the principal of and premium, if
any, or interest on such Debenture on or after the respective due dates
expressed in such Debenture or of the right to convert such Debenture in
accordance with the Indenture. In addition to all other remedies available to
the Holders upon the occurrence of an Event of Default, the Holders of
Debentures representing not less than 25% of the aggregate principal amount of
the Debentures outstanding may (but are not obligated to) appoint one person to
the Company's board of directors so long as the default continues.
The Company will be required to furnish to the Trustee annually a
statement as to the performance by the Company of certain of its obligations
under the Indenture and as to any default in such performance.
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of not less than 50% in
aggregate principal amount of the Outstanding Debentures; provided, however,
that no
49
<PAGE> 53
such modification or amendment may, without the consent of the Holder of each
Outstanding Debenture affected thereby, (i) extend the fixed maturity of any
Debenture, or reduce the principal amount thereof, or reduce the rate or extend
the time of payment of interest thereon, or make the principal thereof or any
premium or interest thereon payable in any coin or currency other than that
hereinbefore provided, or reduce any premium payable on the redemption thereof
or impair the right to convert the Debentures into Common Stock on the terms
set forth in the Indenture or impair or affect the right of any Holder to
institute suit for payment thereof, without the consent of the Holder so
affected, or (ii) reduce the percentage in principal amount at Stated Maturity
of the outstanding Debentures, the consent of whose Holders is required to
amend the Indenture, or the consent of whose Holders is required for any waiver
of compliance with certain provisions hereof or of certain defaults hereunder
and their consequences provided for in this Indenture.
Without the consent of any Holders, the Company, together with the
Trustee, at any time and from time to time, may enter into one or more
indentures supplemental to the Indenture, in form satisfactory to the Trustee
for any of the following purposes: among other things, to evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company contained in the Indenture and in the
Debentures; or so to add the covenants of the Company for the benefit of the
Holders, or to cure any ambiguity, to correct or supplement any provision in
the Indenture which may be inconsistent with any other provision of the
Indenture, or to make any other provisions with respect to matters or questions
arising under the Indenture, provided such action shall not adversely affect
the interests of the Holders of Debentures in any material respect.
The Holders of a majority in aggregate principal amount of the
Outstanding Debentures may waive compliance by the Company with certain
restrictive provisions of the Indenture. The Holders of a majority in
aggregate principal amount of the Outstanding Debentures may waive any past
default prior to any acceleration of the maturity of the Debentures under the
Indenture, except a default in the payment of principal, premium or interest,
or in respect to the provisions referred to in (i) and (ii) above and after
acceleration under certain conditions.
EXCHANGE WARRANTS
Each Exchange Warrant will entitle the holder to purchase one share of
Common Stock for a period of three years following the Effective Date.
One-half of the Exchange Warrants received by a converting Debentureholder will
have an exercise price equal to the Exchange Price, and one-half will have an
exercise price of 125% of the Exchange Price. The Exchange Warrants are
callable by the Company, at $.05 per Warrant, upon 30 days' notice, at any time
after the closing price per share of the Common Stock for ten consecutive
trading days equals or exceeds 150% of the Exchange Price. In the event the
Company gives notice of its intention to redeem, a holder would be forced
either to exercise his or her Warrant within 30 days of the notice of
redemption or accept the redemption price.
The Exchange Warrants will issued in registered form under a Warrant
Agreement between the Company and U.S. Stock Transfer, as warrant agent (the
"Warrant Agent"). The shares of Common Stock underlying the Warrants, when
issued upon exercise of a Warrant, will be fully paid and nonassessable, and
the Company will pay any transfer tax incurred as a result of the issuance of
Common Stock to the holder upon its exercise.
The Company is not required to issue fractional shares upon the
exercise of a Warrant. The holder of a Warrant will not possess any rights as
a stockholder of the Company until such holder exercises the Warrant. A copy
of the form of Warrant Agreement is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
TRANSFER AGENT AND REGISTRAR
The principal transfer agent and registrar for the Common Stock and
the Preferred Stock offered hereby is U.S. Stock Transfer Corporation,
Glendale, California. The co-transfer agent and co-registrar for such
securities is First Interstate Bank of California.
CERTAIN ANTI-TAKEOVER DEVICES
Section 203 of the Delaware General Corporation Law (the "Delaware
Takeover Statute") applies to Delaware corporations with a class of voting
stock listed on a national securities exchange, authorized for quotation on an
inter-dealer quotation system or held of record by 2,000 or more persons. In
general, Section 203 prevents an "interested stockholder" (defined generally as
any person owning, or who is an affiliate or associate of the corporation and
has owned in the preceding three years, 15% or more of a corporation's
outstanding voting stock and affiliates and associates of such person) from
engaging in a "business combination" (as defined) with a Delaware corporation
for three years following the date such person
50
<PAGE> 54
became an interested stockholder unless (1) before such person became an
interested stockholder, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (2) the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding stock held by directors who are also
officers of the corporation and by employee stock plans that do not provide
employees with the rights to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or (3) on
or subsequent to the date such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors.
These provisions could have the effect of delaying, deferring or
preventing a change of control of the Company.
The Commission has indicated the use of authorized unissued shares of
voting stock could have an anti-takeover effect. In such case, various
specific disclosures to the stockholders are required. It has not been
management's intent to install an anti-takeover device nor is it expected that
the Company's authorized but unissued shares of common and preferred stock
would be used for that purpose. In addition, it is not the Company's intent to
rely on any provision of Delaware Law, including Section 203, for their
anti-takeover effects. Any business combination, as that term is used in
Section 203, would be reviewed by the Company's Board of Directors solely for
its impact on the Company.
LEGAL MATTERS
Reish & Luftman, Los Angeles, California, has passed upon the legality
of the securities offered hereby for the Company.
EXPERTS
The financial statements of the Company as of and for the years ended
December 31, 1993 and 1994 and for each of the years in the three year period
ended December 31, 1994, and the statements of revenues and direct operating
expenses of the oil and gas property interests acquired from PetroFina S.A. for
each of the years in the three-year period ended December 31, 1994, have been
included herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The information appearing herein with respect to net proved oil and
gas reserves of the Company at December 31, 1993 and 1994, was estimated by
Huddleston & Co., Inc., independent petroleum engineers, and at December 31,
1992, 1993 and 1994, was estimated by Sherwin D. Yoelin, petroleum engineer,
and is included herein on the authority of such engineers as experts in
petroleum engineering.
GLOSSARY
BBL. "Bbl" means barrel. "Mbbl" means thousand barrels. "MMBbl"
means million barrels.
BOE. "BOE" means barrel of oil equivalent, which are determined using
the ratio of one barrel of crude oil, condensate or natural gas liquids to six
Mcf of natural gas so that six Mcf of natural gas is referred to as one barrel
of oil equivalent or "BOE". "MBOE" means thousands of barrels of oil
equivalent. "MMBOE" means millions of barrels of oil equivalent.
BCF. "Bcf" means billion cubic feet.
GAS WELL. A gas well is a well drilled for producing only gas as its
primary product and not producing oil or condensate.
51
<PAGE> 55
GROSS ACRES OR WELLS. "Gross Acres or Wells" are the total acres or
wells, as the case may be, in which an entity has an interest, either directly
or through an affiliate.
MCF. "Mcf" means thousand cubic feet. "Mmcf" means million cubic feet.
MMBTU. One Million British Thermal Units. A British Thermal Unit is
the amount of heat needed to raise the temperature of one pound of water one
degree Fahrenheit.
NET ACRES OR WELLS. A party's "net acres" or "net wells" are
calculated by multiplying the number of gross acres or gross wells in which
that party has an interest by the fractional interest of the party in each such
acre or well.
PRODUCING PROPERTIES OR RESERVES. Producing Reserves are Proved
Developed Reserves expected to be produced from existing completion intervals
now open for production in existing wells. A Producing Property is a property
to which Producing Reserves have been assigned by an independent petroleum
engineer.
PROVED DEVELOPED RESERVES. "Proved Developed Reserves" are Proved
Reserves which can be expected to be recovered through existing wells with
existing equipment and operating methods.
PROVED RESERVES. "Proved Reserves" are the estimated quantities of
crude oil, natural gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known oil and gas reservoirs under existing economic and operating
conditions, that is, on the basis of prices and costs as of the date the
estimate is made and any price changes provided for by existing conditions.
PROVED UNDEVELOPED RESERVES. "Proved Undeveloped Reserves" are Proved
Reserves which can be expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is
required for recompletion. The offset units containing the proved-undeveloped
reserves are reasonably certain of commercial production when drilled.
PROVED DEVELOPED PRODUCING RESERVES. "Proved Developed Producing
Reserves are defined as those that are recoverable from completion intervals in
existing wells that are currently open and delivering commercial volumes of
hydrocarbons to market.
PROVED DEVELOPED NON-PRODUCING RESERVES. "Proved Developed
Non-Producing Reserves are defined as those that are recoverable from zones
behind cemented casing in existing wells which will require additional
completion work or a future recompletion prior to the start of production. The
cost of making such oil reserves available for production is insignificant
relative to the volume of reserves expected to be recovered from the planned
recompletion programs. The reserves are supported by actual production
performance from wells completed in the prospective sands elsewhere in the
local area.
RESERVES. "Reserves" means crude oil and natural gas, condensate and
natural gas liquids, which are net of leasehold burdens, are stated on a net
revenue interest basis, and are found to be commercially recoverable.
ROYALTY INTEREST. A "Royalty Interest" is an interest in an oil and
gas property entitling the owner to a share of oil and gas production (or the
proceeds of the sale thereof) free of the costs of production.
SEC METHOD. The SEC method is a method of determining the present
value of proved reserves. Under the SEC method, the future net revenues from
proved reserves are estimated assuming that oil and gas prices and production
costs remain constant. The resulting stream of revenues is then discounted at
the rate of 10% per year to obtain a present value.
UNDEVELOPED ACREAGE. "Undeveloped Acreage" is oil and gas acreage
(including, in applicable instances, rights in one or more horizons which may
be penetrated by existing well bores, but which have not been tested) to which
Proved Reserves have not been assigned by independent petroleum engineers.
WORKING INTEREST. A "Working Interest" is the operating interest
under an Oil and Gas Lease which gives the owner the right to drill, produce
and conduct operating activities on the property and a share of production,
subject to all royalties, overriding royalties and other burdens and to all
costs of exploration, development and operations and all risks in connection
therewith.
52
<PAGE> 56
In this Prospectus, natural gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located at 60
degrees Fahrenheit.
53
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditor's Report - KPMG Peat Marwick LLP F-2
Balance Sheets - December 31, 1993 and December 31, 1994 F-3
Statements of Operations for the years ended
December 31, 1992, 1993 and 1994 F-5
Statements of Stockholders' Equity for the years ended
December 31, 1992, 1993 and 1994 F-6
Statements of Cash Flows for the years ended
December 31, 1992, 1993 and 1994 F-7
Notes to Financial Statements F-8
Balance Sheets - September 30, 1994 and 1995 (unaudited) F-19
Statements of Operations and for the nine months
ended September 30, 1994 and 1995 (unaudited) F-21
Statement of Stockholders' Equity for the nine months
ended September 30, 1995 (unaudited) F-22
Statements of Cash Flows for the nine months ended
September 30, 1994 and 1995 (unaudited) F-23
Notes to Financial Statements (unaudited) F-24
Independent Auditor's Report - KPMG Peat Marwick LLP F-28
Statement of Gross Revenues and Direct Lease Operating
Expense for Assets Acquired for the years ended
December 31, 1992, 1993 and 1994 and for the nine months ended
September 30, 1994 and 1995 (unaudited) F-29
Notes to Statements of Gross Revenues and Direct Lease
Operating Expenses for Assets Acquired F-30
Pro Forma Combined Financial Information F-31
Notes to Condensed Combined Financial Statements F-37
</TABLE>
F-1
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fortune Petroleum Corporation
We have audited the balance sheets of Fortune Petroleum Corporation as of
December 31, 1994 and 1993, and the related statements of operations,
stockholders's equity and cash flows for each of the years in the three year
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fortune Petroleum Corporation
as of December 31, 1994 and 1993, and the results of its operations and its
cash flows for the each of the years in the three-year period ended December
31, 1994, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 14. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 10, 1995, except for Note 8
which is as of April 13, 1995
F-2
<PAGE> 59
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------
1993 1994
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 109,000 $ 398,000
Accounts receivable 574,000 550,000
Prepaid expenses and oil inventory 69,000 114,000
----------- ----------
Total Current Assets 752,000 1,062,000
----------- ----------
PROPERTY AND EQUIPMENT (Notes 1, 3 and 4):
Oil and gas properties, accounted for
using the successful efforts method 14,302,000 17,912,000
Automotive, office and other 307,000 330,000
----------- ----------
14,609,000 18,242,000
Less--accumulated depletion, depreciation
and amortization (5,474,000) (8,253,000)
----------- ----------
9,135,000 9,989,000
----------- ----------
OTHER ASSETS:
Notes receivable (long-term portion) 50,000 -
Materials, supplies and other 245,000 270,000
Deferred credit facility costs (net of
accumulated amortization of $0
and $38,000) 48,000 113,000
Bond issuance costs (net of
accumulated amortization of $65,000,
and $122,000)(Note 2) 224,000 167,000
----------- ----------
567,000 550,000
----------- ----------
TOTAL ASSETS $10,454,000 $11,601,00
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 60
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
--------------------------
1993 1994
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long term debt (Note 5) $ 321,000 4,688,000
Accounts payable 582,000 393,000
Accrued expenses 91,000 78,000
Executive Severance Payable - 96,000
Royalties and working interests payable 66,000 53,000
Accrued interest 99,000 130,000
Notes payable to shareholder - 200,000
----------- -----------
Total Current Liabilities 1,159,000 5,638,000
----------- -----------
NOTES PAYABLE TO OFFICERS,
DIRECTORS AND SHAREHOLDERS - 550,000
LONG-TERM DEBT, net of current portion (Note 5) 2,682,000 1,685,000
EXECUTIVE SEVERANCE PAYABLE - 63,000
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--100,000 shares
Issued and outstanding-- None - -
Common stock, $.01 par value
(Notes 1, 3, 7, 9 and 10):
Authorized--10,000,000 shares
Issued and outstanding--2,633,471 and 2,644,032
shares at December 31, 1993 and
1994, respectively (Note 1) 26,000 26,000
Capital in excess of par value (Note 1 and 7) 11,258,000 11,253,000
Accumulated deficit (4,671,000) (7,614,000)
----------- -----------
NET STOCKHOLDERS' EQUITY 6,613,000 3,665,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,454,000 $11,601,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 61
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
REVENUES:
Sales of oil and gas, net of
royalties $2,093,000 $ 2,762,000 $ 3,339,000
Other income 67,000 72,000 58,000
---------- ----------- -----------
2,160,000 2,834,000 3,397,000
DIRECT PRODUCTION EXPENSES 837,000 946,000 1,090,000
---------- ----------- -----------
REVENUES IN EXCESS OF DIRECT
PRODUCTION EXPENSES 1,323,000 1,888,000 2,307,000
---------- ----------- -----------
OPERATING EXPENSES
Depletion, depreciation
and amortization 482,000 1,719,000 2,070,000
General and administrative expenses 654,000 791,000 1,020,000
Abandoned leasehold costs 37,000 71,000 249,000
Dry hole costs - - 195,000
(Gain) or loss on sale of assets 63,000 (133,000) -
Interest expense 234,000 311,000 460,000
Note extension fee 51,000 - -
Reserve for doubtful debt - 101,000 -
Executive severance expense - - 225,000
Impairment to oil and gas reserves - 2,682,000 1,031,000
---------- ----------- -----------
1,521,000 5,542,000 5,250,000
---------- ----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES (198,000) (3,654,000) (2,943,000)
PROVISION FOR INCOME TAXES (Note 6) - - -
---------- ----------- -----------
NET LOSS $ (198,000) (3,654,000) (2,943,000)
========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (Note 10) 713,500 1,772,739 2,638,672
========== =========== ===========
NET LOSS PER COMMON SHARE $ (0.27) $ (2.06) $ (1.12)
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 62
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------- Capital in
Shares Excess of Accumulated
(Note 1) Amount Par Value Deficit Net
-------- --------- ----------- ----------- ----------
<C> <C> <C> <C> <C>
BALANCE, January 1, 1992 512,814 5,000 $ 3,462,000 $ (819,000) $ 2,648,000
Common stock issued or canceled
in exchange for Argo shares (Note 1) (1,960) - - - -
Common stock issued for
assets acquired (Note 3) 249,477 3,000 1,588,000 - 1,591,000
Common stock issued for
exercise of warrants (Note 3) 13,255 - - - -
Common stock issued for
payment of interest (Note 5) 15,079 82,000 - 82,000
Common stock issued for
exercise of stock options (Note 11) 5,000 - 13,000 - 13,000
Common stock issued for
directors' fees (Note 9) 2,795 - 17,000 - 17,000
Net loss - - - (198,000) (198,000)
--------- ------- ----------- ----------- -----------
BALANCE, December 31, 1992 796,460 $ 8,000 $ 5,162,000 $(1,017,000) $ 4,153,000
========= ======= =========== =========== ===========
Common stock returned to
treasury (Note 1) (269) - (2,000) - (2,000)
Common stock issued for public
offering (Note 7) 1,800,000 18,000 5,416,000 - 5,434,000
Warrants issued for public
offering (Note 7) - - 444,000 - 444,000
Warrants issued for payment of services - - 111,000 - 111,000
Common stock issued for
exercise of stock options (Note 11) 9,376 - 25,000 - 25,000
Common stock issued for
payment of interest (Note 5) 22,365 - 86,000 - 86,000
Common stock issued for
directors' fees (Note 9) 5,539 - 16,000 - 16,000
Net loss - - - (3,654,000) (3,654,000)
--------- ------- ----------- ----------- -----------
BALANCE, December 31, 1993 2,633,471 $26,000 $11,258,000 $(4,671,000) $ 6,613,000
========= ======= =========== =========== ===========
Common stock returned
to treasury (80) - (2,000) - (2,000)
Adjustment to proceeds
for 1993 public offering - - (29,000) - (29,000)
Common stock issued for
exercise of stock options 4,688 - 12,000 - 12,000
Common stock issued for
directors' fees 5,953 - 14,000 - 14,000
Net loss - - - (2,943,000) (2,943,000)
--------- ------- ----------- ----------- -----------
BALANCE, December 31, 1994 2,644,032 $26,000 $11,253,000 $(7,614,000) $ 3,665,000
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 63
FORTUNE PETROLEUM CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1992 1993 1994
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (198,000) $(3,654,000) $(2,943,000)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Common stock issued for interest expense 82,000 86,000 -
Common stock issued for directors' fees,
compensation and consulting fees 17,000 16,000 14,000
Debentures issued for payment of legal expenses 25,000 - -
Depletion, depreciation and amortization 482,000 1,719,000 2,070,000
Abandoned leasehold and dry hole costs - - 444,000
(Gain) or Loss on disposition of assets 100,000 (62,000) -
Impairment of oil and gas assets - 2,682,000 1,031,000
Reserve for doubtful debt - 101,000 -
Provision for executive severance - - 225,000
Changes in assets and liabilities:
Accounts receivable (116,000) (263,000) 24,000
Prepaids and oil inventory (44,000) 46,000 (45,000)
Accounts payable and accrued expenses (50,000) 375,000 (202,000)
Payment of executive severance - - (66,000)
Royalties and working interest payable (19,000) (28,000) (13,000)
Accrued interest 30,000 43,000 31,000
Materials, supplies and other (112,000) (81,000) (79,000)
---------- ----------- -----------
Net cash provided by (used in) operating activities 197,000 980,000 491,000
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure for oil and gas properties (176,000) (6,746,000) (4,035,000)
Expenditures to abandon properties and dry hole costs - - (230,000)
Proceeds from sale of properties and equipment - 292,000 8,000
Expenditures for other property and equipment (60,000) (4,000) (30,000)
---------- ----------- -----------
Net cash used in investing activities (236,000) (6,458,000) (4,287,000)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,065,000 - 4,680,000
Proceeds from notes to shareholders - - 750,000
Repayment of long term debt (845,000) (571,000) (1,326,000)
Proceeds from issuance of common stock 13,000 6,336,000 12,000
Expenditures for offering costs (205,000) (322,000) (29,000)
Common stock repurchase - (2,000) (2,000)
---------- ----------- -----------
Net cash provided by financing activities 28,000 5,441,000 4,085,000
---------- ----------- -----------
Net increase (decrease) in cash (11,000) (37,000) 289,000
---------- ----------- -----------
CASH AT BEGINNING OF PERIOD 157,000 146,000 109,000
---------- ----------- -----------
CASH AT END OF PERIOD $ 146,000 $ 109,000 $ 398,000
========== =========== ===========
Supplemental information:
Interest paid in cash $ 152,000 $ 225,000 $ 400,000
Common Stock issued or issuable as directors' fees 23,000 16,000 14,000
Common Stock issued or issuable for interest paid 82,000 86,000 -
Warrants issued for public offering - 444,000 -
Warrants issued for public offering expenses - 111,000 -
Supplemental disclosure of non cash investing and
financing activities:
Common stock issued for payment of executive severance $ - $ - $ -
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 64
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
Fortune Petroleum Corporation (Fortune) is engaged in production and
exploration of oil and gas, primarily in Texas, New Mexico and California.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OIL INVENTORY
Oil inventory is stated at approximate fair market value. Market
value is determined based on current well head price of oil and natural gas
less selling and delivery costs.
PROPERTY AND EQUIPMENT
Oil and gas properties are accounted for using the successful efforts
method. Costs of acquiring non-producing acreage, drilling successful
exploration wells and development are capitalized. All other exploratory
expenses are charged to operations as incurred. The carrying value of oil and
gas properties is evaluated on an aggregate basis in relation to the estimated
present value of future net revenues based on reserve report estimates.
Depletion, depreciation and amortization are calculated using the
unit-of-production method. Oil and gas reserve quantities are based on a
reserve report by an independent petroleum engineer.
Automotive, office and other property and equipment are stated at
cost. Depreciation is provided using the straight-line method over an
estimated future service life of five years.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of identified actual
cost or replacement cost.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes," which
changed its method of accounting for income taxes from the deferred method
under APB 11 to the asset and liability method. The cumulative effect of this
change in accounting principle for the year ended December 31, 1993 was not
material.
Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards.
Under the deferred method of APB 11, which was applied in 1992 and
prior years, deferred income taxes were provided for when revenue and expenses
reported for tax purposes differed from their recognition for financial
statement purposes.
BOND ISSUANCE COSTS
Bond issuance costs are being amortized using the straight line method
over the 5 year life of the related debt.
DEFERRED CREDIT FACILITY COSTS
Deferred credit facility costs are being amortized using the straight
line method over the 2.5 year life of the related debt.
RESERVE IMPAIRMENT
The Company evaluates impairment to the value of aggregate proven
reserves by performing a ceiling test based on the present value of pre-tax
future net revenues, discounted at ten percent. Based upon such evaluation,
the Company recorded
F-8
<PAGE> 65
impairments of $1,031,000 and $2,682,000 in 1994 and 1993, respectively.
Performing a ceiling test using the after-tax undiscounted future net revenues
of the Company's aggregate proven reserves would not result in an additional
impairment.
The Company makes periodic assessments of existing unproved properties
to determine whether they have been impaired. Such assessment is made on a
property-by-property basis. If the results of the assessment indicate
impairment, the Company recognizes the impairment at the time the assessment is
made. Based on the most recent assessment, the Company believes that no
impairment to unproved properties exists at December 31, 1994.
RECLASSIFICATION
Certain reclassifications have been made to the 1993 and 1992 amounts
to conform with the current year presentation.
(3) ACQUISITIONS AND DISPOSITION OF ASSETS
ENRE CORPORATION
On June 24, 1994, the Company acquired a 25% interest in EnRe-l LLC, a
company formed to develop and explore for oil and gas lands held under certain
Jicarilla Apache mineral development agreements in Rio Arriba County, New
Mexico. The net acquisition price was $1,674,000, and the effective date of
the transaction using the purchase method of accounting was June 1, 1994. As a
result of the acquisition, the Company has effective non-operating working
interests ranging from 21.5625% to 25% in 70,000 producing, development and
exploratory acres.
Of that acreage acquired, 60,000 acres are subject to certain mineral
development agreements that require minimum levels of development activity
through December 1995. The Company believes that they are in compliance with
all development requirements as of December 31, 1994. Under the terms of the
mineral development agreements, four additional wells must be drilled in 1995.
The Company estimates that their commitment for such drilling activity will be
approximately $470,000.
LAROCO, LLP
On February 8, 1994, the Company completed an acquisition of a 50%
working interest in a 3,689 acre lease in the La Rosa Natural Gas Field in
Refugio County, Texas from Brooklyn Union Exploration Company, Inc. for
$760,000. The effective date of the transaction using the purchase method of
accounting was February 1, 1994.
MICHAEL PETROLEUM, ET AL.
On October 5, 1993, the Company concluded the acquisition from Michael
Petroleum Corporation, Brazos Resources, Inc., Pioneer Drilling Company and
Endowment Energy Partners of certain interests in two producing natural gas
fields in Webb County, Texas. The funding was provided by substantially all of
the net proceeds from the public offering which closed on the same date (See
Note 7). The transaction was accounted for as a purchase as of July 1, 1993
with a net acquisition price of $6,457,000 and 195,000 common stock purchase
warrants exercisable at $4.13 on October 5, 1995.
VINTAGE PETROLEUM, INC.
On May 27, 1993, the Company sold its interest in 11 gross and .42 net
productive wells in Oklahoma for a total of $278,000 cash. The sale of these
wells did not materially reduce the Company's estimated reserves or future net
revenues.
(4) OIL AND GAS PROPERTIES AND OPERATIONS
Capitalized costs relating to oil and gas producing activities and
related accumulated depletion, depreciation and amortization at December 31,
1992, 1993 and 1994 were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Capitalized costs of oil
and gas properties $ 7,925,000 $14,302,000 $17,912,000
Less accumulated depletion,
depreciation and amortization (1,149,000) (5,282,000) (7,193,000)
----------- ----------- -----------
$ 6,776,000 $ 9,020,000 $10,719,000
=========== =========== ===========
</TABLE>
F-9
<PAGE> 66
Of the above capitalized costs, the amount representing unproved properties was
$1,036,000, $440,000 and $16,000 in 1994, 1993 and 1992, respectively.
Costs incurred in oil and gas producing activities were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- ----------
<S> <C> <C> <C>
Property acquisition $121,000 $ 57,000 $ 511,000
Exploration - - 231,000
Development 96,000 289,000 541,000
-------- ------- ---------
$217,000 $346,000 $1,283,000
======== ======== ==========
</TABLE>
The results of operations from oil and gas producing activities for
the years ended December 31, 1992, 1993 and 1994, are as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Revenues from oil and gas
producing activities:
Sales to unaffiliated parties $2,093 $ 2,762 $ 3,339
------ ------- -------
Production (lifting) costs:
Operating costs and
production and other taxes 837 946 1,090
Depreciation, depletion and amorti-
zation and valuation provisions 454 1,645 1,904
Abandonment and dry hole costs 37 71 444
Impairment to oil and gas reserves - 2,682 1,031
Other 30 11 -
------ ------- -------
Total expenses 1,358 5,355 4,469
------ ------- -------
Pretax income (loss) from producing activities 735 (2,593) (1,130)
Income tax (expense) benefit (250) - -
------ ------- -------
Results of oil and gas producing activities
(excluding corporate overhead and interest costs) $ 485 $(2,593) $(1,130)
====== ======= =======
</TABLE>
F-10
<PAGE> 67
(5) LONG TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1993 1994
---------- ----------
<S> <C> <C>
Note payable to Halliburton due in monthly installments
of $8,072 through May 1, 1994 including interest
of 10% per annum $ 40,000 -
Note payable to H&B Resources $275,000 due in January
1994 and $1,000,000 due on June 30, 1995 including
interest of 1% over prime which is calculated and
paid monthly in shares of the Company's Common Stock 1,275,000 -
Convertible Subordinated Debentures of $1,725,000
(net of discount of $88,000 and $72,000) due
December 31, 1997, including interest of 10-1/2%
per annum paid semi-annually 1,637,000 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 4,680,000
Other debt with interest ranging from 0%
to 9-1/4% per annum due through 1998 51,000 40,000
---------- ----------
Total long-term debt 3,003,000 6,373,000
Less current installments 321,000 4,688,000
---------- ----------
Long-term debt, excluding current installments $2,682,000 $1,685,000
========== ==========
</TABLE>
In 1993 the Company paid $86,000, in interest on the H&B Note using
common stock as payment. The H&B Resources Note and the Halliburton Notes were
paid in full in January 1994.
The 10-1/2% Convertible Subordinated Debentures due December 31, 1997
bear an effective interest rate of 12.13% and were convertible into shares of
the Company's common stock, after April 1, 1994, at a conversion price of $6.32
per share or 158 shares per Debenture. 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 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 $4,700,000 at
December 31, 1994. The credit facility contains various financial covenants,
is secured by all of the Company's oil and gas properties and currently
requires monthly principal reduction payments of $100,000.
At December 31, 1994, the Company was not in compliance with its cash
flow coverage ratio, current ratio and tangible net worth covenants. Under the
terms of credit facility agreement the bank has the right to demand repayment
of the entire loan balance in the event of covenant defaults. The Company is
currently in discussions with Bank One regarding breach of these covenants,
however, it has not obtained a waiver or amendment of such covenants for at
least one year from the bank. Accordingly, the entire amount outstanding is
classified as current in the accompanying financial statements. Should
discussions with the bank be unsuccessful the bank has the right to place the
loan in default. Should a default occur the Company shall have thirty days to
cure such default. If the default is not cured the bank may accelerate
repayment of this outstanding debt and there would be substantial doubt as to
the Company's ability to continue as a going concern. Refer to note 14 for
management's plans in regard to these matters.
F-11
<PAGE> 68
The Company's maturities of long-term debt over the next four years
are as follows:
<TABLE>
<CAPTION>
Year Long-term debt maturity
---- -----------------------
<S> <C>
1995 4,688,000
1996 8,000
1997 1,661,000
1998 16,000
---------
6,373,000
---------
</TABLE>
(6) INCOME TAXES
No provision for income taxes was required for the years ended
December 31, 1994, 1993 and 1992.
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
Deferred tax assets: 1994 1993
---------- ---------
<S> <C> <C>
Net operating loss carryforwards $1,762,000 797,000
Oil and Gas Properties difference
in accumulated depletion 1,634,000 1,180,000
---------- ---------
3,426,000 1,977,000
Less valuation allowance (100%) 3,426,000 1,977,000
---------- ---------
Net deferred taxes 0 0
========== =========
</TABLE>
At December 31, 1994, the Company estimates it had cumulative net
operating loss carryforwards for Federal and State income tax purposes of
$4,336,000 and $2,105,000, 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 2008. Also
at December 31, 1994 the Company had a basis difference of $3,713,000 for
Federal and State purposes which is attributable to write down of oil and gas
properties in 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.
(7) PUBLIC OFFERING
On October 5, 1993, the Company completed a $7,425,000 public offering
of 900,000 Units, for $8.25 per Unit. The net proceeds from the offering were
$5,989,000. Each Unit consists of two shares of the Company's common stock,
$.01 par value and two five-year warrants. Each warrant entitles the holder to
purchase one share of the Company's common stock at a price of $3.75 after the
warrant becomes separately transferable until September 28, 1998. The common
stock and the warrants included in the Units became separately transferable on
April 15, 1994. The Warrants are redeemable by the Company at any time after
the Warrants become separately transferable at $.05 per Warrant upon 30 days
notice if the market price of the common stock for 20 consecutive trading days
within the 30 day period preceding the date the notice is given equals or
exceeds $5.50.
(8) COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with its president, chief
executive officer and chief financial officer that provides for an annual
salary of $102,500 through December 31, 1995, and is subject to renewal upon
expiration. Upon termination of the employment agreement, the president, chief
executive officer and chief financial officer has a two-year consulting
agreement at 40% of his annual salary.
F-12
<PAGE> 69
In June 1994, Daniel E. Pasquini, formerly President and a director of
the Company, resigned. At the time of his resignation, Mr. Pasquini was
employed under an employment agreement with terms similar to Mr. Fairbanks'
agreement. In connection with the cancellation of the agreement, Mr. Pasquini
and the Company negotiated a buyout arrangement under which Mr. Pasquini will
be paid a total severance benefit of $225,000 through July 1996.
The Company leases certain office space under a non-cancelable
operating lease. Rental Expense under the office lease for the years ended
December 31, 1994, 1993 and 1992 was $45,000, $43,000 and $49,000,
respectively.
Minimum future lease payments under the non-cancelable lease are as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1995 $ 52,000
1996 $ 58,000
1997 $ 35,000
--------
$145,000
========
</TABLE>
The Company's interest in the AWP Field in McMullen County, Texas, and
its Sespe Leases in Ventura County, California, were pledged as collateral to a
$1,275,000 mortgage due to H&B Resources at December 31, 1993. The H&B
Resources Note was retired on January 26, 1994 and the Sespe lease and the AWP
Field were released as collateral from this Note.
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 which are currently still in the process of being completed. The
lawsuit is the result of on-going 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. The Company believes that EnRe has operated the property in a
negligent manner, causing loss to Fortune and the other interest owners. In
addition, the Company 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 now seeks 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 to be determined by Fortune in exchange for EnRe's
co-operation in complying with provisions of the operating agreement to provide
Fortune with timely information reporting. As of April 13, 1995, the Company
had paid $122,000 in undisputed well development costs and estimated there may
be a much as $50,000 in additional well development costs which may qualify as
undisputed.
In the opinion of management, Fortune has valid defenses to all remaining
claims made by EnRe. The Company intends to vigorously defend the litigation
and pursue appropriate affirmative relief against EnRe for its actions as
operator.
(9) RELATED PARTY TRANSACTIONS
In December 1994, the Company obtained $750,000 from certain principal
shareholders and directors in exchange for notes payable. The notes are
unsecured and bear interest at 1.5% above Bank One, Texas, prime rate (9% at
December 31, 1994). Interest is payable monthly. $525,000 in notes are due
January 1, 1996 and $225,000 in notes must be repaid in June 1995. $375,000 of
the notes are convertible into 187,500 shares of common stock ar a price of
$2.00 per share and $200,000 of the notes are convertible into 106,667 shares
of common stock at a price of $1.875 per share. In connection with this
financing, the Company issued 35,000 stock purchase warrants exercisable at
$1.875 per share, and 10,000 stock purchase warrants exercisable at $2.40 per
share to holders of the notes.
As compensation to outside directors, the Company pays directors' fees
equal to $2,500 per quarter, one half in shares of Fortune common stock valued
at $1,250 based on the value of the stock on the last day of each quarter and
$1,250 in cash. Inside directors do not receive such compensation.
(10) NET INCOME OR LOSS PER COMMON SHARE
Net loss per share is calculated based on the weighted average number
of outstanding common shares.
F-13
<PAGE> 70
(11) STOCKHOLDERS' EQUITY
On June 16, 1993, the Company effected a 1-for-4 reverse split of the
Company's common stock. In connection with this action, the Company elected to
repurchase fractional shares at a price of $6.50 per share.
In December 1992, the Company adjusted 138,889 common stock purchase
warrants to reflect an exercise price of $3.89 and extended their expiration to
September 28, 1998 in exchange for extending the final payment of $1,000,000 of
the H&B Resources note to July 1, 1995.
Fortune has four non-compensatory Stock Option Plans. The plans cover
all officers and employees of the Company. Three plans also provide for
options for directors of the Company. Awards are made by the Board of
Directors upon recommendations of its Compensation Committee. There is no
performance formula or measure. Options granted under the 1987 plan must be
exercised within ten years of the date of grant or are forfeited. Options
granted under the 1988, 1991 and 1993 plans must be exercised within five years
of the date of grant or they are forfeited.
All options available under the 1987, 1988, 1991 and 1993 plans
(including the 1994 and 1995 grants under this plan) have been granted, and no
shares remain under any of these plans on which options may be granted.
Options have been granted as follows: options under the 1987 plan have been
granted to acquire 12,500 shares of Fortune Petroleum common stock, at a price
of $2.60 per share; options of 27,500 at $2.60 per share under the 1988 plan;
32,500 at $6.00 per share under the 1991 plan have been granted by the Board of
Directors; and 75,000 options at $5.00 per share (the 1993 portion) and 263,000
options at $5.48 per share (the 1994 portion) and 264,000 options at $6.03 per
shares (the 1995 portion) have been granted under the five year plan adopted in
1993. The prices of the options granted in 1991, 1993, 1994 and 1995 were
reduced for all optionholders who remain employees of the Company to $2.75 per
share on January 12, 1995.
In July 1994, a director, exercised 4,688 options at an exercise price
of $2.60 per share from his option under the 1988 stock option plan.
In October 1992, Cecil Basenberg exercised 5,000 options at an
exercise price of $2.60 per share from his option under the 1987 Stock Option
Plan. Additionally, 2,187 options granted under the 1988 Stock Option Plan
were forfeited. In March 1993, James J. Penney exercised 4,688 options at an
exercise price of $2.60 per share from his option under the 1988 Stock Option
Plan. Barry W. Blank also exercised 4,688 options at an exercise price of
$2.60 per shares from his option under the 1988 Stock Option Plan.
At December 31, 1994 the Company's outstanding warrants to purchase
common stock consisted of:
<TABLE>
<CAPTION>
Number of Warrants Exercise Price Range Expiration Date
------------------ -------------------- ---------------
<S> <C> <C>
195,000 $4.13 10/5/95
50,000 $3.89 2/8/96
2,068,653 $3.75 - $4.41 9/28/98
90,000 $11.14 9/28/98*
---------
2,403,653
</TABLE>
__________
* Each warrant permits the holder to purchase two shares of common stock plus
two stock purchase warrants, expiring September 28, 1998, which permit the
holder to purchase one additional share of common stock at an exercise price of
$3.75.
(12) MAJOR CUSTOMER
The Company sold oil representing 72% of its oil production under
contracts to one customer for the year ended December 31, 1994. 92% of the
Company's gas production was sold under contracts to three customers (48%, 25%
and 15%, respectively) for the year ended December 31, 1994.
The Company sold oil representing 83% of its oil production under
contracts to two customers (68% and 14%, respectively) for the year ended
December 31, 1993. 90% of the Company's gas production was sold to two
customers (64% and 26%, respectively) for the year ended December 31, 1993.
F-14
<PAGE> 71
The Company sold oil representing 79% of its oil production under
contracts to two customers (65% and 14%, respectively) for the year ended
December 31, 1992. 83% of the Company's gas production was sold to three
customers (63%, 10% and 10%, respectively) for the year ended December 31,
1992.
(13) SUBSEQUENT EVENTS
On January 20, 1995, the Company amended its Certificate of
Incorporation to increase the number of authorized shared of common stock from
10,000,000 shares to 40,000,000 and the number of authorized preferred shares
from 100,000 to 2,000,000.
On January 5, 1995, Daniel E. Pasquini, the former president of the
Company, agreed to a modification of his severance package. He accepted
$85,000 in cash, the exercise price of 45,000 stock options held by him was
reduced to $.575 per share and the Company issued him warrants to purchase
45,000 shares of common stock at $6.03 per share, which he exercised
immediately. The Company continues to be responsible, under the terms of Mr.
Pasquini's severance agreement for certain medical insurance and vehicle lease
payments, however, such expenses have been reduced due to lower premiums for
which the Company may reclassify into income in the first quarter of 1995 as
much as $5,000 of the previously expensed severance.
(14) LIQUIDITY
Although the Company had a positive cash flow during 1994 from
operating activities of $491,000, the Company had negative working capital at
December 31, 1994 of $4,576,000 due to the re-classification of the Bank One
credit facility to current portion of long-term debt. Current low gas prices
have had a negative impact on the Company's cash flow and terms of its credit
facility. Therefore, the Company's viability as a going concern is dependent
upon either restructuring its debt, completion of a securities offering, pledge
of additional collateral, higher commodity prices or a combination of the
foregoing which would be adequate to provide sufficient cash flow to meet its
obligations. No assurance can be given that the Company's efforts to cure its
liquidity concerns will be successful.
Additionally, the Company and Bank One are in negotiations at the time
of the filing of this Form 10-KSB to waive covenant breaches which occurred at
December 31, 1994 as a result of the impact of lower natural gas prices on the
Company's cash flow and estimated collateral value of its oil and gas
properties pledged to the bank and principal payments required by the bank.
There can be no assurance at this time that these matters involving the
covenants or principal retirements will be resolved to the Company's
satisfaction and an event of default could occur.
(15) UNAUDITED PRO-FORMA OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS
COST INFORMATION
All of the Company's reserves are located within the United States.
Proved reserves represent estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate to be reasonably certain to
be recoverable in the future from known reservoirs under existing economic and
operating conditions Proved developed oil and gas reserves are reserves that
can be expected to be recovered through existing wells using existing equipment
and operating methods.
For the years ended December 31, 1994 and 1993, the oil and gas
reserve estimates were reviewed by Huddleston & Co., Inc., Houston, Texas
independent petroleum engineers and Sherwin D. Yoelin, independent petroleum
engineer, and for the year ended December 31, 1992, the oil and gas reserve
estimates were reviewed by Sherwin D. Yoelin, independent petroleum engineer,
in accordance with guidelines established by the Securities and Exchange
Commission. Such estimates are subject to numerous uncertainties inherent in
the estimation of quantities of proved reserves and in the projection of future
rates of production, prices and the timing of development expenditures. The
future cash inflow, as reflected in the "Standardized Measure of Discounted
Future Net Cash Flows Relating to Proved Oil and Gas Reserves", determined from
such reserve data are estimates only, and the present values thereof should not
be construed to be the current market values of the Company's oil and gas
reserves or the costs that would be incurred to obtain equivalent reserves.
F-15
<PAGE> 72
CHANGES IN ESTIMATED RESERVE QUANTITIES
The Company's net interests in estimated quantities of proved
developed and undeveloped reserves of crude oil and natural gas at December 31,
1992, 1993, and 1994, and changes in such quantities during the years, 1992,
1993 and 1994, were as follows:
<TABLE>
<CAPTION>
CRUDE OIL (Barrels)
--------------------------------
Year Year Year
1992 1993 1994
----- ------ -----
(in thousands)
<S> <C> <C> <C>
BEGINNING OF PERIOD 1,679 2,066 813
Revisions of previous estimates (48) (1,195) 866
Production (58) (79) (88)
Purchase of minerals in place 542 77 56
Sales of minerals in place (49) (56) -
----- ------ -----
END OF PERIOD 2,066 813 1,647
===== ====== =====
Proved developed reserves
Beginning of period 855 983 666
===== ====== =====
End of period 983 666 675
===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
NATURAL GAS (Mcf)
--------------------------------
Year Year Year
1992 1993 1994
----- ------ ------
(in thousands)
<S> <C> <C> <C>
BEGINNING OF PERIOD 2,390 4,795 5,562
Revisions of previous estimates 41 (1,183) 533
Production (234) (724) (1,017)
Purchase of minerals in place 2,598 3,010 833
Sales of minerals in place - (336) -
----- ------ ------
END OF PERIOD 4,795 5,562 5,911
===== ====== ======
Proved developed reserves
Beginning of period 1,111 2,582 4,221
===== ====== ======
End of period 2,582 4,221 3,317
===== ====== ======
</TABLE>
NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
This statement attempts to present future net cash flows related to
proved oil and gas reserves without the subjectivity inherent in either direct
estimation of market value or entity specific discounted net cash flow. This
measure is not a measure of fair market value nor a measure of the present
value of future cash flows, but rather a rough estimation of such.
This measure should be responsive to some of the key variables that
affect fair market value, such as changes in reserve quantities, selling
prices, production costs and tax rates.
The future net cash inflows are developed as follows:
(1) Estimates are made of quantities of proved reserves and the
future periods during which they are expected to be produced based on
period-end economic conditions.
(2) The estimated future production of proved reserves is priced on
the basis of period-end prices except for fixed and determinable escalation
provisions in existing contracts.
F-16
<PAGE> 73
(3) The resulting future gross revenue streams are reduced by
estimated future costs to develop and to produce the proved reserves, based on
period-end cost estimates.
(4) The resulting future net revenue streams are reduced to present
value amounts by applying a 10 percent discount factor.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES
Disclosure of the principal component of the standardized measure of
discounted future net cash flows provides information concerning the factors
involved in making the calculation. In addition, the disclosure of both
undiscounted and discounted net flows provides a measure of comparing proved
oil and gas reserves both with and without an estimate of production timing.
The standardized measure of discounted future net cash flows relating to proved
reserves reflects income taxes.
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Future cash in flows $43,499 $22,153 $32,898
Future costs:
Production (17,549) (7,950) (11,283)
Development (5,565) (1,368) (5,683)
------- ------- -------
Future net inflows before income taxes 20,385 12,835 15,932
Future income taxes (6,931) (4,364) (5,417)
------- ------- -------
Future net cash flows 13,454 8,471 10,515
10% discount factor (7,808) (2,824) (5,137)
------- ------- -------
Standardized measure of
discounted net cash flows $ 5,646 $5,647 $5,378
======= ======= =======
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
FROM PROVEN RESERVE QUANTITIES
This statement discloses the sources of changes in the standardized
measure from period to period. The amount reported as "Net change in sales and
transfer prices" represents the approximate effect of increasing the evaluation
of reserves proved in prior periods to reflect higher prices in effect in the
following years. The "Accretion of discount" was computed by applying the 10
percent discount factor to be valuation of the proved reserves as of the
beginning of the period before income tax effects. "Changes in estimated future
development costs" arise from several sources: (1) revisions of previous
estimates for both development costs actually incurred in the current period
and for development costs estimated to be incurred in succeeding periods, (2)
new discoveries from which future development must be performed and (3)
current-period expenditures which reduced the future expenditures estimated in
prior periods (the amounts at the beginning of the period). The "Sales and
transfers, net of production costs" are expressed in actual dollar amounts.
"Revisions of quantity estimates" are expressed at period-end prices. The "Net
change in income taxes" is computed as the change in present value of future
income taxes. The "Changes in production rates (timing) and other" reflects
all other changes, such as changes in timing, and includes the residual from
estimation errors in computing other elements of change.
F-17
<PAGE> 74
<TABLE>
<CAPTION>
Year Year Year
1992 1993 1994
---- ---- ----
(in thousands)
<C> <C> <C>
Standardized Measure:
Beginning of period $ 2,708 $ 5,646 $ 5,647
Increases (decreases):
Sales and transfers, net of
production costs (1,271) (1,797) (2,249)
Net change in sales and transfer
prices net of production costs 4,354 (2,087) (1,635)
Changes in estimated future
development costs (1,436) 4,197 (4,315)
Revisions of quantity estimates (1,027) (10,999) 6,385
Accretion of discount 271 565 565
Net change in income taxes (1,308) 2,998 (909)
Purchases of reserves in place 3,761 7,231 1,464
Sales of reserves in place (70) (291) -
Changes in production rates
(timing) and other (336) 184 425
------- ------- -------
Standardized Measure:
End of period $ 5,646 $ 5,647 $ 5,378
======= ======= =======
</TABLE>
F-18
<PAGE> 75
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS (unaudited)
<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 551,000 270,000
Deferred credit facility costs (net of accumulated
amortization of $70,000 and $39,000) 67,000 114,000
Bond issuance costs (net of accumulated
amortization of $152,000 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
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE> 76
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<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.
F-20
<PAGE> 77
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS (unaudited)
<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 2,639,055
=========== ==========
NET LOSS PER COMMON SHARE (Note 8) $ (0.30) $ (0.37)
=========== ==========
</TABLE>
See accompanying notes to financial statements
F-21
<PAGE> 78
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(unaudited)
<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 (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 issued for
prepayment 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
F-22
<PAGE> 79
FORTUNE PETROLEUM CORPORATION
STATEMENT OF CASH FLOWS (unaudited)
<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
F-23
<PAGE> 80
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1995 (unaudited)
(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 its right to participate in
the Zydeco 3D Venture. Unaudited proforma net loss per common share would have
been $.27 for the nine months ended September 30, 1995 and $.08 and $.25 for
the three and nine months ended September 30, 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 proforma basis.
F-24
<PAGE> 81
(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 $64,000 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 June 30, 1995.
At September 30, 1995 deferred taxes consist of the following:
<TABLE>
<S> <C>
Deferred tax assets:
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>
F-25
<PAGE> 82
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 June 27,
1995. The net proceeds of $880,000 from the sale of the overallotment shares
were received by the Company of 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.
F-26
<PAGE> 83
(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 six 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.
F-27
<PAGE> 84
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Fortune Petroleum Corporation
We have audited the accompanying statements of revenues and direct operating
expenses of the oil and gas property interests acquired from PetroFina S.A.
(the PetroFina Properties) for each of the years in the three-year period ended
December 31, 1994. These statements of revenues and direct operating expenses
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these statements of revenues and direct operating
expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of revenues and direct operating expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statements of revenues and direct operating expenses. We believe that our
audits of the statements of revenues and direct operating expenses provide a
reasonable basis for our opinion.
The accompanying statements were prepared as described in Note 1 for the
purpose of complying with certain rules and regulations of the Securities and
Exchange Commission (SEC) for inclusion in certain SEC regulatory reports and
filings and are not intended to be a complete financial presentation.
In our opinion, the accompanying statements of revenues and direct operating
expenses present fairly the revenues and direct operating expenses of the
PetroFina Properties for each of the years in the three-year period ended
December 31, 1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
December 20, 1995
F-28
<PAGE> 85
FORTUNE PETROLEUM CORPORATION
STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES
ACQUIRED FROM PETROFINA S.A. (NOTE 1) FOR THE
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30
---------------------------------------- ------------------------
(unaudited)
1992 1993 1994 1994 1995
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Sales of oil and gas, net of
royalties $2,101,807 $2,005,626 $1,599,418 $1,350,770 $1,508,258
DIRECT OPERATING EXPENSES 304,171 229,199 700,031 117,232 252,073
---------- ---------- ---------- ---------- ----------
REVENUES IN EXCESS OF DIRECT
OPERATING EXPENSES $1,797,636 $1,776,427 $ 899,387 $1,233,538 $1,256,185
========== ========== ========== ========== ==========
</TABLE>
See Notes to Statements of Revenues and Direct Operating Expenses for
Assets Acquired.
F-29
<PAGE> 86
FORTUNE PETROLEUM CORPORATION
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES ACQUIRED
FROM PETROFINA S.A. FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying statements present the revenues and direct operating
expenses of the working interests in certain oil and gas properties (the
PetroFina Properties) purchased by Fortune Petroleum Corporation (the Company)
from PetroFina S.A. (PetroFina) during December 1995 for $2.9 million. The
PetroFina Properties are located in federal waters in the Gulf of Mexico.
The accompanying statements of revenues and direct operating expenses
were derived from the historical accounting records of PetroFina. Direct
operating expenses include payroll, lease and well repairs, maintenance and
other direct operating expenses.
The unaudited statements of revenues and direct operating expenses for
the nine months ended September 30, 1994 and 1995 include all material
adjustments, which consist only of normal recurring adjustments necessary for a
fair presentation, and are not necessarily indicative of results for an entire
year.
OMITTED HISTORICAL FINANCIAL INFORMATION
Full historical financial statements, including exploration expense,
general and administrative expenses, interest expense and income tax expense,
have not been presented because they have not historically been allocated at
this level. Historical depletion expense has not been included in such
statements as the Company will adjust the basis in its purchase price allocation
and the historical depletion will no longer be relevant.
ACCRUAL BASIS STATEMENTS
Memorandum adjustments have been made to the financial information
derived from the predecessor owner in order to present the accompanying
statements of revenues and direct operating expenses in accordance with
generally accepted accounting principles.
RELATED PARTY TRANSACTIONS
All of the production from the PetroFina Properties was sold to a
subsidiary of PetroFina. Gas production was sold for average prices of $1.73,
$2.27 and $2.10 per Mcf during 1992, 1993 and 1994, respectively. Oil
production was sold for average price of $17.71, $15.56 and $14.15 during 1992,
1993 and 1994, respectively.
(2) GAS BALANCING POSITIONS
The PetroFina Properties have an immaterial imbalance position as of
December 31, 1995. The entitlements method is used; therefore, production
imbalances are recorded at the sales price in effect at the time of production.
Substantially all of the imbalance position is anticipated to be settled with
production in future periods.
(3) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Total proved and proved developed oil and gas reserves of the PetroFina
Properties at December 31, 1994, have been estimated based on reserve estimates
prepared by Huddleston & Co., Inc. as of November 1, 1995, adjusted for
production from Janaury 1, 1995 through October 31, 1995. No comparable
estimates were available for prior periods. Therefore, reserves for 1992, 1993
and 1994 have been calculated by adjusting the November 1, 1995 amounts for
prior period producing activities and, consequently, no revisions of previous
estimates have been reflected. All reserve estimates are based on economic and
operating conditions existing at November 1, 1995. The future net cash flows
from production of these proved
F-30
<PAGE> 87
reserve quantities were computed by applying current prices of oil and gas
(with consideration of price changes only to the extent provided by contractual
arrangements) as of November 1, 1995 to estimated future production of proved
oil and gas reserves less the estimated future exspenditures (based on current
costs) as of November 1, 1995, to be incurred in developing and producing the
proved reserves. Income taxes were calculated without consideration of any
remaining historical cost basis of the PetroFina Properties. The PetroFina
Properties are located in federal waters in the Gulf of Mexico.
Estimated Quantities of Oil and Gas Reserves:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1992 1993 1994
---------------- ---------------- ----------------
Oil Gas Oil Gas Oil Gas
(Mbbl) (Mmcf) (Mbbl) (Mmcf) (Mbbl) (Mmcf)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year 346 5,493 291 4,751 251 4,159
Production (55) (742) (40) (592) (34) (533)
--- ----- --- ----- --- -----
End of year 291 4,751 251 4,159 217 3,626
=== ===== === ===== === =====
Proved developed reserves:
Beginning of year 346 5,493 291 4,751 251 4,159
End of year 291 4,751 251 4,159 217 3,626
=== ===== === ===== === =====
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves (in 000s):
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Future cash inflows $15,017 $13,011 $11,412
------- ------- -------
Future production costs (2,597) (2,368) (1,668)
Future development costs (200) (200) (200)
------- ------- -------
Future net inflows before
income taxes 12,220 10,443 9,544
Income taxes (4,277) (3,655) (3,340)
------- ------- -------
Future net cash flows 7,943 6,788 6,204
10% discount factor (2,264) (1,935) (1,766)
------- ------- -------
Standardized measure of
discounted net cash flows $ 5,679 $ 4,853 $ 4,438
======== ======= =======
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows from
Proved Oil and Gas Reserves (in 000s)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Standardized measure, beginning of year $6,515 $ 5,679 $4,853
Sales, net of production costs (1,798) (1,776) (899)
Net change in income taxes 450 445 225
Accretion of discount 512 505 259
------ ------ ------
Standardized measure, end of year $5,679 $4,853 $4,438
====== ====== ======
</TABLE>
F-31
<PAGE> 88
FORTUNE PETROLEUM CORPORATION
PRO FORMA COMBINED FINANCIAL INFORMATION
DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
The pro forma combined statements of operations reflect the results of
operations for the year ended December 31, 1994 and period ended
September 30, 1995 as if the PetroFina acquisition of the South Timbalier Block
76 leasehold interests and this financing occurred as of January 1 of each
period.
The acquisitions are reflected in the pro forma combined financial
information using the purchase method of accounting. Accordingly, the carrying
value of the properties acquired have been adjusted to reflect fair values
assigned to assets and liabilities and are included in the Company's combined
financial statements commencing on the date of such acquisition.
The pro forma combined financial information should be read in
conjunction with the Company's historical financial statements and related
notes. The pro forma results of operations are not necessarily indicative of
the results of operations had the acquisition occurred at the beginning of the
periods presented, nor are they necessarily indicative of the results of future
operations.
F-32
<PAGE> 89
FORTUNE PETROLEUM CORPORATION
PRO-FORMA COMBINED SUMMARY BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ASSETS
PetroFina
Leasehold
Historical Interest Pro forma Pro forma
Fortune Acquisition Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total Current Assets $ 3,431,000 $1,087,000 - $ 4,518,000
Property & Equipment
Oil & Gas properties, accounted for
using the successful efforts method 22,264,000 2,450,000 - 24,714,000
Automotive, office & other 336,000 - - 336,000
Less-accumulated depreciation,
depreciation & amortization (9,100,000) - - (9,100,000)
Other Assets 3,114,000 - - 3,114,000
----------- ---------- -----------
Total Assets $20,045,000 $3,537,000 - $23,582,000
=========== ========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Total Current Liabilities $ 4,639,000 - - $ 4,639,000
Total Long Term Liabilities 1,687,000 - - 1,687,000
Total Net Stockholder's Equity 13,719.000 3,537,000 - 17,256,000
----------- ---------- -----------
Total Liabilities and Stockholder's Equity $20,045,000 $3,537,000 - $23,582,000
=========== ========== ===========
</TABLE>
F-33
<PAGE> 90
FORTUNE PETROLEUM CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Petrofina
Leasehold
Historical Interest Pro forma Pro forma
Fortune Acquisition Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 3,339,000 $1,599,000 - $ 4,938,000
Other 58,000 - - 58,000
----------- ----------- --------- -----------
3,397,000 1,599,000 - 4,996,000
Costs and expenses:(a)
Oil and gas production costs 1,090,000 700,000 - 1,790,000
General and administrative 1,020,000 - - 1,020,000
Abandoned leasehold costs 249,000 - - 249,000
Dry hole expense 195,000 195,000
Impairment to oil & gas properties 1,031,000 1,031,000
Depreciation, depletion and
amortization 2,070,000 - 380,000(1) 2,450,000
Executive severance expense 225,000 225,000
Interest expense 460,000 - - 460,000
----------- ----------- --------- -----------
6,340,000 700,000 380,000 7,420,000
----------- ----------- --------- -----------
Income (loss) before income
taxes (2,943,000) 899,000 (380,000) (2.424,000)
Income tax expense - - - -
----------- ----------- --------- -----------
Net Income (loss) $(2,943,000) $ 899,000 ($380,000) ($1,840,000)
=========== =========== ========= ===========
Average number of common
shares outstanding(b) 2,638,672 1,321,117 - 3,959,789
=========== =========== ========= ===========
Net income (loss) per common
share $ (1.12)
===========
Pro forma net income per common
share $ (0.61)
===========
</TABLE>
(a) It is anticipated that there will be no indirect expense as a result of
the asset acquisition.
(b) Acquisition shares computed using the private offering price of $3.22 per
share for 1,321,117 shares.
F-34
<PAGE> 91
FORTUNE PETROLEUM CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Petrofina
Leasehold
Historical Interest Pro forma Pro forma
Fortune Acquisition Adjustments Combined
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 2,030,000 1,508,000 $3,538,000
Other 153,000 - - 153,000
----------- ---------- --------- ----------
2,183,000 1,508,000 3,691,000
Costs and expenses:(a)
Oil and gas production costs 1,037,000 252,000 - 1,289,000
General and administrative 855,000 - - 855,000
Geological and geophysical costs 355,000 355,000
Abandoned leasehold costs 28,000 - - 28,000
Depreciation, depletion and
amortization 989,000 - 586,000(1) 1,515,000
Interest expense 533,000 - - 533,000
----------- ---------- --------- ----------
3,797,000 252,000 586,000 4,635,000
----------- ---------- --------- ----------
Income (loss) before income
taxes (1,614,000) 1,256,000 (586,000) (944,000)
Income tax expense - - - -
----------- ---------- --------- ----------
Net Income (loss) $(1,614,000) $1,256,000 ($586,000) $ (944,000)
=========== ========== ========= ==========
Average number of common
shares outstanding(b) 5,432,712 1,321,117 - 6,753,829
=========== ========== ========= ==========
Net income (loss) per common
share $ (0.32)
===========
Pro forma net income per common
share $ (0.14)
==========
</TABLE>
(a) It is anticipated that there will be no indirect expense as a result of
the asset acquisition.
(b) Acquisition shares computed using the private offering price of $3.22 per
share for 1,321,117 shares.
F-35
<PAGE> 92
FORTUNE PETROLEUM CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
An explanation of the pro forma adjustments is as follows:
(1) Adjustment to reflect the depreciation, depletion and
amortization of the acquired assets of $351,000, $380,000
and $586,000 for the year ended December 31, 1994 and
the nine months ended September 30, 1995, respectively,
using an estimated adjusted acquisition cost to the Company
of $2,120,000 at September 30, 1995 for the proved developed
producing oil and gas properties (using units-of-production
method).
F-36
<PAGE> 93
____________________________________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
____________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information 2
Prospectus Summary 3
Risk Factors 7
Use of Proceeds 12
Dilution 12
Capitalization 12
Dividend Policy 13
Price Range of Common Stock 13
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 14
Business and Properties 21
Management 35
Certain Relationships and
Related Transactions 39
Principal Stockholders 42
Exchange Offer 44
Certain Federal Income Tax
Considerations 44
Description of Securities 47
Legal Matters 51
Experts 51
Glossary 51
Index to Financial Statements F-1
</TABLE>
____________________________
<PAGE> 94
=====================
862,500 SHARES
431,250 WARRANTS
FORTUNE PETROLEUM
CORPORATION
____________
PROSPECTUS
____________
EXCHANGE OFFER
_______________, 1996
=====================
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits the
indemnification of officers, directors, employees and agents of Delaware
corporations. The Certificate of Incorporation and Bylaws of the Company
provide that the corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware as it may be
amended from time to time, indemnify and hold harmless each person who was or
is a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
whom he or she is a legal representative, is or was a director or officer of
the Company or is or was serving at the request of the Company as director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action or
inaction in an official capacity or in any other capacity while serving as a
director, officer, employee or agent, against all costs, charges, expenses,
liabilities and losses (including attorney's fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and
such indemnification shall continue as to person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his or
her heirs, executors and administrators.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in the Registration Statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee . . . . . . . . . . . . . . $ 1,383
Accountants' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
American Stock Exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,000
Printing and Engraving Expenses . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,617
--------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On August 23, 1989, the Company's Board of Directors passed a
resolution that, in some cases, each outside director could receive a certain
number of the Company's shares of Common Stock in lieu of the quarterly
directors' fee of $1,250 cash. The following table lists the shares issued
during the last three years. Such shares were issued without registration
under the Securities Act of 1933 (the "Act") in reliance upon the exemption
contained in Section 4(2) of the Act. No underwriters were involved in the
sale of such shares.
S-1
<PAGE> 96
<TABLE>
<CAPTION>
Director Date Number of Shares Equivalent Amount of Director Fees
- -------- ---- ---------------- ----------------------------------
<S> <C> <C> <C>
Dean W. Drulias 2/08/93 906 $1,250
Graham S. Folsom 2/08/93 906 $1,250
Charles E. Hinkle 2/08/93 906 $1,250
J. Donald Langston 2/08/93 906 $1,250
Dean W. Drulias 4/28/93 870 $1,250
Graham S. Folsom 4/28/93 870 $1,250
Charles E. Hinkle 4/28/93 870 $1,250
Dean W. Drulias 12/27/93 204 $1,250
Graham S. Folsom 12/27/93 204 $1,250
Charles E. Hinkle 12/27/93 204 $1,250
Dean W. Drulias 12/27/93 339 $1,250
Graham S. Folsom 12/27/93 339 $1,250
Charles E. Hinkle 12/27/93 339 $1,250
Dean W. Drulias 12/27/93 588 $1,250
Graham S. Folsom 12/27/93 588 $1,250
Charles E. Hinkle 12/27/93 588 $1,250
William T. Walker, Jr. 12/27/93 588 $1,250
Charles A. Champion 4/04/94 556 $1,250
Dean W. Drulias 4/04/94 556 $1,250
Graham S. Folsom 4/04/94 556 $1,250
William T. Walker, Jr. 4/04/94 556 $1,250
Charles A. Champion 7/14/94 606 $1,250
Dean W. Drulias 7/14/94 606 $1,250
Graham S. Folsom 7/14/94 606 $1,250
William T. Walker, Jr. 7/14/94 606 $1,250
Dean W. Drulias 9/30/94 435 $1,250
Graham S. Folsom 9/30/94 435 $1,250
William T. Walker, Jr. 9/30/94 435 $1,250
Dean W. Drulias 3/29/95 667 $1,250
Graham S. Folsom 3/29/95 667 $1,250
William T. Walker, Jr. 3/29/95 667 $1,250
Charles A. Champion 4/03/95 714 $1,250
Dean W. Drulias 4/03/95 714 $1,250
Barry Feiner 4/03/95 714 $1,250
Graham S. Folsom 4/03/95 714 $1,250
Gary Gelman 4/03/95 714 $1,250
William T. Walker, Jr. 4/03/95 714 $1,250
Charles A. Champion 7/21/95 541 $1,250
Dean W. Drulias 7/21/95 541 $1,250
Barry Feiner 7/21/95 541 $1,250
Graham S. Folsom 7/21/95 541 $1,250
Gary Gelman 7/21/95 541 $1,250
William T. Walker, Jr. 7/21/95 541 $1,250
</TABLE>
As a condition of the Company's Purchase and Sale Agreement and Note
Agreement dated April 10, 1992 with H & B Resources and Klein Bros., Inc., the
Company issued the following shares as payment of interest on the H & B
Resources Note to Klein Bros., Inc. without registration under the Act in
reliance upon the exemption contained in Section 4(2) of the Act.
<TABLE>
<CAPTION>
Date Paid Interest Period Number of Shares
--------- --------------- ----------------
<S> <C> <C>
July 1992 April - June 1992 5,741
August 1992 July 1992 2,327
November 1992 August - October 1992 6,980
January 1993 November and December 1992 4,203
April 1993 January - March 1993 5,935
June 1993 April 1993 1,660
July 1993 May 1993 1,900
December 1993 June - November 1993 8,669
</TABLE>
S-2
<PAGE> 97
On December 19 and 20, 1994, the Company issued stock purchase
warrants to purchase 10,000 shares to Klein Ventures, Inc. and stock purchase
warrants to purchase 35,000 shares to Mr. Jack Farber, respectively, in
connection with loans made to the Company in December 1994. Such warrants were
issued without registration under the Act in reliance upon the exemption
contained in Section 4(2) of the Act.
On February 24, 1995, the Company issued 648,000 shares of Common
Stock for cash to a number of foreign purchasers. Such shares were issued
without registration under the Act in reliance upon the exemption contained in
Regulation S under the Act.
On April 24, 1995, the Company issued 170,000 shares of Common Stock
and 170,000 warrants to Lagniappe Exploration, Inc. in connection with the
Company's acquisition of an interest in the Zydeco 3d Venture. Such shares and
warrants were issued without registration under the Act in reliance upon the
exemption contained in Section 4(2) of the Act.
On May 12, 1995, the Company issued an aggregate of 1,030,000 shares
of Common Stock and 1,030,000 warrants to William D. Forster and BSR
Investments, Inc., the record holders of the common stock of Lagniappe
Exploration, Inc. in connection with the Company's acquisition of that company.
Such shares and warrants were issued without registration under the Act in
reliance upon the exemption contained in Section 4(2) of the Act.
In July, 1995, the Company issued 100,000 shares of Common Stock and
100,000 common stock purchase warrants exercisable at $4.75 per share to OSTIS
Ltd as compensation under a consulting agreement for investment banking
services in the European markets. The shares were issued without registration
under the Act in reliance upon the exemption contained in Regulation S under
the Act and the warrants were issued in reliance upon the exemption contained
in Section 4(2) of the Act.
On September 6, 1995, the Company issued 20,000 stock purchase
warrants exercisable for a period of five years at a price of $3.625 per shares
of Common Stock to each of Ten Square Research, TNC Incorporated and Wagner
Investment Management as compensation for consulting services. Such warrants
were issued without registration under the Act in reliance upon the exemption
contained in Section 4(2) of the Act.
On December 11, 1995, the Company issued 1,321,117 shares of Common
Stock in connection with the acquisition of the Company's interest in the
Timbalier Block. Concurrently, the Company issued stock purchase warrants to
Donald L. Walker to purchase 50,000 shares exercisable at $4.00 per share and
100,000 shares exercisable at $6.00 per share. The shares were issued without
registration under the Act in reliance on the exemption contained in Regulation
S under the Act. The warrants and shares underlying the warrants were issued
(or offered for issuance) without registration under the Act in reliance upon
the exemption contained in Section 4(2) of the Act.
ITEM 27. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
2.1 Purchase and Sale Agreement, dated May 28, 1993, among Registrant, Michael Petroleum Corporation, Pioneer Drilling and
Endowment Energy Partners, L.P. (incorporated by reference to Fortune's Registration Statement on Form SB-2,
Registration No. 33-64600)
2.2 Purchase and Sale Agreement, dated May 28, 1993, among Registrant and Brazos Resources, Inc. (incorporated by
reference to Fortune's Registration Statement on Form SB-2, Registration No. 33-64600)
2.3 Purchase and Sale Agreement entered into between Registrant and EnRe Corporation dated June 24, 1994 (incorporated by
reference to Fortune's Current Report on Form 8-k, filed July 7, 1994, File No. 1-12334)
2.4 LLC Agreement entered into between Registrant and EnRe Corporation dated June 24, 1994 (incorporated by reference to
Fortune's Current Report on Form 8-k, filed July 7, 1994, File No. 1-12334)
</TABLE>
S-3
<PAGE> 98
<TABLE>
<S> <C>
2.5 Letter agreement dated February 13, 1995, between Registrant and Lagniappe Exploration, Inc. and related Exploration
Agreement, as amended (incorporated by reference to Fortune's Registration Statement on Form SB-2, Registration
No. 33-88452)
2.6 Agreement of Reorganization and Merger, dated May 12, 1995, among Registrant, Lanacorp, Inc., Lagniappe Exploration,
Inc., William D. Forster and BSR Investments Limited (incorporated by reference to Fortune's Registration Statement
on Form SB-2, Registration No. 33-88452)
2.7 Acquisition Agreement dated December 6, 1995, among Donald L. Walker, Pendragon Resources, LLC and Registrant
(incorporated by reference to Fortune's Current Report on Form 8-k, filed December 26, 1995, File No. 1-12334)
2.8 Agreement dated December 7, 1995, between Northport Production Company and Registrant (incorporated by reference to
Fortune's Current Report on Form 8-k, filed December 26, 1995, File No. 1-12334)
2.9 Assignment of Record title In Oil and Gas Lease and Bill of Sale and Conveyance from Northport Production Company to
Registrant (incorporated by reference to Fortune's Current Report on Form 8-k, filed December 26, 1995,
File No. 1-12334)
3.1 Certificate of Incorporation of Fortune Petroleum Corporation (incorporated by reference to Fortune's Registration
Statement Form 10, File No. 0-16370)
3.2 Bylaws of Fortune Petroleum Corporation (incorporated by reference to Fortune's Registration Statement Form 10,
File No. 0-16370)
3.3 Certificate of Amendment to Certificate of Incorporation of Registrant increasing authorized capital stock
(incorporated by reference to Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)
4.1 Indenture, dated October 30, 1992, by and between Fortune Petroleum Corporation and IBJ Schroder Bank & Trust Company,
Trustee, as amended (incorporated by reference to Fortune's Registration Statement on Form S-1, Registration
No. 33-49190)
4.2 Form of Warrant Agreement between Registrant and U.S. Stock Transfer Corporation (incorporated by reference to
Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)
5.1 Opinion of Reish & Luftman regarding legality of securities (to be filed by amendment).
8.1 Tax opinion of Reish & Luftman regarding the offer to convert (to be filed by amendment).
10.1 Employment Agreement, dated July 1, 1994, by and between Fortune Petroleum Corporation and Tyrone J. Fairbanks
(incorporated by reference to Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)
10.2 Severance Agreements between Registrant and Daniel E. Pasquini (incorporated by reference to Fortune's Registration
Statement on Form SB-2, Registration No. 33-88452)
10.3 1993 Stock Option Plan (incorporated by reference to Fortune's Registration Statement on Form SB-2, Registration
No. 33-64600)
10.4 Bank One, Texas, N.A. line of credit agreement (incorporated by reference to Fortune's Annual Report on Form 10K-SB,
File No. 1-12334)
10.5 Notes issued to certain related persons on December 19 and 20, 1994 (incorporated by reference to Fortune's Registration
Statement on Form SB-2, Registration No. 33-88452)
10.6 Note issued to Lagniappe Exploration, Inc. on April 24, 1995 (incorporated by reference to Fortune's Registration
Statement on Form SB-2, Registration No. 33-88452)
</TABLE>
S-4
<PAGE> 99
<TABLE>
<S> <C>
10.7 Employment Agreement by and between Fortune Petroleum Corporation and John L. Collins (incorporated by reference to
Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)
10.8 Agreement dated December 8, 1995, between Whitechappel Management Ltd. and Registrant to act as distributor of the
Common Stock under Regulation S (incorporated by reference to Fortune's Current Report on Form 8-k, filed December 26,
1995, File No. 1-12334)
10.9 Regulation S Subscription Agreements and related Joint Escrow Instructions for the sale of 627,450 shares of Common
Stock (incorporated by reference to Fortune's Current Report on Form 8-k, filed December 26, 1995, File No. 1-12334)
10.10 Offshore Securities Subscription Agreements and related Joint Escrow Instructions for the sale of 602,897 shares of
Common Stock (incorporated by reference to Fortune's Current Report on Form 8-k, filed December 26, 1995,
File No. 1-12334)
17.1 Resignation Letter of Mr. Daniel E. Pasquini as President, Chief Executive Officer and Director dated June 23, 1994
(incorporated by reference to Fortune's Current Report on Form 8-k, filed July 7, 1994, File No. 1-12334)
24.1* Consents of KPMG Peat Marwick LLP
24.2* Consent of Huddleston & Co., Inc.
24.3* Consent of Sherwin D. Yoelin
24.4 Consent of Reish & Luftman (included in Exhibit 5.1)
25.1 Power of Attorney (included on signature page)
</TABLE>
- -----------------
* Filed herewith.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) (1) To file during any period in which offers or sales are
being made, a post effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement:
Provided however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
S-5
<PAGE> 100
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer of controlling
person of the registrant in the successful defense of any action, suit of
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
S-6
<PAGE> 101
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Agoura Hills, State of California, on December
29, 1995.
FORTUNE PETROLEUM CORPORATION
By: /s/ Tyrone J. Fairbanks
---------------------------------------
Tyrone J. Fairbanks
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Tyrone J. Fairbanks and Dean W. Drulias, and each of them, as his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign any or all amendments (including post effective amendments)
to this Registration Statement, and to file the same, with all exhibits hereto,
and other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorney- in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Pre-effective Amendment #1 to the Registration Statement has been signed by the
following person in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board and Director December ___, 1995
- ---------------------------------------
Charles A. Champion
/s/ Tyrone J. Fairbanks President, Chief Executive Officer, Chief December 29, 1995
- ---------------------------------------
Tyrone J. Fairbanks Financial and Accounting Officer, and Director
/s/ Dean W. Drulias Director December 29, 1995
- ---------------------------------------
Dean W. Drulias
/s/ Graham S. Folsom Director December 29, 1995
- ---------------------------------------
Graham S. Folsom
Director December ___, 1995
- ---------------------------------------
William T. Walker, Jr.
/s/ Barry Feiner Director December 29, 1995
- ---------------------------------------
Barry Feiner
/s/ Gary Gelman Director December 29, 1995
- ---------------------------------------
Gary Gelman
/s/ William D. Forster Director December 29, 1995
- ---------------------------------------
William D. Forster
/s/ Charif Souki Director December 29, 1995
- ---------------------------------------
Charif Souki
</TABLE>
S-7
<PAGE> 1
Exhibit 24.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fortune Petroleum Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "experts" in the prospectus.
Our report dated March 10, 1995 except for Note 8 which is as of April 13,
1995, contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations and has a net working capital
deficiency, which raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
KPMG Peat Marwick LLP
Los Angeles, California
January 4, 1996
<PAGE> 2
Exhibit 24.1 (con't)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fortune Petroleum Corporation:
We consent to the inclusion of our report dated December 20, 1995, with respect
to the statements of revenues and direct operating expenses of the oil and gas
property interests acquired from PetroFina S.A. for each of the years in the
three-year period ended December 31, 1994
KPMG Peat Marwick LLP
Houston, Texas
January 4, 1996
<PAGE> 1
Exhibit 24.2
HUDDLESTON & CO., INC.
PETROLEUM AND GEOLOGICAL ENGINEERS
1111 FANNIN-SUITE 1700
HOUSTON, TEXAS 77002
(713) 658-0248
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
December 28, 1995
Fortune Petroleum Corporation
30101 Agoura Court, Suite 110
Agoura Hills, California 91301
Dear Sirs:
We hereby consent to the filing of this consent as an exhibit to the
Registration Statement on Form SB-2 of Fortune Petroleum Corporation to be
filed with the Securities and Exchange Commission on or about January 3, 1996,
to the use of our name therein, and to the inclusions of or reference to our
reports of estimated future reserves and revenues effective December 31, 1993,
and December 31, 1994.
HUDDLESTON & CO., INC.
/s/ Peter D. Huddleston
- -------------------------------------
Peter D. Huddleston, P.E.
<PAGE> 1
Exhibit 24.3
SHERWIN D. YOELIN, PETROLEUM ENGINEER INC.
1439 BONNIE JEAN ROAD
LA HABRA HEIGHTS, CALIFORNIA 90631
310/697-3700
December 28, 1995
Fortune Petroleum Corporation
30101 Agoura Court
Suite 100
Agoura Hills, California 91301
Re: Consent of Independent Petroleum Engineer
Gentlemen:
I hereby consent to the incorporation of my January 1, 1993, January 1, 1994
and January 1, 1995, Annual Reserve Reports of the oil and gas reserves of
Fortune Petroleum Corporation dated February 20, 1993, February 15, 1994, and
February 27, 1995, respectively, in the Prospectus constituting part of the
Registration Statement on Form SB-2 to be filed on or about January 3, 1996.
Respectfully,
/s/ Sherwin D. Yoelin
Sherwin D. Yoelin
Registered Petroleum Engineer
State of California
Certificate No. P 1241
