As filed with the Securities and Exchange Commission on July 5, 1996
REGISTRATION STATEMENT NO. 333-00087
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933, AS AMENDED
-----------
FORTUNE PETROLEUM CORPORATION
(Name of small business issuer in its charter)
1311
{Primary Standard Industrial
Classification Code Number)
DELAWARE 95-4114732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 WEST GREENS ROAD, SUITE 720
HOUSTON, TEXAS 77067
(713) 872-1170
(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
515 WEST GREENS ROAD, SUITE 720
HOUSTON, TEXAS 77067
(713) 872-1170
(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
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------------------------
<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 69,000(4) - - -
Common Stock, $.01 par value 69,000(4) $ 4.00 (4) $ 276,000 119
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Shares issuable upon conversion of outstanding debentures. The proposed
offering price per unit is the minimum conversion price per share of common
stock. Filing fee previously paid on initial filing.
(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. Filing fee previously paid on initial filing.
(4) Warrants to be issued to conversion agent in connection with the conversion
offer. Warrants are exercisable at the conversion price to the debentureholders.
Filing fee previously paid on initial filing.
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 93 pages.
The Exhibit Index appears on Page S-1.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM IN FORM S-2 LOCATION IN PROSPECTUS
<S> <C> <C>
ITEM 1. Forepart 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, Risk Factors and Ratio of
Earnings to Fixed Charges............................................ "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;" "Exchange Offer"
ITEM 5. Determination of Offering Price...................................... Outside Front Cover Page of
Prospectus; "Exchange Offer"
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. Description of Securities to be Registered..........................."Description of Securities"
ITEM 10. Interests of Named Experts and Counsel..............................."Experts"
ITEM 11. Information with Respect to the Registrant..........................."Business and Properties"
ITEM 12. Incorporation of Certain Information by
Reference............................................................ Not Applicable
ITEM 13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities......................................."Description of Securities"
</TABLE>
ii
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 JULY 5, 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 July 1, 1996 (the "Record Date"). The
conversion ratio has been determined on the basis of a per share price of $ (the
"Exchange Price"). On July 1, 1996, the last reported sale price of the Common
Stock on the the American Stock Exchange (the "AMEX") was $3.625 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
$52,000.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6
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
<PAGE>
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
S-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.
-------------------
[THIS SPACE LEFT BLANK INTENTIONALLY]
2
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 HERBY 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. The
Company's principal properties are located onshore and offshore Louisiana, in
the Texas and Louisiana Gulf Coast and New Mexico.
During 1995, the Company implemented a program of exploration for
significant oil and gas reserves using state-of-the-art three dimensional ("3D")
seismic and computer-aided exploration ("CAEX") technology. 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
traditional two dimensional (2D) and evaluation methods. In furtherance of this
exploration program, Fortune formed a strategic partnership with Zydeco Energy,
Inc. (formerly Zydeco Exploration, Inc.) in February, 1995 (the "Zydeco 3D
Venture"), and has since acquired an interest in over 20 exploration projects
(the "Zydeco Projects") in the shallow Gulf Coast waters of Louisiana. The first
well drilled on a Zydeco Project was plugged and abandoned in January 1996 after
the Company determined that the cost of completion made the well uneconomic.
Since late 1995, the Company has also acquired interests in three
additional exploratory prospects with other industry partners in the Louisiana
Gulf Coast and is continually evaluating other 3D and 2D exploration projects. A
well has been drilled on one of these three prospects, and is currently in the
process of being completed as a producer.
At the same time, the Company seeks to take advantage of attractive
acquisition targets which will enable it to acquire reserves at an attractive
price. In furtherance of that objective, on December 11, 1995, the Company
purchased an interest in a producing oil and gas property located in the Gulf of
Mexico offshore Louisiana for cash. (See "Business and Properties - Exploration,
Exploitation and Development Activity - Zydeco 3D Venture" and "Acquisition
Activity - South Timbalier Block 76 Acquisition").
ZYDECO 3D VENTURE - Under its exploration agreement with Zydeco, the
Company holds a 50% interest in each of the Zydeco Projects, for which it
contributed $4,850,000, representing its share of the leasehold acquisition and
seismic costs budget for the Zydeco Projects. The Zydeco 3D Venture utilizes
state-of-the-art 3D seismic and CAEX technology in its exploration efforts.
Zydeco has blended these technologies with 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
Zydeco Projects. 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 at lower average reserve finding
costs.
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. 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").
In January 1996, the Company drilled a well on the Aurora project, one of
the Zydeco Projects. Zydeco did not participate in the working interest in the
well. The well reached a total depth on January 18, 1996. Well logs indicated
that well had penetrated three hydrocarbon reservoirs. However, given the
significan costs of completing the well and installing a production platform,
management elected not to complete it. The total cost to the Company to drill,
test and plug and abandon the well was approzimately $832,000. Management is
evaluating whether to drill another well on the project in light of the
hydrocarbon zones shown on the well logs.
OTHER EXPLORATION PROJECTS - The Company has an 11.4% non-operated working
interest in the East Bayou Sorrel Prospect in Iberville, Parish, Louisiana. The
initial test well on the Prospect has been drilled and tested and is in the
process of being completed as an oil and gas well.
In June 1996, the initial exploratory well was spudded on the Lirette
prospect in Lafourche Parish, Louisiana. The Company has a 10% non-operating
working interest in the Prospect. It is anticipated that the well will be
drilled to total depth within 45 days. In June 1996, the Company also committed
to participate in an exploratory well at South Lake Arthur, Jefferson Davis
Parish, Louisiana, for a 12.5% non-operating working interest. The Company
expects that a well on this prospect will be drilled before year end.
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 affort 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")
3
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 recently sold all of its California producing properties and prospects.
The Company also relocated its headquarters to the greater Houston, Texas are in
February, 1996.
EXCHANGE OFFER
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, held
of record on July 1, 1996. 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
EXCHANGE PRICE basis of a per share price of $_______(the
"Exchange Price"). On July 1, 1996, the last
reported sale price of the Common Stock on
the AMEX was $3.625 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 exceed $_____ (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
STOCK AND WARRANTS 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.
CONVERSION AGENT Toluca Pacific Securities Corporation will
act at 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 OFFER This offer will expire on _____________,
1996, unless extended by the Company for up
to an additional thirty (30) days. See
"Offer to Convert".
FEDERAL INCOME TAX For information regarding the federal income
CONSEQUENCES tax consequences of acceptance of the offer
to 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 $52,000.
4
SUMMARY FINANCIAL AND OPERATING DATA
THE FOLLOWING SUMMARY CONDENSED FINANCIAL DATA FOR THE YEARS ENDED
DECEMBER 31, 1993, 1994, AND 1995, AND THE UNAUDITED FINANCIAL INFORMATION FOR
THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, ARE DERIVED FROM AND QUALIFIED
BY REFERENCE TO THE COMPANY'S FINANCIAL STATEMENTS, APPEARING ELSEWHERE HEREIN.
THE STATEMENT OF OPERATIONS DATA FOR THE THREE MONTHS ENDED MARCH 31, 1996, IS
NOT NECESSARILY INDICATIVE OF RESULTS FOR A FULL YEAR. THE FINANCIAL INFORMATION
FOR EACH THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996 ARE UNAURITED 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
"MANAGEMENT'S 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)
STATEMENT OF OPERATIONS DATA: THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- ------- ------- -------
(UNAUDITED)
TOTAL REVENUES ............ $ 2,834 $ 3,397 $ 3,193 $ 724 $ 1,550
NET INCOME (LOSS) ......... $(3,654) $(2,943) $(6,214) $ (409) $ 60
NET INCOME (LOSS) PER SHARE $ (2.06) $ (1.12) $ (.95) $ (0.14) $ 0.01
WEIGHTED AVERAGE SHARES
OUTSTANDING ............ 1,773 2,639 6,556 3,012 11,169
BALANCE SHEET DATA: DECEMBER 31, MARCH 31,
---------------------------- -------
1993 1994 1995 1996
------- ------- ------- -------
TOTAL ASSETS ..................... $10,454 $11,601 $18,997 $17,783
TOTAL DEBT ....................... $ 3,003 $ 7,123 $ 4,897 $ 3,597
NET STOCKHOLDERS' EQUITY ......... $ 6,613 $ 3,665 $13,617 $13,617
NET STOCKHOLDERS' EQUITY PER SHARE $ 2.50 $ 1.39 $ 1.21 $ 1.22
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
OPERATING DATA:
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
NET PRODUCTION:
CRUDE OIL, CONDENSATE AND
GAS LIQUIDS (BBL) ....... 78,737 87,615 91,981 18,900 21,700
NATURAL GAS (MCF) ....... 723,878 1,016,771 909,000 264,200 364,300
OIL EQUIVALENT (BBL) .... 199,383 257,077 243,481 62,900 82,400
AVERAGE SALES PRICE:
CRUDE OIL, CONDENSATE AND
GAS LIQUIDS ($ PER BBL) $ 14.33 $ 14.14 $ 14.66 $ 16.23 $ 16.32
NATURAL GAS ($ PER MCF) . $ 2.28 $ 2.09 $ 1.77 $ 1.52 $ 2.39
<CAPTION>
RESERVES: DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
ESTIMATED NET PROVED RESERVES (1):
CRUDE OIL AND CONDENSATE (MMBBL) ................ 813 1,647 347
NATURAL GAS (BCF) ............................... 5.6 5.9 5.9
ESTIMATED FUTURE NET REVENUES BEFORE
INCOME TAXES (IN THOUSANDS) ..................... $12,835 $15,932 $12,600
PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES
BEFORE INCOME TAXES (DISCOUNTED AT 10% PER ANNUM) $ 8,554 $ 8,148 $ 8,942
</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 REDUCED.
SEE "BUSINESS AND PROPERTIES -- OIL AND GAS OPERATIONS-- OIL AND GAS RESERVES".
5
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. Further, since
the Company does not have its own internal exploration staff, it is dependent on
outside consultants to find and evaluate exploration projects for it. As a
result, the Company must acquire its interests in projects from third parties,
often on a promoted basis (which means that the Company must pay a larger share
of the costs of exploration than its revenue share in the project).
WORKING CAPITAL; NEED FOR ADDITIONAL FINANCING. At March 31, 1996, the
Company had a working capital surplus of $949,000. However, 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
Company's credit facility with Bank One, Texas (the "Credit Facility") and other
borrowings. While the Company currently has sufficient capital or cash flow to
meet all of its projected capital needs for the remainder of 1996, if Zydeco
were to propose an accelerated drilling schedule under the Zydeco 3D Venture,
Fortune may not have sufficient capital or cash flow to participate. Further,
Fortune may not have sufficient capital to pursue other attractive projects not
currently contemplated which might be presented to it. Substantially all of the
Company's producing oil and gas properties are pledged to secure the Credit
Facility. At March 31, 1996, the total amount owed in the Credit Facility was
$1,925,000, and the Company does not have any additional borrowing capacity
under the Credit Facility at the date hereof.
NET LOSSES INCURRED BY COMPANY. During its last three fiscal years, the
Company has incurred net losses. The losses equalled $3,654,000, $2,943,000 and
$6,214,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Although the Company had net income of $60,000 for the first
quarter of 1996, it may continue to incur losses 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 Company's cash flow
from operations insufficient to fund 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."
LIMITED SHORT-TERM IMPACT OF ZYDECO 3D VENTURE. The first well drilled
on one of the Zydeco Projects (the Aurora prospect) was plugged and abandoned in
January 1996 after the Company determined that the costs of completion made the
well uneconomic. See "Business and Properties - Exploration, Exploitation and
Development Activity - Zydeco 3D Venture." The Company retained a 100% working
interest after Zydeco elected not to participate in the well. The dry hole cost
to Fortune of drilling and plugging and abandoning the well was approximately
$832,000. It is anticipated that other wells may be drilled on one or more of
the Zydeco projects in 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 late 1996 or early 1997. Therefore, investors should
be aware that the Zydeco 3D Venture did not have any impact on the Company's
revenues or cash flow from operations during 1995; and any impact during 1996
will be extremely limited. No assurance can be given that Fortune will ever
receive any revenues from any of the Zydeco projects.
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
6
in the Gulf of Mexico to the relatively slow decline rate characteristic of the
long-lived (but less prolific) fields on the California properties which the
Company previously owned. 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. 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."
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. There can be no assurance that the Company
will be able to farmout any portion of its interest in any of the Zydeco
Projects. If the Company is unable to farmout a portion of its interest, it must
either retain its 50% working interest, elect to not participate in the well or
exercise its "put" rights to Zedeco if Zydeco is participating in the well.
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 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, 1997, and the
Company does not currently have the financial resources necessary to repay the
Credit Facility in full without significantly curtailing its operations. Bank
One, Texas has granted extensions of the Credit Facility due date in the past.
While management intends to continue to seek extensions 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 further relief from Bank One in the future.
It is, therefore, possible that Fortune's operating activities could be
significantly curtailed or, in the event that Fortune's financial postition
weakens significantly, 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. 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 adopted SFAS 121 in the fourth quarter of
1995 and, as a result, recorded a $2,530,000 impairment charge against 1995
operations.
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 and Chief Executive 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.
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. 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,
7
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 $2.28,
$2.09 and $1.77 per Mcf in 1993, 1994 and 1995, respectively. The average oil
prices received by the Company were $14.33, $14.14 and $14.66 per Bbl in 1993,
1994 and 1995, respectively. At June 28, 1996, the Company was receiving an
average of approximately $2.20 per Mcf for its gas production and $18.70 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, corrosive or hazardous substances,
mechanical failure of equipment, 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 such as the mechanical failure of downhole equipment at the
Company's South Timbalier Block 76 well. As a result of this equipment failure,
the well has been shut in since April 29, 1996, and the remedial workover
currently in process is estimated to cost the Company approxiately $200,000. See
"Business and Properties - Acquisition Activity - South Timbalier Block 76." 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 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 production and drilling operations in the Gulf of
Mexico and the coastal counties and parishes of the Gulf Coast and could result
in damaged equipment or facilities.
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
8
through its acquisition program. In addition, the Company carries $2,000,000 of
environmental insurance 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."
SHORTAGES OF SUPPLIES AND EQUIPMENT. The Company's ability to conduct
its operations in a timely and cost effective manner is subject to the
availability of oil and gas field supplies, equipment and service crews. The
industry is currently experiencing a shortage of certain types of drilling rigs
and work boats in the Gulf of Mexico. This shortage could result in delays in
the Company's operations as well as higher operating and capital costs.
Shortages of other drilling equipment, tubular goods, drilling service crews and
seismic crews could occur from time to time further hindering the Company's
ability to conduct its operations as planned.
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
$52,000. 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 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."
9
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 June 28, 1996, the Company had outstanding options
and warrants to purchase an aggregate of 6,250,914 shares of Common Stock which
are currently exercisable and up to 431,250 shares of Common Stock issuable upon
conversion of the Company's outstanding Debenture and up to 500,250 shares of
Common Stock issuable upon exercise of warrants to be issued in conjunction with
the Company's Debenture Exchange Offer. At that date, there were 11,431,664
shares of Common Stock outstanding, of which 9,044,433 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 June 1995 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.
"RESET" SHARES. In connection with the acquisition of the South
Timbalier Block 76, the Company issued shares in a Regulation S offering. The
shares were sold subject to "reset" provisions which required the Company to
issue additional shares if the market price of the Common Stock declined during
certain recalculation periods. The price did decline in the first quarter of
1996, and the purchasers have demanded the issuance of an additional 1,266,000
shares. The Company has declined to issue such shares pending completion of an
investigation into whether the price decline was a result of market
manipulation. Three of the purchasers have filed suit to require the issuance of
such shares. See "Business and Properties - Acquisition Activity - Petrofina
Acquisition" and "-- Legal Proceedings."
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."
10
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 $52,000, 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 March 31, 1996, was
$13,523,000 or $1.21 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 March 31, 1996, would have been $15,195,000 or $1.31 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
March 31, 1996, 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.
MARCH 31, 1996
----------------------------
ACTUAL AS ADJUSTED(1)
------------ ------------
Current liabilities (including current
portions of long term debt) .................... $ 2,494,000 $ 2,494,000
============ ============
Long-term debt (excluding current portion) ..... $ 1,672,000 --
------------ ------------
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, 11,171,493 shares outstanding $ 111,000 $ 116,000
Additional paid-in capital ..................... $ 27,274,000 $ 28,994,000
Accumulated deficit ............................ $(13,768,000) $(13,915,000)
------------ ------------
Net stockholders' equity ....................... $ 13,617,000 $ 15,195,000
============ ============
Total capitalization ........................... $ 15,289,000 $ 15,195,000
============ ============
- ------------
(1) Assumes conversion of all Debentures but not the exercise of any of the
Exchange Warrants.
11
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.)
COMMON STOCK WARRANTS
------------------- ------------------
HIGH LOW HIGH LOW
------ ------- -------- -------
1996
Third Quarter (through
July 1, 1996) ........... $ 3-5/8 $ 3-1/2 $ 2-3/8 2-3/8
Second Quarter ............. 4 2-5/8 3 1-3/8
First Quarter .............. 5 2 3-3/16 1-3/8
1995
Fourth Quarter ............. 4-15/16 3-3/8 3-7/16 1-7/8
Third Quarter .............. 3-15/16 2-5/8 2-1/2 1-1/2
Second Quarter ............. 3-5/16 1-5/6 1 1/4
First Quarter .............. 2-1/2 1-3/4 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
At July 1, 1996, the closing price of the Common Stock was $3.625. At
June 28, 1996, there were 11,431,664 shares of the Company's Common Stock
outstanding held of record by approximately 1,500 stockholders.
12
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 in exploring for reserves in the Gulf Coast. 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, 1995, the Company increased its
oil and gas revenues by 13%, to $3,193,000 from $2,834,000.
During the three years ended December 31, 1995, Fortune's production of
crude oil increased 17% despite the Company's emphasis on acquiring gas
reserves. At the same time, natural gas production grew for the same three year
period 26% to 909,000 Mcf from 724,000 Mcf.
DIRECT PRODUCTION EXPENSES PER BOE
Over the three years ended December 31, 1995, the direct production
expense per equivalent barrel increased by 29% to $6.22 per BOE from $4.84 per
BOE primarily as a result of significant storm damage and related repairs in
1995 at one of the California properties which the Company has since sold.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
During the three months ended March 31, 1996, Fortune had net income of
$60,000 compared to a net loss of $(409,000) for the three months ended March
31, 1995.
Net revenues from sales of oil and gas increased $515,000 (73%) in the
three months ended March 31, 1996, compared to the same 1995 period. The
increase resulted primarily from higher natural gas prices, increased production
from South Timbalier Block 76 which was acquired in December 1995, and low 1994
production resulting from shutting in the Company's Hopper Canyon oil field for
5-1/2 months, (2-1/2 months in the first quarter 1995), due to storm damage.
Natural gas prices averaged $2.39 per MCF for the three months ended March 31,
1996 as compared to $1.52 per MCF for the three months ended March 31, 1995. Oil
prices averaged $16.32 per barrel compared to $16.23 per barrel for the three
months period ended March 31, 1995.
In the three months ended March 31, 1996 other income consisted
primarily of interest income and operator overhead fees being charged on jointly
owned wells.
Production and operating expenses decreased by $126,000 (31%) in the
three months ended March 31, 1996 compared to the three months ended March 31,
1995 due primarily to the disposition of the high operating cost California
properties in February 1996.
In the three months ended March 31, 1996, Fortune's general and
administrative expenses increased by $332,000 (171%) over the first quarter
1995. The increase during the three months was due primarily to increased legal
fees resulting from the Regulation S shareholder litigation and the increased
acquisition and disposition activity; increased shareholder reporting expense
due to earlier filing of the Company's annual report and Form 10-KSB; and
increased personnel expense. The company also incurred non-recurring office
relocation and severence cost of $105,000 in the first quarter of 1996 in
connection with the move to Houston.
13
Interest expense decreased by $65,000 (35%) for the three months ended March 31,
1996 over the same 1995 period due to the lower debt balance. The lower
depletable property balance, resulting from the year-end 1995 impairment
write-off, led to the Company's provision for depletion, depreciation and
amortization decreasing by $60,000 (17%) in the three months ended March 31,
1996 as compared to 1995.
YEARS ENDED DECEMBER 31, 1994 AND 1995
During the year ended December 31, 1995 Fortune had a net loss of
$6,214,000, compared to a net loss of $2,943,000 for the year ended December 31,
1994. The loss for the period ended December 31, 1995 was primarily due to a
$2,530,000 impairment charge attributable to the Company's early adoption of
Financial Accounting Standards Board Statement 121 (Accounting for the
Impairment of Long-Lived Assets) and $1,472,000 of exploration expenses,
including geological and geophysical, dry hole and abandoned leasehold cost.
Net revenues from sales of oil and gas decreased $380,000 (11%) in the
year ended December 31, 1995, compared to the same 1994 period. 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 $1.77 for the year ended December 31, 1995,
compared to $2.09 for 1994. Oil prices averaged $14.66 per barrel for the year
ended December 31, 1995 as compared to $14.14 per barrel for the year ended
December 31, 1994.
Other income consisted primarily of interest income, operator's
overhead fee revenues being charged on joint 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 during 1995 by $424,000 (39%)
compared to 1994. The increase is due primarily to the additional operating
expense from the acquired production in Rio Arriba, New Mexico, Refugio County,
Texas and offshore Louisiana; additional wells brought on production in New
Mexico and Refugio County, Texas; and additional expenses incurred in Hopper
Canyon Field, for repairs due to storm damage.
During 1995, Fortune's general and administrative expenses increased by
$192,000 (19%), over 1994. The increase was due primarily to increased insurance
costs, legal fees, public relations expenses, shareholder expense and expense to
relocate the Company's headquarters. Interest expense increased by $410,000
(89%) for the year ended December 31, 1995, 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 decreased by $261,000 (13%) in the year ended December 31, 1995,
compared to the same 1994 period due to the effect of the prior year impairment
write-off.
The Company incurred $418,000 in geological and geophysical costs in
1995 vs. none in 1994. Dry hole costs increased $803,000 over 1994 due primarily
to incurring $799,000 in dry hole cost on the Aurora well offshore Louisiana.
The Company follows the intrinsic value method for stock options
granted to employees. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation." The Company does not intend to adopt the fair value
method for stock-based compensation plans, which is an optional provision of
Accounting Standard 123.
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 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 $14.14
per barrel for the year ended December 31, 1994 as compared to $14.33 per barrel
for the year ended December 31, 1993. Gas prices averaged $2.09 per Mcf for the
period ended December 31, 1994 as
14
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 and
abandoned leasehold costs totaling $1,280,000 on the Company's oil and gas
properties.
LIQUIDITY AND CAPITAL RESOURCES
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. The Company netted approximately $8.1 million after deduction of
underwriting discounts and costs of the offering. On December 11, 1995, the
Company closed a private placement of 1,321,117 shares to acquire a producing
property and raise additional capital. From this sale, the Company netted
approximately $3.3 million after payment of expenses of the offering. See
"Description of Business - Acquisition Activity -- South Timbalier Block 76."
Fortune's operating cash flow decreased during 1995 to $(1,112,000) or
(326%) as compared to 1994. This decrease in cash flow was primarily the result
of the effect of lower natural gas prices, the shutting-in of the Company's
Hopper Canyon Field, higher operating costs and the occurrence of geological and
geophysical expenses in 1995. Fortune's operating cash flow increased for the
three months ended March 31, 1996 to $267,000 as compared to a cash flow deficit
of $(18,000) for the same 1995 period. This increase in cash flow was a result
of the effect of higher natural gas prices and higher production in 1996.
Fortune's internal liquidity and capital resources in the near term
will consist primarily of working capital derived from its oil and gas
operations. These items comprise all of Fortune's liquid assets. Fortune's
working capital increased during 1995 due to the cash infusions from the 1995
stock offerings and the anticipated 1996 sales of the California properties. The
proceeds from the sale of the California properties were used to pay down the
Bank One credit facility after year end. The Company was in breach of its cash
flow covenant at December 31, 1995 and March 31, 1996, but Bank One waived such
breach at those dates. Fortune's working capital increased in the first quarter
primarily due to increased cash flow from operations, and the proceeds received
from the sale of oil and gas properties.
On January 14, 1994, the Company entered into a $10 million secured
master revolving credit facility with Bank One, Texas, N.A. The facility
expires, if not further renewed or extended, on April 1, 1997. The amount the
Company may borrow under the Credit Facility is determined by the borrowing base
as calculated by the Bank semi-annually on the basis of the Company's oil and
gas reserves. The principal balance of the Credit Facility at March 31, 1996 was
$1,925,000. At December 31, 1995, the borrowing base under the Credit Facility
was $3,200,000. The borrowing base continues to decline at the rate of $75,000
per month. Due to the breach in the cash flow covenant, the Company is not able
to fully utilize this borrowing base capacity at this time. The Credit Facility
is secured by a mortgage on substantially all of the Company's existing proved
oil and gas properties. Under the terms of the facility, the Company is subject
to certain covenants, including restrictions or requirements with respect to
working capital, tangible net worth, net cash flow, additional debt, asset sales
and certain mergers.
On April 24, 1995, in connection with the Bank One agreement to waive
certain covenant breaches, Bank One required the Company to enter into a lockbox
arrangement pursuant to which its revenues are paid to an account with Bank One.
Bank One instituted the lock box arrangement to monitor the Company's revenues
until such time the Company could demonstrate it could consistently meet the
terms of the principal covenants. There is no limitation placed on any funds
subject to the lock box arrangement. In addition, the Company agreed to consider
selling its California properties, although this was not a requirement of the
bank.
15
Total 1995 capital expenditures, including expenditures for property
acquisition and drilling and completion costs, were $4,415,000 as compared to
$4,065,000 for 1994. Capital expenditures for the three months ended March 31,
1996 were $ 485,000 as compared to $ 876,000 for the same 1995 period.
Fortune's capital expenditures for 1996 are currently estimated to be
approximately $2.5 million for its exploration and development activities,
including completion and development of the Company's recent exploratory
discovery at East Bayou Sorrel, Iberville Parish, Louisiana. (See "Exploration,
Exploitation and Development Activity"). 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 it
may have otherwise enjoyed in the event of an exploration success.
Conditions outside of the control of Fortune influence the price
Fortune receives for oil and gas. As of June 28, 1996, the Company was receiving
approximately $18.70 per barrel as an average price for its oil production and
$2.20 per MCF as an average price for its gas production. At December 31, 1995,
the Company was receiving an average of $2.32 per Mcf for its gas production and
$16.10 per Bbl. for its oil production. At December 31, 1994, the Company was
receiving approximately $14.62 per barrel as an average price for its produced
oil and $1.39 per Mcf as an average price for its produced gas.
Fortune has obtained updated oil and gas reserve reports from
Huddleston & Co. Inc., of Houston, Texas, its independent engineers, dated March
8, 1996. These reports indicated a net present value discounted at ten percent
of the Company's proved reserves equal to $8.9 million at December 31, 1995,
compared to a $8.1 million discounted value at December 31, 1994. Of that total
value, the proved developed producing wells had a discounted value of $6.7
million at December 31, 1995 compared to $5.7 million at December 31, 1994.
Total net proved recoverable reserves at December 31, 1995 decreased to 347,000
barrels of oil and 5.9 billion cubic feet of natural gas from 1,647,000 barrels
of oil and 5.9 billion cubic feet of natural gas at December 31, 1994. The
decrease in proved oil reserves was primarily attributable to reclassifying to
oil and gas properties held for sale, the Company's California properties which
were sold in February 1996.
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 total capital expenditures of the Company for the year ended
December 31, 1995, excluding properties purchased, and for the years ended
December 31, 1994, and 1993 were $3,170,000, $1,283,000 and $346,000,
respectively. The increase in capital expenditures for 1995 was principally
attributable to capital expended to acquire, explore and develop the Company's
acquired interests offshore Louisiana, 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
16
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 recently sold all of its California producing
properties and prospects. See "Recent Developments -- Divestiture of California
Properties". The Company relocated its headquarters to the greater Houston,
Texas area in February 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 -- South Timbalier Block 76
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 involved in a number of exploration projects, including
the Zydeco 3D Venture projects and projects in the San Juan Basin, Rio Arriba
County, New Mexico, the LaRosa Field, Refugio County, Texas, and onshore
Louisiana. Additionally, Zydeco is continuing its work to identify other
potential projects for the Zydeco 3D Venture.
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17
BUSINESS AND PROPERTIES
GENERAL
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. The
Company's principal properties are located onshore and offshore Louisiana, in
the Texas and Louisiana Gulf Coast and New Mexico.
During 1995, the Company implemented a program of exploration for
significant oil and natural gas reserves using state-of- the-art three
dimensional ("3D") seismic and computer-aided exploration ("CAEX") technology.
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 traditional two dimensional (2D) and evaluation methods. In
furtherance of this exploration program, in February 1995, Fortune formed a
strategic partnership with Zydeco (the "Zydeco 3D Venture") and has since
acquired an interest in over 20 exploration projects (the "Zydeco Projects") in
the shallow Gulf Coast waters of Louisiana. Since late 1995, the Company has
also acquired, with other industry partners, interests in three additional
prospects in the Louisiana Gulf Coast and is continually evaluating other 3D and
2D exploration projects.
At the same time, the Company seeks to take advantage of attractive
acquisition targets which will enable it to acquire reserves at an attractive
price. In furtherance of that objective, on December 11, 1995, the Company
purchased an interest in a producing oil and gas property located in the Gulf of
Mexico offshore Louisiana for cash. See "Exploration, Exploitation and
Development Activity - Zydeco 3D Venture" and "Acquisition Activity -- South
Timbalier Block 76 Acquisition."
The Company's principal executive offices are currently located at 515
West Greens Road, Suite 720, Houston, Texas 77067 and its telephone number at
that address is (713) 872-1170.
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 recently sold all of its California producing properties and prospects.
See "Recent Developments -- Divestiture of California Properties". The Company
relocated its headquarters to the greater Houston, Texas area in February 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.
RECENT DEVELOPMENTS
SALE OF PARTIAL INTEREST IN SOUTH TIMBALIER BLOCK 76
Fortune granted Pendragon Resources, a Texas limited liability company
owned by Donald L. Walker, the right, exercisable until March 11, 1996, to
acquire a 4-1/6% working interest in the South Timbalier Block purchased by
Fortune in December 1995. See "-- Acquisition Activity - South Timbalier Block
76 Acquisition." The acquisition price payable by Pendragon was $790,000 and the
retention of a deposit of $150,000 (the "Option"). On March 11, 1996 the Option
was exercised for the combined total of $940,000 reducing the Company's interest
in the block to 12.50% working interest (9.375% net revenue interest) effective
January 1, 1996. The closing of the transaction took place on March 11, 1996.
18
DIVESTITURE OF CALIFORNIA PROPERTIES
On February 23, 1996, Fortune sold its interest in all but one of its
California properties for cash in the amount of $840,000. The properties sold
consisted of the Company's interest in the Hopper Canyon, Holser Canyon, Oxnard
and Sheils Canyon Fields in Ventura County and the Bacon Hills Field in Kern
County. The sale was effective December 31, 1995. In connection with the sale,
Fortune paid commissions and expenses of approximately $75,000. The Company sold
its remaining California property, the Sespe Field, Ventura County, California,
to Seneca Resources for approximately $300,000 net of closing adjustments in
April 1996. The Company took an impairment of $1.4 million against its 1995
results as a result of these sales.
All of the Company's California properties were pledged to secure the
Company's Credit Facility with Bank One, Texas. Concurrently with the closing of
the sale of the non-Sespe properties, Fortune paid down the Credit Facility by
$1.1 million, representing the entire indebtedness secured by the Company's
California properties.
The closing of the sale of the California properties and the relocation
of the Company's headquarters to Houston completed the Company's strategic move
to focus its efforts on exploration in the Gulf Coast and south Texas area.
At December 31, 1995, Fortune owned and operated 39 gross and 29.92 net
wells located in California (including all the wells that were sold in 1996).
Production in California during 1995 totaled approximately 57,160 net barrels of
oil and 66,292 net Mcf of gas. This represented about 62% of the Company's 1995
oil production and about 7% of its gas production. The Sespe property comprised
approximately 26% of Fortune's net proved oil reserves and 1% of Fortune's net
proved gas reserves as of December 31, 1995.
Despite the high percentage of oil production represented by these
properties, the costs of operating the wells in California was, in the view of
management, disproportionately high in relation to the revenues generated. The
high cost of production in California on the Company's properties was a result
of several factors, including the low gravity of the oil, the small production
from each well and environmental and worker's compensation costs. Therefore, the
net income received by the Company on the California properties was small in
relation to the cost of operation.
EXPLORATION, EXPLOITATION AND DEVELOPMENT ACTIVITY
The Company is involved in a number of exploration and exploitation
projects, including onshore Louisiana, 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.
EAST BAYOU SORREL FIELD, IBERVILLE PARISH, LOUISIANA
On June 6, 1996, the Company announced successful production test
results from the Schwing #1 field discovery well at East Bayou Sorrel, Iberville
Parish, Louisiana. During the production test, the well flowed at a sustained
rate of 1,026 Bbls of oil per day and 980 Mmcf of gas per day with a flowing
tubing pressure of 6,670 PSI on as 8/64 inch choke from a perforated interval of
13,208 to 13,226 feet. The well is expected to commence production during the
third quarter of 1996. The Company has an 11.4% non-operated working interest in
this well.
LIRETTE PROSPECT, LAFOURCHE PARISH, LOUISIANA
In June 1996, the Everett Giroir #1 well on the Lirette prospect in
Lafouche Parish, Louisiana was spudded. The Company has a 10% non-operating
working interest in the Lirette well. At the date of this prospectus, the well
is being drilled.
SOUTH LAKE ARTHUR, JEFFERSON DAVIS PARISH, LOUISIANA
In June 1996, the Company acquired a 12.5% non operating working
interest in the South Lake Arthur prospect in Vermilian Parish, Louisiana. The
Company expects to spud an exploratory well on this prospect before the end of
1996.
19
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 over 20 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. These projects are in various
stages of evaluation and leasehold acquisition. The Company expects that wells
will be drilled on several of the projects before the end of 1997, but no
assurance can be given when, or if, any such wells will be drilled. These
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 the Company
considers advanced 3D seismic and CAEX technology to be effective in better
defining exploration risks. 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 by
Zydeco 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 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. 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 one percent overriding royalty
interest in the project, convertible into a 12-1/2% 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.
Zydeco and Fortune entered into a farmout of the Polaris Project to
Southern Gas Company of Delaware ("Southern") on May 31, 1995 (the "Polaris
Farmout"). 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% 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. In March 1996, Southern
conveyed its rights under the Polaris Farmout to a third party who, as a result
of extensions granted by Zydeco and Fortune, is required to commence drilling a
well on the Polaris Farmout on or before October 1, 1996 in order to earn an
interest in the Project to a depth of 100 feet below the deepest depth drilled
provided such well is completed as 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 the Polaris Farmout will be drilled or
that any drilling will be successful.
In January 1996, the Company drilled a well on the Aurora project.
Zydeco did not participate in the working interest in the well. The well reached
total depth on January 18, 1996. Well logs indicated that the well had
penetrated three hydrocarbon reservoirs. However, given the significant costs of
completing the well and installing a production platform, management elected not
to complete it. The total cost to the Company to drill, test and plug and
abandon the well will be approximately $832,000. Management is evaluating
whether to drill another well on the project in light of the hydrocarbon zones
shown on the well logs.
20
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.
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 -- Acquisition Activity -- San Juan Basin, New Mexico." Under these
MDAs, certain development activities are required to maintain each of the
acreage blocks.
Since June 1994, Fortune has participated in drilling seven wells and
shooting approximately 70 miles of new seismic data. Two of the seven wells were
completed as producing wells. One was plugged and abandoned and three are
temporarily shut in pending further evaluation. 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 litigation that the
Company was involved in affecting this well was recently settled. See " - Legal
Proceedings."
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
completing one well and the completion of two additional wells in 1995 was
approximately $375,000.
There are no immediate plans to conduct further evaluations of the
wells that are temporarily shut in or to drill additional wells in this field.
AMPOLEX USA, Inc. (AMPOLEX), the current operator of the field, was recently
acquired by Mobil Corporation, and has informed Fortune that AMPOLEX may sell
its interest in the field. AMPOLEX has inquired as to whether Fortune would also
be interested in selling its interest with AMPOLEX. Management of Fortune is
currently considering this suggestion as well as its other options.
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
Since acquiring an interest in the LaRosa Field in February 1994, the
Company has participated in over two dozen natural gas and two oil recompletions
in new zones of shut-in wells of which 20 have been successful. 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 and additional acreage being acquired under seismic options.
It is hoped that prospects will be defined by the 3D seismic program and that
development drilling and exploratory drilling on the undeveloped acreage could
commence in early 1997.
AWP FIELD, MCMULLEN COUNTY, TEXAS
There are 11 proved developed locations remaining to be drilled in the
AWP field located in McMullen County, in South Texas on either 40 or 80 acre
spacing. The operator of the field 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. In February 1996 developmental drilling was
resumed with the commencement of drilling the Bracken Ranch #47 well location
which was successfully completed as a producer.
21
DRILLING ACTIVITIES
The following table sets forth information regarding development and
exploratory wells drilled by Fortune in the years ended December 31, 1993, 1994
and 1995:
WELL DRILLING ACTIVITY
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
---- ---- ----
GROSS WELLS
Productive ...................... 3.00 5.00 1.0
Dry ............................. 0.00 3.00 --
---- ---- ---
Total ........................... 3.00 8.00 1.0
==== ==== ===
NET WELLS
Productive ...................... 0.40 1.18 .20
Dry ............................. 0.00 0.47 --
---- ---- ---
Total ........................... 0.40 1.65 .20
==== ==== ===
ACQUISITION ACTIVITY
SOUTH TIMBALIER BLOCK 76 ACQUISITION
On December 11, 1995, Fortune 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 original effective
date of this acquisition was July 1, 1995. A provision in its acquisition
agreement, however, guaranteed certain terms, including an effective date for
oil and gas purposes of June 1, 1995. Fortune is, therefore, 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. In connection with
this acquisition, the Company paid $2.1 million and issued 150,000 warrants
exercisable over a two year period at prices from $4.00 to $6.00 per share. On
March 8, 1996 an option to acquire a 4.1667% working interest was exercised by a
third party for $790,000 plus the retention by Fortune of a $150,000 deposit for
a total of $940,000, reducing the Company's interest in the block to 12-1/2%
working interest (9.375% net revenue interest) effective January 1, 1996. The
closing of the transaction took place on March 11, 1996.
On April 29, 1996, the South Timbalier well was shut in due to a
mechanical failure of downhole equipment. A remedial workover, started June 16,
1996, is expected to cost the Company approximately $200,000. Prior to the
mechanical failure, the well was producing approximately 15 Mmcf of gas and
1,000 Bbls of condensate per day. The Company expects the well to come back on
production by early July, 1996 at comparable rates.
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 overseas investors in a transaction
which qualified for an exemption from the registration requirements of the
Securities Act of 1933 under Regulation S. From this sale, the Company netted
approximately $3.3 million after payment of expenses of the offering. The
balance of approximately $1 million remaining after payment of the purchase
price for the Timbalier Block interest was added to working capital and will be
used for general corporate purpose. The shares were sold subject to certain
"reset" provisions pursuant to which the purchasers could receive additional
shares if the price of the Common Stock were to drop below the purchase price
during certain calculation periods. As a result of the decline in the price of
the Common Stock in the first quarter of 1996, the Company was required to issue
1,266,000 additional shares. However, the Company is currently investigating
certain alleged irregularities in the trading in its Common Stock and is
uncertain whether it will be required to issue additional shares. These shares
are the subject of pending litigation. See "Legal Proceedings."
22
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.
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 Partners. The common stock
purchase warrants are exercisable at $3.88, expire on June 30, 1996, and have
been transferred to another party. 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.
OTHER ACQUISITIONS
Prior to 1994, the Company made various other acquisitions primarily of
producing properties located in California which the Company has since sold.
OIL AND GAS OPERATIONS
OIL AND GAS RESERVES
The Company's reserves are located in Texas, offshore Louisiana and New
Mexico. All of the Company's California reserves were sold in 1996. 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, 1995, the oil and gas reserve
estimates were reviewed by Huddleston.
23
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 isfunction 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 -- Uncertainty of Estimates of Proved Reserves and
Future Net Revenues."
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, 1993, 1994 and 1995.
ESTIMATED NET RESERVE QUANTITIES
DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
Total Proved Reserves(1):
Oil (Bbls) ......................... 813,000 1,647,000 347,000
Natural Gas (Mcf) .................. 5,562,000 5,911,000 5,938,000
--------- --------- ---------
Equivalent Bbls(BOE)(2) ............ 1,740,000 2,632,000 1,337,000
========= ========= =========
Total Proved Developed Reserves:
Oil (Bbls) ......................... 666,000 675,000 324,000
Natural Gas (Mcf) .................. 4,221,000 3,317,000 4,686,000
--------- --------- ---------
Equivalent Bbls(BOE)(2) ............ 1,370,000 1,228,000 1,105,000
========= ========= =========
- ------------
(1) Estimates of oil and gas reserves are based in part on the price at which
the product was sold as of the end of each year; and if the cost of producing
the oil and gas exceeds the sales price, the quantity of "recoverable reserves"
is reduced. The increase in reserves from December 31, 1993 to December 31, 1994
is primarily due to the increase in the average oil price received by the
Company at the end of 1994 ($14.62 per barrel compared to $10.21 per barrel,
respectively) and the resulting increase in economically recoverable quantities.
The decrease in reserves from December 31, 1994 to December 31, 1995 is
primarily due to the transfer to oil and gas properties held for sale of
reserves attributed to the Company's California properties which were sold in
February 1996, and which represented approximately 1.4 million barrels of oil
and 1.5 BCF of natural gas in the Company's Proved Reserves at December 31,
1994, partially offset by the acquisition of the Timbalier Block 76 which added
proved reserves of 174,000 barrels of oil and 2.9 BCF of natural gas on the
acquisition date.
(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,
1993, 1994 and 1995.
DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cumulative Future Net Revenue(1) .... $ 12,835,000 $ 15,932,000 $ 12,600,000
less adjustment to give effect to a
10% annual discount ............... (4,281,000) (7,784,000) (3,658,000)
------------ ------------ ------------
8,554,000 8,148,000 8,942,000
less discounted present value of
future income taxes ............... -- -- --
------------ ------------ ------------
$ 8,554,000 $ 8,148,000 $ 8,942,000
============ ============ ============
</TABLE>
- ------------
(1) 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 $14.62 and $10.21, respectively. The increase in net revenues from
December 31, 1994 to December 31, 1995, is primarily due to higher production
levels of the newly acquired properties as well as higher average sale prices
obtained for that production compared to the prices obtained for the California
production. The increase in 10% discounted value at December 31, 1995 is due to
the net effect of acquired reserves offshore Louisiana and higher natural gas
prices of $2.05 per MMBTU at December 31, 1995 as compared to $1.39 per MMBTU at
December 31, 1994 offset by the exclusion of the California properties sold in
February 1996.
24
PRODUCTION
The approximate net production data related to the Company's properties
for the periods ended December 31, 1993, 1994 and 1995 from the Company's
properties are set forth below:
NET PRODUCTION DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
------- --------- --------
Oil (Bbls) ................... 78,737 87,615 91,981
Gas (Mcf) .................... 723,878 1,016,771 909,000
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, 1993, 1994 and 1995:
AVERAGE SALES PRICES AND PRODUCTION COSTS
YEAR ENDED DECEMBER 31,
1993 1994 1995
------ ------ -----
Average Sale Price Received:
Oil (per barrel) .................... $ 14.33 $ 14.14 $ 14.66
Gas (per Mcf) ....................... 2.28 2.09 1.77
Average Production Cost
per Equivalent Barrel ............... 4.84 4.24 6.22
PRODUCING WELLS
The following table lists the total gross and net producing oil and gas
wells in which Fortune had an interest at December 31, 1995:
PRODUCING WELLS
GROSS NET
---------------- -----------------
OIL GAS OIL GAS
--- --- --- ---
Texas ....................... 59 30 7.4 9.9
Louisiana ................... 0 1 0.0 0.1
New Mexico .................. 4 2 0.7 0.4
California .................. 6 0 4,2 0.0
-- -- --- ----
Total ....................... 69 33 12,3 10.4
== == === ====
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.
These well counts exclude the California wells that were sold on February 23,
1996. The other California wells were sold in April 1996. See "Business and
Properties - Recent Developments".
25
PRINCIPAL CUSTOMERS
For the year ended December 31, 1993, approximately 68% of the Company's
produced oil and gas was sold to Texaco Trading and Transportation, Inc. and 14%
to Enron. For the year ended December 31, 1994, 48% of the Company's produced
gas was sold to Michael Gas Marketing Co., Inc., 25% to Tenneco and 15% to
Enron. 72% of the Company's produced oil was sold to Texaco Trading and
Transportation and 8% to Enron. During 1995, 56% of the Company's oil production
was sold to Texaco Trading and Transportation and 10% to Laroco, LLP. For the
same period 29% of the Company's gas production was sold to Laroco LLP, 26% to
Michael Gas Marketing and 16% to AWP and 16% to PetroFina.
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, 1995 were approximately as follows:
LEASEHOLD ACREAGE
DEVELOPED UNDEVELOPED
----------------- -------------------
GROSS NET GROSS NET
----- ----- ------ ------
Texas ........................ 5,544 1,120 3,960 1,468
New Mexico ................... 1,800 405 68,200 16,106
California(1) ................ 260 260 380 380
Oklahoma ..................... 80 5 -- --
Louisiana .................... 500 83 25,047 11,023
----- ----- ------ ------
Total ........................ 8,184 1,873 97,587 28,977
===== ===== ====== ======
(1) See "Recent Developments - Divestiture of California Properties."
TEXAS PROPERTIES
At December 31, 1995, Fortune owned an interest in 108 gross and 24.70
net oil and gas wells located in Texas. During 1995, approximately 18,591 net
barrels of oil and 695,418 net Mcf of gas were produced from the Texas
properties as compared to approximately 19,348 net barrels of oil and 930,448
net mcf of gas in 1994.
The Texas properties, which are primarily non-operated, comprised
approximately 51% of Fortune's net proven gas reserves and 24% of Fortune's net
proven oil reserves at December 31, 1995.
NEW MEXICO PROPERTIES
At December 31, 1995, Fortune owned an interest in 6 gross and 1.07 net
oil and gas wells located in New Mexico. During the twelve months ended December
31, 1995, approximately 8,377 net Bbls of oil and 25,700 Mcf of gas were
produced from the New Mexico properties compared to 5,246 net Bbls. of oil and
17,697 produced by the New Mexico properties in 1994 for the period following
their acquisition on June 1, 1994 to December 31, 1994. Properties located in
New Mexico, which are all non-operated, represented a negligible portion of
Fortune's net proven gas reserves and comprised 1% net proven oil reserves at
December 31, 1995.
26
LOUISIANA PROPERTIES
At December 31, 1995, Fortune owned an interest in 1 gross and .125 net
gas and condensate well located in Louisiana. For the two months period ended
December 31, 1995, approximately 7,853 net barrels of oil and 121,630 net Mcf of
gas were produced from the Louisiana properties.
The Louisiana properties, which are primarily non-operated, comprised
approximately 47% of Fortune's net proven gas reserves and 48% of Fortune's net
proven oil reserves at December 31, 1995.
CALIFORNIA PROPERTIES
At December 31, 1995, Fortune owned and operated 9 gross and 6.3 net oil
wells located in California. Production in California during 1995 totaled
approximately 57,160 net barrels of oil and 66,292 net Mcf of gas. Production
from California during 1994 totaled approximately 63,021 net barrels of oil and
68,626 net Mcf of gas. The decrease in California oil production in 1995 is due
primarily to the shut down of the Company's Hopper Canyon facility from February
1995 to late June 1995 due to damage to the access road caused by severe
flooding during heavy storms in January 1995.
Properties located in California, which are all operated by the Company,
comprised approximately 26% of Fortune's net proven oil reserves and 1% of
Fortune's net proven gas reserves as of December 31, 1995.
In January 1996 the Company entered into a purchase and sale agreement to
sell its California properties. Effective December 31, 1995, the majority of the
properties, comprising Hopper Canyon, Holser Canyon, Oxnard Field and Shiels
Canyon in Ventura County and the Bacon Hills Lease in Kern County, were sold to
a private oil and gas producer group for a combined price of $840,000. The
Company agreed to sell the remaining California property to Seneca Resources
Corporation ("Seneca"), to be effective December 1, 1995. The Seneca transaction
closed on April 29, 1996. The Company received net proceeds in the transaction
of $300,000 after deducting closing adjustments, primarily consisting of net
cash flow received by the Company between the effective date and the closing
date.
OKLAHOMA PROPERTIES
At December 31, 1995, Fortune owned non-operated interests in 2 gross and
.11 net wells located on 80 gross (5 net) acres in Oklahoma. These two wells
were shut in during 1994 and 1995. For the year ended December 31, 1993 net
production from Oklahoma properties was 1,087 barrels of oil and 6,660 Mcf of
gas. No oil or gas reserves were attributed to the Company's Oklahoma properties
at December 31, 1995.
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 Company's
credit facility with Bank One, Texas, and title opinions were issued. In
November 1995, title on the Company's South Timbalier Block 76 offshore
Louisiana acquisition was examined. The Company believes it holds valid title on
all its properties, free and clear of any liens or encumbrances except for
encumbrances 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. All of the
Company's leasehold interests, except for Sespe, La Rosa and some of its smaller
properties, have been pledged to secure corporate indebtedness with Bank One,
Texas. 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
At December 31, 1995, the Company leased office space in Agoura Hills,
California. In February 1996, the Company relocated its headquarters to Houston,
Texas. The lease in Agoura Hills, California currently expires in 1997. On
February 13, 1996, the Company entered into an agreement with Animation Magazine
to sublease the Agoura Hills office space, under terms and conditions identical
to those contained in the Company's lease with its landlord, for the balance of
the term of Fortune's lease. It was also agreed that Fortune would assume the
balance of the 8 months remaining on Animation Magazine's lease on its present
location. This agreement is effective as of March 1, 1996. Rent for the 4,777
square feet which the Company occupied was $53,000 in 1995, $45,000 in 1994,
$43,000 in 1993. At its present location Fortune occupies approximately 5,400
square feet of office space under a lease agreement with a term of 5 years. The
first year's rent is expected to be $49,000 and for 1997 $84,000. See Note 8 of
Notes to Financial Statements.
27
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 pro ducers, 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. 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
At December 31, 1995, Fortune employed a total of nine persons six of
whom were in management and administration and three in its oil and gas
operations. As of June 15, 1996, following the sale of the California
properties, the Company employs eight persons, all in management and
administration. 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. On February 5, 1996, the
Company relocated its corporate headquarters to Houston, Texas and has adequate
room for expansion at the new location in the event the Company chooses to hire
additional experienced personnel to support its program of exploration and
expansion.
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 $25,000, $14,000 and $10,000 in
environmental compliance costs in 1995, 1994 and 1993, respectively.
The Company is not currently involved in any judicial or administrative
proceedings which concern any environmental regulation or requirement 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 with a $10,000 deductible.
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 filed in the
District Court of Bexar County, Texas by EnRe Corporation ("EnRe"), in which
EnRe, as operator of the Company's New Mexico properties, sought 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
28
property in a negligent manner, causing loss to Fortune and the other interest
owners. In addition, management believes that the Company was permitted under
the terms of the operating agreement to elect not to participate in the drilling
operations for which EnRe 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. The Company
subsequently amended its counterclaim to allege negligence on the part of EnRe
in carrying out operations on the properties.
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. On June 13, 1996 the lawsuits were settled by both parties agreeing to
drop all of its claims.
LEX LITIGATION
In initially entering into the LEX acquisition, Fortune was advised that
the stockholders of LEX included William D. Forster ("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 the public offering made in June 1995.
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
not in the future take any position on who constituted the stockholders of LEX
or 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.
"RESET" LITIGATION
On March 26, 1996, Fortune was served with a lawsuit which had been filed
in the Federal District Court in Delaware by one of the purchasers of Fortune
common stock in an offering in December 1995 under Regulation S. Under the terms
of the subscription agreement, the plaintiff was entitled to receive additional
shares of Fortune stock if the market price fell below a stated level during a
specified period following the 40-day holding period prescribed by Regulation S.
Plaintiff's complaint alleges that
29
the price during the relevant interval did fall below the level necessary for
plaintiff to receive additional shares, but that Fortune has failed to issue the
stock.
Fortune has responded, admitting the essential allegations of the
complaint, but has pled, by way of affirmative defense, that suspicious trading
activity took place in the Common Stock immediately prior to and during the time
period in which the additional- share allocation was computed. Fortune
requested, and the American Stock Exchange commenced, an investigation into such
trading irregularities. The American Stock Exchange completed its investigation
without disclosing to Fortune the results of such investigation, but has
referred the matter to the Securities and Exchange Commission. Fortune
understands that the SEC has included this matter as part of a wider
investigation of Regulation S offerings in general. Management of Fortune does
not know when such investigation will be concluded. Fortune does not intend to
issue any additional shares to plaintiff pending the outcome of the
investigation.
On April 16, 1996, Fortune was advised that similar suits had been filed
in Federal District Court in New York by two other buyers in the same offering.
The allegations parallel those contained in the earlier suit filed in Delaware,
and Fortune intends to respond in the same manner.
(this space left blank intentionally)
30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
DIRECTOR AND/OR
EXECUTIVE OFFICER AGE TITLE
Tyrone J. Fairbanks(1) 39 President, Chief Executive
Officer, and Director
Dean W. Drulias(1)(2) 49 Director and Secretary
Graham S. Folsom(1)(3) 39 Director
William T. Walker, Jr.(1)(2) 64 Director
Barry Feiner(1)(2) 62 Director
Gary Gelman(3) 30 Director
J. Michael Urban 42 Vice President, Chief Financial
Officer and Assistant Secretary
John L. Collins 51 Vice President of Investor
Relations
- ------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
Mr. Tyrone J. Fairbanks has served as a Director of Fortune since January
1991. Mr. Fairbanks also serves as President and Chief Executive Officer of the
Company. Mr. Fairbanks served as Vice President and Chief Financial Officer of
the Company from January 1991 to June 1994. 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. 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 1994 and 1995, his firm billed the Company a total of $109,050 and
$182,643, respectively, for legal fees and costs. He has practiced law in the
Los Angeles area since 1977 after graduating from Loyola Law School and
specializes in areas of energy, environmental and real property law. Mr. Drulias
is Vice-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. 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
31
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. J. Michael Urban was hired effective March 11, 1996, as the Company's
Vice President and Chief Financial Officer. Mr. Urban formerly served as
Vice-President, Finance with Norcen Explorer, Inc., (Norcen) a Houston based oil
and gas company with operations primarily in the offshore Gulf of Mexico. Norcen
is a wholly owned subsidiary of Norcen Energy Resources Limited, a Canadian
public company. Mr. Urban had been with Norcen since March 1986. Prior to
joining Norcen, Mr. Urban was with Arthur Andersen & Co. for six years and a
private Gulf Coast oil and gas company for three years. Mr. Urban received his
BBA in Accounting from the University of Texas in 1976 and has been a Certified
Public Accountant in the State of Texas since 1978.
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.
DIRECTOR COMPENSATION
As compensation to outside directors, the Company pays directors' fees
equal to $2,500 per quarter. Inside directors do not receive any compensation
for serving as directors.
COMMITTEES OF THE BOARD
During the year ended December 31, 1995, the Board of Directors met 19
times. The audit committee met one time and the compensation committee met three
times. No current directors missed more than two Board meetings, except Mr.
Gelman. Mr. Fairbanks and Mr. Drulias attended all Board meetings. 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 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.
32
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
ANNUAL COMPENSATION LONG TERM
COMPENSATION AWARDS
SECURITIES
NAME AND PRINCIPAL UNDERLYING
POSITION YEAR SALARY BONUS OPTIONS/SARS
Charles A. Champion(1) 1995
Chairman 1994 $ 36,000 -- 50,975
Tyrone J. Fairbanks(2) 1995 $125,000 $25,000 105,599
President and CEO 1994 $102,500 $15,000 78,900
- ---------------
(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. On
January 5, 1995, Mr. Champion resigned as Chief Executive Officer and Mr.
Fairbanks was elected by the Board to succeed him in that position. Mr.
Champion remained as Chairman of the Board until his resignation as
Chairman and Director on February 8, 1996.
(2) The only years in which Mr. Fairbanks received salary and bonus exceeding
$100,000 was 1995 and 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.
On May 30, 1995 the Company hired Mr. John L. Collins as Vice President
of Investor Relations with a salary of $96,000 per year. 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.
On March 11, 1996 the Company hired Mr. J. Michael Urban as Vice
President and Chief Financial Officer with a salary of $120,000 a year. Fortune
issued Mr. Urban 35,000 stock purchase warrants exercisable at $2.5625 (the
market price of the Common Stock on March 11, 1996, the date of issue) and
expiring on March 11, 2001.
The following table lists the outstanding options held by the Company's
Chief Executive Officer under Company's Stock Option Plans on December 31, 1995:
AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Number of Value of Unexercised
<TABLE>
<CAPTION>
Unexercised Options in-the-Money Options
at FY-End (1) at FY-End (1)
Shares Acquired Exercisable/ Exercisable/
NAME ON EXERCISE VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tyrone J. Fairbanks - - 216,999/0 $461,122/$0
</TABLE>
- -------------
(1) Based on the closing price of the Common Stock on December 29, 1995. Based
upon the Company's closing price at June 28, 1996, "in-the-money" value of these
stock options is $162,749.
33
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Tyrone J.
Fairbanks, its President and Chief Executive 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.
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 new 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 report, the Company will not grant any 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, 1995 and
1996 have been granted; additional options may be granted under the 1993 plan in
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, options for 264,000 shares at $6.03 per share granted
in 1995, and options for 450,000 shares at $3.125 per share granted in 1996..
The prices of the options granted in 1991, 1993, 1994 and 1995 were reduced to
$2.75 on January 12, 1995.
The following table shows the grants of stock options to each of the
executives named in the Summary Compensation Table during 1995. No options were
exercised by any of these individuals during 1995.
OPTION GRANTS IN 1995
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE ($/SH) DATE
- -------- ------- ------ ------ ----------
Charles A. 26,400 10.0% $2.75 05/08/1996
Champion
Tyrone J. 105,999 40.0% $2.75 01/12/2000
Fairbanks
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.
34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of the relocation of Fortune Petroleum Corporation's headquarters
to Houston, Texas, the Company provided Tyrone J. Fairbanks, its President and
Chief Executive Officer, with an incentive relocation package to facilitate his
move to Texas. The package consisted of a payment by the Company of Mr.
Fairbanks' moving expenses, a non-recourse, unsecured loan in the amount of
$80,000 bearing interest at the rate of 6% per annum, with $20,000 of such loan
forgiven in each of four consecutive years beginning in 1996 provided Mr.
Fairbanks is still employed by the Company or has been terminated by the Company
without cause, and a secured recourse loan in the amount of $70,000 also bearing
interest at the rate of 6% per annum, payable interest only for two years with a
$35,000 principal payment due on the second and third anniversary of the loan.
The Company also extended the term of Mr. Fairbanks' employment contract through
December 31, 1997.
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 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 were
unsecured, bore interest at 11% per annum (1.5% above the Bank One, Texas, prime
rate), payable monthly, and were due six months from their respective dates of
issue. The loans from each of the directors were repaid in full on December 21,
1995. 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. Klein Ventures, Inc.
and the Estate of Jack Farber exercised the option contained in their note
agreement to convert the note to Fortune Common Stock. This option was not
available to the directors.
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 1996 annual
meeting.
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.
35
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 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)
36
PRINCIPAL STOCKHOLDERS
The following table contains information at June 28, 1996, 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.
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNERSHIP OF CLASS(1)
----------- ----------------------- -----------
BSR Investments, Inc.,
Paris, France(2)(4) 905,000 7.6%
William D. Forster, (Director)
237 Park Ave, New York (2)(3) 882,000
Barry Blank,
5353 N. 16th St., Phoenix, AZ(5) 711,313 6.1%
Klein Ventures, Inc.,
1307 E. Pine St., Lodi, CA(6) 640,017 5.8%
Tyrone J. Fairbanks (Director, President,
and CEO) 515 W. Greens Rd., Houston, TX(7) 318,440 2.7%
William T. Walker, Jr. (Director)
515 W. Greens Rd., Houston TX(7) 188,992 1.6%
John L. Collins (Vice President)
515 W. Greens Rd., Houston TX(7) 180,000 1.6%
Graham S. Folsom (Director)
515 W. Greens Rd., Houston, TX(7) 94,384 *
Dean W. Drulias (Director and Secretary)
515 W. Greens Rd., Houston, TX(7) 85,520 *
Gary Gelman (Director)
515 W. Greens Rd., Houston, TX(7) 55,112 *
J. Michael Urban (Vice President and CFO)
515 W. Greens Rd., Houston, TX(7) 55,000 *
Barry Feiner (Director)
515 W. Greens Rd., Houston, TX(7) 49,612 *
All Officers and Directors
as a group of eight (8) persons 1,027,060 8.7%
- -----------------
(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:
AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNERSHIP OF CLASS
Ensign Financial Group Limited, NY, NY ........... 800,000 6.8%
BSR Investments, Inc., Paris, France ............. 505,000 4.3%
William D. Forster, New York, NY ................. 482,000 4.1%
(3) Includes 515,000 shares of Common Stock underlying stock purchase warrants
exercisable at $4.75 per share and expiring April 2000.
37
(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.
(5) Includes 279,200 shares of Common Stock and an additional 432,113 shares of
which are underlying 300,600 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.
(6) 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, 115,000 shares underlying 80,000
public 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., and 10,000 shares issuable upon
exercise of stock purchase warrants with an exercise price of $2.40 per share
issued to Klein Ventures, Inc. 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.
(7) Includes 296,999 shares issuable to Mr. Fairbanks upon the exercise of stock
options granted to him under the Company's various stock option plans,
exercisable at prices of $2.75 to $3.125 per share; an aggregate of 419,801
shares issuable upon exercise of stock options granted to other officers and
directors under the Company's various stock option plans, exercisable at prices
of $2.75 to $3.125 per share; 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; 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; 35,000 shares issuable upon the exercise of common
stock purchase warrants (at $2.5625 per shares) issued to J. Michael Urban on
March 11, 1996.
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38
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 June 30,
1996. In the event the conversion occurs after June 30, 1996, Debentureholders
will not be entitled to receive interest for the period between July 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.
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
39
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.
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
40
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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41
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, 17,682,578 shares of
common stock have been issued or are issuable under options and warrants and are
outstanding at June 28, 1996. Additionally, the Company has reserved 431,250
shares of the Company's Common Stock for issuance upon the conversion of
outstanding Debentures, 431,250 shares for issuance upon exercise of the
Exchange Warrants and 69,000 shares for issuance upon the exercise of the
Warrant Agent warrants.
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 shares 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 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.
42
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 $6.32 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
March 31, 1996 was $1,925,000. 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 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:
REDEMPTION
YEAR PRICE
---- -----
1995 ................ 102%
1996 ................ 101%
1997 ................ 100%
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).
43
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 preform 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 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.
44
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 be 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 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.
45
LEGAL MATTERS
Reish & Luftman, Los Angeles, California, has passed upon the legality
of the securities offered hereby for the Company. C. Frederick Reish, a
shareholder of such firm, holds 1,000 shares of the Common Stock.
EXPERTS
The financial statements of the Company as of December 31, 1994 and
1995 and for each of the years in the three year period ended December 31, 1995,
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 report of
KPMG Peat Marwick LLP covering the December 31, 1995 financial statements of the
Company refers to the adoption of the provisions of statement of Financial
Accounting Standards No. 121, "Accounting for the impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of," as of December 31, 1995.
The information appearing herein with respect to net proved oil and gas
reserves of the Company at December 31, 1994 and 1995, was estimated by
Huddleston & Co., Inc., independent petroleum engineers, and at December 31,
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.
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.
46
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.
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.
47
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report - KPMG Peat Marwick LLP....................... F-2
Balance Sheets - December 31, 1994 and December 31, 1995.................... F-3
Statements of Operations for the years ended
December 31, 1993, 1994 and 1995......................................... F-5
Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995.......................................... F-6
Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995.......................................... F-7
Notes to Financial Statements.............................................. F-8
Balance Sheets - March 31, 1996 (unaudited) and
December 31, 1995 (audited) ............................................. F-20
Statements of Operations and for the three months
ended March 31, 1995 and 1996 (unaudited)................................ F-21
Statements of Stockholders' Equity for the year
ended December 31, 1995 and three months
ended March 31, 1996 (unaudited)......................................... F-22
Statements of Cash Flows for the three months ended
March 31, 1995 and 1996 (unaudited)...................................... F-23
Notes to Financial Statements (unaudited).................................. F-24
Independent Auditors' Report - KPMG Peat Marwick LLP....................... F-28
Statement 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)....................... F-29
Notes to Statements of Revenues and Direct
Operating Expenses Acquired from PetroFina S.A.......................... F-30
Pro Forma Combined Financial Information................................... F-32
Note to Pro Forma Condensed Combined Financial Statement................... F-34
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fortune Petroleum Corporation:
We have audited the financial statements of Fortune Petroleum Corporation as
listed in the accompanying index. 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, 1995 and 1994 and the results of its operations and its cash
flows for the each of the years in the three year period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," as of December 31, 1995.
KPMG Peat Marwick LLP
March 15, 1996
Houston, Texas
F-2
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------ ------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents .................... $ 398,000 $ 1,888,000
Accounts receivable .......................... 550,000 1,035,000
Oil and gas properties
held for sale .............................. -- 1,180,000
Prepaid expenses and oil inventory ........... 114,000 127,000
------------ ------------
Total Current Assets ....................... 1,062,000 4,230,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the successful efforts method ........ 17,912,000 18,960,000
Automotive, office and other ................. 330,000 227,000
------------ ------------
18,242,000 19,187,000
Less--accumulated depletion, depreciation
and amortization ............................. (8,253,000) (7,821,000)
------------ ------------
9,989,000 11,366,000
------------ ------------
OTHER ASSETS:
Materials, supplies and other deferred charges 269,000 62,000
Deferred credit facility costs (net of
accumulated amortization of $39,000) ...... 114,000 --
Bond issuance costs (net of
accumulated amortization of $122,000
and $180,000) .............................. 167,000 109,000
Restricted cash .............................. -- 3,230,000
------------ ------------
550,000 3,401,000
------------ ------------
TOTAL ASSETS ...................................... $ 11,601,000 $ 18,997,000
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
----------------------------
1994 1995
------------ ------------
CURRENT LIABILITIES:
Current portion of long term debt .......... $ 4,688,000 $ 3,208,000
Accounts payable ........................... 393,000 280,000
Accrued expenses ........................... 78,000 96,000
Executive severance payable ................ 96,000 --
Royalties and working interests payable .... 53,000 94,000
Accrued interest ........................... 130,000 119,000
Notes payable to officers, directors
and stockholders ......................... 200,000 --
------------ ------------
Total Current Liabilities ................ 5,638,000 3,797,000
------------ ------------
NOTES PAYABLE TO OFFICERS,
DIRECTORS AND STOCKHOLDERS .................... 550,000 --
LONG-TERM DEBT, net of current portion .......... 1,685,000 1,689,000
EXECUTIVE SEVERANCE PAYABLE ..................... 63,000 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--2,000,000 shares
Issued and outstanding-- None ............ -- --
Common stock, $.01 par value Authorized-
-40,000,000 shares Issued and outstanding-
-2,644,032 and 11,139,709 shares at
December 31, 1994 and 1995, respectively . 26,000 111,000
Capital in excess of par value ............. 11,253,000 27,228,000
Accumulated deficit ........................ (7,614,000) (13,828,000)
------------ ------------
NET STOCKHOLDERS' EQUITY ........................ 3,665,000 13,511,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...... $ 11,601,000 $ 18,997,000
============ ============
See accompanying notes to financial statements.
F-4
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Sales of oil and gas, net of
royalties .......................... $ 2,762,000 $ 3,339,000 $ 2,959,000
Other income ........................ 72,000 58,000 234,000
----------- ----------- -----------
2,834,000 3,397,000 3,193,000
DIRECT PRODUCTION EXPENSES ................. 946,000 1,090,000 1,514,000
----------- ----------- -----------
REVENUES IN EXCESS OF DIRECT
PRODUCTION EXPENSES ...................... 1,888,000 2,307,000 1,679,000
----------- ----------- -----------
OPERATING EXPENSES
Provision for depletion, depreciation
and amortization .................... 1,719,000 2,070,000 1,809,000
Geological and geophysical costs .... -- -- 418,000
General and administrative expenses . 791,000 1,020,000 1,212,000
Abandoned leasehold costs ........... 71,000 249,000 56,000
Dry hole costs ...................... -- 195,000 998,000
Gain on sale of assets .............. (133,000) -- --
Interest expense .................... 311,000 460,000 870,000
Reserve for doubtful debt ........... 101,000 -- --
Executive severance expense ......... -- 225,000 --
Impairment to oil and gas properties 2,682,000 1,031,000 2,530,000
----------- ----------- -----------
5,542,000 5,250,000 7,893,000
----------- ----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES ......................... (3,654,000) (2,943,000) (6,214,000)
PROVISION FOR INCOME TAXES ................. -- -- --
----------- ----------- -----------
NET LOSS ................................... (3,654,000) (2,943,000) (6,214,000)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ................ 1,772,739 2,638,672 6,555,875
=========== =========== ===========
NET LOSS PER COMMON SHARE .................. $ (2.06) $ (1.12) $ (0.95)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN STOCK-
----------------------- EXCESS OF ACCUMULATED HOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
----------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993 .............. 796,460 $ 8,000 $ 5,162,000 $ (1,017,000) $ 4,153,000
=========== ======== ============ ============ ============
Common stock returned to
treasury ............................ (269) -- (2,000) -- (2,000)
Common stock issued for public
offering ............................ 1,800,000 18,000 5,416,000 -- 5,434,000
Warrants issued for public
offering ............................ -- -- 444,000 -- 444,000
Warrants issued for payment of services -- -- 111,000 -- 111,000
Common stock issued for
exercise of stock options ........... 9,376 -- 25,000 -- 25,000
Common stock issued for
payment of interest ................. 22,365 -- 86,000 -- 86,000
Common stock issued for
directors' fees ..................... 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
=========== ======== ============ ============ ============
Common stock returned
to treasury ......................... (12) -- -- -- --
Common stock issued for
exercise of stock options ........... 202,481 2,000 500,000 -- 502,000
Common stock issued for
directors fees ...................... 14,445 -- 39,000 -- 39,000
Common stock issued for
stock offerings ..................... 6,569,117 65,000 11,729,000 -- 11,794,000
Common stock issued for
merger .............................. 1,200,000 12,000 2,480,000 -- 2,492,000
Common stock and warrants issued
for payment of investment
banking services .................... 100,000 2,000 263,000 -- 265,000
Common stock issued for
warrant conversion .................. 115,479 1,000 392,000 -- 393,000
Common stock issued for
note conversion ..................... 294,167 3,000 572,000 -- 575,000
Net loss .............................. -- -- -- (6,214,000) (6,214,000)
----------- -------- ------------ ------------ ------------
BALANCE, December 31, 1995 ............ 11,139,709 $111,000 $ 27,228,000 $(13,828,000) $ 13,511,000
=========== ======== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................... $(3,654,000) $(2,943,000) $ (6,214,000)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Common stock issued for interest expense ............................... 86,000 -- --
Common stock issued for directors' fees,
compensation and consulting fees ..................................... 16,000 14,000 39,000
Depletion, depreciation and amortization ............................... 1,719,000 2,070,000 1,809,000
Abandoned leasehold and dry hole costs ................................. -- 444,000 1,054,000
Gain on disposition of assets .......................................... (62,000) -- --
Amortization of deferred financing cost ................................ -- -- 172,000
Impairment of oil and gas assets ....................................... 2,682,000 1,031,000 2,530,000
Reserve for doubtful debt .............................................. 101,000 -- --
Provision for executive severance ...................................... -- 225,000 (17,000)
Changes in assets and liabilities:
Accounts receivable .................................................. (263,000) 24,000 (485,000)
Prepaids and oil inventory ........................................... 46,000 (45,000) (13,000)
Accounts payable and accrued expenses ................................ 375,000 (202,000) (95,000)
Payment of executive severance ....................................... -- (66,000) (111,000)
Royalties and working interest payable ............................... (28,000) (13,000) 41,000
Accrued interest ..................................................... 43,000 31,000 (11,000)
Materials, supplies and other ........................................ (81,000) (79,000) 189,000
----------- ----------- ------------
Net cash provided by (used in) operating activities .................... 980,000 491,000 (1,112,000)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure for oil and gas properties ................................. (6,746,000) (4,035,000) (4,431,000)
Expenditures to abandon properties and dry hole costs .................. -- (230,000) (855,000)
Restricted cash invested ............................................... -- -- (3,230,000)
Proceeds from sale of properties and equipment ......................... 292,000 8,000 --
Expenditures for other property and equipment .......................... (4,000) (30,000) 16,000
----------- ----------- ------------
Net cash used in investing activities .................................. (6,458,000) (4,287,000) (8,500,000)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ............................... -- 4,680,000 --
Proceeds from notes to stockholders .................................... -- 750,000 --
Repayment of long term debt ............................................ (571,000) (1,326,000) (1,651,000)
Proceeds from issuance of common stock ................................. 6,336,000 12,000 15,220,000
Expenditures for offering costs ........................................ (322,000) (29,000) (2,467,000)
Common stock repurchase ................................................ (2,000) (2,000) --
----------- ----------- ------------
Net cash provided by financing activities .............................. 5,441,000 4,085,000 11,102,000
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ..................................................... (37,000) 289,000 1,490,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 146,000 109,000 398,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $ 109,000 $ 398,000 $ 1,888,000
=========== =========== ============
Supplemental information:
Interest paid in cash .................................................... $ 225,000 $ 400,000 $ 692,000
Common Stock issued or issuable as directors' fees ....................... 16,000 14,000 39,000
Common Stock issued or issuable for interest paid ........................ 86,000 -- --
Warrants issued for public offering ...................................... 444,000 -- --
Warrants issued for public offering expenses ............................. 111,000 -- --
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 ............................... -- -- 575,000
Value of California assets transferred to oil and gas assets held for sale -- -- 1,180,000
</TABLE>
See accompanying notes to financial statements.
F-7
FORTUNE PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fortune Petroleum Corporation (Fortune or the Company), which does
business in Texas and Louisiana as Fortune Natural Resources Corporation, is an
independent energy company engaged in the acquisition, production and
exploration of oil and gas, primarily offshore Louisiana, the Texas and
Louisiana Gulf Coast and New Mexico.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
OIL INVENTORY
Oil inventory is stated at approximate fair market value. Market value is
determined based on current well head price of oil 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 development wells and
successful exploration wells are capitalized. All other exploratory expenses are
charged to operations as incurred. The carrying value of oil and gas properties
is evaluated in relation to the estimated future net revenues based on reserve
report estimates (See: "Reserve Impairment" below). 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
The Company utilizes the asset and liability method for recognition of
deferred tax assets and liabilities. Deferred taxes 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. The effect on deferred
taxes of a change in tax rates is recognized in income in the period the change
occurs.
BOND ISSUANCE COSTS
Bond issuance costs are being amortized using the straight line method
over the 5 year life of the related debt.
RESERVE IMPAIRMENT
In December 1995, $1.2 million of the Company's oil and gas assets were
reclassified as oil and gas property held for sale as of December 31, 1995,
since such assets are being sold during 1996. During 1993, 1994 and 1995 these
properties did not have a significant impact on net income. These assets were
recorded at their estimated realizable value at December 31, 1995 in accordance
with Statement 121 as is discussed below.
F-8
Prior to December 31, 1995, the Company evaluated the carrying cost of
its oil and gas properties for impairment by performing a ceiling test based on
the aggregate present value of future net revenues, discounted at ten percent.
Based upon such evaluation, the Company recorded impairments of $1,031,000 and
$2,682,000 in 1994 and 1993, respectively. In March 1995, the Financial
Accounting Standards Board (FASB) issued Statement 121, "Accounting for the
impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("Statement 121"). This statement requires that an impairment loss be recognized
when the carrying amount of an asset exceeds the sum of the estimated future
cash flow (undiscounted) of the assets. Under Statement 121, the Company
reviewed the impairment of proved oil and gas properties on a depletable unit
basis. For each depletable unit determined to be impaired, an impairment loss
equal to the difference between the carrying value and the fair value of the
depletable unit was recognized. Fair value, on a depletable unit basis, was
estimated to be the present value of expected future cash flows computed by
applying estimated future oil and gas prices, as determined by management, to
estimated future production of oil and gas reserves over the economic lives of
the reserves. As a result of the Company's election to adopt Statement 121 on
December 31, 1995, a provision of $2,530,000 was charged against operations
during 1995.
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, 1995.
RECLASSIFICATION
Certain reclassifications have been made to the 1994 and 1993 amounts to
conform with the current year presentation.
(2) RESTRICTED CASH
Under the terms of the Company's exploration agreement with Zydeco
Exploration, Inc., (See Note 3) Fortune had contributed $4,850,000 in cash as of
December 31, 1995 for its share of a predetermined lease acquisition, seismic
acquisition and seismic processing cost budget. At December 31, 1995,
approximately $1,620,000 of that budget had been expended leaving $3,230,000 of
restricted cash available for future budgeted expenditures. The Company has
signature authority (jointly with Zydeco) 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) ACQUISITIONS AND DISPOSITION OF ASSETS
SOUTH TIMBALIER BLOCK 76
On December 11, 1995, Fortune acquired for $2.2 million a 16-2/3% working
interest (12-1/2% net revenue interest) in a 5,000 acre producing oil and gas
property offshore Louisiana from PetroFina, Inc. 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 June 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. During March 1996, the Company's interest has been
subsequently reduced to a 12-1/2% working interest (9-3/8% revenue interest) as
the result of the exercise by Pendragon Resources, LLC of an option to acquire
the balance of the Company's interest. (See Note 13.)
The following pro forma unaudited results reflect the years ended
December 31, 1994 and 1995 as if the Timbalier Block 76 acquisition had
occurred, and the option had been exercised, and the common stock issued in the
acquisition of LEX was issued (See below and note 9), as of January 1, 1994:
Pro Forma Information
For the Years Ended December 31,
-----------------------------------
1994 1995
Revenues ............................. $ 4,596,000 $ 4,451,000
=============== ===========
Net Loss ............................. $ (2,554,000) $(5,654,000)
=============== ===========
Net Loss Per Common Share ............ $ (.49) $ (.73)
=============== ===========
F-9
LAGNIAPPE EXPLORATION CORPORATION/ZYDECO EXPLORATION
On May 12, 1995, Fortune acquired Lagniappe Exploration, Inc. ("LEX")
which had previously entered into the exploration agreement with Zydeco. 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-owner
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. Under the exploration agreement with Zydeco, Fortune has acquired a
50% interest in each of 19 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. These 19 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.
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. 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.
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% 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 Southern will drill the required well or that any drilling
conducted by Southern will be successful.
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.
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 $3.88, to expire on June 30, 1996 and which have been transferred
to another party.
F-10
(4) OIL AND GAS PROPERTIES AND OPERATIONS - UNAUDITED
Capitalized costs relating to oil and gas producing activities and
related accumulated depletion, depreciation and amortization at December 31,
1993, 1994 and 1995 were as follows:
1993 1994 1995
------------ ------------ ------------
Capitalized costs of oil
and gas properties ......... $ 14,302,000 $ 17,912,000 $ 18,960,000
Less accumulated depletion,
depreciation and amortization (5,282,000) (7,193,000) (7,629,000)
------------ ------------ ------------
$ 9,020,000 $ 10,719,000 $ 11,331,000
============ ============ ============
Of the above capitalized costs, the amount representing unproved properties was
$5,939,000, $1,036,000 and $440,000 in 1995, 1994 and 1993, respectively.
Costs incurred in oil and gas producing activities were as follows:
1993 1994 1995
---------- ---------- ----------
Property acquisition ........... $ 57,000 $ 511,000 $6,788,000
Exploration .................... -- 231,000 576,000
Development .................... 289,000 541,000 498,000
---------- ---------- ----------
$ 346,000 $1,283,000 $7,862,000
========== ========== ==========
The results of operations from oil and gas producing activities for the
years ended December 31, 1993, 1994 and 1995, are as follows:
1993 1994 1995
------- ------- -------
(in thousands)
Revenues from oil and gas producing activities:
Sales to unaffiliated parties ................. $ 2,762 $ 3,339 $ 2,959
------- ------- -------
Production (lifting) costs:
Operating costs and
production and other taxes ................ 946 1,090 1,514
Depreciation, depletion and amorti-
zation ...................................... 1,645 1,904 1,774
Exploration expenses .......................... 71 444 1,472
Impairment to oil and gas reserves ............ 2,682 1,031 2,530
Other ......................................... 11 -- --
------- ------- -------
Total expenses ................................ 5,355 4,469 7,290
------- ------- -------
Pretax loss from producing activities ......... (2,593) (1,130) (4,331)
Income tax (expense) benefit .................. -- -- --
------- ------- -------
Results of oil and gas producing activities
(excluding corporate overhead and
interest costs) ............................ $(2,593) $(1,130) $(4,331)
======= ======= =======
F-11
<TABLE>
<CAPTION>
(5) LONG TERM DEBT
A summary of long-term debt follows: DECEMBER 31,
------------------------------------
<S> <C> <C>
1994 1995
--------- --------
Convertible Subordinated Debentures of $1,725,000 (net of discount of
$103,000 and $88,000) due December 31, 1997, including interest of
10-1/2%
per annum paid semi-annually $ 1,653,000 $1,668,000
Bank One credit facility due April 1, 1997 including
interest at 1-1/2% over Bank One, Texas, NA's
prime rate payable monthly 4,680,000 3,200,000
Other debt with interest ranging from 0%
to 9-1/4% per annum due through 1998 40,000 29,000
---------- ----------
Total long-term debt 6,373,000 4,897,000
Less current installments 4,688,000 3,208,000
---------- ----------
Long-term debt, excluding current installments $1,685,000 $1,689,000
========== ==========
</TABLE>
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 $3,200,000 at December
31, 1995. The credit facility contains various financial covenants, is secured
by all of the Company's oil and gas properties and currently requires monthly
principal reduction payments of $75,000.
At December 31, 1995, the Company was not in compliance with its cash
flow coverage ratio covenant. 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 this covenant, however, it has obtained a waiver of this
covenant from the bank as of December 31, 1995. As of February 29, 1996, the
Company has repaid Bank One $1,100,000 with funds primarily from the proceeds of
the sale of its California properties. The outstanding balance remaining against
the Bank One credit facility is $1,925,000 after the February 29, 1996 payment.
The Company's maturities of long-term debt over the next three years are
as follows:
YEAR LONG-TERM DEBT MATURITY
- ---- -----------------------
1996 ............................................... $3,208,000
1997 ............................................... 1,673,000
1998 ............................................... 16,000
----------
$4,897,000
==========
(6) INCOME TAXES
No provision for income taxes was required for the years ended December
31, 1993, 1994 and 1995. Deferred taxes consist of the following:
Deferred tax assets: 1994 1995
---------- ----------
Net operating loss carryforwards ............. $1,762,000 $2,936,000
Oil and Gas Properties difference
in accumulated depletion .................... 1,634,000 1,688,000
---------- ----------
3,396,000 4,624,000
Less valuation allowance (100%) .............. 3,396,000 4,624,000
---------- ----------
Net deferred taxes ........................... $ 0 $ 0
========== ==========
F-12
At December 31, 1995, the Company estimates it had cumulative net
operating loss carryforwards for Federal income tax purposes of $8,634,000 which
is significantly restricted under I.R.C. 382 and which is available to offset
future Federal taxable income, if any, with various expirations through 2008.
The Company is uncertain as to the recoverability of the above deferred tax
assets and has therefore applied a 100% valuation allowance.
The Company has available IRC Section 29 Tax Credits that may be used to
reduce or eliminate any corporate through the year 2001. 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) STOCK OFFERINGS
On June 27, 1995, the Company entered into an Underwriting Agreement to
sell 4.1 million shares of the Company's common stock at $2.00 per share. On
July 3, 1995, the 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.
Proceeds of approximately $8.1 million, net of offering fees and expenses were
received from the sale of the shares.
On December 15, 1995, the Company closed a private placement of 1,321,117
shares of Common Stock at a price of $3.22 per share. Net proceeds of
approximately $3.3 million were received for the sale of these shares. The
shares were sold subject to certain "reset" provisions pursuant to which the
purchasers could receive additional shares if the price of the Common Stock were
to drop below the purchase price during certain calculation periods. As a result
of the recent decline in the price of the Common Stock, the Company may be
required to issue a substantial number of additional shares. However, the
Company is currently investigating certain alleged irregularities in the trading
in its Common Stock and is uncertain whether it will be required to issue
additional shares. Were it required to issue such shares as of the date hereof
the number of additional shares would be approximately 1,266,000. In February
1995, the Company closed a previous private placement of 648,000 shares of
Common Stock. The proceeds were used to fund the initial contribution to the
Zydeco venture.
(8) COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with its president and chief
executive officer that provides for an annual salary of $150,000 through
December 31, 1997, and is subject to renewal upon expiration. Upon termination
of the employment agreement, the president and chief executive officer has a
two-year consulting agreement at 40% of his annual salary.
The Company leases certain office space under a non-cancelable operating
lease. Rental Expense under the office lease for the years ended December 31,
1995, 1994 and 1993 was $53,000, $45,000 and $43,000, respectively.
Minimum future lease payments under the non-cancelable lease are as
follows:
YEAR ENDING DECEMBER 31,
1996 ............................................... $ 49,000
1997 ............................................... $ 84,000
1998 ............................................... $ 84,000
1999 ............................................... $ 84,000
2000 ............................................... $ 84,000
Thereafter ............................................ $ 35,000
--------
$420,000
F-13
On March 14, 1995, Fortune was served with a lawsuit filed in the
District Court of Bexar County, Texas by EnRe Corporation, in which EnRe , as
operator of the Company's New Mexico properties, seeks recovery of approximately
$438,000 allegedly owed by Fortune for the drilling of certain wells on such
properties. The lawsuit is the result of disputes between the parties regarding
the manner in which EnRe has conducted operations on the property and the proper
interpretation of the operating agreement among the interest owners on the
property. Fortune management believes that EnRe has operated the property in a
negligent manner, causing loss to Fortune and the other interest owners. In
addition, management believes that the Company was permitted under the terms of
the operating agreement to elect not to participate in the drilling operations
for which EnRe sought payment. On March 24, 1995, Fortune answered EnRe's
lawsuit and filed a counterclaim against EnRe for an undeterminable amount for
damages suffered by Fortune for EnRe's actions.
On March 30, 1995, a partial settlement was reached as to payment 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.
In the opinion of management, Fortune has valid defenses to all claims
still in dispute made by EnRe. On March 11, 1996 the Company was advised that
its proposal to EnRe to dismiss its litigation in exchange for the Company's
dismissal of its counterclaim was accepted by EnRe pending the completion of the
appropriate settlement documents.
(9) RELATED PARTY TRANSACTIONS
As part of the relocation of Fortune Petroleum Corporation's
headquarters to Houston, Texas, the Company provided Tyrone J. Fairbanks, its
President and Chief Executive Officer, with an incentive relocation package to
facilitate his move to Texas. The package consisted of a payment by the Company
of Mr. Fairbanks' moving expenses, a non-recourse, unsecured loan in the amount
of $80,000 bearing interest at the rate of 6% per annum, with $20,000 of such
loan forgiven in each of four consecutive years beginning in 1996, provided Mr.
Fairbanks is still employed by the Company or has been terminated by the Company
without cause, and a secured recourse loan in the amount of $70,000 also bearing
interest at the rate of 6% per annum, payable interest only for two years with a
$35,000 principal payment due on the second anniversary of the loan and all
remaining principal and interest due on the third anniversary of the loan. The
Company also extended the term of Mr. Fairbanks' employment contract through
December 31, 1997.
In connection with the acquisition of LEX, Fortune paid Messrs. William
D. Forster and BSR Investments, 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.
In initially entering into the LEX acquisition, Fortune was advised that
the stockholders of LEX included William D. Forster, BSR Investments, ("BSR"), a
corporation owned by members of the family of Mr. Charif Souki (Souki) and
Ensign Financial Group Limited, a British Virgin Islands corporation ("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,
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 the public offering made in June 1995.
At a 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
F-14
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.
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. 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.
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. 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 1,200,000 shares and 1,200,000 warrants issued to
LEX in conjunction with the acquisition. W. Forster & Co., Inc., a corporation
wholly owned by William D. Forster, received a $30,000 placement fee from the
Company for assistance in arranging the $300,000 bridge loan.
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. The notes were
unsecured, bearing interest at 11% per annum (1.5% above the Bank One, Texas,
prime rate), payable monthly, and the notes were due six months from their
respective dates of issue.
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.
At maturity, on December 21, 1995, Klein Ventures, Inc. opted for
conversion of its notes to Fortune common stock. The balance of the notes to the
directors were repaid in full.
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.
On January 1995, Daniel E. Pasquini, the former president of the
Company, agreed to a modification of a previous 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 $2.75 per share.
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 1994 and 1995, his firm billed the Company a total of $109,950, and
$182,643, respectively, for legal fees and costs.
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
F-15
(10) STOCKHOLDERS' EQUITY
On January 20, 1995, the Company amended its Certificate of
Incorporation to increase the number of authorized shares 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.
The Company follows the intrinsic value method for stock options granted
to employees. In October 1995, the FASB issued Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation." The Company does
not intend to adopt the fair value method for stock-based compensation plans
which is an optional provision of Accounting Standard 123.
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 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 remained employees of the Company to $2.75 per share on
January 12, 1995.
In January 1995 a past director of the Company exercised 6,250 options
at $.58 under the 1987 stock option plan and 6,250 options under the 1988 plan,
10,000 options at $.58 under the 1991 plan and 22,500 options awarded in 1993
under the 1993 multi-year stock option plan at $.58. In December 1995 the same
past director exercised the balance of his available options, or 78,900 at $2.75
awarded in 1994 under the 1993 multi-year plan.
In July 1995 a director exercised 3,750 options at $2.75, awarded him in
1993 under the same plan.
In September 1995 an employee of the Company exercised 14,383 options at
$2.75 under the 1993 multi-year stock option plan, covering the 1993 and 1994
awards and a portion of the 1995 award.
In November 1995 an employee exercised 500 options at $2.60 under the
1987 plan, 1,250 options at $2.60 under the 1988 plan and 15,200 options at
$2.75, awarded in 1994 under the 1993 multi-year stock option plan.
In December 1995 an employee exercised 875 options at $2.60 under the
1987 plan, 2,964 options at $2.75 under the 1991 plan, 3,383 options at $2.75
awarded in 1993 under the 1993 multi-year stock option plan, 11,100 options at
$2.75, awarded in 1994 under the same plan and 7,543 options at $2.75, the 1995
award under the plan.
Also in December 1995 another employee exercised 3,383 options at $2.75
awarded him in 1993 under the 1993 multi-year stock option plan, and 6,617
options representing a portion of the 1994 award under the same plan.
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 March 1993, two past directors of the Company exercised 4,688 options
each at an exercise price of $2.60 per share from their options under the 1988
Stock Option Plan.
F-16
At December 31, 1995 the Company's outstanding warrants to purchase
common stock consisted of:
NUMBER OF WARRANTS EXERCISE PRICE RANGE EXPIRATION DATE
187,500 ............................ $ 3.88 06/30/96
10,000 ............................ $ 2.40 12/19/96
35,000 ............................ $ 1.88 12/20/96
100,000 ............................ $ 6.00 12/11/97
50,000 ............................ $ 4.63 12/11/97
2,133,903 ............................ $ 3.75 - $ 4.41 09/28/98
57,375 ............................ $ 11.14 10/05/98*
45,000 ............................ $ 2.75 01/06/00
25,000 ............................ $ 3.25 05/30/00
1,200,000 ............................ $ 4.75 05/12/00
100,000 ............................ $ 4.75 08/01/00
60,000 ............................ $ 3.63 09/06/00
- ----------
4,003,778
==========
- ----------
* Each warrant permits the holder to purchase 3.3 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.
(11) MAJOR CUSTOMER
The Company sold oil representing 56% of its oil production under
contracts to one customer for the year ended December 31, 1995. 71% of the
Company's gas production was sold under contracts to three customers (29%, 26%
and 16%, respectively) for the year ended December 31, 1995.
The Company sold oil representing 72% of its oil production under
contracts to one customer for the year ended December 31, 1994. 88% of the
Company's gas production was sold to three customers (48%, 25% and 15%,
respectively) for the year ended December 31, 1994.
The Company sold oil representing 82% 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.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, debt and other financial assets and liabilities approximate
their fair value.
(13) SUBSEQUENT EVENTS
On March 8, 1996 the option to acquire a 4.1667% working interest in the
South Timbalier Block 76 was exercised for $790,000 plus the retention by
Fortune of a $150,000 deposit for a total of $940,000 reducing the Company's
interest in the block to 12-1/2% working interest (9.375% net revenue interest)
effective January 1, 1996. The closing of the transaction took place on March
11, 1996.
The interest acquired by Fortune was originally 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 $4.63 per share and 100,000 shares at $6.00
per share.) In addition, Fortune gave an additional security deposit to
PetroFina of $100,000.
F-17
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 June 1, 1995 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 granted Pendragon
Resources, a Texas limited liability company owned by Donald L. Walker, the
right, exercisable until March 11, 1996, to acquire the 4-1/6% working interest
in the Timbalier Block for $790,000 and the retention of a deposit of $150,000.
As noted above, Pendragon Resources exercised this option on March 8, 1996.
During 1995 the Company had entered into a purchase and sale agreement to
sell the majority of its California properties comprising of Hopper Canyon,
Holser Canyon, Oxnard Field and Shiels Canyon in Ventura County and Bacon Hills
Lease in Kern County. The properties were divested on February 23, 1996, to a
private oil and gas producer group for a combined price of $840,000 with an
effective date of December 31, 1995. The Company has signed a letter of intent
to sell its remaining California property to Seneca Resources Corporation, to be
effective December 1, 1995. The transaction is expected to close on March 31,
1996. At December 31, 1995, the Company has classified as oil and gas properties
held for sale the net proceeds estimated to be received from both of these
transactions and recorded an impairment reserve of $1.4 million.
(14) 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., ("Huddleston") Houston, Texas
independent petroleum engineers and Sherwin D. Yoelin, independent petroleum
engineer, and for the year ended December 31, 1995, by Huddleston, 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.
(THIS SPACE LEFT BLANK INTENTIONALLY)
F-18
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, 1993,
1994, and 1995, and changes in such quantities during the years, 1993, 1994 and
1995, were as follows:
CRUDE OIL (BARRELS)
------------------------------
Year Year Year
1993 1994 1995
------ ------ ------
(in thousands)
BEGINNING OF PERIOD ........................ 2,066 813 1,647
Revisions of previous estimates ....... (1,195) 866 (160)
Production ............................ (79) (88) (92)
Purchase of minerals in place ......... 77 56 174
sales of minerals in place* ........... (56) -- (1,222)
------ ------ ------
END OF PERIOD .............................. 813 1,647 347
====== ====== ======
Proved developed reserves
Beginning of period ................ 983 666 675
====== ====== ======
End of period ...................... 666 675 324
====== ====== ======
NATURAL GAS (MCF)
---------------------------
Year Year Year
1993 1994 1995
------ ------ ------
(in thousands)
BEGINNING OF PERIOD .............................. 4,795 5,562 5,911
Revisions of previous estimates ..... (1,183) 533 (388)
Production .......................... (724) (1,017) (909)
Purchase of minerals in place ....... 3,010 833 2,934
Sales of minerals in place* ......... (336) -- (1,610)
------ ------ ------
END OF PERIOD .................................... 5,562 5,911 5,938
====== ====== ======
Proved developed reserves
Beginning of period ............ 2,582 4,221 3,317
====== ====== ======
End of period ....................... 4,221 3,317 4,686
====== ====== ======
* During 1995, the Company's interests in its California properties, which were
sold in February 1996, were transferred to oil and gas properties held for sale.
F-19
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
MARCH 31, 1996 DECEMBER 31, 1995
-------------- ------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents .................................................................. $ 1,950,000 $ 1,888,000
Accounts receivable ........................................................................ 1,090,000 1,035,000
Oil and gas properties held for sale ....................................................... 340,000 1,180,000
Prepaid expenses and oil inventory ......................................................... 63,000 127,000
------------ ------------
Total Current Assets ..................................................................... 3,443,000 4,230,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the successful efforts method ...................................................... 18,924,000 18,960,000
Automotive, office and other ............................................................... 272,000 227,000
------------ ------------
19,196,000 19,187,000
Less--accumulated depletion, depreciation
and amortization ........................................................................ (8,141,000) (7,821,000)
------------ ------------
11,055,000 11,366,000
------------ ------------
OTHER ASSETS:
Materials, supplies and other .............................................................. 207,000 62,000
Bond issuance costs (net of accumulated
amortization of $195,000 and $180,000) ................................................... 94,000 109,000
Restricted cash ............................................................................ 2,984,000 3,230,000
------------ ------------
3,285,000 3,401,000
------------ ------------
TOTAL ASSETS ................................................................................. $ 17,783,000 $ 18,997,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, 1996 DECEMBER 31, 1995
------------ ------------
CURRENT LIABILITIES:
Current portion of long term debt .......................................................... $ 1,925,000 $ 3,208,000
Accounts payable ........................................................................... 397,000 280,000
Accrued expenses ........................................................................... 65,000 96,000
Royalties and working interests payable .................................................... 52,000 94,000
Accrued interest ........................................................................... 55,000 119,000
------------ ------------
Total Current Liabilities .............................................................. 2,494,000 3,797,000
------------ ------------
LONG-TERM DEBT, net of current portion ...................................................... 1,672,000 1,689,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--2,000,000 shares
Issued and outstanding--None ............................................................. -- --
Common stock, $.01 par value :
Authorized--40,000,000 shares
Issued and outstanding--11,171,493 and
11,139,709 shares at March 31, 1996 and
December 31, 1995, respectively .......................................................... 111,000 111,000
Capital in excess of par value ............................................................. 27,274,000 27,228,000
Accumulated deficit ........................................................................ (13,768,000) (13,828,000)
------------ ------------
NET STOCKHOLDERS' EQUITY ................................................................... 13,617,000 13,511,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................. $ 17,783,000 $ 18,997,000
============ ============
</TABLE>
See accompanying notes to financial statements.
F-20
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
REVENUES
Sales of oil and gas, net of royalties .......... $ 1,225,000 $ 710,000
Gain on sale of oil and gas properties, net ..... 260,000 --
Other income .................................... 65,000 14,000
----------- -----------
1,550,000 724,000
----------- -----------
COSTS AND EXPENSES
Production and operating ...................... 285,000 411,000
Exploration ................................... 102,000 --
Dryhole ....................................... 32,000 --
Provision for depletion, depreciation
and amortization ............................ 283,000 343,000
Impairment to oil and gas properties .......... 37,000 --
General and administrative .................... 526,000 194,000
Office relocation and severance ............... 105,000 --
Interest ...................................... 120,000 185,000
----------- -----------
1,490,000 1,133,000
----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES .............................. 60,000 (409,000)
PROVISION FOR INCOME TAXES ...................... -- --
----------- -----------
NET INCOME (LOSS) ............................... $ 60,000 $ (409,000)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ..................... 11,168,624 3,012,088
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE .............. $ 0.01 $ (0.14)
=========== ===========
See accompanying notes to financial statements.
F-21
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
-------------------------- EXCESS OF ACCUMULATED
SHARES AMOUNT PAR VALUE DEFICIT NET
----------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 ................. 2,644,032 $ 26,000 $ 11,253,000 $ (7,614,000) $ 3,665,000
=========== ======== ============ ============ ============
Common stock returned to treasury ......... (12) -- -- -- --
Common stock issued for exercise
of stock options ....................... 202,481 2,000 500,000 -- 502,000
Common stock issued for
directors fees ......................... 14,445 -- 39,000 -- 39,000
Common stock issued for
stock offerings ........................ 6,569,117 65,000 11,729,000 -- 11,794,000
Common stock issued for merger ............ 1,200,000 12,000 2,480,000 -- 2,492,000
Common stock and warrants issued
for payment of investment
banking services ....................... 100,000 2,000 263,000 -- 265,000
Common stock issued for
warrant conversion ..................... 115,479 1,000 392,000 -- 393,000
Common stock issued for
note conversion ........................ 294,167 3,000 572,000 -- 575,000
Net loss .................................. -- -- -- (6,214,000) (6,214,000)
----------- -------- ------------ ------------ ------------
BALANCE, December 31, 1995 ................ 11,139,709 $111,000 $ 27,228,000 $(13,828,000) $ 13,511,000
----------- -------- ------------ ------------ ------------
Common stock issued for exercise
of stock options ....................... 31,150 -- 71,000 -- 71,000
Common stock issued for
directors' fees ........................ 1,860 -- 5,000 -- 5,000
Common stock cancelled and
stock issuance cost .................... (1,226) -- (30,000) -- (30,000)
Net income (loss) ........................ -- -- -- 60,000 60,000
----------- -------- ------------ ------------ ------------
BALANCE, MARCH 31, 1996 ................... 11,171,493 $111,000 $ 27,274,000 $(13,768,000) $ 13,617,000
=========== ======== ============ ============ ============
(Unaudited)
</TABLE>
See accompanying notes to financial statements.
F-22
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
FOR THE THREE MONTHS ENDED
-----------------------------------
MARCH 31, 1996 MARCH 31, 1995
------------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ 60,000 $(409,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Common stock issued for directors' fees .............................................. 5,000 4,000
Depletion, depreciation and amortization ............................................. 283,000 343,000
Exploration and dry hole cost ........................................................ 134,000 --
Gain on disposition of assets ........................................................ (260,000) --
Amortization of deferred financing cost .............................................. 19,000 --
Impairment of oil and gas assets ..................................................... 37,000 --
Changes in assets and liabilities:
Accounts receivable ............................................................... (55,000) 75,000
Prepaids and oil inventory ........................................................ 64,000 21,000
Accounts payable and accrued expenses ............................................. 86,000 74,000
Payment of executive severance .................................................... (86,000)
Royalties and working interest payable ............................................ (42,000) (6,000)
Accrued interest .................................................................. (64,000) (44,000)
Other ............................................................................. -- 10,000
----------- ---------
Net cash provided by (used in) operating activities .................................... 267,000 (18,000)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure for oil and gas properties ............................................... (485,000) (876,000)
Exploration and dry hole costs ....................................................... (134,000) --
Restricted cash used ................................................................. 246,000 --
Proceeds from sale of properties and equipment ....................................... 1,621,000 --
Expenditures for other property and equipment and other assets ....................... (193,000) --
----------- ---------
Net cash provided by (used in) investing activities .................................. 1,055,000 (876,000)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt .......................................................... (1,304,000) (80,000)
Proceeds from issuance of common stock ............................................... 71,000 821,000
Expenditures for offering cost ....................................................... (27,000) (108,000)
----------- ---------
Net cash provided by (used in) financing activities .................................. (1,260,000) 633,000
----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................................................. 62,000 (261,000)
----------- ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................................... 1,888,000 398,000
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................... $ 1,950,000 $ 137,000
=========== =========
Supplemental information:
Interest paid in cash ............................................................... $ 102,000 $ 185,000
Non-cash transactions:
Common stock issued or issuable as directors' fees ................................... 5,000 4,000
Common Stock issued for payment of executive severance ............................... -- 43,000
</TABLE>
See accompanying notes to financial statements.
F-23
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PROCEDURES
The condensed financial statements at March 31, 1996, and for the three
months then ended included herein have been prepared by the Company, without
audit, pursuant to the Rules and Regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such Rules and
Regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-KSB. In
the opinion of the Company, the financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of Fortune Petroleum Corporation as of March 31, 1996 and
December 31, 1995 and the results of its operations and cash flows for the three
months ended March 31, 1996 and March 31, 1995. The results of the operations
for such interim periods are not necessarily indicative of the results for the
full year.
(2) DISPOSITION OF ASSETS
In connection with its December 1995 acquisition of a 16.67% working
interest in South Timbalier Block 76, Fortune granted a third party the option,
exercisable until March 11, 1996, to acquire a 4.167% working interest in the
Timbalier Block for $790,000 and the retention by Fortune of the option holder's
deposit of $150,000. The option was exercised on March 8, 1996 for the $940,000
consideration discussed above, reducing the Company's interest in the block to a
12.5%working interest.
During 1995, the Company entered into a purchase and sale agreement to sell
the majority of its California properties consisting of the Hopper Canyon,
Holser Canyon, Oxnard and Shiels Canyon fields in Ventura County and the Bacon
Hills Lease in Kern County, and related equipment. The properties were sold on
February 23, 1996, to a private oil and gas producer group for a combined price
of $840,000 with an effective date of December 31, 1995. The Company signed a
letter of intent to sell its remaining California property to Seneca Resources
Corporation, to be effective December 1, 1995. The transaction closed on April
29, 1996. The company received net proceeds in this transaction of $300,000
after deducting closing adjustments, primarily consisting of net cash flow
received by the Company between the effective date and the closing date. At
December 31, 1995 and March 31, 1996, the Company had classified (as oil and gas
properties held for sale) the estimated net proceeds remaining to be received
from both of these transactions. Further, the Company recorded an impairment
reserve attributable to these properties at December 31, 1995 of $1.4 million.
(3) Long Term Debt
<TABLE>
<CAPTION>
At March 31, 1996 a summary of long-term debt is as follows:
<S> <C> <C>
March 31, December 31,
1996 1995
---------- ----------
Convertible Subordinated Debentures of $1,725,000 (net of discount of
$53,000 and $57,000) due December 31, 1997, including interest of
10-1/2%
per annum paid semi-annually .................................... $1,672,000 $1,668,000
BankOne credit facility due July 1, 1997 including interest at 1-1/2%
over Bank One, Texas, NA's
prime rate payable monthly ...................................... 1,925,000 3,200,000
Other debt with interest ranging from 0% to 9-1/4%
per annum due through 1998 ...................................... -- 29,000
---------- ----------
Total Long-term Debt ................................................ 3,597,000 4,897,000
Less current installments ........................................... 1,925,000 3,208,000
---------- ----------
Long-term debt, excluding current installments ...................... $1,672,000 $1,689,000
========== ==========
</TABLE>
F-24
The 10-1/2% Convertible Subordinated Debentures due December 31, 1997 bear
an effective interest rate of 12.13% and are convertible into shares of the
Company's common stock, after April 1, 1994, at a conversion price of $6.32 per
share or 158 shares per $1,000 principal amount of debenture. Therefore, if all
$1,725,000 were converted, the number of the Company's common shares then
outstanding would increase by 272,981 shares.
The Company has a $10,000,000 credit facility with Bank One, Texas, N.A.
under which it has the ability to borrow amounts up to an available borrowing
base as defined in the credit agreement. This borrowing base was $3,200,000 at
December 31, 1995. The credit facility contains various financial covenants, is
secured by all of the Company's oil and gas properties (except South Timbalier
Block 76), and currently requires monthly principal payments of $75,000.
At December 31, 1995, and March 31, 1996, the Company was not in compliance
with its cash flow coverage ratio covenant in the credit agreement. Under the
terms of credit agreement, the bank has the right to demand repayment of the
entire loan balance in the event of covenant defaults. The Company has obtained
a waiver of this covenant from the bank as of December 31, 1995 and March 31,
1996. During February 1996, the Company made a principal reduction of
$1,100,000, primarily from the proceeds of the sale of its California
properties.
The Company's maturities of long-term debt over the next two years are as
follows:
YEAR LONG-TERM DEBT MATURITY
1996 ............................................... $1,925,000
1997 ............................................... 1,672,000
----------
$3,597,000
==========
(4) INCOME TAX EXPENSE
No provision for income taxes was required for the three months ended
March 31, 1996. At March 31, 1996 deferred taxes consist of the following:
Deferred tax assets:
Net operating loss carryforwards ........................ $ 2,899,000
Oil and Gas Properties
Difference in accumulated depletion,
depreciation and amortization ......................... 1,742,000
4,641,000
Less valuation allowance (100%) ......................... (4,641,000)
-----------
Net deferred taxes ...................................... $ 0
===========
At March 31, 1996, the Company estimates it had cumulative net operating
loss carryforwards for federal income tax purposes of $8,523,000 which is
significantly restricted under IRC Section 382, and is available to offset
future federal taxable income, if any, with various expirations through 2008.
The Company is uncertain as to the recoverability of the above deferred tax
assets and has therefore applied a 100% valuation allowance.
The Company has available IRC Section 29 Tax Credits that may be used to
reduce or eliminate any corporate taxable income in future years. It is
uncertain at this time to what extent the Company will be able to utilize these
federal tax credits, as their utilization is dependent upon the amount, if any,
of future federal income tax incurred, after application of the Company's net
operating loss carryforwards.
F-25
(5) LEGAL PROCEEDINGS
There are no pending material legal proceedings involving any of the
Company's properties or that involves a claim for damages which exceeds 10% of
the Company's current assets.
On March 14, 1995, Fortune was served with a lawsuit in the District Court
of Bexar County, Texas, by EnRe Corporation, in which EnRe, as operator of the
Company's New Mexico properties, seeks recovery of approximately $438,000
allegedly owed by Fortune for the drilling of certain wells on such properties.
The lawsuit is the result of disputes between the parties regarding the manner
in which EnRe has conducted operations on the property and the proper
interpretation of the operating agreement among the interest owners on the
property. Fortune management believes that EnRe has operated the property in a
negligent manner, causing loss to Fortune and the other interest owners. In
addition, management believes that the Company was permitted (under the terms of
the operating agreement) to elect not to participate in the drilling operations
for which EnRe sought payment. On March 24, 1995, Fortune answered EnRe's
lawsuit and filed a counterclaim against EnRe for an undeterminable amount for
damages suffered by Fortune for EnRe's actions.
On March 30, 1995, a partial settlement was reached as to payment of
undisputed well development costs in exchange for EnRe's co-operation in
complying with provisions of the operating agreement to report operating
information to Fortune on a timely basis. As of April 24, 1995, the Company had
paid all well development costs which it believed to be undisputed, totalling
$174,499.
In the opinion of management, Fortune has valid defenses to all claims made
by EnRe still in dispute. On March 11, 1996, the Company was advised that its
proposal to EnRe to dismiss its litigation in exchange for the Company's
dismissal of its counterclaim was accepted by EnRe pending the completion of the
appropriate settlement documents.
On March 26, 1996, Fortune was served with a lawsuit which had been filed in
the Federal District Court in Delaware by one of the purchasers of Fortune
common stock in an offering in December 1995 under Regulation S. Under the terms
of the subscription agreement, the plaintiff was entitled to receive additional
shares of Fortune stock if the market price fell below a stated level during a
specified period following the 40-day holding period prescribed by Regulation S.
Plaintiff's complaint alleges that the price during the relevant interval did
fall below the level necessary for plaintiff to receive additional shares, but
that Fortune has failed to issued the stock.
Fortune has responded, admitting the essential allegations of the complaint,
but has pled, by way of affirmative defense, that suspicious trading activity in
Fortune stock occurred immediately prior to and during the time period in which
the additional-share allocation was computed. Fortune requested, and the
American Stock Exchange commenced, an investigation into such trading
irregularities. That investigation is continuing; Fortune does not intend to
issue any additional shares to plaintiff pending the outcome of the
investigation.
On April 16, 1996, Fortune was advised that similar suits had been filed in
Federal District Court in New York by two other buyers in the same offering. The
allegations parallel those contained in the earlier suit filed in Delaware, and
Fortune intends to respond in the same manner.
(6) COMPUTATION OF EARNINGS (LOSS) PER SHARE
Primary earnings per common share are computed by dividing net income (loss)
by the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares are shares which may be issuable upon
exercise of outstanding stock options and warrants; however, they are not
included in the computation for the three month period ended March 31, 1996
since they would not have a dilutive effect on earnings per share.
Fully diluted earnings per common share are not presented since the
conversion of the Company's 10-1/2% Convertible Subordinated Debentures would
have an anti-dilutive effect.
F-26
(7) SUBSEQUENT EVENTS
On April 17, 1996 the Company entered into a non-binding Letter of Intent
with Texoil, Inc. ("Texoil") pursuant to which Texoil will be acquired through
merger by Fortune in a tax-free transaction. Texoil explores for, develops and
produces oil and natural gas. The Company's common stock and class A and B
warrants are quoted on the NASDAQ smallcap market under the symbols "TXLI",
"TXLIW", and "TXLIZ" respectively.
Texoil's assets include producing oil and gas properties and exploratory
projects. Pending the closing of the transaction, Fortune has agreed to fund
Texoil's share of the cost of shooting 3-D seismic on three exploratory projects
(the 3-D Prospects) and up to $150,000 of Texoil's other reasonable and
necessary costs in exchange for a security interest in a portion of Texoil's
interest in the 3-D Prospects and, under certain circumstances, the right to
earn an interest in the 3-D Prospects should the transaction not close. Texoil's
share of these costs over the next six months are projected to be approximately
$1 million.
In the transaction, the shareholders of Texoil would receive one share of
Fortune common for every 3.2 Texoil shares. Prior to the record date of the
transaction, all Texoil preferred shareholders will exchange their shares and
any accrued dividends into common shares of Texoil at the market price of such
shares on the effective date of the transaction, in a total aggregate amount of
not more than 1,700,000 shares of Texoil common stock. The combined maximum
number of Fortune common shares the Company will issue to the Texoil common and
preferred shareholders is 1,845,000 for all of such outstanding stock. In
addition, approximately $1.1 million of debt owed to certain Texoil shareholders
will be converted to Fortune common shares. Fortune will, thereafter, assist in
the sale of these shares and will guarantee that those shareholders receive at
least the amount of the outstanding debt within the first 15 months after
closing the transaction. All Fortune shares received in the transaction by
Texoil's current officers, directors and principal shareholders, except shares
exchanged for debt, will be subject to a lock-up agreement which will be no
shorter than six (6) months and no more than 15 months.
The transaction is subject to a number of contingencies, including, but not
limited to, entering into a definitive merger agreement, completion of due
diligence by Texoil and Fortune, effectiveness of a registration statement for
the Fortune shares, listing of the Fortune shares that will be issued on the
American Stock Exchange and approval of the merger by the shareholders of both
companies.
(8) UNAUDITED PRO-FORMA OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS COST
INFORMATION
Capitalized costs relating to oil and gas producing activities and related
accumulated depletion, depreciation and amortization for the three month period
ended March 31, 1996 were as follows:
Capitalized costs balance at beginning
of year before accumulated depletion,
depreciation and amortization ................ $18,960,000
Property and leasehold acquisition costs ....... --
Oil and Gas acquisition ........................ --
Development .................................... 241,000
Exploration .................................... 244,000
Less dispositions .............................. (521,000)
-----------
$18,924,000
Less accumulated depletion,
depreciation and amortization ................ 7,938,000
-----------
$10,986,000
===========
Capitalized costs of unproved properties were $ 5,627,000 at March 31, 1996.
F-27
INDEPENDENT AUDITORS' 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
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
SEPTEMBER 30
YEAR ENDED DECEMBER 31, -----------------------
------------------------------------ (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 Note to Statements of Revenues and Direct
Operating Expense for Asset Acquired
F-29
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 throught 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 preiod 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 reserve quantities were computed by applying
current prices of oil and gas (with consideration of price changes only to the
F-30
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:
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994
------------- -------------- --------------
Oil Gas Oil Gas Oil Gas
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
---- ------ ---- ------ ---- ------
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
==== ====== ==== ====== ==== ======
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves (in 000s):
AS OF DECEMBER 31,
--------------------------------------
1992 1993 1994
-------- -------- --------
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
======== ======== ========
Changes in Standardized Measure of Discounted Future Net Cash Flows from
Proved Oil and Gas Reserves (in 000s)
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
------- ------- -------
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
======= ======= =======
F-31
FORTUNE PETROLEUM CORPORATION
PRO FORMA COMBINED FINANCIAL INFORMATION
DECEMBER 31, 1995
The pro forma combined statement of operations reflects the results of
operations for the year ended December 31, 1995 as if the PetroFina acquisition
of the South Timbalier Block 76 leasehold interests and this financing occurred
as of January 1 of the year then ended.
The acquisition is reflected in the pro forma combined financial
information using the purchase method of accounting. Accordingly, the carrying
value of the property acquired has 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
FORTUNE PETROLEUM CORPORATION
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 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 ..................... $ 2,959,000 $1,258,000 $ -- $ 4,217,000
Other ................................. 234,000 -- -- 234,000
----------- ----------- ------------ -----------
3,193,000 1,258,000 -- 4,451,000
Costs and expenses: (a)
Oil and gas production costs .......... 1,514,000 210,000 -- 1,724,000
General and administrative ............ 1,212,000 -- -- 1,212,000
Abandoned leasehold costs ............. 56,000 -- -- 56,000
Dry hole expense ...................... 998,000 -- -- 998,000
Impairment to oil and gas
properties ........................ 2,530,000 -- -- 2,530,000
Depreciation, depletion and
amortization ....................... 1,809,000 -- 488,000(1) 2,297,000
Geological and geophysical
expense ............................ 418,000 -- -- 418,000
Interest Expense ...................... 870,000 -- -- 870,000
---------- ---------- ----------- -----------
9,407,000 210,000 488,000 10,105,000
---------- ---------- ----------- -----------
Income (loss) before income
taxes ................................. (6,214,000) 1,048,000 (488,000) (5,654,000)
ncome tax expense ......................... -- -- -- --
---------- ---------- ------------ -----------
Net Income (loss) .......................... $(6,214,000) $1,048,000 $ (488,000) $(5,654,000)
=========== ========== ============ ===========
Average number of common
shares outstanding (b) ................ 6,555,875 1,235,742 -- 7,791,617
=========== ========== ============ ===========
Net income (loss) per common
share ................................. $ (0.95) -- -- --
===========
Pro Forma net income per common
share ................................. -- -- -- $ (0.73)
===========
</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-33
FORTUNE PETROLEUM CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
DECEMBER 31, 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 $488,000, for the year ended December 31, 1995 using
the units of production method.
F-34
----------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESEN TATIONS 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 CIRCUM STANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------------------
TABLE OF CONTENTS
Page
Available Information ..................................................... 2
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 6
Use of Proceeds ........................................................... 11
Dilution .................................................................. 11
Capitalization ............................................................ 11
Dividend Policy ........................................................... 12
Price Range of Common Stock ............................................... 12
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations .............................................................. 13
Business and Properties ................................................... 18
Management ................................................................ 31
Certain Relationships and
Related Transactions .................................................... 35
Principal Stockholders .................................................... 37
Exchange Offer ............................................................ 39
Certain Federal Income Tax
Considerations .......................................................... 39
Description of Securities ................................................. 42
Legal Matters ............................................................. 46
Experts ................................................................... 46
Glossary .................................................................. 46
Index to Financial Statements ............................................. F-1
-----------------
862,500 SHARES
431,250 WARRANTS
FORTUNE PETROLEUM
CORPORATION
------------
PROSPECTUS
-----------
EXCHANGE OFFER
_______________, 1996
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. 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:
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
ITEM 15. 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 16. EXHIBITS
(a) Exhibits
NUMBER DESCRIPTION
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)
S-1
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).
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)
- -----------------
* Filed herewith.
ITEM 17. 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.
(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.
ITEM 18. FINANCIAL STATEMENTS AND SCHEDULES
Not applicable.
S-2
SIGNATURES
Pursuant to 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 S-2 and has duly authorized this Pre-effective
Amendment #1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on July 5, 1996.
FORTUNE PETROLEUM CORPORATION
By: /S/ TYRONE J. FAIRBANKS
Tyrone J. Fairbanks
President and Chief
Executive Officer
By: /S/ MICHAEL J. URBAN
Vice President and Chief Financial
and Accounting Officer
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.
SIGNATURE TITLE DATE
/s/ TYRONE J. FAIRBANKS President, Chief Executive Officer July 5, 1996
Tyrone J. Fairbanks and Director
/s/ DEAN W. DRULIAS Corporate Secretary and Director July 5, 1996
Dean W. Drulias
/s/ GRAHAM S. FOLSOM *
Graham S. Folsom Director July 5, 1996
/s/ WILLIAM T. WALKER, JR.*
William T. Walker, JR. Director July 5, 1996
/s/ BARRY FEINER *
Barry Feiner Director July 5, 1996
/s/ GARY GELMAN *
Gary Gelman Director July 5, 1996
* By Tyrone J. Fairbanks as Power of Attorney
S-3
Exhibit 24.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fortune Petroleum Corporation
We consent to the use of our report on the financial statements of the
Company included herein and to the reference to our firm under the heading
"Experts" in the Prospectus.
Our report dated March 15, 1996 refers to the adoption of the provisions
of Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" as of
December 31, 1995.
KPMG Peat Marwick LLP
Houston, Texas
July 3, 1996
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
July 3, 1996
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
July 1, 1996
Fortune Petroleum Corporation
One Commerce Green
515 W. Greens Rd., Suite 720
Houston, Texas 77067
Dear Sirs:
We hereby consent to the filing of this consent as an exhibit to the
Pre-effective Amendment No.1 to the Registration Statement on Form S-2 of
Fortune Petroleum Corporation to be filed with the Securities and Exchange
Commission on or about July 5, 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, December 31, 1994 and December 31, 1995.
HUDDLESTON & CO., INC.
/S/ PETER D. HUDDLESTON
Peter D. Huddleston, P.E.
Exhibit 24.3
SHERWIN D. YOELIN, PETROLEUM ENGINEER INC.
1439 BONNIE JEAN ROAD
LA HABRA HEIGHTS, CALIFORNIA 90631
310/697-3700
July 1, 1996
Fortune Petroleum Corporation
One Commerce Green
515 W. Greens Rd., Suite 720
Houston, Texas 77067
Re: Consent of Independent Petroleum Engineer
Gentlemen:
I hereby consent to the incorporation of my January 1, 1994 and January 1, 1995,
Annual Reserve Reports of the oil and gas reserves of Fortune Petroleum
Corporation dated February 15, 1994, and February 27, 1995, respectively, in the
Prospectus constituting part of the Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-2 to be filed on or about July 5, 1996.
Respectfully,
/s/ Sherwin D. Yoelin
Sherwin D. Yoelin
Registered Petroleum Engineer
State of California
Certificate No. P 1241
