Registration Statement No. 333-19877
Rule 424(b)(1)
FORTUNE PETROLEUM CORPORATION
EXCHANGE OFFER
SUPPLEMENT NO. 2 TO PROSPECTUS DATED
DECEMBER 2, 1996
Fortune Petroleum Corporation ("Fortune" or the "Company") hereby amends its
Prospectus dated December 2, 1996, as previously supplemented by Supplement No.
1 dated January 22, 1997, pursuant to which the Company made an offer to the
holders of its Convertible Subordinated Debentures due December 31, 1997 (the
"Debentures") to exchange such Debentures for shares of the Company's Common
Stock and Common Stock Warrants. This supplement must be read in conjunction
with the Prospectus, as previously supplemented, a copy of which was recently
forwarded to each Debentureholder.
CHANGE IN TERMS
The terms of the Revised Exchange Offer are hereby further amended as
follows:
1. The Company has eliminated the 80% minimum acceptance level for the
Exchange Offer. The Company will accept any and all Debentures tendered
in the Exchange Offer. (See "Waiver of 80% Minimum Acceptance Level" and
"Dilution and Capitalization" for a description of the effect of such a
reduction.)
2. This amended offer will expire at 5:00 P.M., Houston, Texas time,
February 26, 1997 (ten business days after the effective date of this
Supplement No. 2 to the Prospectus). The Company, at its sole
discretion, may extend the expiration of the Exchange Offer for
additional periods aggregating not more than seven business days in
total (not beyond March 7, 1997).
Except as modified hereby, all other terms and conditions of the Exchange
Offer remain the same as set forth in the Supplemented Prospectus dated January
22, 1997. (See "Revised Exchange Offer" in the Supplemented Prospectus.)
Further, the federal income tax consequences of an exchange of Debentures for
shares of Common Stock and Exchange Warrants remain the same as described in the
Prospectus. (See "Certain Federal Income Tax Considerations" in the Prospectus.)
To the extent any Debentureholder has previously tendered any shares in the
Exchange Offer, the tendering Debentureholder will be given the right to rescind
his or her tender. If such tender is not rescinded by 5:00 P.M., Houston, Texas
time, February 26, 1997, it will be deemed accepted on the above revised terms.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
IN THE PROSPECTUS
THIS EXCHANGE OFFER EXPIRES AT 5:00 P.M., HOUSTON, TEXAS TIME,
FEBRUARY 26, 1997
THE DATE OF THIS SUPPLEMENT NO. 2 TO THE PROSPECTUS IS FEBRUARY 12, 1997
<PAGE>
WAIVER OF 80% MINIMUM ACCEPTANCE LEVEL
The Company has waived the 80% minimum for the following reasons, among
others: (1) the Company wishes to cut off the Exchange Offer at the earliest
possible date in order to refocus all of its efforts on its operations; (2)
management of the Company does not believe that there is any financial necessity
for any particular amount of Debentures to be exchanged; (3) the Company is
happy to accept as shareholders any of the Debentureholders who wish to exchange
their Debentures for Common Stock and Exchange Warrants on terms more favorable
than those provided for in the original Indenture; and (4) the 80% minimum was
based on discussions with the Co-Conversion Agents as to what they estimated
would be the minimum principal amount of Debentures that would be exchanged in
the Exchange Offer and was not a minimum that satisfied a financial necessity
for the Company.
DILUTION AND CAPITALIZATION
The non-cash debt conversion expense which the Company expects to incur in
connection with the Exchange Offer is estimated to be $896,000, assuming
conversion of all of the Debentures. At the date hereof, the Company has
received tenders of $658,000 principal amount of Debentures (or 38%). If no
additional Debentures are tendered (and no tenders are rescinded), the non-cash
debt conversion expense would be $342,000 (assuming a market price for Fortune
Common Stock of $3.00 per share). The "As Adjusted" columns in the following
table reflects the effect of recording this estimated non-cash debt conversion
expense. See "Capitalization" in the Prospectus. At September 30, 1996, the pro
forma effect of the Revised Exchange Offer terms on the capitalization of the
Company would be as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------------------------------
ACTUAL AS ADJUSTED(1) (2)
----------------- --------------------------------------
38% CONVERSION(3) 100% CONVERSION
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current liabilities (including
current portion of long term
debt) ............................... $ 1,842,000 $ 1,842,000 $ 1,842,000
================= ================= =================
Long-term debt (excluding
current portion) .................... $ 1,680,000 $ 1,039,000 $ --
----------------- ----------------- -----------------
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,
11,431,664 shares outstanding
at September 30, 1996, 12,050,276
shares outstanding after 38%
Debenture Conversion and
12,385,314 shares outstanding
after 100% Debenture Conversion . $ 114,000 $ 120,000 $ 124,000
Additional paid-in capital .......... $ 28,101,000 $ 30,202,000 $ 31,752,000
Accumulated deficit ................. $ (16,008,000) $ (16,350,000) $ (16,904,000)
----------------- ----------------- -----------------
Net stockholders' equity ............ $ 12,207,000 $ 13,972,000 $ 14,972,000
----------------- ----------------- -----------------
Total capitalization ................ $ 13,887,000 $ 15,011,000 $ 14,972,000
================= ================= =================
</TABLE>
- ----------------
(1) Assumes conversion of Debentures but not the exercise of any Exchange
Warrants or Co-Conversion Agent warrants.
(2) The pro forma amounts have been adjusted to give effect to a private
placement equity transaction completed by the Company in December 1996
wherein the Company sold 412,000 Common Shares and received net proceeds
of $1,149,480.
(3) These amounts are based on the $658,000 principal amount (or 38%) of
Debentures tendered as of the date hereof.
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As a result of the change in terms of the Exchange Offer, and assuming
conversion of all of the Debentures and after giving effect to the private
placement of equity referred to in the capitalization table above, the net
tangible book value of the Company at September 30, 1996 would have been $1.21
per share of Common Stock ($1.17 per share assuming conversion of 50% of the
Debentures). This represents an 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.
If 38% of the Debentures is tendered and accepted by the Company, the
Company's total outstanding debt would be $2,142,000 as of February 10, 1997.
All of the outstanding debt is due in 1997. This amount is comprised of
$1,100,000 of bank debt, which requires monthly principal reductions of $75,000
per month, with the remaining balance due October 1, 1997. The remainder of the
debt is attributable to the Debentures which are due December 31, 1997. As of
February 10, 1997, the Company's cash and current assets exceeded the sum of its
current liabilities and the $2,142,000 total outstanding debt which would be
outstanding if 38% of the Debentures are tendered and accepted. In addition, the
Company has positive cash flow from operations and believes that its current
capital commitments for 1997 do not exceed its estimated cash flow from
operations for 1997. Accordingly, the Company believes that it will have the
financial resources in 1997 to pay its liabilities as they become due. However,
there can be no assurance that the cash flow from operations will continue at
current levels. These statements are forward looking statements within the
meaning on Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All forward looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward looking statements. Some of the
factors that could cause actual results to differ materially are set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors" in the Prospectus.
ADDITIONAL RISK FACTORS
Debentureholders should consider the following risk factors in addition to
those set forth on page 6 of the Prospectus:
(1) Debentureholders who elect to tender their Debentures in the revised
Exchange Offer pursuant to this Supplement No. 2 will be exchanging debt for
Common Stock and Exchange Warrants in a more highly leveraged company than was
anticipated in the original Exchange Offer. (See "Dilution and Capitalization"
above) While the Debentures are unsecured, they do bear interest which is paid
semiannually and are due and payable December 31, 1997. Therefore, any
Debentureholder who exchanges will lose the right to receive interest.
(2) 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, under certain conditions, to elect two
directors to the Board of Directors of the Company. The Common Stock does not
afford rights in the same manner to the Debentureholders once they become
stockholders of the Company.
(3) 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 monetize their
investment. While there is currently little or no market for the Debentures,
they are due and payable December 31, 1997.
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<PAGE>
RECENT STOCK PRICE
Since January 1, 1997, the high and low closing prices of the Common Stock
and the Public Warrants on the AMEX have been as follows:
COMMON STOCK WARRANTS
------------ --------
HIGH LOW HIGH LOW
---- --- ---- ---
1997
First quarter through
February 11, 1997 $3-1/4 $2-1/2 $1-3/4 $1-1/4
On February 11, 1996, the closing price of the Common Stock on the AMEX was
$2-5/8 per share. The Exchange Warrants to be received by the Debentureholders
who convert 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" in the Prospectus.)
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