SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 1-12334
FORTUNE NATURAL RESOURCES CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 95-4114732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Green, 515 W. Greens Rd.,
Suite 720, Houston, Texas 77067
(Address of Principal Executive Offices) (Zip Code)
281-872-1170
-------------------------
Issuer's telephone number
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
12,133,479 as of July 31, 1998
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<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 3,530,000 $ 1,667,000
Accounts receivable ............................ 435,000 507,000
Prepaid expenses ............................... 99,000 --
------------ ------------
Total Current Assets ....................... 4,064,000 2,174,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the full cost method ................... 24,838,000 27,822,000
Office and other ............................... 384,000 383,000
------------ ------------
25,222,000 28,205,000
Less--accumulated depletion,
depreciation and amortization ................ (19,493,000) (18,403,000)
------------ ------------
5,729,000 9,802,000
------------ ------------
OTHER ASSETS:
Materials, supplies and other .................. 86,000 124,000
Debt issuance costs (net of accumulated
amortization of $285,000 and $93,000
at June 30, 1998 and December 31,
1997, respectively) .......................... 335,000 526,000
------------ ------------
421,000 650,000
------------ ------------
TOTAL ASSETS ........................................ $ 10,214,000 $ 12,626,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................ $ 175,000 $ 279,000
Accrued expenses................................ 280,000 407,000
Royalties and working interests payable......... 11,000 36,000
Accrued interest................................ - 76,000
------------ ------------
Total Current Liabilities................... 466,000 798,000
------------ ------------
LONG-TERM DEBT....................................... 3,235,000 3,775,000
------------ ------------
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 12,133,479 and
12,118,982 at June 30, 1998 and
December 31, 1997, respectively........... 121,000 121,000
Treasury Stock, at cost (9,769 shares at
December 31, 1997)............................ - (38,000)
Capital in excess of par value.................. 30,169,000 30,283,000
Accumulated deficit............................. (23,777,000) (22,313,000)
------------ ------------
NET STOCKHOLDERS' EQUITY............................. 6,513,000 8,053,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $ 10,214,000 $ 12,626,000
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
For the Six Months Ended
---------------------------
June 30, June 30,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUES
Sales of oil and gas, net of royalties.......... $ 1,123,000 $ 1,804,000
Other income.................................... 76,000 106,000
------------ ------------
1,199,000 1,910,000
------------ ------------
COSTS AND EXPENSES
Production and operating........................ 359,000 736,000
Provision for depletion, depreciation
and amortization.............................. 830,000 969,000
Impairment to oil and gas properties............ 260,000 3,200,000
General and administrative...................... 813,000 1,012,000
Debt conversion expense......................... - 316,000
Stock offering cost............................. - 269,000
Interest paid in cash........................... 209,000 103,000
Interest - amortization of deferred
financing cost................................ 192,000 27,000
------------ ------------
2,663,000 6,632,000
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES............... (1,464,000) (4,722,000)
PROVISION FOR INCOME TAXES........................... - -
------------ ------------
NET LOSS ............................................ $ (1,464,000) $ (4,722,000)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.......................... 12,127,877 12,049,593
============ ============
NET LOSS PER COMMON SHARE............................ $ (0.12) $ (0.39)
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months Ended
---------------------------
June 30, June 30,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUES
Sales of oil and gas, net of royalties ......... $ 417,000 $ 691,000
Other income ................................... 59,000 54,000
------------ ------------
476,000 745,000
------------ ------------
COSTS AND EXPENSES
Production and operating ....................... 132,000 543,000
Provision for depletion, depreciation
and amortization ............................. 260,000 485,000
Impairment to oil and gas properties ........... 260,000 3,000,000
General and administrative ..................... 354,000 459,000
Stock offering cost ............................ - 155,000
Interest paid in cash .......................... 99,000 49,000
Interest - amortization of deferred
financing cost ............................... 96,000 13,000
------------ ------------
1,201,000 4,704,000
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES .............. (725,000) (3,959,000)
PROVISION FOR INCOME TAXES .......................... - -
------------ ------------
NET LOSS ............................................ $ (725,000) $ (3,959,000)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ......................... 12,133,479 12,123,918
============ ============
NET LOSS PER COMMON SHARE ........................... $ (0.06) $ (0.33)
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE SIX MONTHS ENDED JUNE 30, 1998
Common Stock Capital in Stock-
---------------------- Excess of Treasury Accumulated holders'
Shares Amount Par Value Stock Deficit Equity
---------- ---------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996................ 11,853,663 $ 119,000 $29,273,000 $ - $(16,355,000) $ 13,037,000
Common stock issued for
exercise of stock options.............. 6,400 - 18,000 - - 18,000
Common stock issued for
exercise of warrants................... 45,000 - 89,000 - - 89,000
Common stock issued in exchange
for debentures, net of offering costs.. 218,858 2,000 889,000 - - 891,000
Common stock contributed to
Company 401(k) Plan.................... 4,835 - 14,000 - - 14,000
Common stock repurchased in
odd-lot buyback........................ (9,769) - - (38,000) - (38,000)
Common stock returned to treasury......... (5) - - - - -
Net loss.................................. - - - - (5,958,000) (5,958,000)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1997................ 12,118,982 $ 121,000 $30,283,000 $(38,000) $(22,313,000) $ 8,053,000
Common stock issued for
exercise of warrants................... 4,312 - 11,000 - - 11,000
Common stock contributed to
Company 401(k) Plan.................... 10,185 - 24,000 - - 24,000
Cancellation of treasury stock............ - - (38,000) 38,000 - -
Voluntary exchange of public
warrants for private warrants.......... - - (59,000) - - (59,000)
Repurchase of outstanding
private warrants....................... - - (52,000) - - (52,000)
Net loss.................................. - - - - (1,464,000) (1,464,000)
---------- --------- ----------- -------- ------------ ------------
BALANCE, June 30, 1998
(Unaudited)............................ 12,133,479 $ 121,000 $30,169,000 $ - $(23,777,000) $ 6,513,000
========== ========= =========== ======== ============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
For the Six Months Ended
--------------------------
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(1,464,000) $(4,722,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depletion, depreciation and amortization.................. 830,000 969,000
Non-cash compensation expense............................. 20,000 42,000
Amortization of deferred financing cost................... 192,000 28,000
Impairment of oil and gas assets.......................... 260,000 3,200,000
Debt conversion expense................................... - 316,000
Stock offering cost....................................... - 269,000
Changes in assets and liabilities:
Accounts receivable....................................... 72,000 225,000
Prepaids.................................................. (99,000) 18,000
Accounts payable and accrued expenses..................... (231,000) 1,227,000
Royalties and working interest payable.................... (25,000) (47,000)
Accrued interest.......................................... (76,000) (41,000)
Other assets.............................................. 23,000 -
----------- -----------
Net cash (used in) provided by operating activities........... (498,000) 1,484,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties....................... (1,711,000) (2,124,000)
Restricted cash used.......................................... - 138,000
Return of exploration venture restricted cash................. - 2,154,000
Proceeds from sale of properties and equipment................ 4,695,000 203,000
Net changes in other property and equipment and other assets.. 17,000 (129,000)
----------- -----------
Net cash provided by investing activities..................... 3,001,000 242,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt................................... (540,000) (450,000)
Proceeds from issuance of common stock........................ 11,000 103,000
Expenditures for debenture exchange and other offerings....... (59,000) (294,000)
Repurchase of private warrants................................ (52,000) -
----------- -----------
Net cash used in financing activities......................... (640,000) (641,000)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......................... 1,863,000 1,085,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................... 1,667,000 2,174,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................... $ 3,530,000 $ 3,259,000
=========== ===========
Supplemental information:
Interest paid in cash.......................................... $ 209,000 $ 103,000
Non-cash transactions
Common stock issued for conversion of debt..................... - 975,000
Common stock issued for 401(k) Plan contribution............... 24,000 -
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES AND PROCEDURES
The condensed financial statements at June 30, 1998, and for the three
months and six months ended June 30, 1998 and 1997 included herein have been
prepared by Fortune Natural Resources Corporation ("Fortune" or 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-K.
Certain reclassifications have been made to prior period amounts to conform to
presentation in the current period. 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 the Company
as of June 30, 1998 and December 31, 1997, the results of its operations for the
three months and six months ended June 30, 1998 and 1997, and cash flows for the
six months ended June 30, 1998 and 1997. The results of the operations for such
interim periods are not necessarily indicative of the results for the full year.
(2) LONG-TERM DEBT
At June 30, 1998, a summary of long-term debt is as follows:
June 30, December 31,
1998 1997
------------ ------------
Convertible Subordinated Notes
due December 31, 2007............... $ 3,225,000 $ 3,225,000
Credit Lyonnais credit facility
due July 11, 1999................... 10,000 550,000
------------ ------------
Total long-term debt.................. 3,235,000 3,775,000
Less current installments............. - -
------------ ------------
Long-term debt,
excluding current installments...... $ 3,235,000 $ 3,775,000
============ ============
The Convertible Subordinated Notes (the "Notes)" are currently convertible
into the Company's Common Stock at a conversion price of $3.00 per share,
subject to adjustment. The Notes are convertible by the holders after May 1,
1999, subject to a one-time option by the holders to convert at a lower
conversion price prior to that date in the event that the Company issues shares
of its Common Stock at a price below the conversion price. The Notes are
redeemable by the Company after May 1, 1999, at a premium that reduces monthly
from 10% to zero over an 18-month period. Any such premium on redemption is
waived in the event that the Company's Common Stock price averages at least
$4.50 per share for 30 consecutive trading days. The holders of the Notes will
be entitled to receive additional shares upon conversion in the event that the
Company's Common Stock price averages less than the conversion price for a
certain period prior to May 1, 1999. The Company determined at the time of
issuance of the Notes that the value of the potential adjustments to the
conversion price was not material. The Notes are subordinate to all of the
Company's secured debt, including the credit facility with Credit Lyonnais. The
Notes bear interest at a rate of 12% per year, payable quarterly. The costs
incurred to issue the Notes are being amortized as additional interest expense
over the 18-month period ending May 1, 1999, the first date that the Notes are
convertible. As a result of this amortization of issuance costs, the effective
interest rate of the Notes over this 18-month period is 21.2%. If the Notes were
held to maturity, the effective interest rate over the life of the Notes would
be 13.4%.
7
<PAGE>
The Company has in place a $20 million credit facility with Credit Lyonnais
New York Branch ("Credit Lyonnais"). The Credit Lyonnais facility is due July
11, 1999, extendable for one year upon mutual consent. On March 31, 1998, the
Company repaid all but $10,000 of the outstanding balance of the credit facility
with a portion of the proceeds from the sale of East Bayou Sorrel. (See note 6).
Prior to the Company's sale of its interest in the East Bayou Sorrel field, the
Company's borrowing base was $2 million. The bank has not completed its
redetermination of the borrowing base subsequent to this sale; consequently, the
Company does not know how much, if any, is currently available for borrowing
under this credit facility. Under the credit facility, once the borrowing base
is redetermined, the Company may borrow up to a pre-determined borrowing base,
for acquisitions and development projects approved by Credit Lyonnais at either
1.25% above Credit Lyonnais' base rate or 4% above LIBOR. The Credit Lyonnais
facility is secured by a mortgage on all of the Company's existing proved oil
and gas properties. The Company is also required to pay a commitment fee of 0.5%
on the unused portion of the borrowing base. Primarily as a result of the lower
revenues in 1998 as a result of lower oil and gas prices and the sale of East
Bayou Sorrel, the Company was unable to meet the 3 to 1 coverage ratio of cash
flow to fixed-charges which is required by the credit facility for the
twelve-month period ended June 30, 1998. The Company has requested a waiver of
this covenant from the bank for the period ended June 30, 1998. Although a
waiver has not been received from the bank as of the date hereof, the Company
has not reclassified the $10,000 outstanding balance on such debt to current
liabilities because the amount is not material.
The Company's maturities of long-term debt over the next three years are as
follows:
Year Debt
-------- --------
1998 $ -
1999 10,000
2000 -
--------
$ 10,000
========
(3) INCOME TAX EXPENSE
No provision for income taxes was required for the three months and six
months ended June 30, 1998.
At June 30, 1998, the Company estimates it had cumulative net operating
loss carryforwards for federal income tax purposes of $14 million which are
significantly restricted under IRC Section 382. These carryforwards are
available to offset future federal taxable income, if any, with various
expirations through 2013. 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.
(4) LEGAL PROCEEDINGS
There are no material pending legal proceedings involving any of the
Company's properties or which involve a claim for damages which exceed 10% of
the Company's current assets.
8
<PAGE>
On April 16, 1996, Fortune was served with two lawsuits which had been
filed in the Federal District Court in New York by purchasers of its Common
Stock in an offering in December 1995 under Regulation S. Under the terms of the
subscription agreement pursuant to which the plaintiffs acquired their shares,
each was entitled to receive additional shares of Common Stock if the market
price fell below a stated level during a specified period following the 40-day
holding period prescribed by Regulation S. Fortune responded to the suits,
admitting that the stock price declined but alleged that suspicious trading
activity in its Common Stock occurred immediately prior to and during the time
period in which the additional-share allocation was computed. Fortune believes
that it has discovered evidence of active market manipulation in the Common
Stock by these plaintiffs; accordingly, it has commenced a countersuit for
damages suffered by the Company and its shareholders as a result of these acts
and has also received leave of court to add third-party defendants whose actions
furthered this market manipulation. Discovery has been stayed pending a
determination of objections filed by one of these third-party defendants.
Fortune intends to resume both the defense of plaintiffs' claims and the
aggressive prosecution of its own counterclaims as soon as it is entitled to do
so.
(5) COMPUTATION OF LOSS PER SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted earnings per common share
are not presented because the issuance or conversion of additional securities
would have an anti-dilutive effect.
(6) SALE OF EAST BAYOU SORREL
On March 31, 1998, the Company sold its interest in the East Bayou Sorrel
field, Iberville Parish, Louisiana to National Energy Group, Inc. for cash in
the amount of $4,695,000. The properties sold consisted of the Company's
interest in the Schwing #1 and #2 wells and all of the Company's leases,
facilities and interests in the East Bayou Sorrel area of mutual interest, as
such area is defined in the East Bayou Sorrel operating agreement. The sale was
effective April 1, 1998. The sale closed on March 31, 1998, whereupon the
Company received $4,535,000, which is net of ordinary closing adjustments.
The Company's interest in the two productive wells at East Bayou Sorrel
were pledged to secure the Company's Credit Facility with Credit Lyonnais. The
total balance outstanding under the Credit Facility prior to this sale was
$550,000. Concurrently with closing the sale of the East Bayou Sorrel field, the
Company paid down the outstanding balance of the Credit Facility by $540,000.
The Company plans to reinvest the remaining proceeds from the sale of East Bayou
Sorrel into its exploration, development and property acquisition activities,
including, for example, future anticipated exploration and development wells at
its Espiritu Santo Bay and LaRosa 3D seismic exploration projects.
The Schwing #1 and #2 wells began producing from permanent production
facilities in January 1997 and June 1997, respectively. Although both wells were
shut-in from March 13, 1998 through the date of the sale to repair production
facilities, they accounted for a significant portion of the Company's oil and
gas revenues during 1997 and proved reserves as of December 31, 1997. A third
well in the field, the Schwing #3, which was spudded October 9, 1997, was
temporarily plugged and abandoned on March 5, 1998 pending further evaluation of
the well's potential. During 1997 and 1998, the Company incurred approximately
$1 million in connection with drilling and attempting to complete this well as a
result of difficult drilling conditions and mechanical problems. Selected
financial information attributable to the Company's interest in the East Bayou
Sorrel field as reported in its 1997 and year-to-date operating and financial
results is as follows:
9
<PAGE>
Year Ended Six Months Ended
December 31, 1997 June 30, 1998 **
----------------- ----------------
Production
Oil (Bbls) 55,000 12,000
Gas (Mcf) 78,000 18,000
Oil and Gas Revenues $1,241,000 $231,000
Production and Operating Expense 205,000 60,000
Provision for Depletion, Depreciation
and Amortization* 430,000 54,000
As of
December 31, 1997
-----------------
Estimated Net Reserve Quantities
of Total Proved Reserves
Oil (Bbls) 152,000
Gas (Mcf) 204,000
- ----------
* Represents the estimated reduction in depreciation, depletion and
amortization expense reported by the Company in 1997 and 1998 that would
have resulted from excluding the East Bayou Sorrel production and proved
reserves.
** Amounts in this column represent 1998 production, revenues and related
expenses through March 31, 1998, the date of sale of the East Bayou Sorrel
interests.
This represents 32% and 30% of the Company's oil and gas revenues and
equivalent oil production and 23% of the Company's estimated quantities of
equivalent proved oil reserves as of December 31, 1997. Consequently, the
Company's revenues and cash flow from operations will decrease significantly in
1998 unless the production is replaced through successful exploration and
development activities or through the acquisition of producing properties.
Under the full cost method of accounting for oil and gas operations,
dispositions of oil and gas properties are recorded as adjustments to
capitalized costs, with no gain or loss recognized unless such adjustment would
significantly alter the relationship between capitalized costs and proved
reserves. A significant alteration would not ordinarily be expected to occur for
sales involving less than 25 percent of the reserve quantities in a given cost
center. Because the sale of East Bayou Sorrel represents less than 25% of the
Company's reserve quantities, the entire proceeds of $4,695,000 was credited to
capitalized oil and gas properties as of March 31, 1998.
(7) WARRANT EXCHANGE OFFER
On February 12, 1998, the Company commenced a voluntary exchange offer of
its outstanding publicly traded Common Stock purchase warrants and certain
private warrants (collectively referred to herein as the old warrants) for new
private warrants. The old warrants include 1,917,000 publicly traded warrants
and the right to acquire 63,000 private warrants currently held by unitholders,
all of which expire September 28, 1998. Under the terms of the exchange offer,
holders of the old warrants had until April 15, 1998, to exchange their old
warrants for an equal number of new private warrants that expire September 28,
1999. 1,779,713 warrants were tendered and accepted by the Company, representing
93% of the outstanding public warrants. An additional 3,000 public warrants were
exercised by warrantholders during the exchange offer period. The new private
warrants will not be listed for trading, are restricted from transfer and do not
contain the same anti-dilution provisions as the public warrants. Otherwise, the
new private warrants generally contain the same terms and conditions as the old
warrants. The Company did not receive any proceeds as a result of this exchange
offer. $59,000 of costs incurred by the Company in connection with the exchange
offer were charged to Shareholders' Equity during the second quarter of 1998.
10
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF 1998 OPERATING RESULTS TO 1997.
SECOND QUARTER 1998 VS. 1997
During the second quarter of 1998, Fortune's net loss decreased to $725,000
compared to a net loss of $3,959,000 for the same 1997 period. The higher 1997
loss was primarily attributable to the $3,000,000 non-cash impairments to oil
and gas properties recorded in the second quarter of 1997.
Significantly lower oil prices and lower oil and gas production resulted in
net oil and gas revenues decreasing by $274,000 (40%) in the second quarter of
1998, compared to the same 1997 period. The Company's oil production decreased
59% to 6,700 barrels during the second quarter of 1998 versus 1997. Gas
production decreased 15% to 151,000 MCF during the second quarter of 1998 versus
1997. Oil and gas production decreased primarily as a result of the Company's
sale of its entire interest in East Bayou Sorrel effective April 1, 1998. See
note 6 to the financial statements for a discussion of this sale and the impact
on the Company's operating results.
Gas prices on the Company's production averaged $2.22 per MCF for the
second quarter of 1998 as compared to $2.20 per MCF for the same 1997 period (a
1% increase). Oil prices averaged $12.32 per barrel for the second quarter of
1998 compared to $18.33 per barrel for the same 1997 period (a 33% decrease).
Production and operating expense decreased by $411,000 (76%) during the
second quarter of 1998 over 1997. Production and operating expense in 1997
included approximately $400,000 of costs attributable to a workover at South
Timbalier Block 76.
General and administrative expense decreased $105,000 (23%) during the
second quarter of 1998 versus 1997 primarily because of lower litigation costs
in 1998 in connection with the 1995 Regulation S offering (discussed in note 4
to the financial statements) and lower personnel costs.
Interest expense paid in cash increased by $50,000 (102%) during the second
quarter of 1998 over 1997 due to the higher debt balance. The higher debt
balance results from the Company's issuance of subordinated convertible Notes in
December 1997. A portion of the proceeds of this issuance were used to repay all
of the Company's outstanding debentures due December 31, 1997 and to pay down a
portion of its bank debt. Bank debt was further reduced by $540,000 on March 31,
1998 with a portion of the proceeds of the sale of East Bayou Sorrel. Non-cash
amortization of debt financing costs increased by $83,000 during 1998 because of
the Company's Notes offering in December 1997 and credit facility refinancing in
July 1997.
The Company's provision for depletion, depreciation and amortization (DD&A)
decreased by $225,000 (46%) in the second quarter of 1998 as compared to 1997
primarily because of the impact of impairments to oil and gas properties and the
sale of East Bayou Sorrel.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 VS. 1997
During the six months ended June 30, 1998, Fortune had a net loss of
$1,464,000 compared to a net loss of $4,722,000 for the same 1997 period. The
higher 1997 loss was primarily attributable to the $316,000 non-cash debt
conversion expense incurred in connection with closing the Company's Exchange
Offer on February 26, 1997, the $269,000 of stock offering costs incurred in
1997 for the public offering which was withdrawn in April 1997, the $3,200,000
non-cash impairments to oil and gas properties recorded in 1997 and increased
depreciation, depletion and amortization expense in 1997.
Net oil and gas revenues in the first six months of 1998 decreased by
$681,000 (38%) compared to the same 1997 period. The decrease primarily resulted
from significantly lower oil and gas prices and oil and gas production in 1998.
1997 revenues included revenues from the Company's East Bayou Sorrel field that
was sold effective April 1, 1998. South Timbalier Block 76 was shut-in for 26
days in 1997 for a workover, adversely affecting 1997 revenues and partially
offsetting the decrease from 1997 to 1998.
Oil production decreased 22% to 28,100 barrels during the first six months
of 1998 versus 1997 as a result of this sale. Gas production decreased 22% to
320,000 MCF during the first six months of 1998 versus 1997, also primarily
because of the sale of East Bayou Sorrel, as discussed above.
For the first six months of 1998, the Company's natural gas prices averaged
$2.30 per MCF as compared to $2.67 per MCF for the same 1997 period (a 14%
decrease). Oil prices averaged $13.82 per barrel for the first six months of
1998 compared to $19.76 per barrel for the same 1997 period (a 30% decrease).
Production and operating expense decreased by $377,000 (51%) for the first
six months of 1998 over 1997. Production and operating expense in 1997 included
approximately $400,000 of costs attributable to a workover at South Timbalier
Block 76.
General and administrative expense decreased $199,000 (20%) for the first
six months of 1998 versus 1997 primarily because of lower litigation costs in
1998 in connection with the 1995 Regulation S offering (discussed in note 4 to
the financial statements) and lower personnel costs.
Interest expense increased by $106,000 (103%) for the first six months of
1998 versus 1997 due to the higher debt balance. Non-cash amortization of debt
financing costs increased by $165,000 during 1998 because of the Company's Notes
offering in December 1997 and credit facility refinancing in July 1997. The
Company's provision for depletion, depreciation and amortization (DD&A)
decreased by $139,000 (14%) in the first six months of 1998 as compared to 1997
because of the impact of impairments to oil and gas properties and the sale of
East Bayou Sorrel.
LIQUIDITY AND CAPITAL RESOURCES
Cash Balance, Working Capital and Cash Flows from Operating Activities
Cash flow from operating activities declined in 1998; however, working
capital increased significantly at June 30, 1998. Fortune's operating activities
during the first six months of 1998 generated negative cash flow in the amount
of $498,000 as compared to cash flow provided from operating activities of
$1,484,000 for the first six months of 1997. This decrease results primarily
from the significant increase in payables in 1997 versus a decrease in 1998.
Before considering the effect of changes in assets and liabilities, operating
cash flow was $(163,000) for 1998 as compared to $102,000 for 1997. Lower oil
and gas revenues and higher cash interest expense were the primary contributors
to the 1998 decrease in cash flow. The Company's significantly higher working
capital balance of $3,598,000 at June 30, compares to a December 31, 1997
balance of $1,376,000. The proceeds received from the sale of East Bayou Sorrel
were the primary contributor to this significant increase in working capital.
Management believes that, even in the face of fluctuating commodity prices, this
increase in cash and working capital as a result of the sale of East Bayou
Sorrel provides the Company with adequate capital to fully fund its capital
program during 1998.
12
<PAGE>
Fortune's internal liquidity and capital resources in the near term will
consist of working capital and cash flow from its oil and gas operations and its
unused borrowing capacity, if any, under its bank credit facility.
Cash Used in Investing Activities - Capital Expenditures
Cash expenditures for oil and gas properties for the first six months of
1998 were $1,711,000 as compared to $2,124,000 for the same period in 1997. The
1998 expenditures have been incurred primarily in connection with the Company's
projects at LaRosa, Espiritu Santo Bay, East Bayou Sorrel, Whiskey Pass and
Southwest Segno.
The Company has been involved in two significant proprietary 3D seismic
projects along the Texas coast. The La Rosa project, a 24 square mile
proprietary 3D seismic survey over one of the Company's existing producing
fields in Refugio County, Texas has been shot and drilling operations have
commenced. The Company sold one-half of its interest in the non-producing
portion of this field in exchange for the acquiring parties paying 100% of the
Company's 3D seismic costs. Four wells have been drilled based upon the 3D
seismic through June 30, 1998. The first well was completed as a producer, two
wells have been plugged and abandoned and a fourth is awaiting completion. A
fifth well drilled during July 1998 was plugged and abandoned. Additional
drilling is expected in 1998. During 1998, the Company has incurred $502,000 of
seismic interpretation, leasing and drilling costs through the second quarter.
The Company holds a 37.5% working interest in the producing wells and an 18.75%
working interest in the prospective projects covered by this 3D seismic survey.
The second project is offshore Texas in the intracoastal waters of Espiritu
Santo Bay, Calhoun County. This involves a 135 square mile proprietary 3D
seismic survey in which the Company owns a 12.5% working interest. The area
covered by the survey also includes producing fields. This survey was completed
in 1997 and is being interpreted. The Company is encouraged by the results thus
far and expects to begin drilling wells by late 1998. During 1998, the Company
has incurred $137,000 of seismic interpretation and leasing costs through the
second quarter.
During the second quarter of 1998, the Company entered into agreements to
participate in the drilling of three wells on prospects in the transition zone
offshore Louisiana. Two of the wells are on the Whiskey Pass prospect and the
third is on the Sea Serpent prospect. The prospects were identified by another
company on a 25 sq. mile transition zone 3D seismic survey which Fortune also
owns. Through June 30, 1998, the Company has incurred approximately $305,000 of
seismic, leasehold and drilling costs. The first well drilled on the Whiskey
Pass prospect was plugged and abandoned in May 1998. The Sea Serpent well was
drilled in July 1998 and plugged and abandoned on July 22, 1998. The second well
on the Whiskey Pass prospect is planned for the third quarter of 1998. Fortune
pays 12.5% of drilling and completion costs of these wells. The Company also
incurred $166,000 in 1998 in connection with its dry hole at the Southwest Segno
prospect in Liberty County, Texas.
The Company continually reviews exploration, development and acquisition
opportunities and expects to participate in additional projects in 1998.
Cash Used in Financing Activities
On March 31, 1998, the Company paid off all but $10,000 of its bank credit
facility using $540,000 of the proceeds from the sale of East Bayou Sorrel. The
Company's other debt, all of which is subordinated convertible debt, is not due
until 2007. Primarily as a result of the lower revenues in the current quarter,
the Company was unable to meet the 3 to 1 coverage ratio of cash flow to
fixed-charges which is required by the credit facility for the nine-months
period ended June 30, 1998. The Company has requested a waiver of this covenant
from the bank for the period ended June 30, 1998. The Company has requested a
waiver of this covenant from the bank for the period ended June 30, 1998.
Although a waiver has not been received from the bank as of the date hereof, the
Company has not reclassified the $10,000 outstanding balance on such debt to
current liabilities because the amount is not material.
13
<PAGE>
Oil and Gas Prices
Conditions outside of the Company's control influence the price it receives
for oil and gas. The Company's revenues, profitability and future rate of growth
are substantially dependent upon prevailing market prices for natural gas and
oil, which can be extremely volatile and in recent years have been depressed by
excess domestic and imported supplies. These fluctuating oil and gas prices have
contributed to impairments to oil and gas properties such as the $3.2 million
impairment recorded in 1997 and the $260,000 impairment recorded in the second
quarter of 1998. Oil prices have been particularly low in recent months; and,
although they may have recovered somewhat since June 30, 1998, there can be no
assurance that continued fluctuations in oil and/or gas prices will not
contribute to further revenue declines and impairments to oil and gas
properties. As of July 29, 1998, the Company was receiving an average of
approximately $11.60 per barrel for its oil production and $2.40 per MCF for its
gas production.
"Year 2000" Compliance
The Company is aware of the issues associated with the inability of many
computer systems worldwide to recognize dates beyond December 31, 1999 and that
a failure to correct this problem could result in significant disruption to
those systems. The Company has reviewed its internal and accounting systems and
believes that they are "year 2000 compliant." Although the Company believes that
these issues will not adversely impact its operations, there can be no assurance
that disruption or expenses will not occur as a result of the inability of the
Company's vendors or customers to deal with this problem on a timely basis. The
Company will continue to monitor the status of these issues to determine the
impact, if any, on its operations.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking statements include statements
regarding: future oil and gas production and prices, future exploration and
development spending, future drilling and operating plans and expected results,
reserve and production potential of the Company's properties and prospects and
the Company's strategy. Actual events or results could differ materially from
those discussed in the forward-looking statements as a result of various factors
including, without limitation, the factors set forth below and elsewhere in this
10-Q, and in the Company's annual report on Form 10-K.
Exploration and Development Risks. The business of exploring for and, to a
lesser extent, of acquiring and developing oil and gas properties is an
inherently speculative activity that involves a high degree of business and
financial risk. Although available geological and geophysical information can
provide information with respect to a potential oil or gas property, it is
impossible to determine accurately the ultimate production potential, if any, of
a particular property or well.
Dependence on a Limited Number of Wells. Through the first six months of
1998, over 60% of the Company's oil and gas revenues and cash flow was accounted
for by three wells, the South Timbalier Block 76 well and the two East Bayou
Sorrel wells. The Company sold all of its interest in the East Bayou Sorrel
wells effective April 1, 1998. For the three months ended June 30, 1998, over
51% of the Company's oil and gas revenues was accounted for by the South
Timbalier 76 well. The South Timbalier Block 76 well was shut-in for repairs for
one month in 1997 and for over two months in 1996 as the result of mechanical
failures. A significant curtailment or loss of production from the South
Timbalier well for a prolonged period before the Company could replace the
reserves through new discoveries or acquisitions would have a material adverse
effect on the Company's operating results in 1998.
Volatility of Oil and Gas Prices. The Company's revenues, profitability and
future rate of growth are substantially dependent upon prevailing market prices
for natural gas and oil, which can be extremely volatile and in recent years
have been depressed by excess domestic and imported supplies.
14
<PAGE>
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.
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.
Operating and Weather Hazards. The cost and timing of drilling, completing
and operating wells is often uncertain. Drilling operations may be curtailed,
delayed or canceled as a result of a variety of factors, including regulatory
and environmental constraints, unexpected drilling conditions, equipment
failures, accidents, adverse weather conditions, encountering unexpected
formations or pressures in drilling and completion operations, encountering
corrosive or hazardous substances, mechanical failure of equipment, blowouts,
cratering and fires. These conditions 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.
Additional factors. Additional factors that could cause actual events to
vary from those discussed above and elsewhere in this report include, among
others: loss of key company personnel; adverse change in governmental
regulation; regulatory and/or environmental constraints; inability to obtain
critical supplies and equipment, personnel and consultants; and inability to
access capital to pursue the Company's plans.
15
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held April 28, 1998.
The following matters were voted on at that meeting:
<TABLE>
<CAPTION>
Broker
Matter Votes in Favor Votes Opposed Abstain Non-Votes Non-Votes
- -------------------------------------- -------------- ------------- ----------------- ---------
<S> <C> <C> <C> <C>
Election of Daniel R. Shaughnessy
to Board of Directors 9,651,783 0 671,131 0
Election of Graham S. Folsom
to Board of Directors 10,102,383 0 220,531 0
Election of Dewey A. Stringer, III
to Board of Directors 10,102,871 0 220,043 0
Ratification of KPMG Peat Marwick LLP
as Company Auditors 10,222,868 82,600 17,446 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
----------- ----------------------------
27.1* Financial Data Schedule.
(b) REPORTS ON FORM 8-K / 8K-A
None.
*Filed herewith.
16
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FORTUNE NATURAL RESOURCES CORPORATION
By: /s/ TYRONE J. FAIRBANKS
-------------------------------------
Tyrone J. Fairbanks
President and Chief Executive Officer
By: /s/ J. MICHAEL URBAN
-------------------------------------
J. Michael Urban
Vice President and Chief Financial
and Accounting Officer
Date: August 3, 1998
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,530
<SECURITIES> 0
<RECEIVABLES> 435
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,064
<PP&E> 25,222
<DEPRECIATION> (19,493)
<TOTAL-ASSETS> 10,214
<CURRENT-LIABILITIES> 466
<BONDS> 0
0
0
<COMMON> 121
<OTHER-SE> 7,592
<TOTAL-LIABILITY-AND-EQUITY> 10,214
<SALES> 1,123
<TOTAL-REVENUES> 1,199
<CGS> 0
<TOTAL-COSTS> 359
<OTHER-EXPENSES> 813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 401
<INCOME-PRETAX> (1,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,464)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
