SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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.
16,410,415 as of October 31, 2000
Transition small business disclosure format (check one) Yes ___ No X
---
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORTUNE NATURAL RESOURCES CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 676,000 $ 294,000
Accounts receivable.............................. 598,000 314,000
Prepaid expenses................................. 26,000 22,000
------------ ------------
Total Current Assets.......................... 1,300,000 630,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the full cost method..................... 27,826,000 27,302,000
Office and other................................. 384,000 384,000
------------ ------------
28,210,000 27,686,000
Less--accumulated depletion, depreciation
and amortization................................ (22,261,000) (21,562,000)
------------ ------------
5,949,000 6,124,000
------------ ------------
OTHER ASSETS:
Deposits......................................... - 51,000
------------ ------------
TOTAL ASSETS........................................ $ 7,249,000 $ 6,805,000
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt................ $ 10,000 $ -
Accounts payable................................. 69,000 33,000
Accrued expenses................................. 136,000 193,000
Royalties and working interests payable.......... 50,000 5,000
Accrued interest................................. 69,000 97,000
Deferred salary payable to officers.............. 21,000 -
------------ ------------
Total Current Liabilities..................... 355,000 328,000
------------ ------------
LONG-TERM DEBT...................................... 2,295,000 3,235,000
------------ ------------
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 16,383,751 and
12,259,846 at September 30, 2000
and December 31, 1999, respectively......... 164,000 123,000
Capital in excess of par value................... 32,106,000 30,295,000
Accumulated deficit.............................. (27,671,000) (27,176,000)
------------ ------------
NET STOCKHOLDERS' EQUITY............................ 4,599,000 3,242,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 7,249,000 $ 6,805,000
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended
------------ ------------
September 30, September 30,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUES
Sales of oil and gas, net of royalties........... $ 1,793,000 $ 1,136,000
Other income..................................... 26,000 33,000
------------ ------------
1,819,000 1,169,000
------------ ------------
COSTS AND EXPENSES
Production and operating......................... 438,000 330,000
Provision for depletion, depreciation and
amortization................................... 699,000 689,000
General and administrative....................... 852,000 960,000
Note restructuring cost.......................... - 61,000
Interest payable in cash......................... 207,000 291,000
Interest - amortization of deferred
financing cost................................. - 99,000
------------ ------------
2,196,000 2,430,000
------------ ------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM..... (377,000) (1,261,000)
PROVISION FOR INCOME TAXES.......................... - -
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM...................... (377,000) (1,261,000)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT.. (118,000) -
------------ ------------
NET LOSS............................................ $ (495,000) $ (1,261,000)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......... 15,682,359 12,188,875
============ ============
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
Net loss before extraordinary item............... $ (0.02) $ (0.10)
Extraordinary item............................... (0.01) -
------------ ------------
Net loss per common share..................... $ (0.03) $ (0.10)
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
September 30, September 30,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUES
Sales of oil and gas, net of royalties........... $ 777,000 $ 460,000
Other income..................................... 15,000 9,000
------------ ------------
792,000 469,000
------------ ------------
COSTS AND EXPENSES
Production and operating......................... 153,000 128,000
Provision for depletion, depreciation and
amortization................................... 280,000 249,000
General and administrative....................... 288,000 311,000
Interest......................................... 69,000 97,000
------------ ------------
790,000 785,000
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES................... 2,000 (316,000)
PROVISION FOR INCOME TAXES.......................... - -
------------ ------------
NET INCOME (LOSS)................................... $ 2,000 $ (316,000)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......... 16,382,385 12,234,202
============ ============
NET INCOME (LOSS) PER COMMON SHARE
(BASIC AND DILUTED).............................. $ - $ (0.03)
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Common Stock Capital in Stock-
--------------------- Excess of Accumulated holders'
Shares Amount Par Value Deficit Equity
---------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998.......... 12,134,675 $ 121,000 $30,171,000 $(25,588,000) $ 4,704,000
========== ========= =========== ============ ===========
Common stock contributed to
401(k) Plan ...................... 22,137 - 29,000 - 29,000
Warrants issued for
note restructuring ............... - - 61,000 - 61,000
Common stock issued for
directors' fees .................. 103,035 2,000 34,000 - 36,000
Common stock returned to treasury ... (1) - - - -
Net loss ............................ - - - (1,588,000) (1,588,000)
---------- --------- ----------- ------------ -----------
BALANCE, December 31, 1999 .......... 12,259,846 $ 123,000 $30,295,000 $(27,176,000) $ 3,242,000
Common stock contributed to
401(k) Plan ...................... 55,405 1,000 18,000 - 19,000
Common stock issued for
directors' fees .................. 40,877 - 22,000 - 22,000
Common stock issued for
conversion of notes............... 2,821,162 28,000 902,000 - 930,000
Common stock issued for
premium on early extinguishment
of debt .......................... 158,132 2,000 116,000 - 118,000
Common stock issued for
exercise of warrants ............. 224,331 2,000 166,000 - 168,000
Common stock issued for
stock offering ................... 824,000 8,000 610,000 - 618,000
Common stock offering expenses ...... - - (23,000) - (23,000)
Common stock returned to treasury ... (2) - - - -
Net loss ............................ - - - (495,000) (495,000)
---------- --------- ----------- ------------ -----------
BALANCE, September 30, 2000
(Unaudited) ...................... 16,383,751 $ 164,000 $32,106,000 $(27,671,000) $ 4,599,000
========== ========= =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
--------------------------
September 30, September 30,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $ (495,000) $ (1,261,000)
Adjustments to reconcile net loss to net
cash provided by (used) in operating activities:
Depletion, depreciation and amortization...... 699,000 689,000
Non-cash compensation expense................. - 20,000
Common stock issued for directors' fees....... 22,000 34,000
Common stock issued for premium on early
extinguishment of debt...................... 118,000 -
Amortization of deferred financing cost....... - 99,000
Note restructuring cost....................... - 61,000
------------ ------------
Cash flow before changes in operating
assets and liabilities..................... 344,000 (358,000)
Changes in operating assets and liabilities:
Accounts receivable........................... (284,000) 55,000
Prepaids...................................... (4,000) 40,000
Accounts payable and accrued expenses......... - (331,000)
Royalties and working interests payable....... 45,000 (8,000)
Accrued interest.............................. (28,000) -
Other......................................... 70,000 8,000
------------ ------------
Net cash provided by (used) in
operating activities.......................... 143,000 (594,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties.......... (524,000) (302,000)
------------ ------------
Net cash used in investing activities............ (524,000) (302,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........... 786,000 -
Expenditures for offering costs.................. (23,000) -
------------ ------------
Net cash provided by financing activities........ 763,000 -
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.............................. 382,000 (896,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 294,000 1,452,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 676,000 $ 556,000
============ ============
Supplemental information:
Interest paid in cash............................ $ 207,000 $ 291,000
Non-cash transactions
Common stock issued for 401(k) Plan contribution. 19,000 29,000
Common stock issued for directors' fees.......... 22,000 34,000
Common stock issued for conversion of notes...... 930,000 -
Common stock issued for premium on early
extinguishment of debt.......................... 118,000 -
Notes restructuring cost......................... - 61,000
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND PROCEDURES
The condensed financial statements at September 30, 2000, and for the
periods then ended included herein have been prepared by Fortune Natural
Resources Corporation, 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. However, Fortune 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 Fortune's latest annual report on
Form 10-KSB/A. Certain reclassifications have been made to prior period amounts
to conform to presentation in the current period. In Fortune's opinion, the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly its financial position and
the results of its operations and its cash flows for the dates and periods
presented. The results of the operations for these interim periods are not
necessarily indicative of the results for the full year.
(2) LONG-TERM DEBT
At September 30, 2000, a summary of long-term debt is as follows:
September 30, December 31,
2000 1999
------------ ------------
Convertible Subordinated Notes due
December 31, 2007....................... $ 2,295,000 $ 3,225,000
Credit Lyonnais credit facility due
January 11, 2001........................ 10,000 10,000
------------ ------------
Total long-term debt...................... 2,305,000 3,235,000
Less current installments................. (10,000) -
------------ ------------
Long-term debt, excluding
current installments.................... $ 2,295,000 $ 3,235,000
============ ============
Although Fortune reported net income and positive cash flow during the most
recent quarter, the Company has realized net losses for many prior years. These
losses have resulted in an accumulated deficit of approximately $28 million at
September 30, 2000. As a result of depleting reserves and the sale of Fortune's
interest in East Bayou Sorrel in March 1998, Fortune realized negative cash
flows before changes in operating assets and liabilities of $539,000 and
$478,000 in calendar years 1999 and 1998, respectively. From February through
May 2000, Fortune took steps to improve its short term liquidity by raising net
proceeds of $763,000 through the sale of common stock and the exercise of common
stock warrants. See note 6 for information regarding these stock offerings.
Also, during February and March 2000, $930,000 of Fortune's 12% convertible
notes were converted to common stock. The remaining $2,295,000 of notes are
convertible into common stock at $0.75 per share. Furthermore, as a result of
higher oil and gas prices and higher gas production, Fortune realized positive
cash flow before changes in operating assets and liabilities during the first
nine months of 2000 of $344,000 and its working capital at September 30, 2000
was $945,000. Fortune also reported income of
7
<PAGE>
$2,000 during the third quarter of 2000. As a result of these transactions and
improved production and prices, management believes that Fortune has the capital
resources to maintain its operations over the next year. However, based on
historical operating results and the uncertainties of projecting long term
production and cash flows from current oil and gas reserves, Fortune's cash flow
could decrease again and it may not be able to repay its convertible
subordinated notes when they become due in 2007. Management believes that
operating cash flow will continue to increase if Fortune is successful
exploiting its inventory of projects or acquiring producing properties. However,
there is no assurances that cash flow will increase or that it will be
sufficient to enable Fortune to repay the convertible subordinated notes.
In the event that Fortune's operating cash flow decreases unexpectedly,
drilling is unsuccessful or management determines to accelerate the growth plans
for Fortune, the Company will require additional equity and debt financing for
its continuing operations. Fortune's projections of production, cash flow and
capital requirements are based upon numerous assumptions about the future,
including: oil and gas prices, production decline rates, estimates of oil and
gas reserves, costs, absence of major operating disruptions and catastrophes,
timing of projects and markets for our production. There is no assurance that
management's assumptions will be accurate. If Fortune experiences significant
unexpected decreases in cash flow or increases in capital requirements, and is
unable to raise capital, management will need to take other steps to maintain
Fortune's viability over the next year. Those steps might include reducing
overhead further, foregoing our participation in projects or selling assets.
As discussed above, in February and March 2000, holders of the $930,000 of
Fortune's 12% notes that were convertible at approximately $0.33 per share,
converted those notes into 2,821,162 shares of common stock. Fortune paid the
noteholders who converted a premium equal to one year's prepaid interest plus
certain accrued interest. This premium was paid in Fortune common stock valued
at $0.75 per share, resulting in the issuance of an additional 158,132 shares to
the noteholders who converted. This premium was expensed during the first
quarter of 2000 as an extraordinary loss on early extinguishment of debt. Two
Renaissance funds, who are each beneficial owners of more than five percent of
Fortune's common stock, converted all of their combined $700,000 principal
amount of notes to stock in this transaction. Each Renaissance fund received
1,122,394 shares in connection with this conversion. As a result of this note
conversion, Fortune's annual cash interest expense has been reduced by $111,600.
In March 1999, noteholders representing the still outstanding $2,295,000
principle amount of the convertible subordinated notes agreed to amend the
conversion price of their notes to $0.75 per share, subject to adjustment for
certain future recapitalizations or dividends of Fortune. All notes are
convertible by the holders and/or redeemable by Fortune. The notes are
redeemable at a premium that reduces monthly from 10% to zero from May 1, 1999
to November 1, 2000. The notes are subordinate to all of Fortune's secured debt,
including the credit facility with Credit Lyonnais. The notes bear interest at a
rate of 12% per year, payable quarterly. The cost incurred to issue the original
notes has been amortized as additional interest expense over the 18-month period
ended May 1, 1999, the first date that the notes were convertible. As a result
of this amortization of issuance costs, the effective interest rate of the notes
over this 18-month period was 21.2%. If any notes are held to maturity, the
effective interest rate to maturity on those notes will be 13.4%.
For agreeing to amend their conversion price, the amending noteholders
received, for each share into which each of their notes is now convertible, one
three-year warrant, exercisable at $1 per warrant. Fortune valued this warrant
at $0.02 per warrant and expensed the value of all such warrants during the
first quarter of 1999 as note restructuring cost.
8
<PAGE>
Fortune's $20 million credit facility with Credit Lyonnais New York Branch
expires January 11, 2001. The borrowing base is currently set at $10,000,
subject to redetermination upon the bank's approval. The interest rate on the
facility is, at Fortune's option, either 1.25% above Credit Lyonnais' base rate
or 4% above LIBOR. The credit facility is secured by a mortgage on substantially
all of Fortune's proved oil and gas properties. Fortune is also required to pay
a commitment fee of 0.5% on the unused portion, if any, of the borrowing base.
Fortune is required by the credit facility to meet a 3 to 1 coverage ratio
of cash flow to fixed-charges for the twelve-months period ended September 30,
2000. Fortune failed to meet this covenant at September 30, 2000 and has
requested a waiver of this covenant from the bank. If a waiver is not received,
Fortune will repay the $10,000 balance outstanding on the facility.
(3) INCOME TAX EXPENSE
No provision for income taxes was required for the nine months ended
September 30, 2000.
At September 30, 2000, Fortune estimates it had cumulative net operating
loss carryforwards for federal income tax purposes of approximately $23 million,
of which approximately $7 million is subject to restrictions under I.R.C. 382.
These loss carryforwards are available to offset future federal taxable income,
if any. The net operating losses expire from 2002 through 2020. Fortune is
uncertain as to the recoverability of the above deferred tax assets and has
therefore applied a 100% valuation allowance.
(4) LEGAL PROCEEDINGS
There are no material pending legal proceedings involving any of Fortune's
properties or which involve a claim for damages which exceed 10% of Fortune's
current assets.
(5) COMPUTATION OF LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted loss per common
share does not differ from primary loss per common share because the issuance or
conversion of additional securities would have an antidilutive effect.
(6) STOCK ISSUANCE
In January 2000, Fortune commenced both a private placement offering of
common stock and an incentive warrant exercise program. The private placement
closed March 10, 2000, and the incentive warrant exercise program closed June 1,
2000. Fortune raised $618,000 in the private placement (824,000 shares sold at
$0.75 per share) and $168,000 in the incentive warrant exercise (224,331 shares
issued at $0.75 per share). The warrants subject to this program would have been
exercisable otherwise at prices from $2.61 to $3.625 per share. Fortune
determined that the value, if any, associated with reducing the warrant exercise
price in this offering was not material; accordingly, no charge has been
recorded on this transaction.
Barry W. Blank, a beneficial owner of more than five percent of Fortune's
common stock, acquired 51,750 shares of stock in the warrant exercise program.
Also, Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US
Growth and Income Trust PLC, which each beneficially own more than five percent
of Fortune's common stock, each purchased 200,000 shares of stock in the private
placement.
9
<PAGE>
In addition to the shares acquired in these offerings, all participants
received one three-year stock-purchase warrant for each share acquired. The
exercise price of one-half of these warrants was set at $1.50 per share; the
exercise price for the remainder is $2.25. Accordingly, Fortune has issued
1,042,331 such new warrants in connection with these transactions.
Fortune's out-of-pocket costs in these transactions were $23,000. The
proceeds from these offerings are being used for exploration expenditures and
general corporate purposes.
10
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At September 30, 2000, Fortune reported working capital of $945,000, a
cash balance of $676,000 and positive cash flow before changes in operating
assets and liabilities of $344,000 for the nine months then ended. For the
quarter ended September 30, 2000, Fortune realized net income of $2,000 and
positive cash flow before changes in operating assets and liabilities of
$291,000. Fortune has only $10,000 of debt due currently and our long-term debt
is comprised of $2,295,000 of 12% subordinated convertible debentures which are
due December 31, 2007. This long-term debt balance compares to a balance of
$3,235,000 at December 31, 1999. These results reflect a significant improvement
in Fortune's financial position, cash flow and operating results from December
31, 1999 and prior years.
In past years, Fortune realized net losses that have resulted in an
accumulated deficit of approximately $28 million at September 30, 2000. As a
result of depleting reserves and the sale of Fortune's interest in East Bayou
Sorrel in March 1998, Fortune realized negative cash flows before changes in
operating assets and liabilities of $539,000 and $478,000 in calendar years 1999
and 1998, respectively. During February through May 2000, Fortune took steps to
improve its short term liquidity by raising net proceeds of $763,000 through the
sale of common stock and the exercise of common stock warrants. Also, during
February and March 2000, $930,000 of Fortune's 12% convertible notes were
converted to common stock. The remaining notes are convertible into common stock
at $0.75 per share.
Also in February 2000, the producing well at South Timbalier Block 86 was
recompleted and subsequently reached production rates as high as 20 million
cubic feet of gas per day and 100 barrels of condensate per day. Fortune owned a
3.167% overriding royalty interest in the well, which converted in May 2000 to
an after payout overriding royalty interest of 4%. At current production levels
and prices, the well is adding significantly to Fortune's revenue and cash flow.
Fortune has recently had other successful drilling and workover results,
including the Cut Off Field recompletion in late September 2000 which is
producing 2 million cubic feet of gas per day. These wells are discussed below.
Gas prices have increased significantly since year end 1999 and oil prices have
generally remained in the $30 per barrel range. Consequently, Fortune is now
realizing the positive operating results discussed above.
As a result of these transactions and the higher production and prices, we
believe that Fortune has the capital resources to maintain its operations over
the next year. However, based on historical operating results and the
uncertainties of projecting long term production and cash flows from current oil
and gas prices and reserves, Fortune's cash flow could decrease again and we may
not be able to repay the convertible subordinated notes when they become due in
2007. We believe that Fortune's operating cash flow will continue to increase if
we are successful in exploiting our inventory of projects or acquiring producing
properties. However, no assurances can be given that cash flow will increase or
that it will be sufficient to enable Fortune to repay the notes.
11
<PAGE>
In the event that Fortune's operating cash flow decreases unexpectedly,
drilling is unsuccessful or management determines to accelerate the growth plans
for Fortune, we will require additional equity and debt financing to fund our
continuing operations. Fortune's projections of production, cash flow and
capital requirements are based upon numerous assumptions about the future,
including: oil and gas prices, production decline rates, estimates of oil and
gas reserves, costs, absence of major operating disruptions and catastrophes,
timing of projects and markets for our production. See the "Forward Looking
Statements" herein for a discussion of risks associated with Fortune and future
projections made by us.
There is no assurance that our assumptions will be accurate. If we
experience significant unexpected decreases in cash flow or increases in capital
requirements, and we are unable to raise capital, we will need to take other
steps to maintain our viability over the next year. Those steps might include
reducing overhead further, foregoing our participation in projects or selling
assets. Fortune has been successful in the past in raising capital to fund its
operations and/or repay debt balances substantially greater than that currently
outstanding. For example, from 1995 through May 31, 2000, Fortune raised over
$15 million through the issuance of common stock (most of which was raised in
1995), reduced its total debt by $4.8 million and virtually eliminated its
current maturities of long-term debt. Furthermore, Fortune's debt balance in
2000 is the lowest it has been since 1991. Although there is no assurance
Fortune will be successful in raising capital in the future to fund its
activities, management will continue to look for opportunities to improve
Fortune's financial condition.
RESULTS OF OPERATIONS
COMPARISON OF 2000 OPERATING RESULTS TO 1999
QUARTER ENDED SEPTEMBER 30, 2000 AND 1999
Successful drilling results from 1999 and 2000 are offsetting production
declines from depletion. New production from two successful year-end 1998
drilling projects, at South Timbalier Block 86 and Espiritu Santo Bay, began
contributing revenues during the quarter ended June 30, 1999. Revenues from Bay
Marchand Block 5 and the Bacon prospect began contributing revenues during the
third quarter of 1999. Two subsequent Bacon wells began producing in November
1999 and May 2000, respectively. Two successful Cadiz prospect wells began
producing in June 2000 and September 2000, respectively. Two successful wells at
La Rosa began producing in April 2000 and July 2000. A workover program at La
Rosa has resulted in production increases beginning in June 2000.
Fortune also experienced significantly higher oil and gas prices in the
third quarter 2000. Consequently, Fortune's oil and gas revenues for the quarter
ended September 30, 2000 increased 69% to $777,000 compared to $460,000 reported
during the third quarter of 1999. Fortune's reported net income of $2,000 during
the third quarter of 2000 compared to a net loss of $316,000 for the same 1999
period. The income reported during the third quarter of 2000 is due to a
combination of the higher oil and gas prices, higher gas production and lower
costs.
12
<PAGE>
Analysis of change in oil and gas revenues -
Quarter Ended
September 30,
------------------- Percent
2000 1999 Change
-------- -------- --------
Production
Oil - Bbl 2,900 5,400 (47)%
Gas - Mcf 159,400 137,000 16 %
Prices
Oil - $/Bbl $30.61 $ 18.98 61 %
Gas - $/Mcf 4.32 2.60 66 %
Revenues
Oil $ 88,000 $103,000 (15)%
Gas 689,000 357,000 93 %
In early 2000, the South Timbalier 86 well was recompleted and began
producing at a significantly higher rate beginning in February 2000. By June
2000, the well was producing at approximately 20 million cubic feet of gas per
day. September production was approximately 12 million cubic feet of gas and 50
barrels of oil per day. Fortune currently owns a 4% overriding royalty interest
in this well.
Successful wells at Cadiz prospect, the Brooks #1 and #2, and successful
wells and recompletions at La Rosa also contributed to the 16% increase in gas
production compared to the third quarter of 1999.
At the end of September 2000, the Cut Off Field K. Pierce #1 well was
recompleted and began producing 2 million cubic feet of gas and 30 barrels of
condensate per day. Fortune has an approximate 26% net revenue interest in this
well. Although this well had very little impact on third quarter 2000 revenues,
it is expected to significantly impact future operating results.
Offsetting somewhat the production gains, the South Timbalier 76, which
was producing approximately 1.7 million cubic feet of gas and 120 barrels of
condensate per day, was shut in from September 17, 2000 to October 30, 2000 to
repair valves and scale build-up. Fortune has a 9.375% net revenue interest in
South Timbalier 76.
Analysis of change in selected expenses -
Quarter Ended
September 30,
------------------- Percent
2000 1999 Change
-------- -------- --------
Production and operating expense $153,000 $128,000 20%
- per MCFE 0.87 0.75 16%
Depreciation, depletion and
amortization 280,000 249,000 12%
- per MCFE $ 1.59 $ 1.47 8%
Production and operating expense increased by $25,000 for the third
quarter of 2000 versus 1999 because of higher production taxes, more producing
properties in 2000 and $14,000 for workovers in 2000 versus $5,000 during the
same 1999 period. These factors contributed to the higher per MCFE operating
cost in 2000.
13
<PAGE>
Fortune's provision for depletion, depreciation and amortization (DD&A)
increased by $31,000 in the third quarter of 2000 as compared to 1999 primarily
because of a higher depletable oil and gas property balance in relation to
estimated proved reserves at September 30, 2000.
Quarter Ended
September 30,
------------------- Percent
2000 1999 Change
-------- -------- --------
General and administrative expense $288,000 $311,000 (7)%
Interest expense 69,000 97,000 (29)%
Interest expense decreased by $28,000 in 2000 compared to 1999 because of
the note conversion to equity discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Significantly higher oil and gas prices are the primary contributors to
higher oil and gas revenues and a lower net loss in 2000 compared to the same
1999 period. Fortune's net loss decreased 61% to $495,000 during the first nine
months of 2000 compared to a net loss of $1,261,000 for the same 1999 period.
Analysis of change in oil and gas revenues -
Nine Months Ended
September 30,
------------------- Percent
2000 1999 Change
-------- -------- --------
Production
Oil - Bbl 9,600 12,900 (26)%
Gas - Mcf 422,200 412,400 2 %
Prices
Oil - $/Bbl $29.09 $16.27 79 %
Gas - $/Mcf 3.59 2.25 60 %
Revenues
Oil $ 279,000 $ 210,000 33 %
Gas 1,514,000 926,000 64 %
Depletion was the primary contributor to the decrease in oil production.
The $657,000 increase in oil and gas revenue from 1999 to 2000 is primarily
attributable to the 79% increase in oil prices and the 60% increase in gas
prices.
Analysis of change in selected expenses -
Nine Months Ended
September 30,
------------------- Percent
2000 1999 Change
-------- -------- --------
Production and operating expense $438,000 $330,000 33%
- per MCFE 0.91 0.67 36%
Depreciation, depletion and
amortization 699,000 689,000 1%
- per MCFE $ 1.46 $ 1.41 4%
14
<PAGE>
Production and operating expense increased by $108,000 for the first nine
months of 2000 versus 1999 because of higher production taxes, more producing
properties in 2000 and $48,000 of workovers in 2000 versus $5,000 during the
same period in 1999. These factors also contributed to the higher 2000 operating
cost per MCFE.
Fortune's provision for DD&A increased by $10,000 in the first nine months
of 2000 as compared to 1999 primarily because of the higher depletable oil and
gas property balance in relation to proved reserves.
Nine Months Ended
September 30,
------------------- Percent
2000 1999 Change
-------- -------- --------
General and administrative expense $852,000 $960,000 (11)%
Interest - cash 207,000 291,000 (29)%
- non-cash - 99,000 N/A
Interest expense payable in cash decreased by $84,000 in 2000 compared to
1999 because of the note conversion to equity discussed above. This note
conversion resulted in the $118,000 non-cash extraordinary loss on early
extinguishment of debt in 2000 which represents a premium equal to one year's
interest paid in common stock to the converting noteholders. In 1999, Fortune
incurred $61,000 of non-cash note restructuring expense for the value of
warrants issued to noteholders who agreed to amend the terms of their notes.
Non-cash interest expense in 1999 was for amortization of debt financing costs,
which were fully amortized by the end of April 1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH BALANCE, WORKING CAPITAL AND CASH FLOWS FROM OPERATING
ACTIVITIES
Fortune generated $143,000 of cash in its operating activities during the
first nine months of 2000 compared to cash used of $594,000 during the same 1999
period. Before considering the effect of changes in operating assets and
liabilities, cash flow was a positive $344,000 during 2000 compared to a
negative $358,000 during 1999. As discussed above, higher oil and gas prices and
lower expenses account for this significant increase in cash flow. Cash and
working capital at September 30, 2000 increased significantly from December
31,1999 because of the positive cash flow and the capital raised during 2000
discussed above.
Analysis of changes in selected liquidity measures -
As of
-------------------------
September 30, December 31, Percent
2000 1999 Change
---------- ---------- ----------
Cash balance $ 676,000 $ 294,000 130 %
Net working capital 945,000 302,000 213 %
Long-term debt 2,295,000 3,235,000 (29)%
15
<PAGE>
Long-term debt is lower at September 30, 2000 primarily because of the
conversion of $930,000 of debt to equity in the first quarter of 2000 discussed
above.
<TABLE>
<CAPTION>
Quarter ended September 30,
--------------------------
2000 1999 Change
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow from operations before
changes in operating assets and liabilities $ 344,000 $ (358,000) N/A
Cash flow from operating activities after
changes in operating assets and liabilities 143,000 (594,000) N/A
</TABLE>
CASH USED IN INVESTING ACTIVITIES - CAPITAL EXPENDITURES
Expenditures for oil and gas properties for the first nine months of 2000
were $524,000 compared to $302,000 for the first nine months of 1999.
The 2000 expenditures include primarily:
- expenditures for the acquisition and successful recompletion of
the Cut Off Field K. Pierce #1 well;
- drilling and completion expenditures for the successful Brooks
#1 and #2 wells at Cadiz prospect;
- drilling and completion expenditures for the successful Bacon
prospect Ivy 24-11;
- drilling and completion for the successful La Rosa Rooke C-6 and
C-7 wells;
- expenditures for the multiple well recompletion program at LaRosa;
- expenditures for the unsuccessful completion attempt at the
Espiritu Santo Bay 210 #6;
- expenditures for the attempted recompletion at Estherwood
prospect in Louisiana that was abandoned in January 2000; and
- expenditures for seismic interpretation costs and delay rentals
at Espiritu Santo Bay and La Rosa.
The 1999 expenditures include primarily:
- additional leases at Espiritu Santo Bay;
- seismic interpretation at Espiritu Santo Bay and La Rosa;
- completion expenditures for two wells at Espiritu Santo Bay, ST 216 #16
and ST 210 #5;
- completion expenditures for the Bacon prospect Anderson 24-7 well; and
- expenditures for the Espiritu Santo Bay ST 164 #4 well which was
plugged and abandoned in May 1999;
- drilling expenditures for a La Rosa well that was plugged and
abandoned in August 1999.
The 2000 activities are discussed below.
In late July, 2000, Fortune completed an acquisition of a net 35%
non-operated working interest in a well in the Cut Off Field, Lafourche Parish,
Louisiana. Fortune and its partners acquired the property with the intention of
increasing production by recompleting the well. The well was recompleted at the
end of September and is producing approximately 2 million cubic feet of gas and
30 barrels of condensate per day. Fortune's 35% working interest share of the
acquisition and recompletion was approximately $179,000. At current prices and
production, the well should cash flow in excess of $80,000 per month to Fortune.
16
<PAGE>
Logging results of the Brooks #1 well at the Cadiz 3-D Seismic Prospect
indicate that the well encountered approximately 175 feet of net pay in four
potentially productive zones. The log analysis shows 63 feet of net pay in the
Lower Luling, 60 feet of net pay in the Lower Slick, 8 feet of net pay in a
Wilcox stringer sand and 44 feet of net pay in the Upper Luling. The Upper Slick
sand may also be productive in this well.
The well was perforated in the top 10 feet of the Lower Luling sand and is
flowing approximately 2 million cubic feet of gas and 15 barrels of condensate
per day. Because of the better-than-expected results, the partners may perforate
a portion of the additional 53 feet of the Lower Luling net pay interval to
increase production. These additional perforations are in lieu of performing a
fracture stimulation that the partners thought would be necessary on this sand.
The other potential zones will be perforated after the lower zones have been
produced fully. Fortune owns a 6.5625% working interest in this well. Production
commenced on June 24, 2000. The total cost to Fortune to drill and complete this
well was approximately $31,000.
The well was drilled on a 3-D seismic anomaly generated from 3-D seismic
licensed by Fortune and farmed-out to Prime Energy Corporation. Prime exercised
its option to drill a well in an adjacent faultblock which was also identified
from the 3-D seismic. This second well, the Brooks #2, was spud August 12, 2000
and was completed on September 26, 2000. Final logging results indicated that
the Brooks #2 encountered approximately 40 feet of net pay in the Slick sand and
then crossed a fault and did not see the principal target Luling sands. The well
has been perforated in the top portion of the slick sand and is currently
flowing approximately 350 thousand cubic feet of gas per day. The partners are
considering drilling a third well to reach the Luling sands that were faulted
out of the Brook's #2, but productive in the Brooks #1. Fortune owns a 6.5625%
working interest in this well.
The La Rosa #C-7 well was spud on June 18, 2000 and logged on June 26,
2000 as a new discovery. Preliminary log evaluation indicates that the well has
five Miocene pay sands and one additional potential pay sand. The well is
currently producing approximately 140,000 cubic feet of gas per day. Fortune
owns an 18.75% working interest in the well; its share of the drilling and
completion cost was approximately $41,000.
The La Rosa C-6 well was spud on March 29, 2000 and logged on April 5,
2000 as a new discovery. This well is currently producing approximately 340,000
cubic feet of gas per day. Fortune owns an 18.75% working interest in the well
and its share of the drilling and completion costs was approximately $38,000.
In response to historically high oil and gas prices, the partners in the
La Rosa field have begun a re-completion program to increase production. The
Spaulding #11 well, the first operation in this recompletion program, was
brought on production on June 22, 2000, with an initial flow rate of 1 million
cubic feet of gas per day. The well is currently producing approximately 900
thousand cubic feet of gas per day. Fortune owns a 37.5% working interest in the
well and spent less than $10,000 to fund its share of the recompletion.
Recompletions of other wells have resulted in additional production and further
activity is planned.
Testing of Fortune's Grass Island 210-#6 well at Espiritu Santo Bay
concluded in June 2000. Although the frio sands flowed natural gas
intermittently, the sands were tight and lacked sufficient permeability to
produce at consistent economic rates. It is believed that permeability may
improve significantly on the structure's flanks. Therefore, Fortune is very
encouraged that it found hydrocarbons in these frio sands and believes that this
has positive implications for future wells on the Grass Island Deep prospect and
on its other prospects elsewhere in Espiritu Santo Bay. The well was abandoned
in the frio zones. The total cost to Fortune for our 7.4% share of the
completion, testing and abandonment was approximately $80,000. The operator is
in the process of obtaining permits for other wells in Espiritu Santo Bay,
including a 16,000 foot test that the partners hope to spud by early 2001.
17
<PAGE>
The Bacon prospect Ivy #24-11 was completed in May 2000 as a new
discovery. Fortune owns an approximate 10% working interest in the well. The
well is producing approximately 200,000 cubic feet of gas per day. Fortune's
share of the drilling and completion costs was approximately $22,000. Fortune
also incurred approximately $10,000 during the third quarter of 2000 to drill
the Bacon Prospect Anderson 13-10, a dry hole.
OIL AND GAS PRICES
Conditions outside of our control influence the prices we receive for oil
and gas. As of October 27, 2000, Fortune was receiving an average of
approximately $30.50 per barrel for its oil production and $5.40 per Mcf for its
gas production. These prices are significantly higher than historical averages
and could decrease in the near future.
FORWARD LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements. Forward-looking
statements include statements regarding future oil and gas production and
prices, future cash flow and cash requirements, future exploration and
development spending, future drilling and operating plans and results, reserve
and production potential of Fortune's properties and prospects, Fortune's
business strategy, and management's plans and expectations. Actual events or
results could differ materially from those discussed in the forward-looking
statements as a result of various risk factors including the factors described
below.
FORTUNE'S RELIANCE ON EXPLORATORY PROJECTS INCREASES THE RISKS INHERENT IN
THE OIL AND GAS INDUSTRY. Our current investments are primarily in exploration
projects, where the risks are substantially greater than projects involving
already producing formations. We anticipate that one or more of our next wells
will be designed to test formations that are deeper than known production in
Espiritu Santo Bay. These formations have not been extensively tested to date.
The exploration risks, therefore, are higher on this project than they might be
where a greater number of underground references exist. Fortune has realized
less success than originally anticipated in drilling some of its recent
prospects and a substantial number of our future projects could experience
similar results.
FORTUNE HAS INCURRED NET LOSSES FOR EACH OF THE LAST SEVERAL YEARS.
Fortune has incurred substantial net losses for several years prior to 2000.
Although we made significant budget cuts in 1999 and are making additional
budget cuts in 2000, oil and gas prices continue to fluctuate significantly.
This makes it likely that Fortune will incur losses in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR REVENUE IS DEPENDENT UPON A LIMITED NUMBER OF PRODUCING WELLS.
Approximately 33% of our oil and gas revenues in the third quarter were
accounted for by a single well at South Timbalier Block 86. Because this well
has a limited production history, it is difficult to predict accurately its
production decline rate or its ultimate reserves. A significant curtailment or
loss of production for a prolonged period before we could replace this well
would have a material adverse effect on our projected operating results and
financial condition.
OUR NEED FOR WORKING CAPITAL MAY AFFECT OUR LEVEL OF PARTICIPATION IN
VARIOUS PROJECTS. Investment in oil and gas exploration requires the commitment
of substantial amounts of capital over significant periods of time. We may not
have sufficient liquid capital resources to participate at our existing working
interest level if the operators of any of our properties accelerate the drilling
and development schedule or if we incur unexpected significant expenditures or
reduced production. If we do not participate in the capital expenditures for any
project, our interest in that project will be substantially reduced or lost
entirely.
18
<PAGE>
FORTUNE IS DEPENDENT ON OPERATORS, CONSULTANTS AND PARTNERS OVER WHOM IT
HAS LITTLE CONTROL. Since we do not operate our projects, we are dependent on
other oil and gas companies to conduct operations in a prudent, competent, and
timely manner.
ACCOUNTING METHOD MAY RESULT IN ADDITIONAL WRITE-DOWNS OF OIL AND GAS
PROPERTY COSTS. We report our operations using the full-cost method of
accounting for oil and gas properties. Under these rules, the net capitalized
costs of properties may not exceed a "ceiling" limit of the tax-effected,
discounted present value of estimated future net revenues from proved reserves,
plus the lower of cost or fair market value of unproved properties. The risk
that we will be required to write down the carrying value of our properties
increases when oil and gas prices are depressed or unusually volatile or when
previously unevaluated properties are determined to be worth less than their
cost. Fortune has recognized significant impairments in past periods. As a
result of continued fluctuating oil and gas prices, it is likely that we will
incur impairments in future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT MARKET RISK
Fortune is exposed to market risk, including adverse changes in oil and
gas prices and interest rates as discussed below. Fortune does not currently use
derivative financial instruments to mitigate fluctuations in oil and gas prices
or interest rates.
OIL AND GAS PRICE RISK. Fortune's oil and gas revenues can be
significantly affected as oil and gas prices fluctuate widely in response to
changing market forces. These fluctuations can be reduced through the proper use
of oil and gas price hedging tools. We currently do not use oil and gas price
hedges because we do not believe that Fortune has sufficient production volumes
to offset the risks inherent in their use. Consequently, our oil and gas
revenues will continue to fluctuate as prices fluctuate.
INTEREST RATE RISK. Fortune's exposure to changes in interest rates
primarily results from its short-term and long-term debt with both fixed and
floating interest rates.
Fortune's debt structure is comprised of:
Stated Balance
Interest Rate September 30, 2000 Matures
------------- ------------------ -------
12% Fixed $2,295,000 2007
Variable at banks
Base rate + 1 1/4% or
LIBOR + 4% $10,000 2001
Changes in interest rates will not currently have a significant impact on
Fortune's interest expense.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 4 of the footnotes to the financial statements in Part I herein
for a description of legal proceedings.
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
A report on Form 8-K was filed with the Securities and Exchange Commission
on October 2, 2000 to report Fortune's press release providing an exploration
program update.
A report on Form 8-K was filed with the Securities and Exchange Commission
on November 1, 2000 to report Fortune's press release of its third quarter 2000
financial results.
*Filed herewith.
20
<PAGE>
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: November 1, 2000
