1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 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.)
515 W. Greens Road, Suite 720
Houston, Texas 77067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 872-1170
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of exchange on which registered
------------------- ------------------------------------
Common Stock, $.01 par value None - Common stock quoted
on OTC Bulletin Board
Securities registered pursuant to section 12(g) of the Act: None
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 ___
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
State issuers revenues for its most recent fiscal year $1,492,000.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked price of such stock, as of a specified date within 60 days prior to the
date of filing.
The aggregate market value of voting stock held by non-affiliates at March
17, 2000: $9,174,000
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Shares of common stock outstanding as of March 17, 2000: 16,349,530
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of Form 10-KSB into which the document is incorporated: (1) Any annual
report to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933.
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1980).
None
<PAGE>
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
Fortune Natural Resources Corporation is an independent public oil and gas
exploration and production company. We explore, develop and produce oil and gas
from properties located primarily onshore and offshore Louisiana and Texas.
Fortune primarily explores for significant oil and gas reserves using
advanced 3D seismic and computer aided exploration technology. We believe that
the use of this technology provides more accurate and comprehensive geological
data for evaluating drilling prospects than traditional 2D evaluation methods.
Fortune has been acquiring interests in oil and gas prospects on the Gulf Coast
and is continually evaluating 3D and 2D exploration projects. Fortune also seeks
to acquire producing properties at attractive prices.
STRATEGY
Fortune's strategy is to invest in a diversified portfolio of oil and gas
exploration and development properties within its area of interest. Fortune
mitigates the risks of exploration drilling by generally taking minority
interests in projects with large potential reserves and development potential.
Fortune has invested in seismic programs to identify new exploration prospects,
in exploration prospects ready to drill, and in producing properties with
additional development potential, each described in more detail below.
Fortune seeks to participate, generally as a minority, non-operating
interest holder, in a variety of exploration and development projects with
industry partners. Fortune's approach to prospect acquisition is twofold. It
seeks prospects on an opportunistic basis by evaluating individual prospect
opportunities presented to it by other oil and gas companies or consultants. It
also seeks to develop prospects through multi-year strategic joint ventures
designed to evaluate a large area for potential drilling prospects. An example
of this approach is the venture commenced in 1997 along the Texas coast at
Espiritu Santo Bay.
Fortune and its partners use advanced technologies including, where
appropriate, 3D seismic and CAEX technology in defining and evaluating drilling
prospects. Fortune believes that these techniques have undergone important
technological advances in recent years and that their use can provide Fortune
with a more accurate and complete prospect evaluation. These advancements should
materially increase the likelihood of finding commercial quantities of oil and
gas at lower reserve finding costs.
Although Fortune does not currently operate properties or originate
exploration prospects, it actively participates in the evaluation of those
properties and prospects. In order to employ advanced technology while
controlling fixed operating costs, Fortune relies heavily on industry
consultants for its project evaluations. With aggressive downsizing and
reorganizing by larger oil companies in recent years, Fortune has found that
highly qualified prospect originators and technical advisors are available as
consultants and joint venturers. This enables Fortune to acquire expert
technical assistance in its target geographic areas while avoiding the overhead
associated with a larger number of employees.
3
<PAGE>
Fortune employs the services of Interpretation3, a consulting company
headed by Daniel Shaughnessy, formerly an exploration supervisor with Mobil Oil
Company, to assist in evaluating prospects. Mr. Shaughnessy became a director of
Fortune in early 1997. Fortune employs Huddleston & Co., Inc., Houston, Texas,
independent petroleum engineers, to estimate reserves in successful wells and in
certain properties being evaluated for acquisition. Fortune does not have
contracts with these consultants that obligate the consultants to continue their
availability to Fortune. However, we believe that these consultants will
continue to be available to provide services to Fortune for the foreseeable
future.
Substantially all of our current and proposed activities involve a high
degree of risk, including the risk that we will make substantial investments in
properties and wells without achieving commercial production. While Fortune
attempts to manage risk through careful evaluation of potential investments and
diversification, our efforts may not result in successful development of oil or
gas wells.
EXPLORATION ACTIVITIES
Fortune reviews prospects developed by companies that have particular
expertise in specific exploration areas and uses its own consultants and
management knowledge to analyze the exploration data. Taking a minority
non-operating position in high-potential projects exposes Fortune to potentially
significant discoveries while minimizing its losses if the exploration wells are
unproductive. Recent significant exploration projects undertaken by Fortune
include the 3D seismic surveys at Espiritu Santo Bay and LaRosa Field, both of
which are discussed below.
PROPERTY ACQUISITION ACTIVITIES
Prior to mid-1994, Fortune focused its efforts on acquiring producing
properties in an effort to take advantage of competitive prices for proved
reserves with development potential. In mid-1994, Fortune made a strategic
decision to shift its emphasis from acquiring producing properties to exploring
for oil and gas reserves, although Fortune continues to examine attractive
acquisition opportunities. Increasing price competition for attractive producing
properties as well as the recent important advances in exploration technology
prompted this decision. To help facilitate its exploration strategy and focus
its efforts, Fortune sold all of its California properties and relocated its
offices to Houston, Texas in early 1996.
SIGNIFICANT PROPERTIES AND ACTIVITIES
ESPIRITU SANTO BAY PROPRIETARY 3D SEISMIC EXPLORATION JOINT VENTURE,
OFFSHORE CALHOUN COUNTY, TEXAS
In early 1997, Fortune entered into a multi-year proprietary 3D seismic
joint venture to evaluate and identify exploration prospects in a 166.5 square
mile AMI in and around the Texas transition zone, including the intracoastal
waters at Espiritu Santo Bay. Fortune owns a 12.5% working interest in the joint
venture which has completed a 135-square mile proprietary 3D seismic survey.
Fortune and its working interest partners currently own 33,701 leasehold acres.
The joint venture agreement extends through July 15, 2002 but may be extended if
necessary.
Seismic acquisition activities began in April 1997 and were completed in
September 1997. The seismic data has been processed and is continually being
interpreted. Each partner may elect whether to participate in drilling an
initial well or farm out all or part of its interest to other joint venture
partners or third parties. Over a dozen prospects have been delineated to date.
No assurance can be given, however, that significant commercial quantities of
hydrocarbons will be discovered. Drilling began in September 1998. Six wells
have been drilled to date. Two have been plugged, two have been completed, one
is pending production testing as is discussed below. The sixth, State Tract 164
#4, is a potential discovery that experienced an underground blowout in late
1998. This well was plugged in 1999 because of that blowout, but may be
redrilled in the future.
4
<PAGE>
During the third quarter of 1999, Fortune and substantially all of the
working interest owners at Espiritu Santo Bay farmed out their interest in the
first deep Espiritu Santo Bay prospect to McMoRan Oil and Gas, LLC ("McMoRan"),
a wholly-owned subsidiary of McMoRan Exploration Company.
Under the terms of the farmout agreement as it relates to Fortune, McMoRan
and its exploration program partners pay 100% of all drilling, completion,
testing and facilities costs for the farmout well attributable to Fortune's
interest in exchange for 50% of Fortune's working interest in a 3,200 acre
prospect area. Fortune retained the right to 50% of its original interest in the
well once McMoRan recovers all of its costs out of production revenues and its
proportionate share of an approximate 3.4% overriding royalty interest. McMoRan
has agreed to limit the recovery of its costs of the drilling of the well in the
event of any significant drilling cost overruns.
The farmout agreement established a 22 square mile area of mutual interest
(AMI) around the prospect and granted McMoRan a license to approximately 22
square miles of Fortune's 135 square miles of 3-D seismic data. The agreement
also granted McMoRan an option, which has expired unexercised, to acquire 50% of
Fortune's interest in additional acreage in the 22 square mile AMI by paying
Fortune 50% of certain of its costs in that acreage. Fortune will bear its
"after-payout" share of drilling and completion costs for subsequent wells on
the 3,200 acre prospect subject to the farmout. Fortune's working interest in
the 3,200 acre prospect prior to the farmout was approximately 7.4%.
The farmout well, the State Tract 210 #6, was spud on November 1, 1999 and
reached total depth on December 14, 1999. McMoRan ran casing to total depth and
began evaluating the sands encountered in the well to assess future operating
alternatives. In March 2000, McMoRan informed Fortune that it did not plan to
test the State Tract 210 #6 but that it may be interested in participating in
another well on the farmout acreage. Fortune and its other partners at Espiritu
Santo Bay are negotiating to reach an agreement which will permit such a test to
be conducted at no cost to McMoRan. No assurance can be given that the parties
will ultimately enter into such an agreement.
Petro-Guard proposed a shallow well which was drilled in early 2000 on
acreage outside of the McMoRan farmout area. Fortune elected to not participate
in this well because we believed that the estimated well economics did not
justify it being drilled. Fortune expects to participate in additional drilling
on the Espiritu Santo Bay property.
LA ROSA PROPRIETARY 3D SEISMIC EXPLORATION PROGRAM, REFUGIO COUNTY, TEXAS
In 1994, Fortune acquired an undivided 50% interest in the La Rosa Field,
a producing oil and gas field. In January 1997, Fortune's working interest was
reduced to a 37.5% working interest as the result of an after-payout back-in. On
February 13, 1997, Fortune and its partners commenced a proprietary 3D seismic
survey covering 24 square miles over the La Rosa Field and surrounding acreage
in Refugio County, Texas. The survey was conducted using state-of-the-art
technology. Processing was completed in September 1997. Fortune farmed out 50%
of its rights in this seismic program in exchange for the payment of all of
Fortune's 3D survey costs. Accordingly, Fortune currently owns an undivided
18.75% working interest in all newly-generated prospects. Fortune maintains its
37.5% working interest in all production from wellbores existing prior to
shooting the 3D seismic survey.
Fortune and its working interest partners currently own 5,536 acres in the
field. The first well drilled based upon the 3D data was spudded December 2,
1997. Since then 9 additional wells have been drilled. Five of these wells have
been completed and five have been plugged and abandoned. Additional drilling is
expected on this property. During 1999, Fortune incurred $227,000 of seismic
interpretation, leasing and well costs.
5
<PAGE>
TRANSITION ZONE AND TIMBALIER TRENCH PROPERTIES - OFFSHORE LOUISIANA
Fortune owns varying working or royalty interests in eight projects
located in the transition zone and Timbalier Trench regions offshore Louisiana.
Fortune has farmed out its interest in three of the projects, retaining
overriding royalties and/or the right to participate as a working interest
owner. Two of prospects farmed out now have producing wells as discussed below.
Fortune has a 100% working interest on one of the remaining projects and an
approximate 50% working interest in three others.
Sonat Exploration Company successfully completed a well in late 1998 on
one of the farmout prospects, South Timbalier Block 86. Fortune owns a 3.166%
override before payout, which increases to a 4% override after payout, in this
project. Production commenced in March 1999; current production from this well
is approximately 3 MMCFD of gas and 25 BOPD. Fortune also recently farmed out
its interest in Bay Marchand Block 5 to Bois d'Arc Operating Corporation, which
successfully completed a well in the spring of 1999. Fortune's leasehold
interest was unitized with adjacent producing acreage. As a result, Fortune now
owns a 0.24% overriding royalty interest in the entire unit, which contains two
wells producing from three zones. This unit is producing approximately 400 MCFD
of gas and 500 BOPD. As production decreases in the oil and gas zones currently
producing on these two projects, significant reserves and production are
anticipated from future recompletions into additional oil and gas zones behind
pipe.
The remaining projects are being evaluated for drilling, farmout or resale
opportunities.
SOUTH TIMBALIER BLOCK 76 - FEDERAL WATERS, OFFSHORE LOUISIANA
South Timbalier Block 76 is Fortune's most prolific producer, accounting
for approximately one-third of Fortune's revenues and proved reserves in 1999.
This property, acquired in December 1995, includes a producing well which was
completed in 1990, a drilling and production platform and a transmission line.
Fortune owns a 12.5% working interest in the property.
The South Timbalier 76 well has been shut-in in prior years for
significant workovers. The most recent workover caused the well to be shut-in
from March 24 to April 19, 1997 to repair a leak in the casing. Fortune's share
of the costs of this workover was approximately $360,000. The well has also
experienced significant production decline since the latest workover and
Fortune's independent petroleum engineers estimate the current producing zone is
scheduled to fully deplete in 2000. Notwithstanding these shut-ins and decline,
the well has already returned over two times Fortune's initial investment, and
Fortune is evaluating the possibilities for additional development.
BACON AND WEST BACON PROSPECTS - CHICKASAW COUNTY, MISSISSIPPI
Fortune has participated in four wells in Mississippi's Black Warrior
Basin, including one well after year end 1999. The Brand 24-5 #1 well was logged
and completed in late September 1999 with Lewis and Evans sand pay zones 35 feet
structurally higher to the same zones in our Anderson #24-7 discovery in
December 1998. Fortune owns a 10% working interest in the new discovery.
Fortune's cost for this well was approximately $19,000. The Lewis sand is
currently producing approximately 430 MCFD and the Evans sand is expected to be
completed after the Lewis sand depletes.
6
<PAGE>
The Bacon Prospect Anderson #24-7 was logged and completed on December 28,
1998 with three pay zones totaling approximately 95' of gross pay and 29' of net
pay. The bottom pay sand, the Lewis, was completed during the second quarter of
1999 and is currently producing about 80 MCFD. The upper zones of interest (the
Evans and Abernathy "B" sands) will not be tested until the lower zone has
depleted. Fortune owns a 10% working interest in the discovery. Fortune's cost
for the shallow well was approximately $26,000.
The Ivy 24-11 was spud February 22, 2000 and logged on February 28, 2000.
The well appears to be productive in the Lewis and Abernathy sands and the
operator plans to dually complete these sands during March 2000, weather
permitting. The operator also plans to conduct additional drilling in this
field.
Earlier in December 1998, the West Bacon Prospect was drilled as a dry
hole. Fortune owned a 25% working interest in that well; its share of dry hole
and abandonment costs was approximately $36,000.
DIVESTITURE OF EAST BAYOU SORREL, IBERVILLE PARISH, LOUISIANA
On March 31, 1998, Fortune sold its interest in the East Bayou Sorrel
field to the field operator for cash in the amount of $4,695,000. The properties
sold consisted of Fortune's interest in the Schwing #1 and #2 wells and all of
Fortune's leases, facilities and interests in the East Bayou Sorrel operating
area.
Fortune's interest in the two productive wells at East Bayou Sorrel was
pledged to secure a credit facility with Credit Lyonnais. The total balance
outstanding under the credit facility prior to this sale was $550,000. Upon
closing the sale of the field, Fortune paid all but $10,000 of the outstanding
balance of the credit facility.
The Schwing #1 and #2 wells began producing 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 Fortune's oil and gas revenues during 1997 and proved
reserves as of December 31, 1997. A third well in the field, the Schwing #3, was
spudded October 9, 1997, but was temporarily plugged and abandoned on March 5,
1998 pending further evaluation of the well's potential. During 1997 and 1998,
Fortune incurred approximately $1 million to drill and attempt completion of the
Schwing #3.
BELLE PEPPER AND BELLE JEFFERS FIELDS, WEBB COUNTY, TEXAS
In 1995, Fortune acquired interests in approximately 2,300 acres of
mineral leases, including nine currently producing gas wells, in the Belle
Pepper and Belle Jeffers Fields. The Lobo sand in this area has very low
permeability, under one millidarce, which has qualified all the acquired
production as a "tight" gas sand. As a tight gas sand, the production from the
nine wells drilled before January 1, 1993 is exempt from Texas state severance
tax. Fortune has a 20% interest in a proved undeveloped in-fill location within
the Belle Pepper field.
AWP FIELD, MCMULLEN COUNTY, TEXAS
In 1992, Fortune acquired a 10% working interest in the AWP Field. The
field includes approximately 3,500 acres of oil and gas leases, 48 producing oil
and gas wells and nine proved undeveloped locations remaining to be drilled on
either 40 or 80 acre spacing. Fortune's estimated share of the drilling and
completion costs for each of these undeveloped locations is $48,000. In February
1996, developmental drilling resumed with the Bracken Ranch #47 well which was
successfully completed as a producer. The Bracken Ranch #48 well was completed
as a producer in January 1997.
7
<PAGE>
DRILLING ACTIVITIES
The following table sets forth information regarding wells drilled by
Fortune in the years ended December 31, 1999, 1998 and 1997:
WELL DRILLING ACTIVITY
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells
Productive 2 0.29 8 1.14 - -
Dry 2 0.39 11 1.83 1 0.13
----- ----- ----- ----- ----- -----
4 0.68 19 2.97 1 0.13
===== ===== ===== ===== ===== =====
Development Wells
Productive - - - - 1 0.13
Dry - - - - - -
----- ----- ----- ----- ----- -----
- - - - 1 0.13
===== ===== ===== ===== ===== =====
</TABLE>
Four farmout wells were also drilled or completed in 1999 on behalf of
Fortune on acreage either owned by Fortune or unitized with Fortune acreage.
Three of these wells were productive and the fourth is being evaluated. These
wells are discussed above.
OIL AND GAS RESERVES
Fortune's reserves are located onshore and offshore Texas and Louisiana.
Proved reserves represent estimated quantities of oil and gas which geological
and engineering data demonstrate to be reasonably certain to be recoverable in
the future from known reservoirs under existing economic and operating
conditions. Proved developed oil and gas reserves are proved reserves that can
be expected to be recovered through existing wells using existing equipment and
operating methods.
The oil and gas reserve estimates at December 31, 1999, 1998 and 1997 were
determined by Huddleston & Co., Inc., Houston, Texas, independent petroleum
engineers. Such estimates are subject to numerous uncertainties inherent in the
estimation of proved reserves and in the projection of future production, costs
and prices. The accuracy of any reserve estimate is a function of available data
and of engineering and geological interpretation and judgment. Estimates of the
economically recoverable oil and gas reserves and classifications of such
reserves based on risk of recovery by different engineers or by the same
engineers at different times, may vary substantially. The "Standardized Measure
of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves,"
determined from such reserve data, are estimates only. They should not be
construed to be the current market values of Fortune's oil and gas reserves or
the costs that would be incurred to obtain equivalent reserves. While these
reserve estimates are believed to be reasonable, they should be viewed with the
understanding that future production, development drilling and changes in
pricing will affect the reserve estimate.
8
<PAGE>
The following sets forth estimated proved oil and gas reserves as
determined by Fortune's independent petroleum engineers attributable to
Fortune's interests in oil and gas properties as of December 31, 1999, 1998 and
1997. These estimates are based in part on the price at which the product was
sold as of the end of each year.
ESTIMATED NET RESERVE QUANTITIES
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Total Proved Reserves:
Oil (Bbls)....................... 88,000 106,000 257,000
Gas (Mcf)........................ 3,000,000 3,082,000 3,217,000
MCFE (oil at 6 MCFE to 1 Bbl)...... 3,526,000 3,718,000 4,759,000
Total Proved Developed Reserves:
Oil (Bbls)....................... 28,000 47,000 198,000
Gas (Mcf)........................ 1,371,000 1,413,000 1,548,000
MCFE (oil at 6 MCFE to 1 Bbl)...... 1,538,000 1,695,000 2,736,000
</TABLE>
The slight decrease in reserve quantities from 1998 to 1999 results from:
o Depletion and revisions
o Offset almost entirely by exploration discoveries at
- South Timbalier Block 86
- Bacon
- Bay Marchand Block 5
The decline from 1997 to 1998 include -
o The sale of 140,000 Bbls and 186 Mmcf at East Bayou Sorrel in March 1998
o Depletion
o Offset partially by exploration discoveries at Espiritu Santo Bay
and La Rosa
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DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES
The following table represents the estimated undiscounted and discounted
future net revenues using unescalated prices from the proved reserves at
December 31, 1999, 1998 and 1997.
FUTURE NET REVENUES
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Estimated Future Net
Revenue Undiscounted.......... $6,173,000 $4,985,000 $8,410,000
---------- ---------- ----------
Standardized Measure of Discounted
Future Net Cash Flows......... $4,331,000 $3,527,000 $6,503,000
---------- ---------- ----------
</TABLE>
A significant factor in the increase in reserve values from 1998 to 1999
and the decline from 1997 to 1998 is the changes in prices used in each year end
evaluation. The year end prices used were:
<TABLE>
<CAPTION>
Year end
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Oil - $/Bbl....................... $ 23.28 $ 9.85 $ 16.90
Gas - $/Mcf....................... $ 2.50 $ 2.25 $ 2.60
</TABLE>
PRODUCTION
Fortune's net production for the years ended December 31, 1999, 1998 and
1997 was:
NET PRODUCTION DATA
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Oil (Bbls)........................ 17,000 42,000 87,000
Gas (Mcf)......................... 508,000 609,000 821,000
</TABLE>
10
<PAGE>
PRICES AND PRODUCTION COSTS
The following table sets forth Fortune's approximate average sales prices
and production (lifting) costs for the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
AVERAGE SALES PRICES AND PRODUCTION COSTS
December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Average Sales Price Received:
Oil (per Bbl)................... $ 17.89 $ 13.08 $ 19.04
Gas (per Mcf)................... 2.34 2.19 2.66
Average Production and
Operating Cost per MCFE
(including production taxes).. 0.87 0.69 0.81
</TABLE>
PRODUCING WELLS
The following table lists Fortune's total gross and net producing oil and
gas wells at December 31, 1999:
PRODUCING WELLS
<TABLE>
<CAPTION>
Gross Net
----------- -----------
Oil Gas Oil Gas
---- ---- ---- ----
<S> <C> <C> <C> <C>
Texas............................. 48 41 6.9 9.2
Mississippi....................... - 2 - 0.2
Federal waters - Gulf of Mexico... - 1 - 0.1
---- ---- ---- ----
Total................ 48 44 6.9 9.5
===== ==== ==== ====
</TABLE>
PRINCIPAL CUSTOMERS
Fortune routinely sells more than 10% of its oil and gas production to
single customers. Often, all of the oil or gas production from a field for the
entire year is sold to a single customer. However, there are a large number of
both oil and gas customers in Fortune's area of operations. Accordingly, we do
not believe that the loss of any of our customers would have a material adverse
effect on our operations.
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PROPERTIES
LEASEHOLD ACREAGE
Fortune's approximate holdings of developed and undeveloped leasehold
acreage as of December 31, 1999 were:
LEASEHOLD ACREAGE
<TABLE>
<CAPTION>
Developed Undeveloped
--------------- ---------------
Gross Net Gross Net
------ ------ ------ ------
<S> <C> <C> <C> <C>
Louisiana......................... - - 761 227
Federal waters - Gulf of Mexico... 841 63 9,799 2,251
Texas............................. 12,550 1,837 19,728 3,407
Mississippi....................... 733 73 481 48
------ ------ ------ ------
Total........................... 14,124 1,973 30,769 5,933
====== ====== ====== ======
</TABLE>
TITLE TO PROPERTIES
Updated title opinions were issued for many of Fortune's properties in
1997 in conjunction with refinancing Fortune's bank credit facility. Fortune
believes it holds valid title on all its properties, free and clear of any liens
or encumbrances except for encumbrances described herein. Title opinions are
obtained on newly acquired properties as of the date of the closing. As is
customary in the oil and gas industry, Fortune performs only a perfunctory title
examination at the time exploratory oil and gas properties are acquired. Prior
to drilling wells, a thorough title examination of the drillsite and any
pass-through parcels is conducted and any significant defects are remedied
before proceeding with operations. Substantially all of Fortune's producing
leasehold interests have been pledged to secure Fortune's bank credit facility.
Transfers of many of Fortune's properties are subject to various restrictions.
OFFICE FACILITIES
Fortune occupies approximately 5,400 square feet of office space under a
lease agreement with a term of 5 years. See note 6 to the December 31, 1999
financial statements.
COMPETITION
The principal resources necessary to conduct oil and gas exploration and
production activities are:
o leasehold prospects under which oil and gas reserves may be discovered
o drilling and other service contractors to evaluate and explore
for such reserves
o knowledgeable personnel to conduct all phases of oil and gas operations.
Fortune must compete for such resources with both major companies and
independent oil and gas operators. Many of Fortune's competitors are better
equipped to acquire these resources. Accordingly, Fortune may not be able to
acquire any portion of these resources in a timely and economical manner.
12
<PAGE>
EMPLOYEES
As of March 17, 2000 Fortune employed five persons, all in management and
administration. In addition, Fortune engages outside consultants in certain
technical aspects of Fortune's business. Fortune utilizes these consultants to
aid in the evaluation of projects and to evaluate oil and gas assets for
acquisitions.
GOVERNMENTAL REGULATION
Environmental laws and regulations are having an increasing impact on
Fortune's operations. Drilling and production activities are subject to
regulations under federal and state pollution control and environmental laws and
regulations. It is impossible to predict the effect that additional
environmental requirements may have on future earnings and operations, but it
will continue to be necessary to incur costs in complying with these laws and
regulations.
Fortune is not currently a party to any judicial or administrative
proceedings which involve environmental regulations or requirements and believes
that it is in substantial compliance with all applicable environmental
regulations. Fortune believes that it is reasonably likely that the trend in
environmental legislation and regulations will continue toward stricter
standards. Fortune is unaware of future environmental standards that are
reasonably likely to be adopted that will have a material effect on Fortune's
financial position or results of operations, but cannot rule out the
possibility.
Fortune has never had a material environmental problem, but if one of its
properties is found to be contaminated, Fortune could be required to participate
in a "clean up" program. Such a clean up, depending on its magnitude and
Fortune's ownership interest therein, could require undetermined amounts of
capital and exceed Fortune's ability to pay. Fortune has obtained insurance
against certain environmental hazards providing $11,000,000 of coverage with a
deductible of $10,000 offshore and $2,500 onshore.
Fortune's operating activities must comply with spacing and other
conservation rules of various state commissions, the United States Geological
Survey or the Bureau of Land Management. State conservation laws regulate the
rates of production from oil and gas wells for the purpose of ensuring maximum
production of the resource. Such regulations may require Fortune to produce
certain wells at less than their maximum flow rate.
State law also governs unitization proceedings, which apportion production
among property owners and producers where numerous wells may be producing from a
single reservoir. Unitization rulings may allocate production in a particular
reservoir in a manner that decreases Fortune's share of production.
Other regulations prevent Fortune from freely conducting operations at
certain times during the year, such as those which protect the whooping crane
habitat which occupies a portion of Fortune's Espiritu Santo Bay prospect. There
is no assurance that laws and regulations enacted in the future will not
adversely affect Fortune's oil and gas activities. From time to time, proposals
are introduced in Congress or by the Administration that could affect Fortune's
oil and gas operations.
ITEM 3. LEGAL PROCEEDINGS
On January 31, 2000 the remaining lawsuits relating to Fortune's December
1995 offering under Regulation S of the Securities Act were settled. Under the
settlement, the other litigants released all claims against Fortune and paid
Fortune $25,000 in exchange for Fortune releasing all of its claims.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of Fortune's shareholders was held October 21, 1999.
The following matters were voted on at that meeting:
Matter Votes in Favor Votes Opposed Abstain
------ -------------- ------------- -------
Election of Barry Feiner
to Board of Directors 10,494,117 0 669,942
Ratification of KPMG LLP
as Fortune's Auditors 11,025,886 118,939 19,234
14
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the prices of Fortune's common stock on the
AMEX or over-the-counter market for the periods indicated. As of August 6, 1999,
Fortune was delisted from the AMEX due to its failure to comply with the
exchange's continued listing guidelines which required that it report a profit
in any of the prior five years. Fortune's common stock is now reported on the
OTC Bulletin Board. For trades through August 6, 1999, information shown is the
applicable closing price on the AMEX. Thereafter, information reflects the
closing bid price on the OTC Bulletin Board.
<TABLE>
<CAPTION>
Common Stock
-----------------
High Low
------- -------
<S> <C> <C>
1998
First Quarter................................ 2 5/8 1 1/2
Second Quarter............................... 1 11/16 1 3/16
Third Quarter................................ 1 7/16 11/16
Fourth Quarter............................... 1 5/8 3/8
1999
First Quarter ............................... 1/2 3/16
Second Quarter............................... 1/2 1/4
Third Quarter (through August 6, 1999
on the AMEX).............................. 7/16 1/4
Third Quarter (after August 9, 1999 on OTC).. 1/2 3/16
Fourth Quarter............................... 25/32 1/4
2000
First Quarter (through March 28, 2000)....... 1 3/32 9/16
</TABLE>
At March 28, 2000, the per share bid and the ask prices of the common
stock were $0.56 and $0.72, respectively. At March 17, 2000, there were
16,349,530 shares of common stock outstanding held of record by approximately
3,000 stockholders.
Fortune has not paid dividends on its stock and does not intend to pay
dividends in the foreseeable future. Under its credit facility, Fortune may not
pay dividends on its capital stock without the prior written consent of its
bank.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following Summary Condensed Financial Data for each of the years in
the five-year period ended December 31, 1999, are derived from, and qualified
by, reference to Fortune's financial statements appearing elsewhere herein. This
data should be read in conjunction with the financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7.
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues.............................. $ 1,492 $ 2,023 $ 4,005 $ 4,040 $ 3,143
Loss on sale of oil and gas properties...... - - - - 3,607
Impairment to oil and gas properties........ - 960 3,650 - -
Net loss.................................... (1,588) (3,275) (5,958) (1,330) (5,876)
Net loss per share.......................... (0.13) (0.27) (0.49) (0.12) (0.90)
Net weighted average shares outstanding..... 12,207 12,132 12,086 11,351 6,556
Operating Data:
Net Production:
Oil (Bbl)................................ 17,000 42,000 87,000 57,000 92,000
Gas (Mcf)................................ 508,000 609,000 821,000 1,038,000 909,000
Gas equivalent (MCFE).................... 610,000 859,000 1,343,000 1,383,000 1,461,000
Average Sales Price:
Oil ($ per Bbl).......................... $ 17.89 $ 13.08 $ 19.04 $ 20.24 $ 14.66
Gas ($ per Mcf).......................... 2.34 2.19 2.66 2.56 1.77
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets................................ $ 6,805 $ 8,492 $ 12,626 $ 16,335 $ 17,800
Total debt.................................. 3,235 3,235 3,775 2,933 4,897
Net stockholders' equity.................... 3,242 4,704 8,053 13,037 12,314
</TABLE>
Estimates of oil and gas reserves are based in part on the sales price at
December 31 of the respective year. To the extent that the cost of producing the
oil and gas, plus applicable taxes, from any particular property exceeds the
sales price, the quantity of proved reserves is reduced. See "Business and
Properties - Oil and Gas Operations - Oil and Gas Reserves."
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Reserves:
Estimated Net Proved Reserves:
Oil (MBbl)............................... 88 106 257 249 347
Gas (Bcf)................................ 3.0 3.1 3.2 3.5 5.9
Estimated future net revenues before
income taxes.............................. $ 6,173 $ 4,985 $ 8,410 $ 14,112 $ 12,600
Standardized measure of future
net cash flow............................. $ 4,331 $ 3,527 $ 6,503 $ 10,820 $ 8,942
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Fortune primarily explores, develops and produces oil and gas properties
in the U.S. Gulf Coast. All of Fortune's operating revenues are derived from the
production and sale of oil and gas.
Operating revenues decreased in 1999 because depletion and the 1998 sale
of East Bayou Sorrel offset the new revenues from the 1999 discoveries.
Operating revenues decreased in 1998 primarily because Fortune sold its interest
in East Bayou Sorrel on March 31, 1998. Notwithstanding the decrease in revenues
and cash flow, management believes that the sale of East Bayou Sorrel was very
positive for Fortune. At the time of the sale, Fortune's reserve report
reflected approximately $1.9 million of discounted proved reserves value for
East Bayou Sorrel. 1997 net cash flow from the property was approximately $1.0
million. Substantially all of this 1997 cash flow was reinvested in the property
to drill the Schwing #3 which was a dry hole. The $4.7 million sales price
represented 250% of the proved reserve and 460% of the 1997 net cash flow for
the property. East Bayou Sorrel was primarily an oil property and oil prices
declined significantly in 1998 after the sale. The cash from the sale enabled
Fortune to repay substantially all of its bank debt and to conduct an active
exploration program in 1998.
Results in 1998 and 1997 were adversely affected by substantial
impairments to oil and gas properties. No such expense was recorded in 1999.
Results in 1997 were also adversely affected by debt conversion expense and
stock offering costs. General and administrative expense decreased 22% during
1999 and 21% during 1998 because of lower litigation costs and reductions
implemented in response to lower oil and gas prices.
Fortune experienced substantial net losses in 1998 and 1997, primarily
attributed to the items described above, and a smaller net loss in 1999.
Operations contributed cash in 1997, primarily due to relatively high gas prices
and/or increases in production, but consumed cash in 1999 and 1998 because of
decreased production and low prices.
Fortune made substantial investments in oil and gas properties in 1998 and
1997, and a smaller investment in 1999. Fortune's primary sources of capital
have been the sale of equity and proceeds from the sale of oil and gas
properties. From 1995 through March 2000, Fortune reduced its total debt by $4.8
million and, as a result of restructuring its borrowing relationships,
significantly increased the maturity of its remaining debt obligations.
At December 31, 1999, Fortune had $3,225,000 of 12% subordinated
convertible notes outstanding. Such convertible subordinated notes are due
December 31, 2007. Fortune has realized net losses for many years, resulting in
an accumulated deficit of $27 million at December 31, 1999. As a result of
depleting reserves and the sale of Fortune's interest in East Bayou Sorrel in
March 1998, Fortune has realized negative operating cash flows of $656,000 and
$616,000 in 1999 and 1998, respectively. In February and March 2000, Fortune
took steps to improve its short term liquidity by raising $782,000 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. As a result of these transactions, 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
reserves, Fortune may not be able to repay the remaining $2,295,000 of
convertible subordinated notes when they become due on December 31, 2007. We
believe that Fortune's operating cash flow will increase if we are successful
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 convertible subordinated notes at
December 31, 2007.
17
<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, costs, absence of major
operating disruptions and catastrophes, timing of projects and markets for our
production. See "Forward Looking Statements" below 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 raising capital to fund its operations and/or repay debt
balances substantially greater than that currently outstanding. For example,
from 1995 through March 17, 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 at March 17, 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
YEAR ENDED DECEMBER 31, 1999 AND 1998
During 1999, Fortune's net loss improved to $1.6 million compared to a net
loss of $3.3 million for 1998. Lower expenses in almost all categories in 1999
more than offset a decline in revenues. Significantly lower oil and gas
production resulted in total net oil and gas revenues decreasing by $389,000
(21%) in 1999, compared to 1998. The East Bayou Sorrel field, which accounted
for 12% and 11% of 1998 revenues and production, respectively, was sold on March
31, 1998 for $4.7 million. See note 2 to the financial statements for a
discussion of this sale and its impact on Fortune's operating results.
Analysis of change in oil and gas revenues -
Percent
1999 1998 Change
------ ------ ------
(Thousands except where indicated)
Production
Oil - MBbl 17 42 (59)%
Gas - Mmcf 508 609 (17)%
- MMCFE 610 859 (29)%
Prices
Oil - $/Bbl $17.89 $13.08 37 %
Gas - $/Mcf 2.34 2.19 7 %
Revenues
Oil $ 304 $ 544 (44)%
Gas 1,188 1,337 (11)%
Improved oil and gas prices softened the negative impact of lower
production. Prices have continued to improve and as of March 17, 2000 Fortune
was receiving approximately $2.70 per mcf and $28.60 per bbl for its production.
18
<PAGE>
Analysis of change in selected expenses -
Percent
1999 1998 Change
------ ------ ------
(Thousands except where indicated)
Production and operating expense $ 532 $ 595 (11)%
- per MCFE 0.87 0.69 26 %
Depreciation, depletion and
amortization 834 1,365 (39)%
- per MCFE 1.37 1.59 (14)%
Impairment to oil and gas properties - 960 (100)%
Production and operating expense decreased by $63,000 in 1999 versus 1998
because of lower production. High workover costs in the fourth quarter of 1999
lessened the year to year decline which had been running 31% through the first
nine months of 1999.
Fortune's provision for depletion, depreciation and amortization (DD&A)
decreased by $531,000 (39%) in 1999 versus 1998 primarily because of lower
production and a lower property balance as a result of the sale of the East
Bayou Sorrel property and past ceiling test impairments.
Percent
1999 1998 Change
------ ------ ------
(Thousands except where indicated)
General and administrative expense $1,204 $1,547 (22)%
Interest - payable in cash 388 403 (4)%
- amortization of
financing cost 99 428 (77)%
General and administrative expense decreased by $343,000 (22%) because of
reductions primarily in personnel costs, investor relations expense and
consulting fees which have been made in response to lower oil and gas prices.
The cumulative reduction to general and administrative expense since 1998 has
been 39%. In connection with Fortune's efforts to reduce cash outlays, the board
of directors voted, effective January 1, 1999, to pay the quarterly $2,500 per
outside director fee in Fortune common stock instead of cash.
Interest expense paid in cash decreased by $15,000 (4%) for 1999 versus
1998 due to a lower debt balance. The lower debt balance resulted from Fortune
paying off substantially all of its credit facility at March 31, 1998 with a
portion of the proceeds of the sale of East Bayou Sorrel. Non-cash amortization
of debt financing costs has declined because all such costs were fully amortized
at the end of April 1999.
19
<PAGE>
YEAR ENDED DECEMBER 31, 1998 AND 1997
Fortune had a net loss of $3.3 million in 1998 compared to a net loss of
$6.0 million in 1997. The higher 1997 loss was primarily attributable to the
following items recorded in 1997:
o $316,000 non-cash debt conversion expense incurred to exchange a
portion of Fortune's debentures
o $323,000 stock offering costs for an aborted 1997 public offering
o $3.7 million non-cash impairment to oil and gas properties
versus $1.0 million in 1998
o higher depreciation, depletion and amortization
Analysis of change in oil and gas revenues -
Percent
1998 1997 Change
------ ------ ------
(Thousands except where indicated)
Production
Oil - MBbl 42 87 (52)%
Gas - Mmcf 609 821 (26)%
- MMCFE 859 1,343 (36)%
Prices
Oil - $/Bbl $13.08 $19.04 (31)%
Gas - $/Mcf 2.19 2.66 (18)%
Revenues
Oil $ 544 $1,663 (67)%
Gas 1,337 2,188 (39)%
As can be seen in the preceding table, the revenue decrease primarily
resulted from significantly lower oil and gas prices and oil and gas production
in 1998. 1997 revenues included revenues from Fortune'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.
If East Bayou Sorrel production was excluded from both 1998 and 1997, the
decrease in oil and gas production would have been 11% and 20%, respectively.
Analysis of change in selected expenses -
Percent
1998 1997 Change
------ ------ ------
(Thousands except where indicated)
Production and operating expense $ 595 $1,094 (46)%
- per MCFE 0.69 0.81 (15)%
Depreciation, depletion and
amortization 1,365 2,219 (38)%
- per MCFE 1.59 1.65 (5)%
Impairment to oil and gas properties 960 3,650 (74)%
Production and operating expense in 1997 included approximately $360,000
of costs attributable to a workover at South Timbalier Block 76. No significant
workovers were undertaken in 1998. The sale of East Bayou Sorrel contributed to
additional decreases.
20
<PAGE>
Fortune's provision for depletion, depreciation and amortization decreased
because of the impact of impairments to oil and gas properties in 1997 and the
sale of East Bayou Sorrel in 1998.
Percent
1998 1997 Change
------ ------ ------
(Thousands except where indicated)
General and administrative expense $1,547 $1,965 (21)%
Interest - payable in cash 403 249 62 %
- amortization of financing cost 428 147 191 %
General and administrative expense decreased primarily because of lower
litigation costs in 1998 in connection with the 1995 Regulation S offering,
discussed in the footnotes to the financial statements included herein and lower
personnel costs.
Interest expense paid in cash increased due to the higher debt balance.
Non-cash amortization of debt financing costs increased because of Fortune's
notes offering in December 1997 and credit facility refinancing in July 1997.
LIQUIDITY
CASH BALANCE, WORKING CAPITAL AND CASH FLOWS FROM OPERATING ACTIVITIES
- - 1999 and 1998
Analysis of changes in selected liquidity measures -
Percent
1999 1998 Change
------ ------ ------
(Thousands except where indicated)
Cash balance at year end $ 294 $1,452 (80)%
Net working capital at year end 292 1,324 (78)%
Long-term debt 3,235 3,225 0 %
Cash flow from operating
activities for the year $ (656) $ (616) (6)%
Less: change in assets
and liabilities (117) (138) 13 %
------ ------ ------
Cash flow from operations before
change in assets and liabilities $ (539) $ (478) (12)%
====== ====== ======
Lower oil and gas production, as discussed above, accounts for this
decrease in cash flow. Cash and working capital at December 31, 1999 decreased
because of the negative cash flow from operating activities and the capital
expenditures discussed below.
21
<PAGE>
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. The incentive warrant exercise program has been extended
through June 1, 2000, unless terminated earlier at Fortune's sole discretion.
Fortune raised $618,000 in the private placement (824,000 shares sold at $0.75
per share) and has raised $164,000 through March 10, 2000 in the incentive
warrant exercise (218,331 shares issued at $0.75 per share). Warrants
convertible into approximately 1.5 million shares of common stock remain
eligible to participate in the incentive warrant exercise program through the
termination date.
Also in February and March 2000, holders of $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. As an inducement to encourage
conversion, Fortune paid the participating noteholders one year's prepaid
interest. This interest was paid in Fortune common stock valued at $0.75 per
share, resulting in the issuance of an additional 148,800 shares to the
noteholders who converted. As a result of this note conversion, Fortune's annual
cash interest expense has been reduced by $111,600.
Fortune estimates that the out-of-pocket costs it incurred in these
transactions did not exceed $20,000. The proceeds from these offerings will be
used for anticipated exploration expenditures and general corporate purposes.
See note 14 to the December 31, 1999 financial statements included herein for
additional information about these offerings.
Management believes that, even in the face of fluctuating oil and gas
prices, Fortune has the capital to fund its operations during the short term.
Drilling success and/or additional equity funding will be necessary to fund long
term growth.
- - 1998 and 1997
Analysis of changes in selected liquidity measures -
Percent
1998 1997 Change
------ ------ ------
(Thousands except where indicated)
Cash balance at year end $1,452 $1,667 (13)%
Net working capital at year end 1,324 1,376 (4)%
Long-term debt 3,225 3,775 (15)%
Cash flow from operating activities
for the year $ (616) $1,379 N/A
Less: change in assets and liabilities (138) 624 N/A
------ ------ ------
Cash flow from operations before
change in assets and liabilities $ (478) $ 755 N/A
====== ====== ======
The decrease in cash flow from operating activities 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, the decrease in
cash flow was considerably less. Lower oil and gas revenues and higher cash
interest expense were the primary contributors to the 1998 decrease in cash
flow.
22
<PAGE>
CAPITAL RESOURCES
CASH USED IN INVESTING ACTIVITIES - CAPITAL EXPENDITURES
- - 1999
Expenditures for oil and gas properties for of 1999 were $0.5 million
compared to $3.7 million for 1998. The 1999 expenditures include primarily:
- additional leases and delay rentals at Espiritu Santo Bay;
- seismic interpretation at Espiritu Santo Bay and LaRosa;
- completion expenditures for two wells at Espiritu Santo Bay,
State Tract 216 #16 and State Tract 210 #5;
- expenditures for two Bacon prospect wells drilled in Mississippi;
- expenditures for the Espiritu Santo Bay State Tract 164 #4 well
which was plugged and abandoned in May 1999;
- drilling expenditures for three La Rosa wells including one that
was completed in December 1999;
- recompletion expenditures at La Rosa; and
- an attempted reentry at Estherwood prospect in Louisiana.
Fortune has been involved in two significant proprietary 3D seismic
projects along the Texas coast. The Espiritu Santo Bay project is offshore Texas
in the intracoastal waters of Espiritu Santo Bay. This involves a 135-square
mile proprietary 3D seismic survey in which Fortune owns a 12.5% working
interest. This survey was completed in 1997 and is continually being
interpreted. Drilling began in August 1998. Six wells have been drilled to date.
Two have been plugged, two have been completed and one is pending production
testing as is discussed below. The sixth well, the State Tract 164 #4, is a
potential discovery which may need to be redrilled as the result of experiencing
an underground blowout. During 1999, Fortune incurred $152,000 of seismic
interpretation, leasing costs and well operations. Fortune expects to
participate in additional drilling on this property.
During the third quarter of 1999, Fortune and substantially all of the
working interest owners at Espiritu Santo Bay farmed out their interest in the
first deep Espiritu Santo Bay prospect to McMoRan Oil and Gas, LLC, a
wholly-owned subsidiary of McMoRan Exploration Company. Under the terms of the
farmout agreement, McMoRan and its exploration program partners pay 100% of all
drilling, completion, testing and facilities costs for the farmout well in
exchange for 50% of Fortune's working interest in a 3,200 acre prospect area.
Fortune's working interest in the 3,200 acre prospect prior to the farmout was
approximately 7.4%
The farmout well, the State Tract 210 #6, was spud on November 1, 1999 and
reached total depth on December 14, 1999. McMoRan ran casing to total depth and
began evaluating the sands encountered in the well to assess future operating
alternatives. On March 17, 2000, McMoRan informed Fortune that it does not plan
to test the State Tract 210 #6 but that it may be interested in participating in
another well on the farmout acreage. Fortune and the other partners at Espiritu
Santo Bay are negotiating to reacquire the State Tract 210 #6 from McMoRan so
that we can test the well.
23
<PAGE>
The second project is at La Rosa. The La Rosa project is a 24-square mile
proprietary 3D seismic survey over one of Fortune's existing producing fields
has been shot and drilling operations have commenced. In 1997, Fortune sold
one-half of its interest in the non-producing portion of this field in exchange
for the acquiring parties paying of 100% of Fortune's 3D seismic costs. Drilling
began in December 1997. Ten wells have been drilled based upon the 3D seismic.
Five wells were completed as producers and five wells have been plugged and
abandoned. During 1999, Fortune incurred $227,000 of seismic interpretation,
leasing and well costs . Fortune holds a 37.5% working interest in the wells
drilled prior to the 3D seismic survey and an 18.75% working interest in the
prospective projects covered by this 3D seismic survey. Additional drilling on
this property is expected.
Fortune did not incur any expenditures on the South Timbalier Block 86 and
Bay Marchand Block 5 wells because Fortune farmed out these properties retaining
overrides of 3.17% and 0.5%, respectively. The South Timbalier Block 86 override
increases to 4% after payout. The Bay Marchand Block 5 farmout acreage was
unitized with acreage containing another producing well. This unitization
resulted in Fortune's revenue interest decreasing to 0.24% over the
newly-combined acreage block.
- - 1998 and prior
Cash expenditures for oil and gas properties in 1998 were $3.7 million as
compared to $4.9 million for the same period in 1997. The 1998 expenditures have
been incurred primarily in Fortune's projects at La Rosa ($0.8 million),
Espiritu Santo Bay ($1.1 million), East Bayou Sorrel ($0.4 million), Whiskey
Pass and Sea Serpent ($0.9 million) and Southwest Segno ($0.2 million).
Capital expenditures funded with cash for the years ended December 31,
1997 were $4.9 million. 1997 capital expenditures consisted primarily of $2.5
million for 3D seismic and leases at Espiritu Santo Bay; $1.5 million for
development at East Bayou Sorrel and $0.4 million for the acquisition of an
additional interest at East Bayou Sorrel.
In June 1997, Zydeco returned to Fortune $2.2 million of exploration
venture cash under the terms of the venture agreement, as discussed in note 12
to the December 31, 1999 financial statements.
CASH FLOWS FROM FINANCING ACTIVITIES -
- OUTSTANDING DEBT AND DEBT REDUCTION
On March 31, 1998, Fortune repaid all but $10,000 of its bank credit
facility using $540,000 of the proceeds from the sale of East Bayou Sorrel.
During February and March 2000, $930,000 of Fortune's subordinated convertible
notes were converted to common stock thereby reducing Fortune's total debt to
$2,305,000 and its future interest obligations by $111,600 per year. As of the
date hereof, Fortune's debt consists primarily of subordinated convertible notes
which are not due until 2007. From 1995 through March 17, 2000, Fortune has
reduced its total debt by $4.8 million and virtually eliminated its current
maturities of long-term debt.
- CONVERTIBLE SUBORDINATED NOTES DUE DECEMBER 31, 2007
On December 1, 1997, Fortune completed a private placement of 12%
Convertible Subordinated Notes due December 31, 2007. An aggregate of $3,225,000
principal amount of notes was sold and Fortune received $2,815,000 of net
proceeds after offering expenses and commissions. The notes were sold to a group
of accredited investors under a placement agreement with J. Robbins Securities
L.L.C. As is discussed herein, $930,000 of these notes were converted to common
stock in 2000.
24
<PAGE>
The net proceeds of the private placement were used to refinance existing
debt and for general corporate purposes. On December 5, 1997, using the proceeds
of the notes offering, Fortune redeemed the remaining outstanding balance of
$1,028,000 of Fortune's debentures due December 31, 1997. In addition, $315,000
of net proceeds of the notes offering were used to reduce the borrowings under
Fortune's credit facility with Credit Lyonnais. See note 4 of the December 31,
1999 financial statements for the terms of the notes.
- CREDIT FACILITY
Fortune has in place a credit facility with Credit Lyonnais New York
Branch ("Credit Lyonnais") that is due January 11, 2001. Upon the sale of East
Bayou Sorrel in March 1998, Fortune repaid all but $10,000 of the outstanding
balance of the credit facility. The bank has set the borrowing base at $10,000
subject to redetermination upon its approval. Primarily as a result of the lower
revenues since the 1998 sale of East Bayou Sorrel, Fortune 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 December 31, 1999. Fortune is
also required by the credit facility to maintain a minimum cash balance of
$500,000 while any subordinated debt, including the 12% notes, is outstanding.
Fortune also failed to meet this covenant at December 31, 1999. Fortune has
received waivers of these covenants from the bank for the period ended December
31, 1999. In March 2000, the bank amended the credit facility to reduce the
minimum cash requirement to $200,000; however, Fortune will need waivers of the
interest coverage covenant in future periods until operating cash flow increases
significantly. See note 4 of the December 31, 1999 financial statements for the
terms of this credit facility.
- DEBENTURES
On February 26, 1997, Fortune closed an exchange offer for the Convertible
Subordinated Debentures due December 31, 1997 which resulted in 40%, or $697,000
principal amount, of debentures being exchanged for 218,858 shares of common
stock and 174,250 common stock warrants. Consequently, the balance due on the
Debentures at December 31, 1997 was $1,028,000. This remaining balance was
repaid on December 5, 1997 with proceeds from the notes offering discussed
above.
In connection with the February 1997 exchange of debentures, Fortune
recorded a non-cash debt conversion expense of approximately $316,000 during the
first quarter of 1997. This expense represents the difference between the fair
market value of all of the common stock and warrants issued in the exchange
offer and the fair market value of the lower number of shares of common stock
that could have been issued under the debentures' original terms.
25
<PAGE>
OIL AND GAS PRICES AND RESERVES
Fortune's revenues, profitability and future growth are substantially
dependent upon oil and gas prices. These prices can be extremely volatile and in
recent years have been depressed by excess supplies. These fluctuating oil and
gas prices have contributed to impairments to oil and gas properties such as the
$3.7 million impairments recorded in 1997 and the $960,000 impairments recorded
in 1998. As a result of continued fluctuating oil and gas prices, Fortune may
incur further impairments in 2000. As of March 17, 2000, Fortune was receiving
an average of approximately $28.60 per Bbl for its oil production and $2.70 per
Mcf for its gas production.
Analysis of selected reserve information at year end:
Percent
1999 1998 Change
------ ------ ------
(Thousands except where indicated)
Proved Reserves
Oil - MBbl 88 106 (17)%
Gas - Mmcf 3,000 3,082 (3)%
- MCFE 3,526 3,718 (5)%
Year end Prices
Oil - $/Bbl $23.28 $ 9.85 136 %
Gas - $/Mcf 2.50 2.25 13 %
Estimated future net
revenue undiscounted $6,173 $4,985 24 %
Standardized measure of discounted
future net cash flow $4,331 $3,527 23 %
Fortune's 1999, 1998 and 1997 year end oil and gas reserve reports have
been prepared by Huddleston & Co. Inc., of Houston, Texas, its independent
petroleum engineers. The present value of the reserves increased in 1999
primarily because of the higher yearend prices. Reserves booked on the 1999
exploration discoveries at South Timbalier Block 86, Bay Marchand Block 5 and
Bacon almost offset depletion and revisions on the other properties.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Fortune does not use derivative instruments;
accordingly, SFAS 133 is not expected to have a material effect on the reporting
of Fortune's future operating results.
26
<PAGE>
FORWARD LOOKING STATEMENTS
This annual report contains forward-looking statements. Forward-looking
statements include statements regarding future oil and gas production and
prices, future exploration and development spending, future drilling and
operating plans and expectations, reserve and production potential of Fortune's
properties and prospects and Fortune's business strategy. 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.
RISKS ASSOCIATED WITH FORTUNE
FORTUNE'S RELIANCE ON EXPLORATORY PROJECTS INCREASES THE RISKS INHERENT IN
THE OIL AND GAS INDUSTRY. We base our decisions to participate in exploration
projects on assumptions and judgements concerning the oil and gas industry, such
as future oil and gas prices, competition for leases, reserves, and equipment,
and our perceived risk of success. These assumptions and judgments may be
speculative and are often subjective. Although we can obtain information with
respect to the potential of oil or gas properties, it is impossible to determine
with certainty the ultimate production potential, if any, of a particular
property or well. Moreover, the successful completion of an oil or gas well does
not insure a profit on our investment, since completion and production expenses
must also be considered. We primarily invest in exploration projects, where the
risks are substantially greater than investing in wells drilled into already
producing formations. We anticipate that one or more of our next wells will be
designed to test the deeper formations beneath known production in Espiritu
Santo Bay. These formations have not been extensively tested to date, leaving
seismic imaging and the well data from the recently drilled State Tract 210 #6
as the few tools available to aid in understanding subsurface geology. 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 some of its recent prospects and we
expect that a substantial number of our future projects could experience similar
results.
FORTUNE HAS INCURRED NET LOSSES FOR EACH OF THE LAST THREE years. Fortune
has incurred substantial net losses in each of the last three years. Although we
made significant budget cuts recently, oil and gas prices remain volatile and
our production has declined. This makes it likely that these losses will
continue.
FORTUNE IS NOT CURRENTLY REPLACING ALL OF ITS EXISTING reserves. Oil and
gas reserves which are being produced are depleting assets. Fortune's future
cash flow and income are highly dependent on our ability to find or acquire
additional reserves to replace those being currently produced. We are not adding
reserves at present at the same pace at which they are being produced. Without
adding additional reserves in the future, our oil and gas reserves and
production will continue to decline.
OUR REVENUE IS DEPENDENT UPON A LIMITED NUMBER OF PRODUCING WELLS.
Approximately one-third of our oil and gas revenues, cash flow, and proved oil
and gas reserves are currently accounted for by a single well at South Timbalier
Block 76. This well was shut-in for repairs for one month in 1997 and for over
two months during 1996 as the result of mechanical failures and has since
experienced significant production declines. Fortune's independent petroleum
engineers estimate that the current producing zone in this well is scheduled to
fully deplete in 2000. See "Business and Properties - Significant Properties and
Activities - South Timbalier Block 76 - federal waters, offshore Louisiana." A
significant curtailment or loss of production for a prolonged period before we
could replace the reserves through new discoveries or acquisitions would have a
material adverse effect on our projected operating results and financial
condition.
27
<PAGE>
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. For the
three-year period ended December 31, 1999, Fortune incurred approximately $9
million of capital costs in its oil and gas exploration, development and
acquisition activities. It is very difficult for small-cap energy companies to
raise additional funds because of the recent depressed state of the oil and gas
industry. Fortune does not have sufficient liquid capital resources to
participate at its existing working interest level if the operators of any of
its properties propose an accelerated drilling schedule. If Fortune fails to
participate in the capital expenditures for any project, its interest in that
project will be substantially reduced or lost entirely.
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. Although we are actively involved in project evaluations, we
often have little or no control over the manner or timing of such operations. If
the operator is not prudent, we could be forced to incur additional costs to
conduct remedial procedures and could lose our investment in a property
altogether. Because we employ a variety of technological approaches to our
geologic, geophysical, and engineering evaluation of properties and projects, we
rely heavily on outside consultants for their expertise. Fortune has no
long-term agreements with such consultants, all of whom are available to other
oil and gas companies, including our competitors. In the current environment of
volatile oil and gas prices, our partners may determine that projects which have
previously been agreed upon are no longer economically feasible. If this were to
occur, projects could be delayed or cancelled completely. If, on the other hand,
projects are accelerated because of high oil and gas prices, Fortune may not
have the capital resources to participate.
ACCOUNTING RULES MAY RESULT IN ADDITIONAL WRITE-DOWNS OF PROPERTY VALUES.
We report our operations using the full-cost method of accounting for oil and
gas properties. Under these rules, all exploration and development costs are
capitalized. The net capitalized costs of properties may not exceed a "ceiling"
limit of the tax-effected present value of estimated future net revenues from
proved reserves, discounted at 10%, plus the lower of cost or fair market value
of unproved properties. This requires calculating future revenues at the
unescalated prices in effect as of the end of each fiscal quarter. A write-down
is required if the net capitalized costs of the properties exceed the ceiling
limit, even if price declines are only temporary. 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 carried at cost are disposed of below that cost. For
example, we recognized a $3.7 million impairment in 1997 and a $960,000
impairment for in 1998. As a result of continued volatile oil and gas prices, we
may incur further impairments.
OUR PROVED PROPERTIES ARE PLEDGED TO SECURE DEBT. Substantially all of our
proved properties are pledged to secure our bank credit facility. If we fail to
pay the principal or interest to the bank or breach the financial covenants
under our credit facility, we could lose our principal producing properties. The
entire principal balance of the credit facility was due January 11, 2000;
however, the bank is considering extending the credit facility to January 11,
2001. Although the current balance is only $10,000, we may borrow additional
amounts if the bank approves. If our operating activities are significantly
curtailed or our financial position weakens significantly and we are unable to
repay such debt when it comes due, our properties could be seized through a
foreclosure.
THERE ARE UNINSURED RISKS IN OUR OPERATIONS WHICH COULD CAUSE MATERIAL
LOSSES. The operators of our projects are required to carry insurance against
certain risks of oil and gas operations. We normally pay our proportionate share
of the premiums for such insurance and are named as an additional insured under
the policy. In addition to such insurance, we also carry insurance against
operating risks such as pollution control and blowouts. However, we may not be
fully insured against all risks because such insurance is not available, is not
affordable, or losses may exceed policy limits.
28
<PAGE>
FORTUNE DEPENDS ON A KEY OFFICER. Fortune depends to a large extent on the
abilities and continued participation of its key employee, Tyrone J. Fairbanks,
President and Chief Executive Officer. The loss of Mr. Fairbanks could have a
material adverse effect on Fortune. In an effort to reduce the risk, Fortune has
entered into an employment agreement with Mr. Fairbanks which expires six months
following any notice of termination which may be given by the board of
directors. No such notice has been given to date. Fortune also has obtained
$500,000 of key man life insurance on the life of Mr. Fairbanks.
THE MARKET FOR FORTUNE COMMON STOCK IS LIMITED. As of August 6, 1999,
Fortune was delisted from the American Stock Exchange due to its failure to
comply with the exchange's continued listing guidelines requiring that it report
a profit in any of the last five years. Fortune now trades on the
over-the-counter bulletin board under the symbol FPXA. There are currently eight
firms making a market in the Fortune stock.
THE NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE COULD POTENTIALLY DILUTE THE
PRICE OF FORTUNE STOCK. At March 17, 2000, 16,349,530 shares of our common stock
were outstanding, of which 13,344,331 shares were freely tradeable and 3,005,199
shares were "restricted securities" as that term is defined in Rule 144 under
the Securities Act. At that date, we also had outstanding options and private
warrants to acquire 11,421,889 shares of common stock. We also had $2,295,000 of
notes convertible into 3,060,004 shares of common stock, subject to adjustment.
These share and warrant amounts reflect the results through March 17, 2000 of
conversions of Fortune's 12% notes, Fortune's private placement offering of
common stock that closed March 10, 2000 and its incentive warrant exercise
program that is continuing through June 1, 2000, unless terminated earlier at
Fortune's sole discretion. Warrants that are convertible into approximately 1.5
million shares of common stock remain eligible to participate in the incentive
exercise plan at the incentive exercise price of $0.75 per share. Warrantholders
participating in the incentive exercise plan will also receive an equal number
of three-year warrants, one-half exercisable at $1.50 per share and one-half
exercisable at $2.25 per share. We do not know how many additional warrants, if
any, will be exercised in this incentive exercise program. The issuance of
substantial additional shares or sales of substantial amounts of the common
stock in the public market could adversely affect the market price of Fortune's
common stock.
ADDITIONAL FACTORS. Additional factors that apply generally to the oil and
gas industry but that could cause actual events to vary from those discussed in
this annual report include: adverse change in governmental regulation; inability
to obtain critical supplies and equipment, personnel and consultants; and
inability to access capital to pursue our plans.
29
<PAGE>
ITEM 7A. 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 these risks.
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 use them effectively. 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 December 31, 1999 Matures
------------- ----------------- ----------
12% Fixed $3,225,000 2007
Variable at banks
Base rate + 1 1/4% or
LIBOR + 4% $10,000 2001
Changes in interest rates currently will not have a significant impact on
Fortune's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted beginning at page 41.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AUDITING
AND FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of Fortune are:
<TABLE>
<CAPTION>
Director
Executive Officer Age Since Title
-------------------------- --- ------ -----------------------------
<S> <C> <C> <C>
Tyrone J. Fairbanks....... 43 1991 President, Chief Executive
Officer, and Director
Dean W. Drulias........... 53 1990 Executive Vice President,
General Counsel, Corporate
Secretary and Director
J. Michael Urban.......... 46 -- Vice President, Chief
Financial Officer and
Assistant Secretary
Barry Feiner.............. 66 1995 Director
Daniel R. Shaughnessy..... 49 1997 Director
</TABLE>
Tyrone J. Fairbanks serves as President and Chief Executive Officer of
Fortune. Mr. Fairbanks served as Vice President and Chief Financial Officer of
Fortune from January 1991 to June 1994. Prior to joining Fortune, Mr. Fairbanks
served as President, Chief Executive Officer and Director of Fairbanks & Haas,
Inc. from January 1990 to January 1991. Fairbanks & Haas, Inc. was an oil and
gas exploration, production, acquisition and operations company located in
Ventura, California. Mr. Fairbanks co-founded Fairbanks & Haas, Inc. and served
in the capacity of Director and Executive Vice President from February 1987 to
January 1990.
Dean W. Drulias has served as Executive Vice President and General Counsel
since October 1996. Prior to his employment by Fortune, Mr. Drulias was a
stockholder of and a practicing attorney at the law firm of Burris, Drulias &
Gartenberg, a Professional Corporation, Los Angeles, California, which served as
counsel to Fortune since its incorporation in May 1987. He had practiced law in
the Los Angeles area since 1977, specializing in the areas of energy,
environmental and real property law. Mr. Drulias is a member of the State Bars
of California and Texas and serves on the Compensation Committee of the board.
J. Michael Urban has served as Fortune's Vice President and Chief
Financial Officer since March 1996. Mr. Urban previously served as
Vice-President, Finance with Norcen Explorer, Inc., a Houston based oil and gas
company with operations primarily in the Gulf of Mexico. Norcen was a wholly
owned subsidiary of Norcen Energy Resources Limited, a Canadian public company.
Mr. Urban had been with Norcen since March 1986. Mr. Urban is also a director of
Community Bank, a private commercial bank located in the Houston area. Mr. Urban
received his B.B.A. in Accounting from the University of Texas in 1976 and has
been a Certified Public Accountant in the State of Texas since 1978.
Barry Feiner graduated from Columbia Law School and is a member of the Bar
of the State of New York. He has practiced law in New York since 1965. His
practice concentrates on the areas of corporate and securities law. Mr. Feiner
is chairman of the board's Compensation Committee.
Daniel R. Shaughnessy is a geologist and geophysicist. He is the founder
and president of Interpretation3, a company that specializes in interpretation
of 2D and 3D seismic data. His firm provides consultation services to Fortune.
For the period from 1980 through 1993, he worked for Mobil Oil, most recently as
Exploration Supervisor in Louisiana. Prior to that he worked at the Woods Hole
Oceanographic Institute for the multi-channel seismic group of the geology
department. See "Business and Properties - Strategy." Mr. Shaughnessy is
chairman of the Audit Committee.
31
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table lists the total compensation paid by Fortune to its
chief executive officer during the periods indicated and up to four other
executive officers whose combined 1999 salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
--------------------------- ------------------------- --------
Restricted Securities
Stock Underlying LTIP All Other
Name and Principal Salary Bonus Other Awards Options/Warrants Payouts Compensation
Position Year ($) ($) ($) ($) (No.) ($) ($)
- -------------------------- ---- -------- -------- -------- -------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tyrone J. Fairbanks....... 1999 169,367 - 20,885 - 120,000 - 4,113
President and CEO 1998 164,667 17,500 20,885 - 100,000 - 5,000
1997 155,833 17,500 35,309 - 120,000 - 4,748
Dean W. Drulias........... 1999 124,100 - - - 120,000 - 5,000
Executive Vice President 1998 125,000 - - - 150,000 - 5,000
1997 125,000 3,000 - - 75,000 - 4,750
J. Michael Urban.......... 1999 120,000 - - - 120,000 - 5,000
Chief Financial Officer 1998 120,000 - - - 150,000 - 5,000
1997 120,000 5,000 - - 100,000 - 4,750
</TABLE>
"Other" annual compensation includes automobile expenses and loan
forgiveness, but are shown only if such amounts exceed 10% of the total annual
salary and bonus.
The following table lists the outstanding options and warrants held on
December 31, 1999 by Fortune's executive officers under our stock option plans:
AGGREGATE OPTIONS EXERCISES IN 1999 AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options/ in the Money Options
Warrants at FY-End at FY-End
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized ($) Unexercisable Unexercisable
---------------------- ----------- ------------------ -------------- ----------------
<S> <C> <C> <C> <C>
Tyrone J. Fairbanks - - 525,599 / 0 -
J. Michael Urban - - 425,000 / 0 -
Dean W. Drulias - - 419,800 / 0 -
</TABLE>
32
<PAGE>
EMPLOYMENT AGREEMENTS
Fortune has an employment agreement with Tyrone J. Fairbanks, its
President and Chief Executive Officer. The agreement provides that if employment
is terminated for any reason other than cause, death or disability within two
years following a change in control, Mr. Fairbanks is entitled to a single
payment equal to two year's compensation and all shares of common stock
underlying his stock options without payment of the exercise price. For purposes
of the employment agreement, change in control means a change in more than
one-third of the board of directors following certain special events. Mr.
Fairbanks' agreement also provides for two years of consulting services upon the
completion of the primary term of his contract at 40% of the last compensation
thereunder. Mr. Fairbanks' employment agreement provides for an annual salary of
$176,000 and additional compensation, in an amount not to exceed his annual
salary, based upon certain increases in the value of Fortune's common stock. Mr.
Fairbanks' employment contract expires six months following a notice of
non-renewal. As part of the relocation of Fortune's headquarters to Houston,
Texas, Fortune provided Mr. Fairbanks with an incentive relocation package to
facilitate his move and with various loans and other benefits. See "Certain
Relationships and Related Transactions."
STOCK OPTIONS
Fortune has two stock option plans that cover its directors, officers and
employees. Awards are made by the board of directors upon recommendations of its
compensation committee. There is no performance formula or measure. Options
granted under each of these plans must be exercised within five years of the
date of grant or they are forfeited.
On January 12, 1995 Fortune reduced the exercise price of all options
granted in 1991, 1993, 1994 and 1995 that were held by employees and directors
on that date. The repricing included options held by one executive officer as
follows:
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
Length of
Securities original
underlying Market price option term
number of of stock at Exercise New remaining
options time of price at time exercise at date of
Name and Position Date repriced repricing of repricing price repricing
- ---------------------- ------- ---------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
President and CEO -
Tyrone J. Fairbanks 1/12/95 10,000 $1.75 $6.00 $2.75 2.1 years
Tyrone J. Fairbanks 1/12/95 22,500 $1.75 $5.00 $2.75 4.1 years
Tyrone J. Fairbanks 1/12/95 78,900 $1.75 $5.48 $2.75 4.1 years
Tyrone J. Fairbanks 1/12/95 105,599 $1.75 $6.03 $2.75 5.0 years
</TABLE>
During the ten year period ended December 31, 1999, no other options held
by executive officers were repriced or amended.
33
<PAGE>
The following table shows the grants of stock options during 1999 to each of
the executives named in the Summary Compensation Table.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------- Potential Realizable Value At
Number of % of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise or For Option Term
Options Employee in Base Price Expiration -------------------
Name Granted Fiscal Year ($/Share) Date 5% 10%
- ------------------- ---------- ------------ ----------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Tyrone J. Fairbanks 120,000 28.6% 1.56 March 24, 2004 None None
Dean W. Drulias 120,000 28.6% 1.56 March 24, 2004 None None
J. Michael Urban 120,000 28.6% 1.56 March 24, 2004 None None
</TABLE>
In the event of a change in control of Fortune that is not approved by its
board of directors, the shares of common stock underlying all outstanding
options will be issued to the option holders without the payment of the exercise
price for such shares.
RETIREMENT PLAN
During 1996, Fortune adopted the Fortune Natural Resources Corporation
401(k) Profit Sharing Plan for its eligible employees. Under the plan, eligible
employees are permitted to make salary deferrals of up to 15% of their annual
compensation, subject to Internal Revenue Service (IRS) limitations. Salary
deferrals will be matched 50% by Fortune, subject to IRS limitations, and are
100% vested after two years of service with Fortune. Salary deferrals are 100%
vested at all times. Fortune does not make profit sharing contributions to the
plan. Messrs. Drulias and Urban are the trustees of the plan.
For the 1999 plan year, Fortune's matching contribution obligation was
$19,000, all of which was paid in Fortune common stock. The amounts contributed
to the plan as matching contributions for Fortune's executives are shown in the
Summary Compensation Table set forth above.
DIRECTOR COMPENSATION
Outside directors earn fees of $2,500 per quarter, paid in Fortune common
stock valued as of the last trading day of each quarter. Inside directors do not
receive any director compensation.
34
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information at March 17, 2000, as to all
persons who, to our knowledge, were the beneficial owners of five percent or
more of Fortune's outstanding common stock, and of all officers and directors.
<TABLE>
<CAPTION>
Position Amount and Nature Percent
Name and Address with Fortune of Beneficial Ownership of Class
- ------------------------------ ------------------------ ----------------------- --------
<S> <C> <C> <C>
Barry Blank
1661 E. Camelback, Suite 201
Phoenix, AZ 85016 - 2,670,088 14.2%
Renaissance Capital Growth
8080 N. Central Expressway, #210
Dallas, TX 75206 - 1,522,394 9.2%
Renaissance US Growth and Income
8080 N. Central Expressway, #210
Dallas, TX 75206 - 1,522,394 9.2%
John E. McConnaughy, Jr.
1011 Highridge Road
Stanford, CT 06905 - 1,366,667 7.7%
Tyrone J. Fairbanks
515 W. Greens Road, #720
Houston, TX 77067 Director, President and CEO 614,045 3.6%
J. Michael Urban
515 W. Greens Road, #720
Houston, TX 77067 Vice President and CFO 611,748 3.6%
Dean W. Drulias
515 W. Greens Road, #720 Director, Executive Vice President,
Houston, TX 77067 General Counsel and
Corporate Secretary 601,688 3.6%
Barry Feiner
515 W. Greens Road, #720
Houston, TX 77067 Director 363,673 2.2%
Daniel R. Shaughnessy
515 W. Greens Road, #720
Houston, TX 77067 Director 166,714 1.0%
All Officers and Directors
as a group of five (5) persons 2,357,868 12.8%
</TABLE>
35
<PAGE>
ADDITIONAL INFORMATION REGARDING THESE HOLDINGS FOLLOWS:
o MR. BLANK'S HOLDINGS
In addition to the 666,667 shares into which Mr. Blank's notes are
convertible, his holdings include 204,300 shares of common stock and the
following warrants:
Number of Warrant Common Stock
Warrants Exercise Price Equivalent
---------- -------------- ------------
666,667 $1.00 666,667
25,875 $1.50 25,875
25,875 $2.25 25,875
200,000 $2.40 200,000
17,917 $3.60 17,917
600,200 $3.75 862,787
The warrants with $2.40, $3.60 and $3.75 per warrant exercise price have
all been temporarily reduced to a $0.75 per share exercise price in connection
with the incentive warrant exercise program discussed herein at "Certain
Relationships and Related Transactions". See "Certain Relationships and Related
Transactions" regarding Mr. Blank's acquisition of certain of the warrants.
o RENAISSANCE CAPITAL GROWTH
Renaissance Capital Growth holdings include 200,000 three-year common
stock purchase warrants, one-half exercisable at $1.50 per share and one-half
exercisable at $2.25 per share.
o RENAISSANCE US GROWTH INCOME
Renaissance US Growth Income holdings include 200,000 three-year common
stock purchase warrants, one-half exercisable at $1.50 per share and one-half
exercisable at $2.25 per share.
o MR. MCCONNAUGHY'S HOLDING
In addition to the 666,667 shares into which Mr. McConnaughy's notes are
convertible, his holdings include warrants to purchase 666,667 shares of common
stock exercisable at $1.00 each and 33,333 warrants to purchase common stock
exercisable at $4.75 each.
o OFFICER AND DIRECTOR HOLDINGS
The table includes the following shares of common stock issuable upon the
exercise of stock options granted under Fortune's various stock option plans and
shares of common stock issuable upon the exercise of stock purchase warrants
issued to employees in lieu of stock options:
Common Stock Average Weighted
Issuable Exercise Price
------------ ----------------
J. Michael Urban 575,000 $1.82
Tyrone J. Fairbanks 570,000 1.98
Dean W. Drulias 549,800 1.79
Barry Feiner 185,250 2.08
Daniel R. Shaughnessy 111,000 1.43
36
<PAGE>
Mr. Feiner's holdings also include 5,000 shares of common stock, 14,375
shares issuable upon exercise of 10,000 stock purchase warrants exercisable at
$3.75 per warrant, 66,667 shares issuable upon exercise of a like number of
stock purchase warrants exercisable at $1.00 per warrant, and the shares into
which the notes are convertible. These shares, warrants, and notes are owned by
Mr. Feiner's wife, Janet Portelly. Mr. Feiner disclaims beneficial ownership of
all such securities owned by Ms. Portelly.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998 and 1997, Fortune incurred $421,000 and $182,000,
respectively, for consulting services provided by Interpretation3, of which
Daniel R. Shaughnessy is the owner and president. Mr. Shaughnessy was elected to
Fortune's board of directors in January 1997. No such fees were incurred in
1999. See "Management - Directors and Executive Officers."
Petro-Guard Company, Inc., the operator at Espiritu Santo Bay, is owned by
Dewey A. Stringer III. Mr. Stringer was a director of Fortune from April 1998 to
June 1999. As the operator of Espiritu Santo Bay, Petro-Guard bills Fortune and
the other Espiritu Santo Bay partners their share of the monthly expenditures on
the project. As such, Petro-Guard billed Fortune $1,042,000 of Espiritu Santo
Bay exploration expenditures in 1998 and $107,000 from January 1, 1999 through
June 1999.
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. The incentive warrant exercise program has been extended
through June 1, 2000, unless terminated earlier at Fortune's sole discretion.
Fortune raised $618,000 in the private placement (824,000 shares sold at $0.75
per share) and has raised $164,000 through March 17, 2000 in the incentive
warrant exercise (218,331 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.
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. Warrants convertible into approximately 1.5 million shares of common
stock, including 1,080,705 shares owned by Mr. Blank, remain eligible to
participate in the incentive warrant exercise program.
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.
Also in February and March 2000, holders of $930,000 of Fortune's 12%
notes, which represent all of the notes that were convertible at approximately
$0.33 per share, converted those notes into 2,821,162 shares of common stock. As
an inducement to encourage conversion, Fortune paid the noteholders who
converted one year's prepaid interest. This interest was paid in Fortune common
stock valued at $0.75 per share, resulting in the issuance of an additional
148,800 shares to these noteholders. The Renaissance funds, who each owned
$350,000 of such notes, converted all of their notes. Each Renaissance fund
received 1,122,394 shares in connection with this transaction. As a result of
this note conversion, Fortune's annual cash interest expense has been reduced by
$111,600.
37
<PAGE>
Fortune estimates that the out-of-pocket costs it incurred in these
transactions did not exceed $20,000. The proceeds from these offerings will be
used for anticipated exploration expenditures and general corporate purposes.
On October 14, 1997, Fortune commenced a private placement of up to $4.5
million of 12% Convertible Subordinated Notes due December 31, 2007. The private
placement was completed on December 1, 1997. An aggregate of $3,225,000
principal amount of notes was sold, and Fortune received $2,815,000 of net
proceeds after offering expenses and commissions. The notes were sold under an
agreement with J. Robbins Securities, L.L.C. who served as placement agent. The
placement agent received a ten percent sales commission, a three percent
non-accountable expense allowance, and warrants to purchase 89,583 shares of
common stock. The warrants are exercisable over a five-year period at $3.60 per
warrant. Barry W. Blank, a beneficial owner of more than five percent of
Fortune's common stock, was a managing director for the placement agent at the
time of the offering and marketed substantially the entire private placement. As
such, Mr. Blank earned approximately 50% of the fees and commissions paid to the
placement agent for the notes sold by him and 20% of the warrants issued to the
placement agent. A trust established by and, under certain circumstances, for
the benefit of Mr. Blank acquired $500,000 of the notes. Mr. Blank's mother also
acquired $50,000 of notes. Mr. Blank disclaims beneficial ownership of the notes
purchased by his mother. Barry Feiner, a director of Fortune, acted as outside
counsel for the placement agent in the private placement and earned $32,250 in
legal fees from the placement agent. Mr. Feiner's wife acquired $50,000 in notes
for which Mr. Feiner disclaims beneficial ownership. Mr. Feiner recused himself
from voting on all board of director matters associated with the private
placement.
As part of the relocation of Fortune's headquarters to Houston, Texas,
Fortune provided Tyrone J. Fairbanks, its President and Chief Executive Officer,
with an incentive relocation package to facilitate his move to Texas. The
package consisted of a payment by Fortune of Mr. Fairbanks' moving expenses, a
non-recourse, unsecured loan in the amount of $80,000 and a secured recourse
loan in the amount of $70,000. The $80,000 loan bore interest at the rate of 6%
per annum, with $20,000 of such loan forgiven in each of four consecutive years
beginning in 1996 contingent on Mr. Fairbank's continued employment by Fortune.
As of January 31, 1999, the entire amount of this loan had been forgiven. The
$70,000 loan bore interest at the rate of 6% per annum, payable interest only
for two years with $35,000 principal payments due on the second and third
anniversaries of the loan. As of December 31, 1999, all of the $70,000 loan had
been repaid by Mr. Fairbanks.
All of the foregoing transactions were, and any future transactions with
related parties will be, on terms no less favorable to Fortune than those which
could be obtained from unaffiliated third parties. In addition, no transaction
will be entered into between Fortune and its management or principal
stockholders unless they are approved by a majority of the directors who are not
members of management or principal stockholders.
38
<PAGE>
LIMITED LIABILITY OF DIRECTORS
In accordance with the Delaware General Corporation Law, Fortune has
included a provision in its Certificate of Incorporation to limit the personal
liability of its directors for violations of their fiduciary duties. The
provision eliminates such directors' liability to Fortune or its stockholders
for monetary damages, except for any breach of the directors' duty of loyalty to
Fortune or its stockholders, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for unlawful
payment of dividends or unlawful stock purchases or redemptions, or for any
transaction from which any director derived an improper personal benefit.
This provision protects Fortune's directors against personal liability for
monetary damages arising from breaches of their duty of care. Directors remain
liable for breaches of their duty of loyalty to Fortune and its stockholders and
for the specific matters set forth above, as well as for violations of the
federal securities laws. The provision has no effect on the availability of
equitable remedies such as injunction or rescission. Additionally, these
provisions do not protect a director from activities undertaken in any capacity
other than that of director.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Fortune's bylaws provide for indemnification of its officers and directors
to the fullest extent permitted by the Delaware General Corporation Law in
effect at the time of a claim for indemnification. Such indemnification applies
to any threatened, pending or contemplated suit or proceeding arising by reason
of such person acting as an officer or director of Fortune or its affiliates.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Fortune
pursuant to the foregoing provisions, Fortune has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
(1) Financial Statements
Page
----
Independent Auditors' Report--KPMG LLP....................... 43
Balance Sheets--December 31, 1999 and 1998................... 44
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... 45
Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.......................... 46
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997....................................... 47
Notes to Financial Statements................................ 48
39
<PAGE>
(2) Financial Statement Schedules
None
(3) Exhibits
Number Description
3.1 Certificate of Incorporation of Registrant (filed as
Exhibit 3.1 to Registrant's Quarterly Report Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by
reference).
3.2 By-laws of Registrant (filed as Exhibit 3.3 to Registrant's
Quarterly Report Form 10-Q for the quarter ended June 30,
1997 and incorporated
herein by reference)
4.1 Warrant Agreement by and between Registrant and U.S.
Stock Transfer Corporation, as warrant agent (filed as
Exhibit 4.1 to Registrant's Registration Statement on
Form S-2 (333-45469) and incorporated herein by reference)
4.2 Form of Warrant Certificate (filed as Exhibit 4.2 to
Registrant's Registration Statement on Form S-2
(333-45469) and incorporated herein by reference)
4.3 Form of Note between Registrant and holders of Convertible
Subordinated Notes due December 31, 2007 (filed as Exhibit
4.1 to Registrant's Quarterly Report Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by
reference)
4.4 Form of Placement Agent Warrant Agreement between
Registrant and J. Robbins Securities, L.L.C. (filed
as Exhibit 4.2 to Registrant's Quarterly Report Form
10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference)
4.5 Shareholder Rights Plan of Registrant dated March 21, 1997
(filed as Exhibit 4.1 to Registrant's Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by
reference)
4.6 Form of Co-Conversion Agent warrant exercisable at $3.4965
per share (filed as Exhibit 4.4 to Registrant's
registration Statement on Form S-2 (333-00087) and
incorporated herein by reference)
4.7 Form of Warrant Agreement between Registrant and U.S.
Stock Transfer Corporation (incorporated by reference to
Registrant's Registration Statement on Form SB-2,
Registration No. 33-88452)
4.8 Form of Amended Note between Registrant and holders of
amended Convertible Subordinated Notes due December 31,
2007 (filed as Exhibit 4.10 to Registrant's Registration
Statement on Form S-2 (333-75715) and incorporated herein
by reference)
4.9 Form of Warrant exercisable at $1.00 per share between
Registrant and holders of amended Convertible Subordinated
Notes due December 31, 2007 (filed as Exhibit 4.11 to
Registrant's Registration Statement on Form S-2 (333-75715)
and incorporated herein by reference)
10.1 Credit Agreement between Registrant and credit Lyonnais New
York Branch and Certain Lenders dated July 11, 1997 (filed
as Exhibit 10.1 to Registrant's Form 10-Q for the quarter
ended June 30, 1997 and incorporated herein by reference)
10.2 Amendment dated November 3, 1997 to Credit Agreement
between Registrant and Credit Lyonnais New York Branch and
Certain Lenders (filed as Exhibit 10.1 to Registrant's Form
10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference)
40
<PAGE>
10.3 Participation Agreement by and between Registrant
and Smith Management Company, Inc. et al. to
acquire a 12.5% working interest in Espiritu
Santo Bay (filed as Exhibit 10.1 to Registrant's
Registration Statement on Form S-2 (333-22599)
and incorporated herein by reference)
10.4 Employment Agreement dated June 1, 1997 by and between
Registrant and Tyrone J. Fairbanks (filed as Exhibit 10.2
to Registrant's Form 10-Q for the quarter ended June 30,
1997 and incorporated herein by reference)
10.5 1993 Stock Option Plan (filed as an Exhibit to
Registrant's Registration Statement on Form SB-2
(33-64600) and incorporated herein by reference)
10.6 1998 Stock Option Plan (filed as Exhibit 10.8 to
Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by
reference)
10.7 Lease Agreement for 515 W. Greens Road, Houston,
Texas 77067 (filed as Exhibit 10.3 to
Registrant's Form 10-KSB for the year ended
December 31, 1995 and incorporated herein by
reference)
10.8 Form of Option Exercise Grant and Extension Agreement
between all executives and directors and Registrant (filed
as Exhibit 10.15 to the Registrant's Registration Statement
on Form S-2 (333-65847) and incorporated herein by
reference)
10.9* Letter Agreement by and between McMoRan Oil & Gas LLC and
Registrant, et al., to farmout portion of Registrant's
interest in Espiritu Santo Bay
10.10* Amendment dated March 13, 2000 to Credit Agreement between
Registrant and Credit Lyonnais New York Branch and Certain
Lenders
23.1* Consent of KPMG LLP
23.2* Consent of Huddleston & Co., Inc.
27.1* Financial Data Schedule
- ----------------
* Filed herewith
(b) Reports on Form 8-K
Form 8-K filed November 3, 1999 to report Fortune's press release
providing an exploration program update and announcing that the initial well on
its first Espiritu Santo Bay Deep Prospect had commenced.
Form 8-K filed December 21, 1999 to report Fortune's press release which
provided an Espiritu Santo Bay well update.
Form 8-K filed February 7, 2000 to report Fortune's press release
announcing the conversion into common stock of certain Fortune notes.
Form 8-K filed March 30, 2000 to report Fortune's press release of its
1999 financial results and financing transactions completed in March 2000.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report - KPMG LLP.......................... 43
Balance Sheets - December 31, 1999 and 1998...................... 44
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.............................. 45
Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997............................... 46
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................... 47
Notes to Financial Statements.................................... 48
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fortune Natural Resources Corporation:
We have audited the accompanying balance sheets of Fortune Natural
Resources Corporation as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fortune Natural Resources
Corporation as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
- ---------------
Houston, Texas
March 28, 2000
43
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................... $ 294,000 $1,452,000
Accounts receivable............................ 314,000 361,000
Prepaid expenses............................... 22,000 74,000
---------- ----------
Total Current Assets........................... 630,000 1,887,000
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the full cost method................... 27,302,000 26,800,000
Office and other............................... 384,000 384,000
---------- ----------
27,686,000 27,184,000
Less--accumulated depletion, depreciation
and amortization............................. (21,562,000) (20,728,000)
---------- ----------
6,124,000 6,456,000
---------- ----------
OTHER ASSETS:
Deposits and other............................. 51,000 51,000
Debt issuance costs (net of accumulated
amortization of $346,000 at
December 31, 1998)........................... - 98,000
---------- ----------
51,000 149,000
---------- ----------
TOTAL ASSETS....................................... $6,805,000 $8,492,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.............. $ - $ 10,000
Accounts payable............................... 33,000 93,000
Accrued expenses............................... 193,000 351,000
Royalties payable.............................. 5,000 12,000
Accrued interest .............................. 97,000 97,000
---------- ----------
Total Current Liabilities...................... 328,000 563,000
---------- ----------
LONG-TERM DEBT, net of current portion ............ 3,235,000 3,225,000
---------- ----------
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--12,259,846 and
12,134,675 shares at December 31, 1999
and 1998, respectively 123,000 121,000
Capital in excess of par value................. 30,295,000 30,171,000
Accumulated deficit............................ (27,176,000) (25,588,000)
---------- ----------
NET STOCKHOLDERS' EQUITY........................... 3,242,000 4,704,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $6,805,000 $8,492,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
44
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Sales of oil and gas, net of royalties............ $ 1,492,000 $ 1,881,000 $ 3,851,000
Other income...................................... 38,000 142,000 154,000
------------ ------------ ------------
1,530,000 2,023,000 4,005,000
------------ ------------ ------------
EXPENSES
Production and operating.......................... 532,000 595,000 1,094,000
Provision for depletion, depreciation
and amortization................................ 834,000 1,365,000 2,219,000
General and administrative........................ 1,204,000 1,547,000 1,965,000
Debt restructuring expense........................ 61,000 - 316,000
Stock offering cost............................... - - 323,000
Interest.......................................... 487,000 831,000 396,000
Impairments to oil and gas properties............. - 960,000 3,650,000
------------ ------------ ------------
3,118,000 5,298,000 9,963,000
------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES................ (1,588,000) (3,275,000) (5,958,000)
PROVISION FOR INCOME TAXES............................ - - -
------------ ------------ ------------
NET LOSS.............................................. $ (1,588,000) $ (3,275,000) $ (5,958,000)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING........................... 12,206,718 12,132,362 12,086,219
============ ============ ============
NET LOSS PER COMMON SHARE
(BASIC AND DILUTED)................................. $ (0.13) $ (0.27) $ (0.49)
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in Stock-
Common 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
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 stock options....... 5,512 - 13,000 - - 13,000
Common stock contributed to
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)
Common stock returned to treasury. (4) - - - - -
Net loss.......................... - - - - (3,275,000) (3,275,000)
---------- -------- ----------- -------- ------------ -----------
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
========== ======== =========== ======== ============ ===========
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(1,588,000) $(3,275,000) $(5,958,000)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Common stock issued for directors' fees.................... 36,000 - -
Depletion, depreciation and amortization................... 834,000 1,365,000 2,219,000
Amortization of deferred financing cost.................... 98,000 428,000 147,000
Debt conversion and restructuring expense.................. 61,000 - 316,000
Stock offering cost........................................ - - 323,000
Impairments to oil and gas properties...................... - 960,000 3,650,000
Non-cash compensation expense.............................. 20,000 44,000 58,000
Changes in assets and liabilities:
Accounts receivable........................................ 47,000 146,000 188,000
Prepaids................................................... 52,000 (74,000) 25,000
Accounts payable and accrued expenses...................... (218,000) (145,000) 525,000
Royalties and working interest payable..................... (7,000) (24,000) (67,000)
Accrued interest........................................... - (76,000) (25,000)
Deposits and other......................................... 9,000 35,000 (22,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities......... (656,000) (616,000) 1,379,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties..................... (502,000) (3,673,000) (4,946,000)
(Increase) decrease in restricted cash...................... - - 2,293,000
Proceeds from sale of properties and equipment.............. - 4,695,000 203,000
Net change in other property and equipment.................. - 17,000 (27,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities......... (502,000) 1,039,000 (2,477,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Gross proceeds from issuance of long-term debt,
net of issuance costs.................................... - - 3,290,000
Repayment of long term debt................................. - (540,000) (1,793,000)
Gross proceeds from issuance of common stock................ - 13,000 103,000
Debt and equity offering costs.............................. - (59,000) (971,000)
Common stock and warrant repurchase......................... - (52,000) (38,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities......... - (638,000) 591,000
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................... (1,158,000) (215,000) (507,000)
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................... 1,452,000 1,667,000 2,174,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR......................... $ 294,000 $ 1,452,000 $ 1,667,000
=========== =========== ===========
Supplemental information:
Interest paid in cash........................................ $ 388,000 $ 403,000 $ 249,000
Common stock issued or issuable as directors' fees........... 36,000 - -
Common stock issued for conversion of debt................... - - 975,000
Common stock issued for 401(k) Plan contribution............. 29,000 24,000 14,000
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
FORTUNE NATURAL RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fortune Natural Resources Corporation is an independent energy company
engaged in the acquisition, production and exploration of oil and gas, primarily
onshore and offshore Louisiana and Texas. All of Fortune's properties are
located in the United States. Fortune considers its business to be a single
operating segment.
USE OF ESTIMATES
In order to prepare financial statements in conformity with generally
accepted accounting principles, management must make estimates, judgments and
assumptions that affect the reported amounts. Actual results could differ from
those estimates.
CASH EQUIVALENTS
Fortune considers all highly liquid instruments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Fortune accounts for its oil and gas operations using the full cost
method. Under the full cost method, all costs associated with the acquisition,
exploration and development of oil and gas reserves, including non-productive
costs, are capitalized as incurred. Internal overhead, which is directly
identified with acquisition, exploration and development is capitalized. Such
overhead has not been material through December 31, 1999.
The capitalized costs of oil and gas properties are accumulated in a
single cost center and are amortized using the unit-of-production method based
on proved reserves. Estimated future development and abandonment costs are
included in the amortization base. Capitalized costs and estimated future
development costs associated with unevaluated properties are excluded from
amortization until the quantity of proved reserves attributable to the property
has been determined or impairment has occurred. Oil and gas property
depreciation, depletion and amortization expense per equivalent Mcf was $1.30,
$1.54 and $1.62 for the years ended December 31, 1999, 1998, and 1997,
respectively.
Proceeds from the dispositions of oil and gas properties are credited to
capitalized oil and gas property, with no gain or loss recognized unless the
disposition would significantly alter the relationship between capitalized costs
and proved reserves.
The cost of oil and gas properties net of amortization and related
deferred income tax may not exceed an amount equal to the tax-effected net
present value discounted at 10% of proved oil and gas reserves plus the lower of
cost or estimated fair market value of unevaluated properties. To the extent
Fortune's unamortized cost of oil and gas properties exceeds the ceiling amount,
a provision for additional depreciation, depletion and amortization would be
required as an impairment reserve. During 1998 and 1997, Fortune recorded $1.0
million and $3.7 million of impairments to oil and gas properties, respectively.
See note 12 regarding the 1997 impairments.
48
<PAGE>
Office and other property and equipment are stated at cost. Depreciation
is provided using the straight-line method over the estimated future service
life of the property and equipment.
INCOME TAXES
Fortune utilizes the asset and liability method for recognizing deferred
tax assets and liabilities. Deferred taxes are recognized for future tax
consequences attributable to (1) differences between financial statement basis
of assets and liabilities and their respective tax bases and (2) tax net
operating loss and tax credit carryforwards. The effect on deferred taxes of a
change in tax rates is recognized in income in the period the change occurs.
DEBT ISSUANCE COSTS
The cost of issuing Fortune's convertible debt has been amortized over the
period that such debt was not convertible, which ended April 30, 1999.
STOCK OPTION PLANS
Fortune follows the intrinsic value method of accounting for stock option
grants. Accordingly, no compensation expense is recognized for our stock based
compensation plans; however, we provide pro forma disclosure of the impact of
these stock plans on operating results.
COMPUTATION OF NET LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding. Since the issuance or
conversion of additional securities would have an anti-dilutive effect, diluted
loss per share is the same as basic loss per share.
(2) SALE OF EAST BAYOU SORREL
On March 31, 1998, Fortune 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 Fortune's interest in
the Schwing #1 and #2 wells and all of the associated leases, facilities and
interests.
Fortune's interest in the two productive wells at East Bayou Sorrel was
pledged to secure the credit facility with Credit Lyonnais. The total balance
outstanding under the credit facility prior to this sale was $550,000. Upon
closing the sale, Fortune repaid all but $10,000 of the outstanding balance of
the credit facility.
49
<PAGE>
The Schwing #1 and #2 wells began producing 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 Fortune's oil and gas revenues during 1997 and proved
reserves as of December 31, 1997. A third well in the field, the Schwing #3, was
spudded October 9, 1997 and temporarily plugged and abandoned on March 5, 1998.
During 1997 and 1998, Fortune incurred approximately $1 million to drill and
attempt completion of this well as a result of difficult drilling conditions and
mechanical problems. Selected unaudited financial information attributable to
Fortune's interest in the East Bayou Sorrel field as reported in its 1997 and
1998 financial results is as follows:
Year Ended December 31,
----------------------
1998 1997
--------- ---------
Production
Oil (Bbls) 12,000 55,000
Gas (Mcf) 18,000 78,000
Oil and gas revenues $231,000 $1,241,000
Production and operating expense 60,000 205,000
Provision for depletion, depreciation
and amortization 54,000 430,000
As of December 31, 1997
----------------------
Estimated net reserve quantities
of total proved reserves
Oil (Bbls) 152,000
Gas (Mcf) 204,000
This represented 32% and 30% of Fortune's 1997 oil and gas revenues and
production and 23% of proved reserves as of December 31, 1997. Consequently,
Fortune's revenues and cash flow from operations have decreased significantly
since the sale.
Under the full cost method of accounting, proceeds from the sale of oil
and gas properties are credited to capitalized oil and gas property costs, with
no gain or loss recognized unless such sales 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% of the reserve quantities in a given cost center. Because the sale of
East Bayou Sorrel represented less than 25% of Fortune's reserve quantities, the
entire proceeds of $4,695,000 was credited to capitalized oil and gas properties
as of March 31, 1998. Subsequent to charging these proceeds against capitalized
oil and gas property costs, Fortune recorded impairments to oil and gas
properties. Consequently, any gain which Fortune might have reported on the sale
of this property would have been entirely offset by additional impairments to
oil and gas properties.
50
<PAGE>
(3) OIL AND GAS PROPERTIES AND OPERATIONS
Capitalized costs relating to oil and gas producing activities and related
accumulated depletion, depreciation and amortization at December 31, 1999, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Capitalized costs of oil and gas properties..... $27,302,000 $26,800,000 $27,822,000
Less accumulated depletion,
depreciation and amortization................. (21,216,000) (20,422,000) (18,137,000)
----------- ----------- -----------
$ 6,086,000 $ 6,378,000 $ 9,685,000
=========== =========== ===========
</TABLE>
The unproved properties portion of capitalized costs was $2.7 million,
$2.6 million and $3.2 million in 1999, 1998 and 1997, respectively. Costs
incurred in oil and gas producing activities were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Property acquisition
Unproved...................................... $ 48,000 $ 437,000 $ 333,000
Proved........................................ - - 368,000
Exploration..................................... 348,000 2,558,000 2,285,000
Development..................................... 106,000 678,000 1,960,000
----------- ----------- -----------
$ 502,000 $ 3,673,000 $ 4,946,000
=========== =========== ===========
</TABLE>
The results of operations from oil and gas producing activities for the
years ended December 31, 1999, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from oil and gas producing activities:
Sales to unaffiliated parties................ $ 1,492,000 $ 1,881,000 $ 3,851,000
----------- ----------- -----------
Expenses -
Production and operating........................ 532,000 595,000 1,094,000
Depreciation, depletion and amortization........ 794,000 1,325,000 2,179,000
Impairments to oil and gas properties........... - 960,000 3,650,000
----------- ----------- -----------
Total expenses.................................. 1,326,000 2,880,000 6,923,000
----------- ----------- -----------
Pretax income (loss) from producing activities.. 166,000 (999,000) (3,072,000)
Income tax expense.............................. - - -
----------- ----------- -----------
Results of oil and gas producing activities
(excluding corporate overhead and
interest costs).............................. $ 166,000 $ (999,000) $(3,072,000)
=========== =========== ===========
</TABLE>
51
<PAGE>
(4) LONG-TERM DEBT
At December 31, 1999, a summary of long-term debt is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
------------ ------------
1999 1998
------------ ------------
<S> <C> <C>
Convertible Subordinated Notes due December 31, 2007...... $ 3,225,000 $ 3,225,000
Credit Lyonnais credit facility due January 11, 2001...... 10,000 10,000
------------ ------------
Total long-term debt...................................... 3,235,000 3,235,000
Less current installments................................. - (10,000)
------------ ------------
Long-term debt, excluding current installments............ $ 3,235,000 $ 3,225,000
============ ============
</TABLE>
At December 31, 1999, Fortune had $3,225,000 of 12% subordinated
convertible notes outstanding. Such convertible subordinated notes are due
December 31, 2007. Fortune has realized net losses for many years, resulting in
an accumulated deficit of $27 million at December 31, 1999. As a result of
depleting reserves and the sale of Fortune's interest in East Bayou Sorrel in
March 1998, Fortune has realized negative operating cash flows of $656,000 and
$616,000 in 1999 and 1998, respectively. In February and March 2000, Fortune
took steps to improve its short term liquidity by raising $782,000 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. See note 14 for information regarding these transactions. As
a result of these transactions, 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 may not be
able to repay the remaining $2,295,000 of convertible subordinated notes when
they become due on December 31, 2007. Management believes that operating cash
flow will 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 at December 31, 2007.
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
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, 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 the company 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.
In March 1999, noteholders representing $2,295,000 principle amount of the
Convertible Subordinated Notes agreed to amend the conversion price of their
notes. As a result, these amended notes are convertible into Fortune's common
stock at a conversion price of $0.75 per share, subject to adjustment for
certain future recapitalizations or dividends of Fortune. If these noteholders
had not agreed to this amendment, the conversion price for the notes would have
been approximately $0.33 per share effective May 1, 1999. The remaining $930,000
principal amount of notes are convertible into Fortune's common stock at a
conversion price of approximately $0.33 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 by
52
<PAGE>
Fortune at a premium that reduces monthly from 10% to zero from May 1999 to
November 2000. As of March 1, 2000, the premium on redemption was 4.40% of par.
Any such premium on redemption is waived if Fortune's common stock price
averages at least $4.50 per share for 30 consecutive trading days. 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.
Fortune's $20 million credit facility with Credit Lyonnais New York Branch
was to expire January 11, 2000; however, in March 2000, Credit Lyonnais extended
the facility to January 11, 2001. On March 31, 1998, Fortune 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 2). Prior to its sale of
the East Bayou Sorrel field, Fortune's borrowing base was $2 million. The
borrowing base is now $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 existing 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.
Primarily as a result of the lower revenues after the sale of East Bayou
Sorrel, Fortune 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-months
period ended December 31, 1999. Fortune is also required by the credit facility
to maintain a minimum cash balance of $500,000 while any subordinated debt,
including the 12% notes, is outstanding. Fortune failed to meet these covenants
at December 31, 1999. Fortune has received waivers of these covenants from the
bank for the period ended December 31, 1999. See note 14 for information about
amendments to this credit facility in March 2000.
(5) INCOME TAXES
No provision for income taxes was required for the years ended December
31, 1999, 1998 and 1997. Deferred taxes consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 7,276,000 $ 4,539,000
Difference in basis of oil and gas properties........ 1,227,000 3,267,000
----------- -----------
8,503,000 7,806,000
Less valuation allowance (100%)...................... (8,503,000) (7,806,000)
----------- -----------
Net deferred taxes................................... $ - $ -
=========== ===========
</TABLE>
At December 31, 1999, Fortune estimates it had cumulative net operating
loss carryforwards for federal income tax purposes of approximately $21 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 2019. Fortune is
uncertain as to the recoverability of the above deferred tax assets and has
therefore applied a 100% valuation allowance.
53
<PAGE>
(6) COMMITMENTS AND CONTINGENCIES
Fortune has an employment agreement with its President and Chief Executive
Officer that provides for an annual salary of $176,000 through the later of May
31, 2000, or six months following notice of non-renewal. The agreement provides
that if employment is terminated for any reason other than cause, death or
disability within two years following a change in control, the CEO is entitled
to a lump-sum payment of two year's compensation and all shares of common stock
underlying his stock options without payment of the exercise price. The
agreement also provides for two years of consulting services upon the completion
of the primary term of his contract at 40% of the last compensation thereunder.
The agreement further provides for additional compensation, in an amount not to
exceed his annual salary, based upon certain increases in the value of Fortune's
common stock.
Fortune leases office space under a non-cancelable operating lease. Rental
expense under the office lease for the years ended December 31, 1999, 1998 and
1997 was $94,000, $89,000 and $86,000,
respectively.
Minimum future lease payments under the non-cancelable operating leases
are as follows:
Year ending December 31,
2000...................... $ 93,000
2001...................... 39,000
---------
$ 132,000
=========
On January 31, 2000 the remaining lawsuits relating to Fortune's December
1995 offering under Regulation S of the Securities Act were settled. Under the
settlement, the other litigants released all claims against Fortune and paid
Fortune $25,000 in exchange for Fortune releasing all of its claims.
(7) RELATED PARTY TRANSACTIONS
On January 22, 1997, Fortune's board of directors appointed Daniel R.
Shaughnessy as a director of Fortune. Mr. Shaughnessy is a petroleum
geophysicist and geologist and is president and owner of Interpretation3, an
integrated 3D geophysical interpretation company which does geological and
geophysical consulting work for Fortune. During 1998 and 1997, Mr. Shaughnessy's
firm billed Fortune a total of $421,000 and $182,000, respectively, for
geological and geophysical consulting. No such fees were incurred in 1999.
Petro-Guard Company, Inc., the operator at Espiritu Santo Bay, is owned by
Dewey A. Stringer III. Mr. Stringer was a director of Fortune from April 1998 to
June 1999. As the operator of Espiritu Santo Bay, Petro-Guard bills Fortune and
the other Espiritu Santo Bay partners their share of the monthly expenditures on
the project. As such, Petro-Guard billed Fortune $1,042,000 of Espiritu Santo
Bay exploration expenditures in 1998 and $107,000 from January 1, 1999 through
June 30, 1999.
The convertible subordinated notes discussed in note 4 were sold under a
placement agreement with J. Robbins Securities, L.L.C., the placement agent. The
placement agent received a ten percent sales commission, a three percent
non-accountable expense allowance, and warrants to purchase 89,583 shares of
common stock. The warrants are exercisable over a five-year period at $3.60 per
share. Barry W. Blank, a beneficial owner of more than five percent of Fortune's
common stock, was managing director for the placement agent at the time of the
offering and marketed substantially the entire private placement. As such, Mr.
Blank earned approximately 50% of the fees and commissions paid to the Placement
Agent for the notes sold by him and 20% of the warrants issued to the placement
agent. A trust established by and, under certain
54
<PAGE>
circumstances, for the benefit of Mr. Blank acquired $500,000 of the notes. Mr.
Blank's mother also acquired $50,000 of notes. Mr. Blank disclaims beneficial
ownership of the notes purchased by his mother. Barry Feiner, a director of
Fortune, acted as outside counsel for the placement agent in connection with the
private placement and earned $32,250 in legal fees from the placement agent. Mr.
Feiner's wife acquired $50,000 in notes for which Mr. Feiner disclaims
beneficial ownership. Mr. Feiner recused himself from voting on all board of
director matters associated with the private placement.
Fortune pays each outside director compensation of $2,500 per quarter.
Beginning in 1999, these fees are being paid in Fortune common stock in lieu of
cash. Inside directors do not receive such compensation.
As part of the relocation of its headquarters to Houston, Texas, Fortune
provided Tyrone J. Fairbanks, its President and Chief Executive Officer, with an
incentive relocation package to facilitate his move to Texas. The package
consisted of a payment by Fortune of Mr. Fairbanks' moving expenses, a
non-recourse, unsecured loan in the amount of $80,000 and a secured recourse
loan in the amount of $70,000. The $80,000 loan bore interest at the rate of 6%
per annum, with $20,000 of such loan forgiven in each of four consecutive years
beginning in 1996. As of January 31, 1999, the entire amount of the loan had
been forgiven under the terms of the relocation agreement. The $70,000 loan also
bore interest at the rate of 6% per annum, payable interest only for two years,
with $35,000 principal payments due on the second and third anniversaries of the
loan. As of December 31, 1999, Mr. Fairbanks had repaid all of the $70,000 loan.
See note 14 for a discussion of related party transactions that occurred
after December 31, 1999.
(8) STOCKHOLDERS' EQUITY
Fortune has two stock option plans only one of which, the 1998 plan, has
options available for grant. The plans cover all officers, directors and
employees of Fortune. The board of directors grants awards upon recommendations
of its compensation committee. There is no performance formula or measure.
Options granted under the plans must be exercised within five years of the date
of grant or they are forfeited.
Fortune follows the intrinsic value method of accounting for stock option
grants. Accordingly, no compensation expense has been recognized for its stock
based compensation plans. Had compensation cost for Fortune's stock option plans
been determined based upon the fair value method of accounting for stock based
compensation plans, the impact on Fortune's reported net loss and loss per share
would have been:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Impact on net loss:
Increase in net loss (millions) $ 0.1 $ 0.5 $ 0.6
Increase in net loss per share $ 0.01 $ 0.04 $ 0.05
</TABLE>
55
<PAGE>
The fair value on the date of grant of the options granted during 1999 is
estimated as $0.10 per common stock option using the Black-Scholes
option-pricing model. Fortune used the following assumptions to calculate the
fair value of options granted and the impact on its net loss and net loss per
share based upon the methodology prescribed under FAS 123:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Assumptions:
Dividend yield 0% 0% 0%
Volatility 65% 65% 65%
Risk-free interest rate 5.1% 5.7% 6.3%
Forfeiture rate 5% 5% 5%
Expected life (years) 5.0 2.5 2.5
</TABLE>
Common stock option transactions were:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Options Exercisable of Options
------------------- ----------------
<S> <C> <C>
Balance, December 31, 1996............. 934,709 2.93
Granted................................ 595,000 2.80
Exercised.............................. (6,400) 2.75
Forfeited.............................. (20,411) 2.74
---------- ----------
Balance, December 31, 1997............. 1,502,898 2.96
Granted................................ 757,500 1.57
Exercised.............................. (1,200) 1.56
Forfeited.............................. (115,975) 2.96
---------- ----------
Balance, December 31, 1998............. 2,143,223 2.47
Granted................................ 600,000 1.56
Exercised.............................. - -
Forfeited.............................. (378,459) 2.74
---------- ----------
Balance, December 31, 1999............. 2,364,764 $ 2.20
========== ==========
</TABLE>
The above table includes 80,000 common stock warrants which were issued to
employees in 1995 and 1996 in lieu of common stock options.
All options are immediately exercisable upon grant. At December 31, 1999,
Fortune had 1,225,985 common stock options available for grant during 2000 under
the 1998 Stock Option Plan.
<PAGE>
The following table summarizes information concerning currently
outstanding and exercisable options and warrants issued in lieu of options:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
----------------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Price Outstanding Life Price
-------------- ----------- ----------- ---------
<S> <C> <C> <C>
$1.56 to $3.25 2,364,764 2.7 years $2.20
</TABLE>
At December 31, 1999 Fortune's outstanding common stock purchase warrants
consisted of (b):
<TABLE>
<CAPTION>
Exercise Price
Number of Warrants Per Warrant Expiration Date
------------------ -------------- ---------------
<S> <C> <C>
35,000 $ 2.75 1/06/00
27,600 $ 3.19 2/25/00
685,000 $ 4.75 5/12/00
200,000 $ 2.03 6/25/00
100,000 $ 4.75 8/01/00
60,000 $ 3.63 9/06/00
1,163,513 (a) $ 3.75 9/28/00
37,500 $ 3.63 12/05/00
80,000 $ 1.03 8/21/01
20,000 $ 2.44 8/29/01
10,000 $ 2.44 9/06/01
200,000 $ 2.03 3/01/02
616,200 (a) $ 3.75 3/01/02
3,060,004 $ 1.00 3/18/02
17,917 $ 3.60 11/30/02
---------
6,312,734
=========
</TABLE>
(a) Warrants permit the holders of these warrants to purchase 2,558,338 total
shares of common stock.
(b) Table excludes warrants that have been issued to employees in lieu of
stock options.
On April 15, 1998, Fortune closed a voluntary offer to exchange its
1,917,000 publicly traded common stock warrants and 63,000 private warrants for
new private warrants. These old warrants would have expired September 28, 1998.
1,779,713 old warrants were tendered and accepted by Fortune, representing 93%
of the outstanding public warrants. An additional 3,000 public warrants were
exercised by warrantholders during the exchange offer period. As a result of a
subsequent extension granted in 1999, the new private warrants expire September
28, 2000. These new 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 are similar to the old warrants.
Fortune did not receive any proceeds as a result of this exchange offer, but
incurred $59,000 of offering expense that was charged to stockholders' equity in
1998. The old warrants that were not exchanged expired on September 28, 1998.
In May 1998, Fortune repurchased 515,000 of its then outstanding private
common stock warrants for $0.10 per warrant. The warrants were exercisable at
$4.75 per share and would have expired April 2000. The purchase price was
charged to stockholders' equity.
57
<PAGE>
On September 30, 1997 Fortune completed an odd-lot shareholder stock buy
back wherein Fortune offered to buy for $3.00 per share the common stock owned
by shareholders who held fewer than 100 shares of Fortune's common stock.
Fortune initiated the odd-lot buy back to reduce the cost of administering
odd-lot shareholders. As a result, 9,769 shares of Fortune's common stock were
acquired as treasury stock. The treasury stock was cancelled in 1998.
(9) MAJOR CUSTOMERS AND PRODUCTION CONCENTRATION
Fortune routinely sells over 10% of its oil and gas revenues to single
customers. The following table shows the percentage of oil and gas revenues to
each customer who exceeded 10% of total such revenues during 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Largest customer 22% 29% 27%
Next largest customer 17% 14% 25%
Next largest customer 11% 11% 11%
Next largest customer 10%
------ ------ ------
Total sold to all customers who exceed 10% 62% 64% 63%
====== ====== ======
</TABLE>
Approximately 33% of Fortune's 1999 oil and gas revenues, cash flow, and
proved oil and gas reserves were currently accounted for by a single well at
South Timbalier Block 76. This well was shut-in for repairs for one month in
1997 and for over two months during 1996 as the result of mechanical failures.
Production from this well has declined significantly since the workovers and
Fortune's independent petroleum engineers estimate that the current producing
zone is scheduled to fully deplete in 2000. A significant curtailment or loss of
production for a prolonged period before we could replace the reserves through
new discoveries or acquisitions would have a material adverse effect on our
projected operating results and financial condition.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, debt and other financial assets and liabilities approximate
their fair value.
(11) RETIREMENT PLAN
During 1996, Fortune adopted the Fortune Natural Resources Corporation
401(k) Profit Sharing Plan for its eligible employees. Under the plan, eligible
employees are permitted to make salary deferrals of up to 15% of their annual
compensation, subject to Internal Revenue Service limitations. Salary deferrals
will be matched 50% by Fortune, subject to IRS limitations, and are 100% vested
after two years of service with the company. Salary deferrals are 100% vested at
all times. Fortune makes its matching contribution in shares of Fortune common
stock. Fortune does not make profit sharing contributions to the plan. For the
1999, 1998 and 1997 plan years, Fortune's matching contribution liability was
$19,000, $24,000 and $24,000, respectively.
58
<PAGE>
(12) RESTRICTED CASH AND ZYDECO VENTURE
Under the terms of Fortune's exploration venture agreement with Zydeco
Exploration, Inc., Fortune contributed $4.8 million in cash to the Zydeco
venture during 1995 for payment of certain prior and future lease and seismic
costs incurred by the venture. Fortune's contribution entitled it to a 50%
working interest in all projects generated within the venture's area of
operations. Prior to June 1997, the remaining unspent contribution had been
recorded as restricted cash on Fortune's balance sheet. On June 4, 1997, Fortune
exercised its right under the exploration agreement with Zydeco to have all
unspent capital contributions returned to Fortune. The balance of unspent funds
of $2,154,000 was returned to Fortune in June 1997. Fortune is relieved of any
obligation to pay future costs associated with the projects; however, Fortune's
50% working interest in each project which has not already been farmed out is
subject to a proportionate reduction if Zydeco expends additional funds on such
project.
In connection with requesting the return of unspent venture funds, Fortune
reviewed for impairment is $4.3 million remaining unevaluated investment in the
Zydeco exploration venture properties. The $4.3 million investment included the
value of the Fortune common stock that was issued in 1995 to acquire its
interest in the exploration venture as well as the funds that Fortune has spent
for leases and seismic in the exploration venture. As a result of this
impairment review, Fortune transferred all of its investment in the Zydeco
exploration venture projects to the evaluated property account during 1997.
Consequently, Fortune recorded impairments to oil and gas properties during 1997
of $3.7 million.
(13) OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS COST INFORMATION
(UNAUDITED)
All of Fortune's reserves are located within the United States. Proved
reserves represent estimated quantities of oil and gas which geological and
engineering data demonstrate to be reasonably certain to be recoverable in the
future from known reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells using existing equipment and operating methods.
For the years ended December 31, 1999, 1998 and 1997, the oil and gas
reserve estimates were determined by Huddleston & Co., Inc., Houston, Texas
independent petroleum engineers, in accordance with guidelines established by
the Securities and Exchange Commission. Such estimates are subject to numerous
uncertainties inherent in the estimation of proved reserves and in the
projection of future production, prices and costs. The future cash inflow, as
reflected in the "Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves", determined from such reserve data are
estimates only. They should not be construed to be the current market values of
Fortune's oil and gas reserves or the costs that would be incurred to obtain
equivalent reserves.
59
<PAGE>
CHANGES IN ESTIMATED RESERVE QUANTITIES
Fortune's net interests in estimated quantities of proved developed and
undeveloped reserves of oil and gas at December 31, 1999, 1998, and 1997, and
changes in such quantities during the years then ended were as follows:
<TABLE>
<CAPTION>
Oil (MBbls)
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
BEGINNING OF PERIOD................... 106 257 249
Revisions of previous estimates..... (6) 16 (1)
Extensions and discoveries.......... 5 15 88
Production.......................... (17) (42) (87)
Purchase of minerals in place....... - - 13
Sales of minerals in place.......... - (140) (5)
------ ------ ------
END OF PERIOD......................... 88 106 257
====== ====== ======
Proved developed reserves
Beginning of period.............. 47 198 160
====== ====== ======
End of period.................... 28 47 198
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Gas (Mmcf)
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
BEGINNING OF PERIOD.................. 3,082 3,217 3,481
Revisions of previous estimates.... (181) 306 431
Extensions and discoveries.......... 607 354 187
Production.......................... (508) (609) (821)
Purchase of minerals in place...... - - 11
Sales of minerals in place.......... - (186) (72)
------ ------ ------
END OF PERIOD......................... 3,000 3,082 3,217
====== ====== ======
Proved developed reserves
Beginning of period.............. 1,413 1,548 1,749
====== ====== ======
End of period ................... 1,371 1,413 1,548
====== ====== ======
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 "Disclosures
about Oil and Gas Producing Activities" and based on oil and gas reserve and
production volumes determined by Fortune's reserve engineers. It may be useful
for certain comparative purposes, but should not be solely relied upon in
evaluating Fortune or its performance. Further, information contained in the
following table should not be considered as representative of realistic
assessments of future cash flows, nor should the Standardized Measure of
Discounted Future Net Cash Flows be viewed as representative of the current
value of Fortune.
60
<PAGE>
Fortune believes that the following factors should be taken into account
in reviewing this information:
o future costs and selling prices will probably differ from those
required to be used in these calculations;
o due to future market conditions and governmental regulations, actual
rates of production in future years may vary significantly from the rate
of production assumed in the calculations;
o selection of a 10% discount rate is arbitrary and may not be
reasonable as a measure of the relative risk inherent in
realizing future net oil and gas revenues; and
o future net revenues may be subject to different rates of income
taxation.
Under the standardized measure, future cash inflows were estimated by
applying period-end oil and gas prices adjusted for fixed and determinable
escalations to the estimated future production of period-end proved reserves.
Future cash inflows were reduced by estimated future development, abandonment
and production costs based on period-end costs in order to arrive at net cash
flow before tax. Future income tax expense has been computed by applying
period-end statutory tax rates to aggregate future pre-tax net cash flows,
reduced by the tax basis of the properties involved and tax carryforwards. SFAS
No. 69 requires use of a 10% discount rate.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as proved reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Future cash inflows................... $ 10,332 $ 8,709 $ 12,717
Future costs:
Production.......................... (3,210) (2,807) (3,346)
Development......................... (949) (917) (961)
-------- -------- --------
Future net inflows before income taxes 6,173 4,985 8,410
Future income taxes................... - - -
-------- -------- --------
Future net cash flows................. 6,173 4,985 8,410
10% discount factor................... (1,842) (1,458) (1,907)
-------- -------- --------
Standardized measure of
discounted net cash flows........... $ 4,331 $ 3,527 $ 6,503
======== ======== ========
</TABLE>
The average prices received by Fortune at year end 1999, 1998 and 1997 and
used in determining year end proved reserves were as follows:
1999 1998 1997
------ ------ ------
Oil - $/Bbl................ $23.28 $ 9.85 $16.90
Gas - $/Mcf................ $ 2.50 $ 2.25 $ 2.60
As of March 17, 2000, Fortune was receiving an average of approximately
$2.70 per Mcf for its gas production and $28.60 per Bbl for its oil production.
61
<PAGE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
FROM PROVEN RESERVE QUANTITIES
A summary of the changes in the standardized measure of discounted future
net cash flows applicable to proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Standardized Measure:
Beginning of period......................... $ 3,527 $ 6,503 $ 10,820
Increases (decreases):
Sales and transfers, net of production costs (960) (1,286) (2,757)
Extensions and discoveries.................. 960 541 1,571
Net change in sales and transfer prices,
net of production costs................... 943 (964) (4,643)
Changes in estimated future
development costs......................... (2) - 245
Development costs incurred during the period - - 400
Revisions of quantity estimates............. (370) 418 630
Accretion of discount....................... 353 650 1,082
Purchases of reserves in place.............. - - 191
Sales of reserves in place.................. - (1,870) (199)
Changes in timing of production and other... (120) (465) (837)
-------- -------- --------
Standardized Measure:
End of period............................... $ 4,331 $ 3,527 $ 6,503
======== ======== ========
</TABLE>
(14) SUBSEQUENT EVENT - NOTE CONVERSION AND 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. The incentive warrant exercise program has been extended
through June 1, 2000, unless terminated earlier at Fortune's sole discretion.
Fortune raised $618,000 in the private placement (824,000 shares sold at $0.75
per share) and has raised $164,000 through March 10, 2000 in the incentive
warrant exercise (218,331 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.
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. Warrants convertible into approximately 1.5 million shares of common
stock, including 1,080,705 shares owned by Mr. Blank, remain eligible to
participate in the incentive warrant exercise program through the termination
date.
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.
62
<PAGE>
Also in February and March 2000, holders of the $930,000 of Fortune's 12%
notes that were convertible at approximately $0.33 per share, including $700,000
of total notes held by the two Renaissance funds, converted those notes into
2,821,162 shares of common stock. As an inducement to encourage conversion,
Fortune paid the noteholders who converted one year's prepaid interest. This
interest was paid in Fortune common stock valued at $0.75 per share, resulting
in the issuance of an additional 148,800 shares to the noteholders who
converted. Each Renaissance fund received 1,122,394 shares in connection with
this transaction. As a result of this note conversion, Fortune's annual cash
interest expense has been reduced by $111,600.
Fortune estimates that its out-of-pocket costs in these transactions did
not exceed $20,000. The proceeds from these offerings will be used for
anticipated exploration expenditures and general corporate purposes.
In March 2000, the bank amended Fortune's credit facility to extend the
due date to January 11, 2001, reduce to $200,000 the minimum cash balance
Fortune must hold while any subordinated notes are outstanding and set the
borrowing base at $10,000, subject to redetermination upon the bank's approval.
63
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Houston, State of Texas, on March 30,
2000.
FORTUNE NATURAL RESOURCES CORPORATION
By: /s/ Tyrone J. Fairbanks
------------------------------
Tyrone J. Fairbanks
President, Chief Executive Officer and Director
By: /s/ J. Michael Urban
------------------------------
J. Michael Urban
Vice President, Chief Financial Officer and
Chief Accounting Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates stated.
Signature Title Date
--------- ----- ----
/s/ Tyrone J. Fairbanks
- ------------------------------ President, Chief Executive
Tyrone J. Fairbanks Officer and Director March 30, 2000
/s/ Dean W. Drulias Executive Vice President,
- ------------------------------ General Counsel, Corporate
Dean W. Drulias Secretary and Director March 30, 2000
/s/ Barry Feiner
- ------------------------------
Barry Feiner Director March 30, 2000
/s/ D. R. Shaughnessy
- ------------------------------
D. R. Shaughnessy Director March 12, 1999
64
<PAGE>
[McMoRan Oil & Gas Letterhead]
September 8, 1999
Petro-Guard Company, Inc. Fairfield Resources Corp.
5858 Westheimer 14100 Southwest Freeway
Suite 400 Suite 340
Houston, TX 77057 Sugarland, TX 77478
Attn: Mr. Dewey Stringer Attn: Mr. Barry Rava
Solvation, Inc. Fortune Natural Resources Corporation
5858 Westheimer 515 W. Greens Road
Suite 400 Suite 720
Houston, TX 77057 Houston, TX 77067
Attn: Mr. Arthur Pasmas Attn: Mr. Tyrone J. Fairbanks
Energy Management Corporation Lamar Oil & Gas, Inc.
5858 Westheimer P. O. Box 2197
Suite 400 Rockport, TX 78381
Houston, TX 77057 Attn: Mr. David R. Pilgrim
Attn: Mr. Arthur Pasmas
OGA 1, L.P.
5858 Westheimer
Suite 400
Houston, TX 77057
Attn: Mr. Arthur Pasmas
Re: Farmout Agreement
Grass Island Deep Prospect
Calhoun County, Texas
Gentlemen:
This Farmout Agreement ("Agreement") shall evidence the agreement of each of
Fairfield Resources Corp., Petro-Guard Company, Inc., Solvation, Inc., OGA
1, L.P., Lamar Oil & Gas, Inc. and Fortune Natural Resources Corporation
(hereinafter collectively referred to as "Farmor" or "Farmors") to farmout their
leasehold interests in and to that area designated as the Farmout Area on the
attached plat marked Exhibit "A" ("Farmout Area") to McMoRan Oil & Gas LLC
("Farmee") under the terms and conditions as set forth herein. Farmors
individually farmout their respective interests, and all options and elections
provided for in this Agreement will be exercised by each Farmor independently of
the other Farmors.
<PAGE>
Farmout Agreement
September 8, 1999
Page 2
I. INITIAL TEST WELL
On or before November 1, 1999, Farmee will commence the actual drilling of an
Initial Test Well, subject to rig availability and obtaining the requisite
permits, at a location on the Farmout Area mutually agreed to by Farmor, Farmee,
and third parties owning a working interest in the Farmout Area (the "Other
Parties"). Farmee will prosecute the drilling of such well with due diligence
and in a workmanlike manner to the lesser of (a) a depth of 13,500' TVD, (b) a
depth sufficient to encounter a time equivalent point of 3.287 seconds, which
point is described by velocity survey in the Getty #1 San Antonio Bay State
Tract 82 as being equal to a subsea depth of 13,482' TVD, which point in the
prestack time migration/Fairfield display data set of Espiritu Santo Bay 3D
seismic survey is 37 milliseconds below the positive amplitude event that occurs
between 3.200 seconds and 3.250 seconds at the intersection of Line 889 and
cross line 315, or (c) a depth of no less than 12,500' at which conditions are
encountered which would require a reasonably prudent operator to utilize a mud
weight of at least 17.5 pounds per gallon ("Contract Depth"). Farmee will assume
all cost and risk attributable to the interest of Farmor associated with the
drilling, completing and installation of flowlines, pipelines, shore facilities,
platforms, and other production facilities necessary for the production of such
Initial Test Well or any substitute therefor at the maximum prudent production
rate for such well, in the event the well is completed as a producer, or the
plugging and abandoning of the well if same is a dry hole.
In the event the Initial Test Well fails to reach Contract Depth due to its
encountering impenetrable substances, salt, saltwater flow, heaving shale,
cavity, excessive pressure, mechanical difficulties, or if other conditions are
encountered which in the opinion of a reasonable prudent operator would render
further drilling of such well hazardous or impractical ("Gulf Coast
Conditions"), but such well is completed as a well capable of commercial
production at a lesser depth, Farmee shall comply and earn an assignment in
accordance with the terms of Article III hereof, which assignment will be
limited to depths from the depth of 6,500' below the surface to 100 feet below
the stratigraphic equivalent of total depth drilled in the well, subject to
Farmee's right to earn additional depths by drilling a Substitute Well to
Contract Depth. Farmee may drill the Initial Test Well to any depth below
Contract Depth it deems appropriate.
If Farmee is unable to timely spud the Initial Test Well or any substitute
therefor due to rig availability, permitting problems, or force majeure, Farmor
agrees to grant a reasonable extension of time to allow Farmee to spud the well.
II. SUBSTITUTE WELL
If the Initial Test Well, or any substitute therefor, encounters Gulf Coast
Conditions, as defined above, prior to reaching Contract Depth, Farmee shall
have
<PAGE>
Farmout Agreement
September 8, 1999
Page 3
the option to commence operations for the drilling of a Substitute Well
("Substitute Well"). If Farmee elects to drill a Substitute Well, it shall be
drilled having a bottomhole location of Farmee's choice in the Farmout Area, and
such Substitute Well will be committed to in writing by Farmee within 30 days
and commenced within 120 days of rig release from the well for which it is
substituted. The Substitute Well shall be drilled pursuant to the terms and
conditions of this Agreement and will be considered for all purposes as if it
were the well for which it is a substitute, including allocation of costs for
purposes of Payout.
III. RIGHT TO TAKE OVER WELL
In the event Farmee does not elect to complete the Initial Test Well, any
substitute therefor or subsequently drilled well on the Farmout Area, it will
give notice to Farmor of its election to plug and abandon such well. Subject to
the rights of the Other Parties, Farmor shall have forty-eight (48) hours from
receipt of such notice inclusive of weekends and holidays in which it may elect
to take over the well for the purposes of completing same. If Farmor elects to
take over such well, Farmee, at Farmors election, will set a plug in the
intermediate casing at a mutually acceptable depth or take such steps as are
necessary to secure the rig prior to releasing the well to Farmor, at the
expense of Farmee. Farmee will thereafter have no further interest in the well
bore. Farmor will assume operatorship of the well and will execute all
appropriate forms necessary to be recognized as Operator under the laws and
regulations of the State of Texas. Farmor will assume all cost and risk
associated with the well including all standby charges for rig, vessels and
other associated equipment incurred by Farmee from the time Farmor receives
notice of Farmees' election to plug and abandon the well until Farmor notifies
Farmee of its election whether or not to take over the well. If Farmor elects to
take over the well, Farmor shall then also be responsible for any subsequent
standby costs incurred. Farmor shall also assume the obligation to plug and
abandon the well and restore the surface premises in accordance with all state
and federal regulations. As between each Farmor, proposals to take over the well
will be considered in order from the deepest interval in which any Farmor
proposes to complete the well to the shallowest interval. Such proposals will be
made pursuant to the applicable Operating Agreement. If notice of an election to
takeover the well is not furnished to Farmee within such 48 hour period, Farmee
will plug and abandon the well according to the terms of this Agreement. As to
any interval(s) below 6,500', Farmor shall have no right to take over a well and
attempt a completion if Farmee intends to commence a subsequent well to test
such interval(s). Additionally, if Farmor takes over said well as hereinabove
provided, such action shall not in any way impair the right of Farmee to earn
rights in the Farmout Leases by the drilling of a Substitute Well in the manner
provided in this Agreement.
<PAGE>
Farmout Agreement
September 8, 1999
Page 4
IV. RIGHTS TO BE EARNED
In the event that, within the time and in the manner provided for in this
Agreement, Farmee drills the Initial Test Well, or any substitute therefor, to
the Contract Depth ("Earning Well"), and Farmee furnishes to Farmors, together
with the information required by Article IX, below, if not previously furnished,
notice that an Earning Well has been drilled to Contract Depth, Farmors shall
provide to Farmee an assignment, within a reasonable period of time, not to
exceed 45 days, following the receipt of such notice, which assignment shall be
effective as of the date of receipt of such notice, of the following:
An undivided fifty percent (50%) of each of Farmors' right, title and
interest in the leases which are described on Exhibit "IV.A" attached hereto
to the extent such leases cover lands included in the Farmout Area (the
"Farmout Leases"), reserving unto each Farmor, its successors and assigns, a
pro rata share of an overriding royalty of the difference, if any, between
lessors' royalties and any existing burdens thereon and twenty-five percent
(25%), proportionately reduced to the interest being assigned to Farmee, of
any and all of the oil and gas and other liquid or gaseous hydrocarbon
substances produced, saved and marketed from, or attributable to the
assigned interests under the terms and conditions of the leases. Said
overriding royalty interest shall be computed and paid at the same time and
in the same manner as royalties are computed and paid to the lessor under
the terms of the leases. Such overriding royalty shall be free and clear of
all costs of exploring, operating, developing, producing and maintaining
said lease in force and effect, except the proportionate share of severance,
production, excise and other like taxes applicable to such overriding
royalty interest, and a pro rata share of transportation charges borne by
Farmee . Said reserved overriding royalty shall not be reducible at Payout
except that Farmors' 50% working interest shall, at Payout, be subject to
50% of such reserved overriding royalty interest. It is the intention of
Farmor to deliver a 75% Net Revenue Interest in the Farmout Leases. The
assignment will also reserve all rights from the surface of the earth to
6,500' and shall further reserve all title and interest owned by Petro-Guard
Company, Inc., Solvation, Inc. and OGA 1, L.P. in and to all wells,
production platforms, facilities, pipelines and structures and appurtenances
of any kind on the Farmout Area. The assignment will provide the Farmee
shall additionally be entitled to all production from the Initial Test Well
attributable to 100% of the working interest of Farmor under this Agreement
until Payout, as defined herein.
V. OPERATING AGREEMENT
Except as otherwise provided in this Agreement, all operations conducted on the
Farmout Area will be conducted in accordance with the provisions of the
Operating Agreement which is attached hereto as Exhibit "V.A". The Operating
Agreement
<PAGE>
Farmout Agreement
September 8, 1999
Page 5
will apply to the Farmout Area which shall be the same as the Contract
Area described in Exhibit "A" to the Operating Agreement. The AMI provisions of
the Operating Agreement shall be applicable as of the date hereof. In the event
of a conflict between the Operating Agreement and this Agreement, the terms of
this Agreement shall prevail.
VI. RISKS, COSTS, EXPENSES AND INDEMNITY
The Initial Test Well, and any substitute therefor, drilled under the provisions
of this Agreement shall be drilled free of any cost and/or liabilities of any
kind or character to Farmor, and all risks, liability, costs or expenses
incurred in connection with drilling, testing, completing and equipping said
well or wells, or plugging and abandoning said well or wells, shall be borne
solely by Farmee to the extent of the farmed out interest, except as otherwise
specifically provided for in this Agreement. Farmee also assumes and agrees to
indemnify and defend Farmor against any and all claims, demands or causes of
action of any kind or nature, including spills or other environmental damage,
that may be asserted against Farmor by suit or otherwise, for injury to or death
of any person or persons and/or the loss of or damage to property arising from
or in any manner growing out of or connected with the above described operations
conducted in or on said well or wells or facilities by Farmee, except for any
such claims, losses, demands or causes of action caused by the actions or
omissions of Farmor.
Farmee does not assume any cost, risk or liability in connection with or arising
from any existing wells or structures located on the Farmout Area or any wells
drilled or operations previously conducted by Farmor or others on any portion of
the Farmout Lease, except as to any liabilities arising out of the operations
and actions of Farmee. Any such wells or structures shall be retained by those
Farmors owning such wells or structures and Farmors will be responsible for any
liabilities arising therefrom. Farmor shall also assume full responsibility and
liabilities for any additional wells as may be drilled or structures as may
hereafter be installed in connection with those stratigraphic depths of the
Farmout Leases not made subject to this Agreement. Additionally, Farmee agrees
that it shall have no access to or rights in any such structures or platforms as
a result of the execution of this agreement.
VII. SEISMIC DATA
Upon execution of this Agreement, and approval of the Other Parties, Farmee will
receive a Seismic License Agreement covering the 1997 3-D seismic data insofar
as designated on Exhibit "VII.A" hereof and will receive the data covered
thereby to work in Farmee's offices under the terms of such Seismic License
Agreement. Each Farmor and Farmee further agree that for a period of two years
from the date hereof it will give the other the right to review any prospects
which Farmee or such Farmor elects to farmout in the 3-D Seismic Area, as such
area is set forth on that plat attached hereto as Exhibit "VII. B". The parties
will execute appropriate
<PAGE>
Farmout Agreement
September 8, 1999
Page 6
confidentiality agreements prior to reviewing such prospects. The 3-D License
Agreement is attached hereto as Exhibit "VII.C".
VIII. OPTION AREA
Farmors hereby grant to Farmee an option, exercisable during a thirty-day period
beginning on the date on which the Initial Test Well or any substitute therefor
is drilled to Contract Depth, in which Farmee may elect to purchase fifty
percent (50%) of the interest owned by Farmors in and to the leases covering
lands outside the Farmout Area but within the Option Area as set forth on
Exhibit "A" hereof, as to rights below the depth of 6,500' below the surface. If
Farmee elects to acquire such interest, Farmee shall make payment to Farmors of
50% of Farmors' costs of acquisition and annual rentals paid on such leases.
Farmors shall promptly assign to Farmee its share of each such lease, reserving
unto Farmors the overriding royalty provided for in Article IV, above.
In the event Farmors, or any of them, on the one hand, or Farmee, on the other
hand, desire to bid on any unleased acreage within the Option Area, the parties
desiring to bid shall notify all other parties and shall convene a meeting to
attempt to agree on the acreage to be bid upon and the bid price. The parties
will act in good faith to attempt to agree on these matters. Farmee and Farmors,
prior to proposing the acquisition of any lease and/or the proposing any well in
the Option Area (initial or otherwise), will to the extent allowable under the
applicable agreements, make available their geological and geophysical
interpretations of said prospect and well. All assignments of leases acquired by
either Farmor or Farmee within the 3-D Seismic Data Area and assigned to the
other, subject to the above or under the terms of the AMI provision of the
Operating Agreement, will provide that Farmors will be entitled to all rights
from the surface of the earth to a depth of 6,500' and Farmors shall be entitled
to an overriding royalty of the difference between the lease royalty burden and
25%, if any.
IX. INTERPRETATIONS, WELL INFORMATION, AND DATA
In the course of drilling the Initial Test Well, or substitute therefor, Farmee
agrees to do such evaluation and to have made or conducted such operations as,
in Farmee's sole opinion, a prudent operator would do, or have made or
conducted, under the same or similar circumstances. To the extent that such
tests or evaluations are conducted by Farmee, Farmee shall comply with each of
the requirements set forth on Exhibit "IX.A" hereto (the "Geologic and Technical
Requirements"). Farmors shall be entitled to all notices and information
required to be sent to a participating working interest owner in a paid up
status. Except as otherwise provided in this Agreement, during the drilling,
completion, and production of any well drilled hereunder on the Farmout Area and
Option Area, the Farmors' authorized agents and representatives shall be
entitled to receive copies of all geological, geophysical and engineering
information obtained from the drilling of said well or wells and shall
<PAGE>
Farmout Agreement
September 8, 1999
Page 7
be entitled to all rights and privileges of a working interest owner, including,
but not limited to, daily detailed rig drilling reports, logging while drilling
logs, mud logs and reports, mud engineer reports, flow tests, paper and digital
copies of all logs, regulatory filings, emergency notifications, and any other
information related to daily rig and drilling activity. Farmors shall have
access to the rig floor, at the sole risk of Farmor, its authorized agents or
representatives, to observe all operations conducted in or on said well or
wells. Prior to conducting any logging operations in said well or wells, Farmee
will give Farmor, in accordance with the provisions of the Geologic and
Technical Requirements, twenty-four (24) hours notice in advance of such logging
operations or, in the event that well conditions do not permit such twenty-four
(24) hour notice, Farmee will give as much advance notice of intended operations
as time will allow.
If requested by Farmor, Farmee will provide transportation for Farmor, its
agents and representatives, subject to space availability, to and from said well
or wells on regularly scheduled trips, at the sole risk of Farmor, its agents
and representatives. Farmor may otherwise provide its own transportation to the
rig upon notice to Farmee. Farmor assumes and agrees to indemnify Farmee against
any and all claims, demands and causes of action of any kind or nature that may
be asserted against Farmee, by suit or otherwise, arising out of or in any
manner growing out of or connected with the authorized agents and
representatives of Farmor having access to, or being upon, the rig floor or the
providing by Farmee of transportation to and from the well or wells for the
authorized agents and representatives of Farmor, except as to any damages or
loss caused by the negligence or willful misconduct of Farmee or its agents or
representatives.
X. PAYOUT
The term "Payout" as used herein shall mean that point in time at which the
Farmee has recovered out of the net proceeds from the sale of production from
the Initial Test Well or a substitute therefor, after first deducting all
royalties and overriding royalties applicable to such production together with
all severance, production, or excise taxes and marketing and gathering costs
applicable to such production to the extent attributable to the interests of
Farmors, plus any reimbursements or credits of others including insurance
reimbursements and claims, all of Farmee's share of the cost of drilling,
completing, equipping for production including the installation of flowlines,
pipelines, shore and production facilities and operating said well and/or a
substitute therefor attributable to the farmed-in interests (all such charges
shall be made in accordance with the provisions of the Operating Agreement to
the extent such charges are covered by the Operating Agreement). That portion of
Payout to be recouped by Farmee as to drilling costs shall be limited to 115% of
the amount of such costs as set out on Farmee's AFE for the Initial Test Well,
or the actual drilling costs incurred by Farmee to Casing Point, whichever is
the lesser. The cost of equipping the well(s) for production shall include the
cost of installing a platform and facilities. However, in the event a subsequent
well is drilled and
<PAGE>
Farmout Agreement
September 8, 1999
Page 8
completed prior to Payout, the subsequent well participants will not bear any of
the capital costs of the production facilities other than the costs necessary to
tie-in the subsequent well into the facilities for the Initial Test Well (if
such production facilities capacities are available and the subsequent well is
tied into same). The subsequent well participants will, however, bear their
share of operating costs including their share of rentals on any leased
equipment or facilities. In the event Farmee receives any Credits and
Reimbursements after payout occurs that are attributable to the period prior to
Payout, Farmee shall credit all such amounts to the joint account of Farmor to
the same effect as if such amounts had been received prior to payout.
Farmee shall furnish Farmor monthly operating statements as if Farmor was an
active working interest participant. Payout statements shall be furnished once
each quarter within thirty (30) days after the calendar quarter for which the
computations are made, showing the proceeds of production from the applicable
well(s) and providing an itemized account of the well costs and authorized
deductions from production for the previous quarter. Such payout statements
shall be provided monthly during the calendar month immediately following the
month to which they apply once the well for which such statements are provided
is within 20% of payout. Such statements shall also show the cumulative proceeds
of production (and the gross volume) from such well and provide an itemized
account of the cumulative well costs and cumulative authorized deductions from
production revenues so that the then current payout status can be readily
determined from the statement. Farmee shall keep an accurate record of all
charges and credits connected with the applicable well(s), and such records
shall be available at all reasonable times for audit by Farmor. Farmee agrees to
provide Farmor with the above information within the periods provided herein.
Beginning with the date hereof and continuing until two years following Farmee's
notification to Farmor of payout, Farmor shall have the right to audit Farmee's
books and records pertaining to this project as to all revenues and expenses
beginning with the first charges incurred. Upon reaching payout, Farmee shall
begin disbursing revenues, if applicable, to Farmor within thirty days.
XI. CONFIDENTIALITY
The parties hereto agree that all geological, engineering, technical, production
test or other data obtained from all wells drilled under this Agreement shall be
considered to be "tight" and shall be the property of Farmee and Farmor and
shall be maintained as confidential information for a period of two (2) years
from the date hereof, or until such information is made public by any
governmental agency acquiring jurisdiction, unless all parties hereto agree in
writing to a lesser period of time. It is further agreed that the ownership of
proprietary geophysical data belonging either to Farmee or Farmor remains
respectively vested in each such owner to do with as it so desires; however, any
such geophysical data furnished hereunder to a non-owner shall be protected as
confidential information. It is understood that any filings of reports or press
releases by Farmee or Farmor which are required by governmental agencies or
<PAGE>
Farmout Agreement
September 8, 1999
Page 9
stock exchanges or which are made to satisfy public disclosure requirements
shall not constitute a breach hereof. Except as provided in the preceding
sentence any party hereto desiring to make a press release shall furnish a copy
thereof to the other party hereto prior to release for the purpose of advising
the parties and obtaining comments thereon.
XII. PERMITS, DATA AND FILINGS
It is understood that Farmee shall assume all duties, responsibilities and
liabilities in connection with all permits for operations hereunder and that
Farmee shall make any and all filings and reports necessary in connection with
the drilling, completing, and the plugging and abandoning of any well or wells
drilled under the terms of this Agreement. It is also understood that Farmor
shall aid and assist Farmee in its attempt to secure the final approval on any
such required permit by furnishing on a timely basis such necessary information
as Farmor has available.
XIII. GAS COMMITMENTS
Farmor represents that the interests farmed out herein are not subject to any
existing gas contract or oil and/or gas call on production except for that Gas
Purchase Agreement dated April 1, 1986 between Seneca Resources Corporation et.
al. and Dow Chemical Company, as amended, and that Crude Oil Purchase Agreement
dated December 11, 1998 with GulfMark Energy, Inc., and will not enter into any
such contracts or commitments affecting the interests which may be earned by
Farmee hereunder. Farmor will further attempt to obtain a release of said Gas
Purchase Agreement and said Crude Oil Purchase Agreement as to the interests
subject to this Agreement prior to the commencement of the Initial Test Well.
Resolution of the release of such agreements will be resolved to the
satisfaction of Farmee prior to spudding the Initial Test Well.
XIV. LIMITED WARRANTY/STIPULATION OF INTERESTS
Any assignment from Farmor to Farmee shall be without warranty except for a
special warranty as to parties claiming by, through or under Farmor, and shall
include an express representation and warranty by Farmor that the interest
assigned to Farmee is not subject to any obligations or burdens, except as set
out in the Operating Agreement, other than a proportionate share of the lessor's
royalty and a proportionate share of the overriding royalty interests to be
retained by Farmor pursuant to the terms and provisions of this Agreement.
Further, any assignment from Farmor to Farmee shall warrant that the interest
assigned to Farmee is assigned free from any mortgage, lien, production payment,
advanced payments or any other burden or encumbrance (other than the Lessor's
royalty and the overriding royalty interests referenced above) and Farmor agrees
to indemnify Farmee against any loss or damages incurred by Farmee resulting
from the breach of such warranty.
<PAGE>
Farmout Agreement
September 8, 1999
Page 10
The Farmors agree that as between themselves the working interest ownership in
the Leases are correctly reflected on Exhibit "A" to the Operating Agreement
hereof and that it is the intention of each Farmor to farmout under the terms of
this Agreement its entire interest in the Farmout Area to Farmee.
XV. LAWS AND REGULATIONS
Farmee agrees to comply with all laws and lawful regulations applicable to any
activities carried out by Farmee under the provisions of this Agreement and/or
any amendments thereto. The laws of the State of Texas shall apply.
XVI. ACCEPTANCE OF TITLE
Farmee's obligations under this Agreement are subject to the acceptance by
Farmee of Farmor's title in and to the Leases included in the Farmout Area.
Farmee will advise Farmor of any title deficiencies within thirty (30) days of
the date hereof.
XVII. FORFEITURE OF RIGHTS
Farmee shall not be liable in damages or otherwise for failure to commence,
drill, test or complete the Initial Test Well, or any substitute therefor, in
the manner or within the time set forth herein, but such failure shall result
only in the forfeiture by Farmee of its rights and privileges under the
provisions of this Agreement not earned and all further obligations and
liabilities of Farmee hereunder shall cease.
XVIII. RELATIONSHIP OF PARTIES, TAX PARTNERSHIP
Farmor and Farmee hereby agree that the respective obligations and liabilities
of the parties under this Agreement shall be several, not joint or collective,
and each shall be responsible for its own obligations. It is not the purpose or
the intention of this Agreement to create, and the same shall never be construed
as creating, a joint venture, agency, mining partnership or other relationship
whereby any of the parties shall be liable for acts, either of commission or
omission, of any party hereto.
XIX. LEASE MAINTENANCE PAYMENTS
Prior to Farmee earning the interest as to Farmout Leases, Petro-Guard Company,
Inc. shall pay, all delay rentals accruing after the date of the Agreement under
the Farmout Leases and shall notify Farmee of each payment. Within thirty (30)
days after receipt of such notice, Farmee shall reimburse Petro-Guard for the
full amount of such payment. Petro-Guard shall not be liable for failure to make
a proper payment, but agrees to use the same degree of care used in making such
payments under its other leases. Farmee shall be responsible for making all
rental payments on leases within the Farmout Area after Farmee has earned the
assignment referred to in Article IV, above. All parties will reimburse Farmee
their proportionate share thereof.
<PAGE>
Farmout Agreement
September 8, 1999
Page 11
XX. EFFECT AND ASSIGNABILITY
It is expressly understood that the terms and provisions of this Agreement shall
extend to, be binding upon and inure to the benefit of the successors and
assigns of the parties hereto.
This Agreement shall not be assigned by any party hereto without first securing
the written consent to such assignment by the other parties hereto, which
consent shall not be unreasonably withheld. Any assignment of interests in the
Farmout Leases during the term or effectiveness of this Agreement shall be
subject to this Agreement.
Farmor specifically agrees that Farmee shall be authorized to make an assignment
of interests in acreage which has been earned hereunder to the participants in
its Exploration Program and may disclose confidential data to such participants,
namely, Phosphate Resource Partners Limited Partnership and Gerald J. Ford and
that Farmee may disclose information acquired hereunder to such participants,
subject to the confidentiality provisions hereof.
XXI. NOTICES
All notices, reports and information to be given to Farmee pursuant to the
provisions of this Agreement shall be given to Farmee as follows:
McMoRan Oil & Gas LLC
Attention: Glenn A. Kleinert, Senior Vice President
1615 Poydras Street
New Orleans, Louisiana 70112
Post Office Box 60004
New Orleans, Louisiana 70160
Telephone Number:(504) 582-4610
Telecopy Number: (504) 582-4155
or to such other representative as Farmee designates in writing.
Farmors notice shall be given to the following:
Petro-Guard Company, Inc.
Attention: Mr. Dewey Stringer
5858 Westheimer, Suite 400
Houston, TX 77057
Telephone: 713/974-5550, ext. 14
Fax: 713/974-6818
<PAGE>
Farmout Agreement
September 8, 1999
Page 12
Solvation, Inc.
Attn: Mr. Arthur Pasmas
5858 Westheimer, Suite 400
Houston, TX 77057
Telephone: 713/782-5212
Fax: 713/782-0916
Energy Management Corporation
5858 Westheimer
Suite 400
Houston, TX 77057
Attn: Mr. Arthur Pasmas
OGA 1, L.P.
Attn: Mr. Arthur Pasmas
5858 Westheimer, Suite 400
Houston, TX 77057
Telephone: 713/782-5212
Fax: 713/782-0916
Fairfield Resources Corp.
Attn: Mr. Barry Rava
14100 Southwest Freeway, Suite 340
Sugarland, Texas 77478
Telephone: 281/275-7738
Fax: 281/275-7770
Fortune Natural Resources Corporation
Attn: Mr. Tyrone J. Fairbanks
515 W. Greens Road, Suite 720
Houston, TX 77067
Telephone: 281/872-1170
Fax: 281/872-1213
Lamar Oil & Gas, Inc.
Attn: Mr. David R. Pilgrim
P.O. Box 2197
Rockport, TX 78381
Telephone: 512/790-9678
Fax: 512/ 790-5519
All notices shall be effective upon receipt.
<PAGE>
Farmout Agreement
September 8, 1999
Page 13
If the above and foregoing, together with the Exhibits attached hereto,
correctly set forth and evidence the agreement and understanding between the
parties, please sign and date the enclosed copy of this Agreement at the spaces
indicated below and return the executed copy of same to the undersigned within
fifteen (15) days from the date hereof or this Agreement may be terminated at
the option of Farmee.
This Agreement has been prepared for counterpart execution and, will be binding
as to each Party upon its execution, whether or not the other parties listed
below execute same.
McMoRan Oil & Gas LLC
By: /s/ Glenn A. Kleinert
----------------------------------
Glenn A. Kleinert
Senior Vice President
Agreed to and accepted on this 7th day of September, 1999.
Petro-Guard Company, Inc.
By: /s/ Dewey A. Stringer, III
---------------------------------
Dewey A. Stringer, III
Agreed to and accepted on this 9th day of September, 1999.
Solvation, Inc.
By: /s/ Arthur J. Pasmas
---------------------------------
Arthur J. Pasmas
Agreed to and accepted on this 9th day of September, 1999.
Energy Management Corporation
By: /s/ Arthur J. Pasmas
---------------------------------
Arthur J. Pasmas
<PAGE>
Farmout Agreement
September 8, 1999
Page 14
Agreed to and accepted on this 9th day of September, 1999.
OGA 1, L.P.
By: /s/ Arthur J. Pasmas
---------------------------------
Arthur J. Pasmas
Agreed to and accepted on this 7th day of September, 1999.
Fairfield Resources Corp.
By: /s/ M. J. Fontenot
---------------------------------
M. J. Fontenot
Agreed to and accepted on this 9th day of September, 1999.
Fortune Natural Resources Corporation
By: /s/ Tyrone J. Fairbanks
---------------------------------
Tyrone J. Fairbanks
Agreed to and accepted on this 9th day of September, 1999.
Lamar Oil & Gas, Inc.
By: /s/ David Pilgrim
---------------------------------
David Pilgrim
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement dated March 13, 2000, but to be
effective as provided for in Section 5 below, (this "AMENDMENT"), is among
FORTUNE NATURAL RESOURCES CORPORATION, a Delaware corporation (the "BORROWER"),
CREDIT LYONNAIS NEW YORK BRANCH, as Agent (the "AGENT"), and the lenders party
to the Credit Agreement defined below (the "LENDERS"). Capitalized terms used in
this Amendment and not otherwise defined herein shall have the meanings given to
them in the Credit Agreement.
PRELIMINARY STATEMENTS:
WHEREAS, the Borrower, the Agent and the Lenders have entered into that
certain Credit Agreement dated as of July 11, 1997(as modified and amended from
time to time, the "CREDIT AGREEMENT"); and
WHEREAS, the Borrower has requested and the Agent and Lenders have agreed,
upon the following terms and conditions, to amend the Credit Agreement to, among
other things, extend the Stated-Termination Date from January 11, 2000 to
January 31, 2001, and establish a fixed Borrowing Base in the amount of
$10,000.00 during the period of time from January 11, 2000 through January 31,
2001 (the "EXTENSION PERIOD").
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties hereto hereby agree as
follows:
SECTION 1.AMENDMENT TO SECTION 1.1. Section 1.1 of the Credit Agreement,
as such Section was previously amended by the Second Amendment to Credit
Agreement dated August 25, 1999, is hereby amended by deleting the existing
definition of "Stated-Termination Date" in its entirety and inserting in lieu
thereof the following:
"STATED-TERMINATION DATE means January 31, 2001."
SECTION 2.AMENDMENT TO SECTION 2.1 (B). Section 2.1(b) of the Credit
Agreement is hereby amended by deleting the reference to "$100,000" in the first
line thereof, and replacing it with "$10,000" so that as amended Section 2.1(b)
shall read as follows:
"(b) Each Borrowing may only be $10,000 or a greater integral
multiple of $10,000 if a Base-Rate Borrowing or $500,000 or a greater
integral multiple of $100,000 if a LIBOR-Rate Borrowing;"
SECTION 3.AMENDMENT TO BORROWING BASE. Notwithstanding the language
contained in Section 2.6 or any other Section of the Credit Agreement, during
the entire term of the Extension Period, the Borrowing Base shall be fixed at
$10,000 and there shall be no redetermination of the Borrowing Base without the
prior written consent of the Agent.
SECTION 4.AMENDMENT TO SECTION 10.3. Section 10.3 of the Credit Agreement,
as such Section was previously amended by the First Amendment to Credit
Agreement dated November 3, 1997, is hereby amended by deleting the reference to
"$1,028,000" and replacing it with "$200,000" so that as amended Section 10.3
shall read as follows:
<PAGE>
"10.3 Coverage of Subordinated Debentures (10-1/2%). The value of all
investments of Borrower permitted pursuant to paragraphs 1-8 on Schedule
9.8, plus all cash on hand, to be less than $200,000 at any time during
which any Subordinated Debentures (10-1/2%) remain outstanding."
SECTION 5.CONDITIONS OF EFFECTIVENESS. Upon receipt by the Agent of
counterparts of this Amendment duly executed by the Borrower, this Amendment
shall be deemed effective on and as of January 11, 2000.
SECTION 6.REPRESENTATIVES AND WARRANTIES. The Borrower
represents and warrants as follows:
(a) The execution, delivery and performance by the Borrower of this
Amendment and the Credit Agreement, as amended hereby, and the
consummation of the transactions contemplated hereby and thereby are
within the Borrower's powers as a corporation, have been duly authorized
by all necessary corporate action and do not (I) contravene the Borrower's
articles of incorporation, by-laws or any other charter documents, (ii)
violate any law, rule, regulation, order, writ, judgment, injunction,
decree, determination, or award applicable to the Borrower, (iii) conflict
with or result in the breach of, or constitute a default under, any
agreement or instrument binding on or affecting the Borrower or any of its
properties or (iv) result in or require the creation or imposition of any
Lien upon or with respect to any of the assets of the Borrower.
(b) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body or any other
third party is required for the due execution, delivery or performance by
the Borrower of this Amendment or the Credit Agreement, as amended hereby,
or for the consummation of the transactions contemplated hereby and
thereby.
(c) This Amendment has been duly executed and delivered by the
Borrower. This Amendment and the Credit Agreement, as amended hereby, are
the legal, valid and binding obligation of the Borrower enforceable
against the Borrower in accordance with its terms.
SECTION 7.REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS:
(a) Upon the effectiveness hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Credit Agreement, and
each reference in the other Loan Documents to the Credit Agreement,
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Credit Agreement, as
amended hereby.
(b) Except as specifically amended above, the Credit Agreement is and
shall continue to be in full force and effect and is hereby in all
respects ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any
rights, power or remedy of any Lender under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 8.GOVERNING LAW. This Amendment shall be governed by,
and construed in accordance with, the laws of the State of New York.
<PAGE>
SECTION 9.EXECUTION IN COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
Delivery of an executed counterpart of a signature page to this Amendment by
telecopier shall be effective as delivery of a manually executed counterpart of
this Amendment.
SECTION 10. NUMBER OF BANKS. Although initially Credit Lyonnais New York
Branch is the only Lender party hereto, there may be multiple Lenders party
hereto from time to time as a result of one or more assignments pursuant to this
Agreement. Accordingly, various provisions contemplate that the Borrowings will
consist of multiple loans or otherwise contemplate that more than one Lender is
a party hereto. So long as only one Lender is a party hereto, references to
multiple loans or Notes shall include a single loan or Note, as the case may be,
where appropriate, and references to multiple Lenders shall mean such Lender.
SECTION 11. FINAL AGREEMENT. THIS WRITTEN AGREEMENT
REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
FORTUNE NATURAL RESOURCES
CORPORATION, a Delaware corporation
By: /s/ J. Michael Urban
-------------------------------------
Name: J. Michael Urban
Title: Vice President and CFO
CREDIT LYONNAIS NEW YORK BRANCH, as
Agent and a Lender
By: /s/ Philippe Soustra
------------------------------------
Name: Philippe Soustra
Title: Senior Vice President
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Fortune Natural Resources Corporation:
We consent to incorporation by reference of our report dated March 28, 2000,
relating to the balance sheets of Fortune Natural Resources Corporation as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999, which report appears in the December 31, 1999,
annual report on Form 10-K of Fortune Natural Resources Corporation in the
following registration statements of Fortune Natural Resources Corporation: (i)
No. 333-35417 on Form S-8 dated September 11, 1997, (ii) No. 333-60557 on Form
S-8 dated August 4, 1998 and (iii) No. 333-91509 on Form S-8 dated November 23,
1999.
/s/KPMG LLP
Houston, Texas
March 28, 2000
HUDDLESTON & CO., INC.
PETROLEUM AND GEOLOGICAL ENGINEERS
1 HOUSTON CENTER
1221 MCKINNEY, SUITE 3700
HOUSTON, TEXAS 77010
-----
PHONE (713) 209-1100 - FAX (713) 752-0828
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
March 27, 2000
Fortune Natural Resources Corporation
One Commerce Green
515 W. Greens Rd., Suite 720
Houston, Texas 77067
Dear Sirs:
We hereby consent to the filing of this consent as an exhibit to the Annual
Report on Form 10-K of Fortune Natural Resources Corporation to be filed with
the Securities and Exchange Commission on or about March 27, 2000, to the use of
our name therein, and to the inclusions of or reference to our reports of
estimated future reserves and revenues effective December 31, 1997, December 31,
1998 and December 31, 1999.
HUDDLESTON & CO., INC.
/s/ Peter D. Huddleston, P.E.
-----------------------------
Peter D. Huddleston, P.E.
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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