SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File No. 1-12334
FORTUNE NATURAL RESOURCES CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 95-4114732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Green, 515 W. Greens Rd.,
Suite 720, Houston, Texas 77067
(Address of Principal Executive Offices) (Zip Code)
281-872-1170
Issuer's telephone number
N/A
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
16,639,089 as of April 30, 2002
Transition small business disclosure format (check one) Yes ___ No X
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
FORTUNE NATURAL RESOURCES CORPORATION
BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
---------- ----------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents........................ $ 198,000 $ 507,000
Restricted joint venture cash account............ 273,000 -
Accounts receivable.............................. 182,000 214,000
Prepaid expenses................................. 46,000 25,000
---------- ----------
Total Current Assets.......................... 699,000 746,000
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the full cost method..................... 28,802,000 28,546,000
Office and other................................. 82,000 396,000
---------- ----------
28,884,000 28,942,000
Less--accumulated depletion, depreciation
and amortization............................... (25,044,000) (25,261,000)
---------- ----------
3,840,000 3,681,000
---------- ----------
Deferred stock offering and bridge financing costs.. 114,000 -
---------- ----------
TOTAL ASSETS........................................ $4,653,000 $4,427,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2002 2001
---------- ----------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts payable................................. $ 113,000 $ 134,000
Accrued expenses................................. 162,000 94,000
Royalties and working interests payable.......... 49,000 52,000
Accrued interest................................. 17,000 69,000
Bridge loans payable............................. 260,000 -
Mandatory redeemable series B preferred stock.... 240,000 -
---------- ----------
Total Current Liabilities..................... 841,000 349,000
---------- ----------
DEFERRED INTEREST PAYABLE........................... 57,000 -
---------- ----------
LONG-TERM DEBT...................................... 2,295,000 2,295,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--2,000,000 shares
Issued and outstanding--240,000 shares of
Series B.................................... - -
Common stock, $.01 par value:
Authorized--40,000,000 shares
Issued and outstanding 16,615,685 and 16,485,474
at March 31, 2002 and December 31, 2001 ..... 166,000 165,000
Capital in excess of par value................... 32,567,000 32,171,000
Accumulated deficit.............................. (31,273,000) (30,553,000)
---------- ----------
NET STOCKHOLDERS' EQUITY............................ 1,460,000 1,783,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $4,653,000 $4,427,000
========== ==========
See accompanying notes to financial statements.
2
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months Ended
-----------------------
March 31, March 31,
2002 2001
---------- ----------
(Unaudited)
REVENUES
Sales of oil and gas, net of royalties............ $ 205,000 $ 844,000
Other income...................................... 29,000 14,000
---------- ----------
234,000 858,000
COSTS AND EXPENSES
Production and operating.......................... 119,000 168,000
Provision for depletion, depreciation
and amortization................................ 100,000 167,000
General and administrative........................ 304,000 358,000
Stock option variable accounting charge........... 350,000 -
Interest.......................................... 81,000 70,000
---------- ----------
954,000 763,000
---------- ----------
NET INCOME (LOSS).................................... $ (720,000) $ 95,000
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDIN............ 16,588,000 16,446,000
========== ==========
NET INCOME (LOSS) PER COMMON SHARE
(BASIC AND DILUTED)............................... $ (0.04) $ 0.01
========== ==========
See accompanying notes to financial statements.
3
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
Common Stock Capital in Stock-
--------------------- Excess of Accumulated holders'
Shares Amount Par Value Deficit Equity
---------- -------- ----------- ------------ ----------
BALANCE, December 31, 2001......... 16,485,474 $165,000 $32,171,000 $(30,553,000) $1,783,000
Common stock contributed to
401(k) Plan..................... 51,462 - 20,000 - 20,000
Common stock issued for
directors' fees................. 68,750 1,000 10,000 - 11,000
Common stock issued for
employee compensation........... 10,000 - 2,000 - 2,000
Common stock returned to treasury.. (1) - - - -
Common stock warrants issued
for professional services....... - - 14,000 - 14,000
Stock option variable
accounting charge............... - - 350,000 - 350,000
Net loss........................... - - - (720,000) (720,000)
---------- -------- ----------- ------------ ----------
BALANCE, March 31, 2002
(unaudited)..................... 16,615,685 $166,000 $32,567,000 $(31,273,000) $1,460,000
========== ======== =========== ============ ==========
See accompanying notes to financial statements.
4
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
For the Three Months Ended
----------- -----------
March 31, March 31,
2002 2001
----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ (720,000) $ 95,000
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depletion, depreciation and amortization ..................... 100,000 167,000
Stock option variable accounting charge ...................... 350,000 -
Common stock issued for employee compensation ................ 2,000 -
Common stock warrants issued for professional services ....... 14,000 -
Common stock issued for directors' fees ...................... 11,000 -
Common stock issued for 401(k) Plan contribution ............. - 24,000
Amortization of bridge financing costs ....................... 6,000 -
----------- -----------
Cash flow before changes in operating assets and liabilities (237,000) 286,000
Changes in operating assets and liabilities:
Accounts receivable .......................................... 32,000 133,000
Prepaids ..................................................... (21,000) -
Accounts payable and accrued expenses ........................ 67,000 103,000
Royalties and working interests payable ...................... (3,000) (2,000)
Accrued interest ............................................. (52,000) -
----------- -----------
Net cash (used in) provided by operating activities ............. (214,000) 520,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Funding of restricted joint venture cash account, net ........... (273,000) -
Expenditures for oil and gas properties.......................... (256,000) (250,000)
Expenditures for other property and equipment ................... (3,000) (2,000)
----------- -----------
Net cash used in investing activities............................ (532,000) (252,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge financing .................................. 500,000 -
Repayment of long-term debt ..................................... - (10,000)
Expenditure for private placement offering costs ................ (102,000) -
Bridge financing offering costs ................................. (18,000) -
Deferment of subordinated debt interest ......................... 57,000 -
----------- -----------
Net cash provided by (used in) financing activities ............. 437,000 (10,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... (309,000) 258,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................... 507,000 1,028,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 198,000 $ 1,286,000
=========== ===========
Supplemental information:
Interest paid in cash............................................ $ 69,000 $ 70,000
Non-cash transactions
Common stock issued for 401(k) Plan contribution ................ 20,000 --
See accompanying notes to financial statements.
5
FORTUNE NATURAL RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2002
(1) Line of Business and Summary of Significant Accounting Policies
and Procedures
The condensed financial statements at March 31, 2002, and for the periods
then ended included herein have been prepared by Fortune Natural Resources
Corporation, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. However, Fortune
believes that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the financial statements and the notes thereto included in Fortune's latest
annual report on Form 10-KSB. In Fortune's opinion, the financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly its financial position and the results of its
operations and its cash flows for the dates and periods presented. The results
of the operations for these interim periods are not necessarily indicative of
the results for the full year.
(2) Liquidity
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and classification of
liabilities that might be necessary should Fortune be unable to continue as a
going concern.
Fortune incurred a loss during the first quarter of 2002 and has incurred
substantial losses in earlier years resulting in an accumulated deficit at March
31, 2002 of approximately $31 million. Fortune incurred negative cash flow
before changes in operating assets and liabilities of $237,000 and $325,000
during the first quarter of 2002 and the year ended December 31, 2001. Fortune
also reported a working capital deficit at March 31, 2002 of $142,000.
Furthermore, Fortune expects to report negative cash flow and a net loss during
the second quarter of 2002. Fortune believes that this negative cash flow and
earnings trend may continue and could cause the company to be unable to service
its obligations when they becomes due. To improve its viability as a going
concern, Fortune has recently taken the following steps:
o Acquired a working interest in a new exploration program in an effort to
increase the quality of the drilling projects available to Fortune and the
opportunity to have greater control over the exploration process by
serving as operator on 50% of the prospects delineated in the program;
o Hired a new President and Chief Operating Officer in an effort to enhance
the quality of the technical review applied to Fortune's drilling projects
and to better manage oil and gas operations;
o Reduced overhead expenses by reducing staff and cutting other
expenditures;
o Obtained the short-term bridge financing discussed herein to
finance the initial expenditures of its new exploration program; and
o Began a private placement offering to raise up to $5 million to fund its
operations and repay the bridge financing. As of May 15, 2002, $192,500,
net of underwriter's commission and underwriter's accountable offering
expenses, has been raised.
6
If Fortune is successful raising sufficient capital or if the initial
drilling in the new exploration program is sufficiently successful, Fortune
believes that it will have the capital to fund its operations during the short
term. However, drilling success, improved commodity prices and/or additional
financings will be necessary to fund long-term growth.
(3) Joint Venture Cash Account
In connection with the new onshore exploration program, the co-operators
of the program, Fortune and PrimeEnergy Management Corporation, each deposited
$287,500 into a joint venture bank account styled the PrimeFortune Onshore
Exploration Account. The bank account funds are being used to fund the initial
program expenditures. Both PrimeEnergy and Fortune have signature authority over
the bank account and each owns one-half of the funds in the account. Fortune has
recorded its 50% share of the bank account on its books as well as its share of
all expenditures incurred in the account.
(4) Long-Term Debt
At March 31, 2002, a summary of long-term debt is as follows:
March 31, December 31,
2002 2001
---------- ----------
Convertible Subordinated Notes
due December 31, 2007............... $2,295,000 $2,295,000
Less current installments............. - -
---------- ----------
Long-term debt, excluding current
installments........................ $2,295,000 $2,295,000
========== ==========
Fortune's subordinated notes are convertible by the holders into common
stock at $0.75 per share or redeemable by Fortune at par. The notes are
unsecured and can be subordinated to any secured debt. 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%.
Fortune's credit facility with Credit Lyonnais New York Branch expired
January 11, 2001. The $10,000 outstanding balance of this credit facility was
repaid in the first quarter of 2001. The interest rate on the facility was 1.25%
above Credit Lyonnais' base rate.
In March 2002, Fortune offered to extend until April 15, 2002 the
expiration date of the Fortune common stock purchase warrants owned by holders
of Fortune's 12% notes in exchange for the noteholders consent to defer for one
year their interest payment that was due April 1, 2002. Included among these
holders are Barry Blank, a principal shareholder of Fortune, who owns 666,667
such warrants, and John McConnaughy, a member of Fortune's board of directors,
who owns 333,333 such warrants. Also, 66,667 of such warrants are owned by the
wife of another member of Fortune's board of directors. Eighteen of 22 note
holders representing $56,850 of the $68,850 interest payment due April 1, 2002
agreed to the extension. In April 2002, Fortune paid the interest due to the
note holders who declined this offer.
7
(5) Series B Preferred Stock and Bridge Loans Payable
In February 2002, Fortune acquired a 25% working interest in an onshore
oil and gas exploration program. To finance its initial participation in this
program, Fortune obtained short-term bridge financing in February 2002 of
$500,000. This bridge financing consisted of $240,000 in Series B Preferred
Stock and loans of $260,000. On May 14, 002, Fortune obtained $200,000 of
additional short-term bridge financing in the form of a loan with generally the
same terms as the earlier bridge loans. This latest bridge loan is being used,
along with Fortune cash, to redeem the $240,000 in Series B Preferred Stock. On
May 15, 2002, Fortune began the formal process of redeeming the Series B
Preferred Stock and expects to complete the redemption by May 20, 2002.
The $240,000 in Series B Preferred Stock was issued to Renaissance Capital
Growth & Income Fund and Renaissance US Growth & Income Trust, PLC, which are
principal shareholders of Fortune. The Series B Preferred Stock has a 10%
quarterly dividend, and is redeemable on the earlier of funding the private
placement offering currently in progress or August 18, 2002.
The $460,000 of loans have been provided by members of Fortune's board of
directors (Mssrs. Fairbanks, Drulias and Lacoff), by Barry Blank, a principal
shareholder of Fortune, and by C. K. Cooper & Company, Inc., the managing dealer
in Fortune's private placement offering discussed below, and certain other third
parties. The loans bear interest at the rate of 10% per annum. Interest is
payable quarterly commencing April 1, 2002. The loans are due August 18, 2002
and may be prepaid at any time without penalty. The $260,000 loans are secured
by Fortune's Cadiz property and the $200,000 of new bridge indebtedness is
secured by the balance of Fortune's producing properties.
Fortune has also agreed to pay the holders of the initial bridge
financing, three-year Fortune common stock purchase warrants. The number of
warrants issuable and the exercise price will be determined by the date on which
the Series B Preferred Stock is redeemable or the loans are repaid according to
the following schedule:
Number of warrants to be issued Exercise price as
Date of issuance of expressed as percentage of dollar percentage of market
warrants after date hereof value of amount due hereunder price of common stock
- -------------------------- --------------------------------- ---------------------
Less than 76 days 20% 150%
76-105 days 30% 140%
106-140 days 40% 130%
141-170 days 50% 120%
More than 170 days 60% 110%
The market price of Fortune's common stock used to make the foregoing
calculation is calculated as the ten-day average closing price prior to the date
the bridge financing was obtained. In connection with redeeming their stock, the
Series B Preferred Stockholders are entitled to receive 72,000 warrants
exercisable at approximately $0.25 per share.
(6) Private Placement Offering
On February 19, 2002 Fortune began a private placement offering of from
25,000 to 400,000 Units priced at $10 each. Each Unit consists of one share of
Fortune Series A Convertible Participating Preferred Stock and one three-year
common stock purchase warrant. Each warrant converts into one share of Fortune
common stock at an exercise price of $0.90 per share. Fortune and the managing
dealer of the offering can jointly agree to increase the offering size by an
additional 100,000 Units.
8
On May 15, 2002, Fortune closed on the sale of the first 25,000 Units of
the private placement offering and received $192,500, net of underwriter's
commission and underwriter's accountable offering expenses. The offering will be
open until May 23, 2002.
The preferred shares will pay both a fixed and a contingent cash dividend
quarterly. The fixed dividend is payable at 8% per year, increasing to 12% on
January 1, 2004, as a penalty if Fortune does not use an amount equal to the net
proceeds in the onshore exploration program discussed above.
The contingent dividend will be a percentage of Fortune's net oil and gas
revenue from the new onshore exploration program discussed above. The percentage
of such revenues will vary from 0.1875% based upon the number of Units sold to
date to 3.00% if 400,000 Units are sold.
The preferred shares will have a liquidity preference of $10.00 per share.
Fortune will be restricted from issuing certain securities while the preferred
shares are outstanding. Each preferred share is convertible into shares of
Fortune common stock at $0.45 per common stock share. They will convert
automatically if Fortune's common stock price reaches $0.90 per share for a
10-day trading period. Fortune may redeem the shares for $25 per share of
preferred stock. The preferred shareholders will have certain other rights if
Fortune fails to pay the preferred stock dividends.
The managing dealer of the offering will also receive Fortune three-year
common stock purchase warrants exercisable at $0.90 per share. The number of
warrants received will depend upon the size of the offering. Accordingly, the
managing dealer will receive from 13,889 warrants based upon the number of Units
sold to date to 222,222 warrants if 400,000 Units are sold.
Fortune estimates that it will receive, net of expenses, approximately
$3,550,000 if 400,000 Units are sold. These net proceeds will be used to fund
Fortune's operations.
(7) Stock Option Variable Accounting
Since 1995, Fortune's stock option plans have provided that the exercise
price per share of its stock options issued to employees and directors would be
reduced to par value ($0.01 per share) in the event of a change in control of
Fortune that is not approved by its board of directors. This change of control
provision requires Fortune to follow variable accounting for its stock options
while they are outstanding. Under variable accounting, increases in Fortune's
stock price above the option exercise price as of the end of each quarter will
result in an expense equal to the excess of the stock price over the exercise
price multiplied by the number of such options. Fortune's March 31, 2002 common
stock closing price of $0.47 per share resulted in a non-cash expense of
$350,000 as of that date as a result of variable accounting. Subsequent
decreases, if any, in Fortune's stock price will result in a reversal of all or
part of this expense.
(8) Income Tax Expense
No provision for income taxes was required for the three months ended
March 31, 2002 and 2001.
At March 31, 2002, Fortune estimates it had cumulative net operating loss
carryforwards for federal income tax purposes of approximately $25 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 2021. Fortune is
uncertain as to the recoverability of the above deferred tax assets and has
therefore applied a 100% valuation allowance.
9
(9) Legal Proceedings
There are no material pending legal proceedings involving any of Fortune's
properties or which involve a claim for damages which exceed 10% of Fortune's
current assets.
(10) Computation of Loss Per Share
Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted loss per common
share does not differ from basic loss per common share because the issuance or
conversion of additional securities would have an antidilutive effect.
(11) New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has recently issued
Statement of Financial Accounting Standards ("SFAS") No. 141, `Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 141, "Business Combinations," requires the use of the purchase
method of accounting for all business combinations initiated after June 30,
2001, SFAS No. 142, "Goodwill and Other Intangible Assets", addresses accounting
for the acquisition of intangible assets and accounting for goodwill and other
intangible assets after they have been initially recognized in the financial
statements. Fortune does not currently have goodwill or other similar intangible
assets; therefore, the adoption of the new standard on January 1, 2002, has not
had a material effect on Fortune's financial statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations," addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 will be effective for Fortune January 1, 2003 and early adoption is
encouraged. SFAS No. 143 requires that the fair value of a liability for an
asset's retirement obligation be recorded in the period in which it is incurred
and the corresponding cost capitalized by increasing the carrying amount of the
related long-lived asset. The liability is accreted to its then present value
each period, and the capitalized cost is depreciated over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized. Currently, Fortune does accrue for certain
dismantlement costs through depletion and is therefore evaluating the impact the
new standard will have on its financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," is effective for Fortune January 1, 2002, and addresses accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business." SFAS No. 144 retains the fundamental provisions of SFAS No. 121 and
expands the reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the entity and
that will be eliminated from the ongoing operations of the entity in a disposal
transaction. The new standard has not had a material impact on Fortune's
financial statements.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Events
In February 2002 Fortune acquired a 25% working interest and a
co-operating position along with PrimeEnergy Management Corporation in a
large-scale onshore oil and gas exploration and development program in Texas.
The centerpiece of this program is a large onshore Texas 2D seismic database
comprising approximately 50,000 linear miles in approximately 105 counties of
the Texas Gulf Coast, East Texas, and South Texas. Fortune and Prime will be in
charge of leasing, drilling, and producing each prospect in the program. Fortune
anticipates that its share of this initial operating phase may require up to
$3,000,000 of capital spending through December 31, 2002, after which Fortune
believes the program will be self-funding, based on reasonable success levels.
Fortune believes at least 250 prospect leads may be identified from the
reprocessed data that should in turn generate a minimum of 50 drillable
prospects over the next few years. Fortune expects that drilling could commence
by the middle of 2002.
Financing Arrangements
In order to finance its initial participation in this program, Fortune
obtained $500,000 in short-term bridge financing through a combination of
$260,000 of notes and $240,000 of preferred stock from various investors
including members of Fortune's board of directors, current shareholders, C. K.
Cooper & Company, Inc., Fortune's managing dealer in the offering discussed
below, and other unaffiliated investors. The preferred stock portion of the
financing is being redeemed primarily with $200,000 received by Fortune on May
14, 2002 from an additional bridge loan. As of May 15, 2002, the bridge loans
outstanding amount to $460,000. The interest rate on the notes is 10% per annum,
payable quarterly. The dividend on the preferred stock was also 10% per annum.
The notes are due on August 18, 2002. The financing may be prepaid at any time
without penalty. As additional consideration for providing the financing, the
investors in the initial bridge financing will receive warrants to purchase
shares of common stock at an amount and premium to current share price which
depends on when the financing is repaid.
Private Placement Offering
To fund our share of the new onshore exploration program and to repay the
bridge financing, Fortune began a private placement offering on February 19,
2002 to sell from 25,000 to 400,000 Units. The offering will be open until May
23, 2002. The Units are priced at $10 each. Each Unit consists of one share of
Fortune Series A Convertible Participating Preferred Stock and one three-year
common stock purchase warrant. Each warrant is exercisable into one share of
Fortune common stock at a price of $0.90 per share. Fortune and the managing
dealer of the offering can jointly agree to increase the offering size by an
additional 100,000 Units.
On May 15, 2002, Fortune closed on the sale of the first 25,000 Units of
the private placement offering and received $192,500, net of underwriter's
commissions and underwriter's accountable offering expenses. The offering is
still open. Fortune estimates that it will receive, net of expenses,
approximately $3,550,000 if 400,000 Units are sold.
11
Results of Operations
Comparison of 2002 Operating Results to 2001
Quarter ended March 31, 2002 and 2001
Fortune's oil and gas prices decreased 30% and 67%, respectively, in the
first quarter 2002 versus the same 2001 period. Fortune's oil and gas production
also decreased 8% and 36%, respectively. Fortune's production gains that
resulted from successful drilling and workover operations over the past year at
Cadiz, La Rosa and Gamble Gully were not sufficient to offset the loss of our
well at South Timbalier Block 86, the loss of the Cutoff Field well and declines
from depletion. Consequently, Fortune's oil and gas revenues for the quarter
ended March 31, 2002 decreased 76% to $205,000 compared to $844,000 reported
during the first quarter of 2001.
Analysis of change in oil and gas revenues -
Quarter Ended
March 31,
------------------- Percent
2002 2001 Change
-------- -------- --------
Production
Oil - Bbl 2,100 2,200 (8)%
Gas - Mcf 66,900 104,200 (36)%
Prices
Oil - $/Bbl $19.38 $27.74 (30)%
Gas - $/Mcf 2.45 7.50 (67)%
Revenues
Oil $ 40,000 $ 62,000 (35)%
Gas 165,000 782,000 (79)%
In early 2000, the South Timbalier 86 well was recompleted and began
producing at a significantly higher rate beginning in February 2000. During the
first quarter of 2001, the well produced approximately 13,900,000 cubic feet of
gas, 31 barrels of oil and generated $121,000 of oil and gas revenue net to
Fortune's interest. This well stopped producing on March 13, 2001; although it
produced approximately 2 million cubic feet of gas per day for a brief period
during August 2001. The operator has informed Fortune that they have no further
plans to attempt to restore production. Fortune currently owns a 4% overriding
royalty interest in this well.
The La Rosa C-12 well was spud on December 11, 2001 and logged on January
13, 2002 as a discovery. Log evaluation indicates that the well has
approximately 20 feet of aggregate pay sand in multiple zones. The well was
completed on February 18, 2002 and is currently producing approximately 40 to 50
barrels of oil per day and 30,000 cubic feet of gas per day. Fortune owns an
18.75% working interest in the well and incurred approximately $50,000 for its
share of drilling and completion costs.
12
Analysis of change in selected expenses -
Quarter Ended
March 31,
--------------------- Percent
2002 2001 Change
--------- --------- ---------
Production and operating expense $ 119,000 $ 168,000 (29)%
- per MCFE 1.50 1.43 5 %
Depreciation, depletion and
amortization 100,000 167,000 (40)%
- per MCFE 1.26 1.42 (11)%
Production and operating expense decreased by $49,000 for the first
quarter of 2002 versus 2001 because of lower production taxes that resulted from
the lower revenues during 2002
Fortune's provision for depletion, depreciation and amortization (DD&A)
decreased by $67,000 in the first quarter of 2002 as compared to 2001 because of
the lower production and the impact of ceiling impairment writedowns in prior
quarters. The lower DD&A rate per MCFE results from the prior ceiling impairment
writedowns.
Quarter Ended
March 31,
--------------------- Percent
2002 2001 Change
--------- --------- ---------
General and administrative expense $ 304,000 $ 358,000 (15)%
Interest expense 81,000 70,000 16 %
General and administrative expense decreased $54,000 for the first quarter
of 2002 versus 2001 primarily because of lower personnel costs as a result of
staff reductions. We have implemented a plan to reduce general and
administrative expenses by up to 44% versus 2001 levels in the event that we are
not successful in the private placement offering discussed above. Certain
reductions took effect at January 1, 2002 and other reductions are anticipated
over the course of the year, if needed.
Interest expense increased by $11,000 as a result of the bridge financing
discussed in Recent Events above.
Liquidity and Capital Resources
Cash Balance, Working Capital and Cash Flows from Operating Activities
Fortune reported negative cash flow of $214,000 from its operating
activities during the first quarter of 2002 compared to positive cash flow of
$520,000 during the same 2001 period. Before considering the effect of changes
in operating assets and liabilities, cash flow was a negative $237,000 during
the first quarter of 2002 compared to a positive $286,000 during the same 2000
period. As discussed above, lower production and lower oil and gas prices
account for this significant decrease in cash flow. Fortune is attempting to
reverse this negative trend in cash flow by seeking to invest its capital
resources in successful exploration and development projects.
13
Analysis of changes in selected liquidity measures -
As of
-----------------------
March 31, December 31, Percent
2002 2001 Change
---------- ---------- ----------
Cash balance $ 198,000 $ 507,000 (61)%
Restricted joint venture cash 273,000 - N/A
Net working capital (142,000) 397,000 N/A
Long-term debt 2,295,000 2,295,000 -
In February 2002, Fortune and PrimeEnergy, the co-operators of the new
onshore exploration program, each deposited $287,500 into a joint venture cash
account. These funds are being used to fund the initial program expenditures.
Quarter ended March 31,
---------------------- Percent
2002 2001 Change
---------- ---------- ----------
Cash flow from operations before changes
in operating assets and liabilities $ (237,000) $ 286,000 N/A
Adjustment for change in operating
assets and liabilities 23,000 234,000 90%
---------- ---------- ----------
Cash flow from operating activities $ (214,000) $ 520,000 N/A
========== ========== ==========
Lower production and lower oil and gas prices for the first quarter of
2002 contributed to the lower cash flow during the period versus the same 2001
period.
Cash Used in Investing Activities - Capital Expenditures
Expenditures for oil and gas properties for the first quarter of 2002 were
$256,000 compared to $250,000 for the same period in 2001.
The 2002 expenditures include primarily:
- Exploration costs attributable to the new onshore exploration
program;
- Drilling and completing the successful La Rosa C-12 well; and
- Drilling the unsuccessful Gamble Gully GU #6 well #1.
The 2001 expenditures include primarily:
- drilling and completing the successful Gamble Gully Koemel #1
sidetrack well;
- drilling and completing the successful Brooks #3 well at Cadiz
prospect;
- land, seismic and prospect fee for the West Point prospect;
- the multiple well recompletion program at La Rosa; and
- seismic interpretation costs and delay rentals at Espiritu Santo
Bay and La Rosa.
14
Oil and Gas Prices
Conditions outside of our control influence the prices we receive for oil
and gas. Currently, Gulf Coast spot prices are approximately $26.50 per barrel
for oil and $3.50 per MCF for gas.
Forward Looking Statements
All statements, trend analyses and other information contained in this
10-QSB relating to our production, our reserves, markets for our production and
trends in our results of operations or financial conditions, as well as other
forward-looking statements including those containing words such as "will,"
"should," "could," "may," "anticipate," "believe," "plan," "estimate," "expect,"
"intend," "project," "forecast," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements involve known and unknown risks and
uncertainties that may cause results and conditions to differ materially from
the forward-looking statements. Some of the risk factors that may affect Fortune
and any forward-looking statements made by us are described below.
Risks Associated with Fortune
Liquidity Constraints. Fortune is currently experiencing negative cash
flow from operations. Fortune is required to make quarterly interest payments in
the amount of $68,850 on its 12% convertible notes. These payments are due each
January 1, April 1, July 1 and October 1 that the notes are outstanding.
Eighteen of 22 note holders who represent $56,850 of the quarterly interest
payment have agreed to defer their April 1, 2002 interest payment for one year
in exchange for a one year extension of certain of their common stock purchase
warrants. It is possible that Fortune will not be able to meet subsequent
interest payment obligations due in 2002. If we fail to pay interest on the
$2,295,000 convertible notes, the entire balance could become due and payable
upon written notice from a majority of the noteholders. Fortune's $460,000 of
bridge loans are due August 18, 2002. Failure to repay the bridge loans that are
secured by Fortune's producing properties could result in the foreclosure by the
lenders of these properties. Failure to complete the process, which started May
15, 2002, of redeeming the $240,000 Series B Preferred Stock on a timely basis
may result in those stock holders exercising their option to require Fortune to
buy back their Fortune common stock holdings for $1,091,000.
Fortune's viability as a going concern is dependent on raising sufficient
capital to meet our interest obligations and fund our future operations. It is
very difficult for small-cap energy companies to raise additional funds because
of the recent volatility of the oil and gas industry. However, our liquidity
concerns should be mitigated if the minimum, and to a greater extent, the
maximum private placement offering is achieved. No assurance can be given that
our efforts at raising capital will cure our liquidity concerns.
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, 2001, Fortune spent approximately $4.7
million in its oil and gas exploration, development and acquisition activities.
Under the new onshore exploration program we expect to fund certain expenditures
during 2002 estimated to be up to $3 million to Fortune's working interest. In
addition, from time to time Fortune receives proposals to participate in
development and exploratory wells or other projects on owned as well as
non-owned properties. Fortune expects to be presented with proposals for
development wells and/or exploratory wells at its Espiritu Santo Bay and LaRosa
properties, as well as on prospects generated through the onshore exploration
program. At Fortune's current rate of negative cash flow, we may not be able to
participate in such operations at our current working interest levels.
15
Size of Private Placement Offering. If no additional Units are sold in the
private placement offering , we may not have sufficient capital to conduct all
of our planned activities in the onshore exploration program. Our current funds
may be too small to allow us to maximize the potential return on our investment
and may not permit Fortune to participate at its full working interest level.
This may have an adverse effect on Fortune's expected return from the program.
Risks associated with the Onshore Exploration Program. Fortune has
acquired a 25% working interest in the onshore exploration program and will be a
co-operator of any properties acquired and prospect drilled through the program.
The other operator, PrimeEnergy Management Corporation, has a right to withdraw
from the program under certain circumstances, including if Fortune fails to
raise at least $3,000,000 of net proceeds for oil and gas exploration. Such a
withdrawal would not affect Fortune's interest in or its right to continue
participation in the program. It would mean, however, that Fortune may be
required to assume Prime's 25% working interest under certain circumstances or
to find other industry partners to undertake Prime's financial responsibilities.
The further processing and reprocessing of the onshore exploration program
seismic data obtained from Exxon is entirely dependent on payments by the
third-party seismic partners. If the seismic partners fail to pay the required
amounts on a quarterly basis, Fortune may lose access to any further seismic
data if other arrangements are not made. Management believes, however, that the
amount of data already reprocessed and the number of prospects already
identified makes the onshore exploration program worthwhile even if such an
event were to occur.
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 judgments concerning the oil and gas industry, such
as future oil and gas prices, competition for leases, reserves, and equipment,
and our perceived chance 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
project. Moreover, the successful completion of an oil or gas well does not
insure a profit on our investment, since completion and production expenses may
exceed the value of the future production. 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 in recent years. Fortune has incurred
substantial net losses in prior years and a smaller net loss in 2002. Oil and
gas prices remain volatile and our production has declined; accordingly, it is
likely that Fortune will continue to incur losses.
Our oil and gas reserves 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 currently producing. We are not adding reserves at
present at the pace at which they are being produced. Without adding additional
reserves in the future, our oil and gas reserves and production will decline.
16
Fortune's estimates of proved reserves and future net revenue may not be
accurate. Fortune's proved reserve data represent estimates which may prove to
be incorrect over time. The accuracy of any reserve estimate is a function of
available data and of engineering and geological interpretation and judgment.
The estimates are based upon certain assumptions about future production levels,
future drilling, future oil and gas prices and future operating costs, some or
all of which will likely change over time. Estimates and classifications of the
economically recoverable oil and gas reserves by different engineers or by the
same engineers at different times may vary substantially. Certain of Fortune's
proved reserves have a short production history and approximately 54% of
Fortune's proved reserves as of December 31, 2001 were undeveloped. Undeveloped
reserves require significant expenditures of capital before production can
commence. Estimates of undeveloped reserves and those with a short production
history are inherently more uncertain than estimates of producing reserves with
a long production history.
Our revenue is dependent upon a limited number of producing wells. During
the first quarter of 2002, Fortune derived approximately 27% of its revenues
from three wells: South Timbalier Block 76, Cadiz Brooks #1 and Cadiz Brooks #3.
A significant curtailment or loss of production from an individually significant
well for a prolonged period before we could replace that well would have a
material adverse effect on our projected operating results and financial
condition.
Fortune has substantial debt due in 2007. At March 31, 2002, Fortune had
$2,295,000 of 12% subordinated convertible notes outstanding that are due
December 31, 2007. All of these notes are convertible by the holder at $0.75 per
share or redeemable by Fortune at par. Fortune has realized significant net
losses that have resulted in an accumulated deficit of approximately $31 million
at March 31, 2002. Fortune also realized negative cash flows in calendar years
1998, 1999, 2001 and year-to-date 2002. Based on these historical operating
results, historical fluctuating oil and gas prices and the uncertainties of
projecting long-term production and cash flows from current oil and gas prices
and reserves, there is risk that Fortune's cash flow will not increase
sufficiently to allow us to repay the convertible subordinated notes or to make
the required quarterly interest payments in cash or at all as they become due.
If we do not increase cash flow sufficiently or we experience increases in
capital requirements, and we are unable to raise capital, we may need to take
other steps to maintain our ability to service the notes. Those steps might
include reducing overhead, foregoing our participation in projects or selling
assets. In the event that Fortune defaults in the payment of interest or
principal obligations on this debt, it may become immediately due and payable.
Fortune is dependent on operators, consultants and partners over whom it
has little control. Historically, we have been dependent on other oil and gas
companies to conduct operations in a prudent, competent, and timely manner on
our properties. 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 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 geological, 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. We are seeking to eliminate or significantly reduce this risk by
becoming the operator in the new onshore exploration program and adding Ronald
Nowak as Fortune's President and Chief Operating Officer effective January 1,
2002.
17
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 unevaluated 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 determined to be worth less than that
cost. For example, we recognized $2.2 million of impairments in 2001. As a
result of continued volatile oil and gas prices, we may incur future
impairments.
Stock option plans may result in earnings fluctuations. Fortune follows
the intrinsic value method of accounting for stock option grants. However,
Fortune's stock option plans provide for reducing the stock option exercise
price to par value ($0.01 per share) in the event of a change of control of
Fortune not approved by its board of directors. This change of control provision
requires Fortune to follow variable accounting for its stock options while they
are outstanding. Under variable accounting, increases in Fortune's stock price
above the option exercise price as of the end of each quarter will result in an
expense equal to the excess of the stock price over the exercise price
multiplied by the number of such options. Subsequent decreases in Fortune's
stock price will result in a reversal of all or part of this expense. Variable
accounting for stock options may result in significant fluctuations in Fortune's
quarterly operating results.
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.
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,
Chairman 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 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.
Industry Conditions; Fluctuations in the Energy Market. Fortune's revenues
and profitability are substantially dependent upon prevailing prices for oil and
gas. Prices for oil and gas are subject to fluctuations in response to
relatively minor changes in supply of and demand for oil and gas, market
uncertainty and a variety of additional factors that are beyond our control.
These factors include political conditions in the Middle East and elsewhere, the
domestic and foreign supply of oil and gas, the level of consumer demand,
weather conditions, domestic and foreign government regulations, the price and
availability of alternative fuels and overall economic conditions. The excess or
short supply of oil has placed pressures on prices and has resulted in price
fluctuations, which may adversely impact Fortune's cash flow and revenues. The
price of gas has exhibited market demand fluctuations; however, because most of
the gas consumed domestically is produced within the United States, the price
for gas has not exhibited the price fluctuations that oil prices have
experienced under conditions of high import levels. In addition to the issue of
availability and capacity of gas pipelines, various factors, including the
effect of federal and state regulation of production and transportation, general
economic conditions, changes in supply due to drilling by other producers and
changes in demand, may adversely affect Fortune's ability to market its oil and
gas production.
18
Governmental Regulation. Fortune's business is subject to certain federal,
state and local laws and regulations relating to the exploration for and
development, production, marketing and transmission of oil and gas, as well as
environmental and safety matters. In particular, oil and gas production,
operations and economics are, or have been, affected by price controls, taxes
and other laws relating to the oil and gas industry and by changes in such laws
and regulations. Fortune cannot predict how existing laws and regulation may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted or the effect such changes may have on its
business or financial condition. There is no assurance that laws and regulations
enacted in the future will not adversely affect Fortune's business.
Environmental Regulation. Fortune is subject to numerous federal, state
and local environmental laws and regulations governing the production, drilling
and exploration of oil and gas, including spillage, noise pollution, air
quality, leakage, and disposal of water, and ecosystem preservation. To date,
expenditures related to complying with these laws and for remediation of
existing environmental contamination have not been material. Nevertheless, the
discharge of oil, gas, or other pollutants in the air, soil or water may give
rise to liabilities on our part to the government and third parties and may
require us to incur costs to remedy the discharge. No assurance can be given
that we will be able to comply with existing, proposed or future governmental
regulations concerning the environment, or that we will not incur additional
capital expenditures in order to comply with such laws and regulations. Any
additional expenditure may adversely affect Fortune's business and may delay or
prevent the commencement or continuance of its operations.
The market for Fortune common stock is limited. Fortune's common stock
trades on the over-the-counter bulletin board under the symbol FPXA. Although
Fortune has been informed that are as many as eight firms making a market in the
Fortune stock, the market for our stock may be limited from time to time.
The number of shares eligible for future sale could potentially dilute the
price of Fortune stock. At April 30, 2002, 16,639,089 shares of our common stock
were outstanding, of which 3,450,586 shares were "restricted securities" as that
term is defined in Rule 144 under the Securities Act and the remainder are
freely tradeable. At that date, we also had outstanding options and private
warrants to acquire 7,603,230 shares of common stock that, if all were
exercised, would result in proceeds to Fortune of $7,995,582. At April 30, 2002,
we also had $2,295,000 of notes convertible into 3,060,004 shares of common
stock, subject to adjustment. 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.
Stock purchase warrants will also be issued to the investors in the
initial bridge financing in an amount which will be calculated based on the
length of time the bridge financing is outstanding. The number of warrants
issued on the bridge financing, including the preferred stock portion, will
range from 150,000 if the remaining outstanding loans are repaid before June 5,
2002 to 228,000 if the repayment is after August 8, 2002.
One stock-purchase warrant and one preferred share will also be included
as part of each Unit sold in the private placement currently underway. Since the
maximum number of Units proposed to be sold (unless increased with the consent
of both Fortune and the managing dealer) is 400,000, up to an equivalent number
of stock-purchase warrants may be issued in connection with the sale of the
Units. Furthermore, the preferred shares will be convertible into 8,888,889
shares of Fortune common stock in the event 400,000 Units are sold. Stock
purchase warrants will also be issued to the managing dealer and selling agents
of this offering in an amount based upon the gross proceeds of the offering. If
400,000 Units are sold, Fortune will issue 222,222 such warrants.
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: inability to obtain critical supplies, equipment,
personnel and consultants.
19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See note 9 of the footnotes to the financial statements in Part I herein
for a description of legal proceedings.
ITEM 2. Change in Securities
To finance its initial participation in the new onshore exploration
program, Fortune obtained short-term bridge financing in February 2002 of
$500,000. This bridge financing consisted of $240,000 in Series B Preferred
Stock and loans of $260,000. The $240,000 in Series B Preferred Stock was issued
to Renaissance Capital Growth & Income Fund and Renaissance US Growth & Income
Trust, PLC, which are principal shareholders of Fortune. On May 15, 2002,
Fortune began the formal process to redeem this preferred stock and expects that
redemption will be completed by May 20, 2002. All rights and obligations of the
Series B Preferred Stock will be cancelled upon redemption. The Series B
Preferred Stock was sold pursuant to Section 230.505 of Regulation D of the
Securities Act which exempts from registration certain transactions of limited
size and scope. Fortune did not use an underwriter for this transaction;
consequently, no underwriting discounts or commissions were paid. The Series B
Preferred Stock had a 10% quarterly dividend, was redeemable by the earlier of
funding the private placement offering currently in progress or August 18, 2002
and contained certain put rights granted to the Renaissance funds. Under the put
rights, if Fortune failed to redeem the stock within five days of the redemption
date, the Renaissance funds would have received a right that, if later exercised
by Renaissance, would have required Fortune to repurchase up to all of their
outstanding stock in Fortune for $1,091,000, the price they paid for the stock.
While the Series B Preferred Stock was outstanding, Fortune was prohibited from
paying any Series A Preferred Stock or common stock dividends; disposing of
assets with a value exceeding $20,000 unless the funds are used to redeem the
Series B Preferred Stock; changing the rights of the Series B Preferred Stock;
or creating a lien on any of its properties other than the Cadiz property.
Fortune has also agreed to pay the holders of the Series B Preferred
Stock, three-year Fortune common stock purchase warrants. The number of warrants
issuable and the exercise price will be determined by the date on which the
Series B Preferred Stock is redeemable according to the following schedule:
Number of warrants to be issued Exercise price as
Date of issuance of expressed as percentage of dollar percentage of market
warrants after date hereof value of amount due hereunder price of common stock
- -------------------------- --------------------------------- ---------------------
Less than 76 days 20% 150%
76-105 days 30% 140%
106-140 days 40% 130%
141-170 days 50% 120%
More than 170 days 60% 110%
The market price of Fortune's common stock used to make the foregoing
calculation is calculated as the ten-day average closing price prior to the date
the bridge financing was obtained. Upon redemption of the securities, the
Preferred Shareholders earned 72,000 warrants exercisable at approximately $0.25
per warrant.
20
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Securities Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
Exhibit No. Description
----------- -----------
10.1* Certificate of Designation of Series B Preferred Stock
of Fortune Natural Resources Corporation
10.2* 10% Secured Promissory Note to Barry W. Blank Living Trust
10.3* Deed of Trust, Security Agreement, Financing Statement
and Assignment of Production in Favor of Barry W. Blank
Living Trust as collateral for 10% Promissory Note
(b) REPORTS ON FORM 8-K / 8K-A
None
*Filed herewith.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FORTUNE NATURAL RESOURCES CORPORATION
By: /s/ Tyrone J. Fairbanks
-------------------------------------------
Tyrone J. Fairbanks
Chairman, Chief Executive Officer, Director
and Chief Accounting Officer
By: /s/ Ronald P. Nowak
-------------------------------------------
Ronald P. Nowak
President and Chief Operating Officer
Date: May 15, 2002