SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 1-12334
FORTUNE NATURAL RESOURCES CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 95-4114732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Green, 515 W. Greens Rd.,
Suite 720, Houston, Texas 77067
(Address of Principal Executive Offices) (Zip Code)
281-872-1170
-------------------------
Issuer's telephone number
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
12,133,478 as of April 30, 1998
FORTUNE NATURAL RESOURCES CORPORATION
BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 4,672,000 $ 1,667,000
Accounts receivable ............................................... 291,000 507,000
------------ ------------
Total Current Assets .......................................... 4,963,000 2,174,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the full cost method ...................................... 23,977,000 27,822,000
Office and other .................................................. 384,000 383,000
------------ ------------
24,361,000 28,205,000
Less--accumulated depletion, depreciation and amortization ........ (18,973,000) (18,403,000)
------------ ------------
5,388,000 9,802,000
------------ ------------
OTHER ASSETS:
Materials, supplies and other ..................................... 126,000 124,000
Debt issuance costs (net of accumulated amortization of
$189,000 and $93,000 at March 31, 1998 and
December 31, 1997, respectively) ................................ 431,000 526,000
------------ ------------
557,000 650,000
------------ ------------
TOTAL ASSETS ........................................................... $ 10,908,000 $ 12,626,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1998 1997
------------ ------------
CURRENT LIABILITIES:
Accounts payable .................................................. $ -- $ 279,000
Accrued expenses .................................................. 300,000 407,000
Royalties and working interests payable ........................... 24,000 36,000
Accrued interest .................................................. -- 76,000
------------ ------------
Total Current Liabilities ..................................... 324,000 798,000
------------ ------------
LONG-TERM DEBT ......................................................... 3,235,000 3,775,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--2,000,000 shares
Issued and outstanding--None .................................. -- --
Common stock, $.01 par value :
Authorized--40,000,000 shares
Issued and outstanding 12,133,479 and 12,118,982 at
March 31, 1998 and December 31, 1997, respectively ............ 121,000 121,000
Treasury Stock, at cost (9,769 shares at December 31, 1997) ....... -- (38,000)
Capital in excess of par value .................................... 30,280,000 30,283,000
Accumulated deficit ............................................... (23,052,000) (22,313,000)
------------ ------------
NET STOCKHOLDERS' EQUITY ............................................... 7,349,000 8,053,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 10,908,000 $ 12,626,000
============ ============
See accompanying notes to financial statements.
2
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months Ended
---------------------------
March 31, March 31,
1998 1997
------------ ------------
(Unaudited)
REVENUES
Sales of oil and gas, net of royalties ............................. $ 706,000 $ 1,113,000
Other income ....................................................... 17,000 52,000
------------ ------------
723,000 1,165,000
------------ ------------
COSTS AND EXPENSES
Production and operating ........................................... 227,000 193,000
Provision for depletion, depreciation and amortization ............. 570,000 484,000
Impairment to oil and gas properties ............................... -- 200,000
General and administrative ......................................... 459,000 553,000
Debt conversion expense ............................................ -- 316,000
Stock offering cost ................................................ -- 114,000
Interest ........................................................... 110,000 54,000
Amortization of deferred financing cost ............................ 96,000 14,000
------------ ------------
1,462,000 1,928,000
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES .................................. (739,000) (763,000)
PROVISION FOR INCOME TAXES .............................................. -- --
------------ ------------
NET LOSS ................................................................. (739,000) $ (763,000)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ............................................. 12,122,000 11,974,000
============ ============
NET LOSS PER COMMON SHARE ............................................... $ (0.06) $ (0.06)
============ ============
See accompanying notes to financial statements.
3
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
Capital in Stock-
Common Stock Excess of Treasury Accumulated holders'
Shares Amount Par Value Stock Deficit Equity
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 ............. 11,853,663 $ 119,000 $ 29,273,000 $ -- $(16,355,000) $ 13,037,000
Common stock issued for
exercise of stock options ........... 6,400 -- 18,000 -- -- 18,000
Common stock issued for
exercise of warrants ................ 45,000 -- 89,000 -- -- 89,000
Common stock issued in exchange
for debentures, net of offering costs 218,858 2,000 889,000 -- --
891,000
Common stock contributed to
Company 401(k) Plan ................. 4,835 -- 14,000 -- -- 14,000
Common stock repurchased in
odd-lot buyback ..................... (9,769) -- -- (38,000) -- (38,000)
Common stock returned to treasury ...... (5) -- -- -- -- --
Net loss ............................... -- -- -- -- (5,958,000) (5,958,000)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 ............. 12,118,982 $ 121,000 $ 30,283,000 $ (38,000) $(22,313,000) $ 8,053,000
============ ============ ============ ============ ============ ============
Common stock issued for
exercise of warrants ................ 4,312 -- 11,000 -- -- 11,000
Common stock contributed to
Company 401(k) Plan ................. 10,185 -- 24,000 -- -- 24,000
Cancellation of treasury stock ......... -- -- (38,000) 38,000 -- --
Net loss ............................... -- -- -- -- (739,000) (739,000)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 1998
(Unaudited) ......................... 12,133,479 $ 121,000 $ 30,280,000 $ -- $(23,052,000) $ 7,349,000
============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
4
FORTUNE NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
For the Three Months Ended
--------------------------
March 31, March 31,
1998 1997
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (739,000) $ (763,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depletion, depreciation and amortization ................. 570,000 484,000
Non-cash compensation expense ............................ -- 5,000
Amortization of deferred financing cost .................. 96,000 14,000
Impairment of oil and gas assets ......................... -- 200,000
Debt conversion expense .................................. -- 316,000
Stock offering cost ...................................... -- 114,000
Changes in assets and liabilities:
Accounts receivable ...................................... 216,000 142,000
Prepaids ................................................. -- 18,000
Accounts payable and accrued expenses .................... (386,000) 78,000
Royalties and working interest payable ................... (12,000) (53,000)
Accrued interest ......................................... (76,000) (66,000)
Other .................................................... 23,000 --
------------ ------------
Net cash provided by (used in) operating activities .......... (308,000) 489,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties ...................... (850,000) (899,000)
Restricted cash used ......................................... -- 55,000
Proceeds from sale of properties and equipment ............... 4,695,000 203,000
Expenditures for other property and equipment and other assets (3,000) (8,000)
------------ ------------
Net cash provided by (used in) investing activities .......... 3,842,000 (649,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt .................................. (540,000) (225,000)
Proceeds from issuance of common stock ....................... 11,000 103,000
Expenditures for debenture exchange and stock offering ....... -- (139,000)
------------ ------------
Net cash used in financing activities ........................ (529,000) (261,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................................ 3,005,000 (421,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................... 1,667,000 2,174,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 4,672,000 $ 1,753,000
============ ============
Supplemental information:
Interest paid in cash ........................................ $ 110,000 $ 54,000
Non-cash transactions
Common stock issued for conversion of debt ................... -- 975,000
Common stock issued for 401(k) Plan contribution ............. 24,000 --
See accompanying notes to financial statements
5
FORTUNE NATURAL RESOURCES CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND PROCEDURES
The condensed financial statements at March 31, 1998, and for the three
months then ended included herein have been prepared by Fortune Natural
Resources Corporation ("Fortune" or the "Company"), without audit, pursuant to
the Rules and Regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such Rules and Regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. Certain reclassifications have been
made to prior period amounts to conform to presentation in the current period.
In the opinion of the Company, the financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of March 31, 1998 and December 31, 1997,
the results of its operations for the three months ended March 31, 1998 and
1997, and cash flows for the three months ended March 31, 1998 and 1997. The
results of the operations for such interim periods are not necessarily
indicative of the results for the full year.
(2) LONG-TERM DEBT
At March 31, 1998, a summary of long-term debt is as follows:
March 31, December 31,
1998 1997
----------- -----------
Convertible Subordinated Notes
due December 31, 2007.................... $ 3,225,000 $ 3,225,000
Credit Lyonnais credit facility
due July 11, 1999,....................... 10,000 550,000
----------- -----------
Total long-term debt....................... 3,235,000 3,775,000
Less current installments.................. -- --
----------- -----------
Long-term debt,
excluding current installments............ $ 3,235,000 $ 3,775,000
=========== ===========
The Convertible Subordinated Notes (the "Notes)" are currently
convertible into the Company's Common Stock at a conversion price of $3.00 per
share, subject to adjustment. The Notes are convertible by the holders after May
1, 1999, subject to a one-time option by the holders to convert at a lower
conversion price prior to that date in the event that the Company issues shares
of its Common Stock at a price below the conversion price. The Notes are
redeemable by the Company after May 1, 1999, at a premium that reduces monthly
from 10% to zero over an 18-month period. Any such premium on redemption is
waived in the event that the Company's Common Stock price averages at least
$4.50 per share for 30 consecutive trading days. The holders of the Notes will
be entitled to receive additional shares upon conversion in the event that the
Company's Common Stock price averages less than the conversion price for a
certain period prior to May 1, 1999. The Company has determined that the value
of the potential adjustments to the conversion price is not material. The Notes
are subordinate to all of the Company's secured debt, including the credit
facility with Credit Lyonnais. The Notes bear interest at a rate of 12% per
year, payable quarterly. The costs incurred to issue the Notes is being
amortized as additional interest expense over the 18-month period ending May 1,
1999, the first date that the Notes are convertible. As a result of this
amortization of issuance costs, the effective interest rate of the Notes over
this 18-month period is 21.2%. If the Notes were held to maturity, the effective
interest rate over the life of the Notes would be 13.4%.
6
A portion of the net proceeds of the private placement of the Notes was
used to refinance existing debt. On December 5, 1997, the Company redeemed the
remaining outstanding balance of $1,028,000 of the Company's Debentures due
December 31, 1997. In addition, $315,000 of net proceeds was used to reduce the
borrowings under the Company's credit facility with Credit Lyonnais.
The Company has in place a $20 million credit facility with Credit Lyonnais
New York Branch ("Credit Lyonnais"). The Credit Lyonnais facility is due July
11, 1999, extendable for one year upon mutual consent. Under the new credit
facility, the Company may initially borrow up to a pre-determined borrowing
base, for acquisitions and development projects approved by Credit Lyonnais at
either 1.25% above Credit Lyonnais' base rate or 4% above LIBOR. The Credit
Lyonnais facility is secured by a mortgage on all of the Company's existing
proved oil and gas properties. The Company is also required to pay a commitment
fee of 0.5% on the unused portion of the borrowing base. On March 31, 1998, the
Company repaid all but $10,000 of the outstanding balance of the credit facility
with a portion of the proceeds from the sale of East Bayou Sorrel. (See note 6).
Prior to the Company's sale of its interest in the East Bayou Sorrel field, the
Company's borrowing base was $2 million. The bank has not completed its
redetermination of the borrowing base subsequent to this sale. Primarily as a
result of the lower revenues in the current quarter, the Company was unable to
meet the 3 to 1 coverage ratio of cash flow to fixed-charges which is required
by the credit facility for the nine-months period ended March 31, 1998. The
Company has obtained a waiver of this covenant from the bank for the period
ended March 31, 1998.
The Company's maturities of long-term debt over the next three years are
as follows:
Year Debt
-------- ----------
1998 $ -
1999 10,000
2000 -
----------
$ 10,000
==========
(3) INCOME TAX EXPENSE
No provision for income taxes was required for the three months ended
March 31, 1998.
At March 31, 1998, the Company estimates it had cumulative net operating
loss carryforwards for federal income tax purposes of $13 million which are
significantly restricted under IRC Section 382. These carryforwards are
available to offset future federal taxable income, if any, with various
expirations through 2013. The Company is uncertain as to the recoverability of
the above deferred tax assets and has therefore applied a 100% valuation
allowance.
The Company has available IRC Section 29 Tax Credits that may be used to
reduce or eliminate any corporate taxable income in future years. It is
uncertain at this time to what extent the Company will be able to utilize these
federal tax credits, as their utilization is dependent upon the amount, if any,
of future federal income tax incurred, after application of the Company's net
operating loss carryforwards.
(4) LEGAL PROCEEDINGS
There are no material pending legal proceedings involving any of the
Company's properties or which involve a claim for damages which exceed 10% of
the Company's current assets.
7
On April 16, 1996, Fortune was served with two lawsuits which had been
filed in the Federal District Court in New York by purchasers of Fortune Common
Stock in an offering in December 1995 under Regulation S. Under the terms of the
subscription agreement pursuant to which the plaintiffs acquired their shares,
each was entitled to receive additional shares of Fortune Common Stock if the
market price fell below a stated level during a specified period following the
40-day holding period prescribed by Regulation S. Fortune responded to the
suits, admitting that the stock price declined but alleged that suspicious
trading activity in Fortune stock occurred immediately prior to and during the
time period in which the additional-share allocation was computed. Fortune
believes that it has discovered evidence of active market manipulation in the
Common Stock by these plaintiffs; accordingly, it has commenced a countersuit
for damages suffered by the Company and its shareholders as a result of these
acts and has also received leave of court to add third-party defendants whose
actions furthered this market manipulation. Discovery has been stayed pending a
determination of objections filed by one of these third-party defendants.
Fortune intends to resume both the defense of plaintiffs' claims and the
aggressive prosecution of its own counterclaims as soon as it is entitled to do
so.
(5) COMPUTATION OF LOSS PER SHARE
Net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted earnings per
common share are not presented, since the issuance or conversion of additional
securities would have an anti-dilutive effect.
(6) SALE OF EAST BAYOU SORREL
On March 31, 1998, the Company sold its interest in the East Bayou Sorrel
field, Iberville Parish, Louisiana to National Energy Group, Inc. for cash in
the amount of $4,695,000. The properties sold consisted of the Company's
interest in the Schwing #1 and #2 wells and all of the Company's leases,
facilities and interests in the East Bayou Sorrel area of mutual interest, as
such area is defined in the East Bayou Sorrel operating agreement. The sale is
effective April 1, 1998. The sale closed on March 31, 1998, whereupon the
Company received $4,535,000, which is net of ordinary closing adjustments.
The Company's interest in the two productive wells at East Bayou Sorrel
were pledged to secure the Company's Credit Facility with Credit Lyonnais. The
total balance outstanding under the Credit Facility prior to this sale was
$550,000. Concurrently with closing the sale of the East Bayou Sorrel field, the
Company paid down the outstanding balance of the Credit Facility by $540,000.
The Company plans to reinvest the remaining proceeds from the sale of East Bayou
Sorrel into its exploration, development and property acquisition activities,
including, for example, future anticipated exploration and development wells at
its Espiritu Santo Bay and LaRosa 3D seismic exploration projects.
The Schwing #1 and #2 wells began producing from permanent production
facilities in January 1997 and June 1997, respectively. Although both wells have
been shut-in since March 13, 1998 pending the repair of production facilities,
they accounted for a significant portion of the Company's oil and gas revenues
during 1997 and proved reserves as of December 31, 1997. A third well in the
field, the Schwing #3, which spud October 9, 1997, was temporarily plugged and
abandoned on March 5, 1998 pending further evaluation of the well's potential.
The Company incurred approximately $1 million in connection with drilling and
attempting to complete this well as a result of difficult drilling conditions
and mechanical problems. Selected financial information attributable to the
Company's interest in the East Bayou Sorrel field as reported in its 1997 and
year-to-date operating and financial results is as follows:
8
Year Ended Three Months Ended
December 31, 1997 March 31, 1998
----------------- ------------------
Production
Oil (Bbls) 55,000 12,000
Gas (Mcf) 78,000 18,000
Oil and Gas Revenues $1,241,000 $230,000
Production and Operating Expense 205,000 55,000
Provision for Depletion, Depreciation
and Amortization* 430,000 54,000
As of December 31, 1997
-----------------------
Estimated Net Reserve Quantities
of Total Proved Reserves
Oil (Bbls) 152,000
Gas (Mcf) 204,000
This represents 32% and 30% of the Company's oil and gas revenues and
equivalent oil production and 23% of the Company's estimated quantities of
equivalent proved oil reserves as of December 31, 1997. Consequently, the
Company's revenues and cash flow from operations will decrease significantly in
1998 unless the production is replaced through successful exploration and
development activities or through the acquisition of producing properties.
Under the full cost method of accounting for oil and gas operations,
dispositions of oil and gas properties are recorded as adjustments to
capitalized costs, with no gain or loss recognized unless such adjustment would
significantly alter the relationship between capitalized costs and proved
reserves. A significant alteration would not ordinarily be expected to occur for
sales involving less than 25 percent of the reserve quantities in a given cost
center. Because the sale of East Bayou Sorrel represents less than 25% of the
Company's reserve quantities, the entire proceeds of $4,695,000 have been
credited to capitalized oil and gas properties as of March 31, 1998.
(7) SUBSEQUENT EVENT
On February 12, 1998, the Company commenced a voluntary exchange offer of
its outstanding publicly traded Common Stock purchase warrants and certain
private warrants (collectively referred to herein as the old warrants) for new
private warrants. The old warrants include 1,917,000 publicly traded warrants
and the right to acquire 63,000 private warrants currently held by unitholders,
all of which expire September 28, 1998. Under the terms of the exchange offer,
holders of the old warrants had until April 15, 1998, to exchange their old
warrants for an equal number of new private warrants that expire September 28,
1999. 1,779,713 warrants were tendered and accepted by the Company, representing
93% of the outstanding public warrants. An additional 3,000 public warrants were
exercised by warrantholders during the exchange offer period. The new private
warrants will not be listed for trading, are restricted from transfer and do not
contain the same anti-dilution provisions as the public warrants. Otherwise, the
new private warrants generally contain the same terms and conditions as the old
warrants. The Company did not receive any proceeds as a result of this exchange
offer.
- -----------------------
* Represents the estimated reduction in depreciation and amortization expense
reported by the Company in 1997 and 1998 that would have resulted from
excluding the East Bayou Sorrel production and proved reserves.
9
FORTUNE NATURAL RESOURCES CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR FIRST QUARTER OF 1998 TO THE FIRST QUARTER
OF 1997.
During the first quarter of 1998, Fortune's net loss decreased to
$739,000 compared to a net loss of $763,000 for the same 1997 period.
Significantly lower oil and gas prices and lower gas production resulted in net
oil and gas revenues decreasing by $407,000 (37%) in the first quarter of 1998,
compared to the same 1997 period. The East Bayou Sorrel field was shut in for
facility repairs from March 13, 1998 through the end of the quarter,
contributing to the lower revenues. Oil and gas revenues are expected to
decrease in the future as a result of the Company's sale of its entire interest
in East Bayou Sorrel effective April 1, 1998. See note 6 to the financial
statements for a discussion of this sale and the impact on the Company's
operating results.
The Company's oil production increased 8% during the first quarter of
1998 versus 1997. Gas production decreased 26% during the first quarter of 1998
versus 1997 primarily because of normal depletion.
Gas prices on the Company's production averaged $2.37 per MCF for the
first quarter of 1998 as compared to $3.04 per MCF for the same 1997 period (a
22% decrease). Oil prices averaged $14.28 per barrel for the first quarter of
1998 compared to $20.84 per barrel for the same 1997 period (a 31% decrease).
Interest expense increased by $56,000 (104%) for the first quarter of
1998 over 1997 due to the higher debt balance. The higher debt balance results
from the Company's issuance of subordinated convertible Notes in December 1997.
A portion of the proceeds of this issuance were used to repay all of the
Company's outstanding debentures due December 31, 1997 and to pay down a portion
of its bank debt. Bank debt was further reduced by $540,000 on March 31, 1998
with a portion of the proceeds of the sale of East Bayou Sorrel. Consequently,
interest expense is expected to decline in the second quarter of 1998. Non-cash
amortization of debt financing costs increased by $82,000 for 1998 due to the
Company's 1997 Notes offering in December 1997 and refinancing its bank credit
facility in July 1997.
The Company's provision for depletion, depreciation and amortization
(DD&A) increased by $86,000 (18%) in the first quarter of 1998 as compared to
1997 primarily because of lower reserves and higher costs in 1998. The DD&A rate
is expected to decrease in the second quarter of 1998 as a result of the sale of
the East Bayou Sorrel property.
LIQUIDITY AND CAPITAL RESOURCES
Cash Balance, Working Capital and Cash Flows from Operating Activities
Cash flow from operating activities declined in 1998; however, working
capital increased significantly at March 31, 1998. Fortune's operating
activities were a net user of cash during the first quarter of 1998 in the
amount of $308,000 as compared to cash flow provided from operating activities
of $489,000 for 1997. This decrease results primarily from the significant
reduction in payables in the first quarter of 1998 as compared 1997. Before
considering the effect of changes in assets and liabilities, operating cash flow
was $(73,000) for 1998 as compared to $370,000 for 1997. Lower oil and gas
revenues and higher cash interest expense were the primary contributors to the
1998 decrease in cash flow. The Company's historically high working capital
balance of $4,639,000 at March 31, compares to a December 31, 1997 balance of
$1,376,000. The proceeds received from the sale of East Bayou Sorrel were the
primary contributor to this significant increase in working capital. Management
believes that, even in the face of fluctuating commodity prices, this increase
in cash and working capital as a result of the sale of East Bayou Sorrel
provides the Company with adequate capital to fully fund its capital program
during 1998.
Fortune's internal liquidity and capital resources in the near term will
consist of working capital and cash flow from its oil and gas operations and its
unused borrowing capacity, if any, under its bank credit facility.
10
Cash Used in Investing Activities - Capital Expenditures
Cash expenditures for oil and gas properties for the first quarter of
1998 were $850,000 as compared to $899,000 for 1997. The 1998 expenditures
include primarily drilling and completion expenditures for the third well at
East Bayou Sorrel, which was temporarily plugged and abandoned on March 5, 1998,
drilling and completion operations at LaRosa and drilling costs for a dry hole
at the S.W. Segno prospect.
The Company has been involved in two significant proprietary 3D seismic
projects along the Texas coast. The La Rosa project, a 24 square mile
proprietary 3D survey over one of the Company's existing producing fields in
Refugio County, Texas has been shot and is currently being interpreted. The
Company sold one-half of its interest in the non-producing portion of this field
in exchange for the acquiring parties paying 100% of the Company's 3D seismic
costs. Two wells have been drilled to date. The first well was completed as a
producer and the second well was plugged and abandoned. Additional drilling is
expected in 1998. The Company holds a 37.5% working interest in the producing
wells and an 18.75% working interest in the prospective projects covered by this
3D survey.
The second project is offshore Texas in the intracoastal waters of
Espiritu Santo Bay, Calhoun County. This involves a 135 square mile proprietary
3D seismic survey in which the Company owns a 12.5% working interest. The area
covered by the survey also includes producing fields. This survey has also been
completed and is being interpreted. The Company is encouraged by the results
thus far and expects to begin drilling wells by mid 1998.
The Company continually reviews exploration, development and acquisition
opportunities and expects to participate in other such projects in 1998.
Cash Used in Financing Activities
On March 31, 1998, the Company paid off all but $10,000 of its bank
credit facility using $540,000 of the proceeds from the sale of East Bayou
Sorrel. The Company's other debt, all of which is subordinated convertible debt,
is not due until 2007. Primarily as a result of the lower revenues in the
current quarter, the Company was unable to meet the 3 to 1 coverage ratio of
cash flow to fixed-charges which is required by the credit facility for the
nine-months period ended March 31, 1998. The Company has obtained a waiver of
this covenant from the bank for the period ended March 31, 1998.
Oil and Gas Prices
Conditions outside of the Company's control influence the price it
receives for oil and gas. As of April 30, 1998, the Company was receiving an
average of approximately $13.20 per barrel for its oil production and $2.40 per
MCF for its gas production.
"Year 2000" Compliance
The Company is aware of the issues associated with the inability of many
computer systems worldwide to recognize dates beyond December 31, 1999 and that
a failure to correct this problem could result in significant disruption to
those systems. The Company has reviewed its internal and accounting systems and
believes that they are "year 2000 compliant." Although the Company believes that
these issues will not adversely impact its operations, there can be no assurance
that disruption or expenses will not occur as a result of the inability of the
Company's vendors or customers to deal with this problem on a timely basis. The
Company will continue to monitor the status of these issues to determine the
impact, if any, on its operations.
11
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking statements include statements
regarding: future oil and gas production and prices, future exploration and
development spending, future drilling and operating plans and expected results,
reserve and production potential of the Company's properties and prospects and
the Company's strategy. Actual events or results could differ materially from
those discussed in the forward-looking statements as a result of various factors
including, without limitation, the factors set forth below and elsewhere in this
10-Q, and in the Company's annual report on Form 10-K.
Exploration Risks. The business of exploring for and, to a lesser extent,
of acquiring and developing oil and gas properties is an inherently speculative
activity that involves a high degree of business and financial risk. Although
available geological and geophysical information can provide information with
respect to a potential oil or gas property, it is impossible to determine
accurately the ultimate production potential, if any, of a particular property
or well.
Dependence on a Limited Number of Wells. Through the first quarter of
1998, over 60% of the Company's oil and gas revenues, cash flow and proved oil
and gas reserves was accounted for by three wells, the South Timbalier Block 76
well and the two East Bayou Sorrel wells. The Company sold all of its interest
in the East Bayou Sorrel wells effective April 1, 1998. The South Timbalier
Block 76 well was shut-in for repairs for one month in 1997 and for over two
months in 1996 as the result of mechanical failures. A significant curtailment
or loss of production from the South Timbalier well for a prolonged period
before the Company could replace the reserves through new discoveries or
acquisitions would have a material adverse effect on the Company's operating
results in 1998.
Volatility of Oil and Gas Prices. The Company's revenues, profitability
and future rate of growth are substantially dependent upon prevailing market
prices for natural gas and oil, which can be extremely volatile and in recent
years have been depressed by excess domestic and imported supplies.
Uncertainty of Estimates of Proved Reserves and Future Net Revenues.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer.
Estimating quantities of proved reserves is inherently imprecise. Such estimates
are based upon certain assumptions about future production levels, future
natural gas and crude oil prices and future operating costs made using currently
available geologic engineering and economic data, some or all of which may prove
to be incorrect over time.
Operating and Weather Hazards. The cost and timing of drilling,
completing and operating wells is often uncertain. Drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, equipment failures, accidents, adverse weather
conditions, encountering unexpected formations or pressures in drilling and
completion operations, corrosive or hazardous substances, mechanical failure of
equipment, blowouts, cratering and fires. These conditions could result in
damage or injury to, or destruction of, formations, producing facilities or
other property or could result in personal injuries, loss of life or pollution
of the environment.
Additional factors. Additional factors that could cause actual events to
vary from those discussed above and elsewhere in this report include, among
others: loss of key company personnel; adverse change in governmental
regulation; inability to obtain critical supplies and equipment, personnel and
consultants; and inability to access capital to pursue the Company's plans.
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit No. Description
----------- -----------
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
27.1* Financial Data Schedule.
(B) REPORTS ON FORM 8-K / 8K-A
A report on Form 8-K was filed with the Securities and Exchange
Commission on March 31, 1998 to report the Company's sale of East Bayou Sorrel.
*Filed herewith.
13
FORTUNE NATURAL RESOURCES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FORTUNE NATURAL RESOURCES CORPORATION
By: /s/ TYRONE J. FAIRBANKS
-------------------------------------
Tyrone J. Fairbanks
President and Chief Executive Officer
By: /s/ J. MICHAEL URBAN
-------------------------------------
J. Michael Urban
Vice President and Chief Financial
and Accounting Officer
Date: May 8, 1998