As Filed: December 8, 1995 SEC File No. 33-86076
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective
Amendment No. 3
to
Registration Statement on Form S-2
Under the Securities Act of 1933
FORELAND CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 1070 87-0422812
(State or other jurisdiction of (Primary Standard Industrial
(I.R.S. Employer
incorporation or organization) Classification Code Number)
Identification No.)
12596 West Bayaud, Suite 300, Lakewood, Colorado 80228 (303) 988-3133
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
N. Thomas Steele, 12596 West Bayaud, Suite 300, Lakewood, Colorado 80228 (303)
988-3133
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
James R. Kruse, Esq.,
Kruse, Landa & Maycock
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Telephone: (801) 531-7090
Telecopy: (801) 359-3954
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this post-effective amendment.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to rule 415 under the Securities Act of
1933, check the following box.
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box.
Pursuant to rule 429, the prospectus contained in this registration
statement also relates to the offer and sale of unissued securities registered
in registration statements numbered 33-64756, 33-44405, 33-34970, 33-19014, and
33-42828.
This post-effective amendment to the registration statement shall become
effective in accordance with section 8(c) of the Securities Act of 1993, as
amended.
Page 1 of consecutively numbered pages
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Exhibit index appears on page .
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<PAGE>
POST-EFFECTIVE
AMENDMENT NO. 3 DATED DECEMBER 8, 1995
FORELAND CORPORATION
This comprehensive Amendment is a part of and should be read in conjunction with
the Prospectus of
Foreland Corporation dated December 9, 1994 (the "Prospectus").
(Terms used but not defined herein have the same meaning as set forth in the
Prospectus.)
Incorporation by Reference
The Company's annual report on form 10-K for the year ended December 31,
1994, and its quarterly reports on form 10-Q for the fiscal quarters ended March
31, June 30, and September 30, 1995, are hereby incorporated by reference into
this Amendment and the Prospectus.
Use of Proceeds
The following table illustrates the proceeds that could be received from
the offering, if all Warrants and Options are exercised, giving effect to the
events that have occurred since the offering was commenced:
<TABLE>
<S> <C> <C> <C> <C>
-------------- ------------- ----------- ------------
Number of Commissions Net
Securities Sales Price (1) Proceeds(1)
---------- ------------- ----------- -----------
L Warrants 1,242,000 $6.00-$8.00 $0.42- $6,930,360
$0.56 to
$9,240,480
X Warrants 697,000 $4.00 $0.28 $2,592,840
Y Warrants 3,000 $4.00 $0.28 $11,160
$1.50 Warrants 200,000 $1.50 -- $300,000
$1.25 Warrants 1,000 $1.25 -- $1,250
Options 30,000 $3.00 -- $90,000
1991 Underwriter Unit 400 Units at $552, consisting
Warrant and A and B of 138,000 shares Common
Warrants Stock, 138,000 A Warrants
at $2.25 and 138,000 B
Warrants at $3.90, and
276,000 shares Common Stock
on exercise of such
Warrants -- $1,069,500
1993 Placement Agent Unit 70,000 Units at $5.50,
Warrant and X Warrants consisting of 70,000 shares
1993 Series Preferred
Stock, 70,000 X Warrants at
$4.00, and 70,000 shares
Common Stock on exercise of
X Warrants -- $665,000
-----------
Total Proceeds $ 11,660,110
to
$ 13,970,230
<FN>
(1)Net proceeds reflect the payment of the maximum amount of commissions of 7% on all warrants
exercised through securities broker-dealers. Warrants not exercised through a broker-dealer
and, therefore, not subject to a commission will result in increased net proceeds to the
Company, which will be used for its Nevada exploration activities. Net proceeds do not deduct
other costs of the offering payable by the Company estimated at $48,000. (See Prospectus:
"PLAN OF DISTRIBUTION.")
</TABLE>
Drilling Results
The Company's Eldorado test in Little Smoky Valley, the fifth of six tests
to be drilled with Enserch/Berry, was drilled to a total depth of 4.523 feet and
was plugged and abandoned. The Eagle Springs #64-35 well has been completed and
has commenced production with an initial production rate of 116 barrels of oil
per day based upon a continuous 24 hour test. The Company and Barrett are
completing for production the Eagle Springs #55-35 well and have begun drilling
the Eagle Springs #13-36 location, the eighth well to be drilled in Eagle
Springs by the Company and Barrett under their joint development program. The
Company is also advancing its drilling at Deadman Creek in Toano Draw under the
Company's exploration agreement with and Parker and Parsley Petroleum Company
(successor-in-interest to Santa Fe Energy Resources, Inc).
<PAGE>
Preliminary Prospectus dated December 9, 1994
FORELAND CORPORATION
The Prospectus relates to the issuance by Foreland Corporation (the
"Company") of:
(a) 1,242,000 Common Stock purchase warrants (the "L Warrants")
representing the right to purchase one share of the Company's common stock, par
value $0.001 per share (the "Common Stock"), at $6.00 through December 31, 1995,
and at $8.00 thereafter through December 31, 1996;
(b) 1,242,000 shares of Common Stock on the exercise of a like number of L
Warrants;
(c) 200,000 shares of Common Stock on the exercise of a like number of
purchase warrants (the "$2.00 Warrants") with an exercise price of $2.00 per
share through April 30, 1996;
(d) 48,000 shares of Common Stock on the conversion of 4,000 shares of
1993 Series Preferred Stock and 40,000 shares of 1991 Series Preferred Stock,
par value $0.001 per share (together, with the 1994 Series Preferred Stock, the
"Preferred Stock");
(e) 697,000 shares of Common Stock on the exercise of a like number of X
Warrants with an exercise price of $3.25 if exercised by December 16, 1994, and
$4.00 if exercised thereafter through December 15, 1995 (the "X Warrants");
(f) 697,000 Y Warrants on the exercise of the above X Warrants by December
16, 1994, entitling the holders to purchase a like number of shares of Common
Stock at $4.00 per share through December 15, 1995 (the "Y Warrants");
(g) 700,000 shares of Common Stock on the exercise of a like number of Y
Warrants with an exercise price of $4.00 per share;
(h) 1,000 shares of Common Stock on the exercise of a like number of
warrants with an exercise price of $1.25 per share (the "$1.25 Warrants");
(i) 98,500 shares of Common Stock issuable upon exercise of a like number
of options (the "Options"), with a weighted average exercise price of $3.54,
more particularly described hereinafter;
(j) 825,659 shares of Common Stock issuable for cash, upon cancellation of
indebtedness, for services rendered, or for other consideration as determined by
the board of directors, such shares to be issued from time to time at such
prices approximately equal to the bid price of the Company's Common Stock on the
date of issuance or at a discount therefrom, as the board of directors deems
advisable and in the Company's best interest at the time of issuance, of which
the Company presently intends to issue to unaffiliated third parties 10,000
shares for services rendered, and 54,000 shares for certain nonproducing
properties, as more particularly described hereinafter;
(k) Up to 400 Underwriter Units issuable upon the exercise of presently
outstanding Underwriter Unit Warrants and the related underlying securities
consisting of 108,000 shares of Common Stock, 108,000 Class A Warrants, 108,000
Class B Warrants, and 216,000 shares of Common Stock issuable upon the exercise
of such A and B Warrants; and
(l) Up to 70,000 1993 Placement Agent Units issuable on the exercise of
presently outstanding Placement Agent Warrants and the related underlying
securities consisting of 70,000 shares of 1993 Series Preferred Stock, 140,000
shares of Common Stock issuable on conversion of such Preferred Stock, 70,000 X
Warrants, 70,000 Y Warrants issuable on the exercise of such X Warrants, and the
140,000 shares of Common Stock issuable on the exercise of the X and Y Warrants.
This prospectus also relates to the sale by certain selling shareholders
(the "Selling Shareholders") of 1,316,210 shares of Common Stock issuable on the
conversion of a like number of shares of 1994 Series Preferred Stock now held by
them and 658,105 shares of Common Stock ("Warrant Shares") purchasable by the
Selling Shareholders on the exercise of Warrants now held by them. (See
"SELLING SHAREHOLDERS.") This prospectus also relates to the sale by the
placement agent in the 1994 Preferred Stock and C Warrant offering of up to
131,622 shares of Common Stock issuable on the conversion of a like number of
1994 Series Preferred Stock and 65,811 shares of Common Stock purchasable by the
Selling Shareholder on the exercise of warrants, issuable on exercise of the
1994 Placement Agent Warrants.
The Company will pay to securities broker-dealers that solicit the exercise
of Warrants a commission of 7% of the exercise price of Warrants exercised
through them. Such soliciting broker-dealers may be deemed "underwriters"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), and any commissions received by them may be deemed underwriting
commissions under the Securities Act.
THESE ARE SPECULATIVE SECURITIES. AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY INVOLVES SUBSTANTIAL RISKS. (SEE "RISK FACTORS.")
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE OR OTHER REGULATORY AUTHORITY, NOR HAS THE
COMMISSION OR ANY STATE OR OTHER REGULATORY AUTHORITY PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS OR ENDORSED THE MERITS OF THE OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated December 9, 1994
<PAGE>
<TABLE>
<S> <C> <C> <C>
Proceeds to
Price to Commissions the
Public (1) Company(1)(2)
------------ ------------- -------------
Per Share Price Range for L $ 6.00 - $ 0.42 - $ 5.58 -
Warrants 8.00 0.56 7.44
Total for 1,242,000 Warrants 7,452,000 to 521,640 to 6,930,360 to
9,936,000 695,520 9,240,480
Per Share Price Range for X 3.25- 4.00 0.23 - 0.28 3.02-3.72
Warrants 2,265,250 to 158,568 to 2,106,682 to
Total for 697,000 Warrants(3) 2,788,000 195,160 2,592,840
Per Share Price for Y Warrants 4.00 0.28 3.72
Total for 700,000 Warrants(3) 0 to 0 to 196,000 0 to
2,800,000 2,604,000
Per Share Price for $2.00 Warrants 2.00 -- 2.00
Total for 200,000 Warrants(3) 400,000 -- 400,000
Per Share Price for $1.25 Warrants 1.25 -- 1.25
Total for 1,000 Warrants(3) 1,250 -- 1,250
Weighted Average Per Share Price 3.54 -- 3.54
for Options(4) 348,500 -- 348,500
Total for 98,500 Options(3)
Per Share Price for Common 2.94 -- 2.94
Stock(5) 2,239,277 -- 2,239,277
Total for 761,659 shares(6)
1991 Underwriter Unit Exercise 550.00 -- 550
Price 220,000 -- 220,000
Total for 400 Units(7)
Per Share Price for 1991 2.25 -- 2.25
Underwriter A Warrants 243,000 -- 243,000
Total for 108,000 Warrants(7)
Per Share Price for 1991 3.90 -- 3.90
Underwriter B Warrants 421,200 -- 421,200
Total for 108,000 Warrants(7)
1993 Placement Agent Unit Warrant 5.50 -- 5.50
Exercise Price 385,000 -- 385,000
Total for 70,000 Unit Warrants(8)
Per Share Price for 1993 Placement 3.25-4.00 -- 3.25-4.00
Agent X Warrants 227,500 to -- 227,500 to
Total for 70,000 X Warrants(8) 280,000 -- 280,000
Per Share Price for 1993 Placement 4.00 -- 4.00
Agent Y Warrants 0 to 280,000 -- 0 to 280,000
Total for 70,000 Y Warrants(8)
Total Offering(9) $14,778,228 $716,800 $14,061,427
to to to
$19,766,977 $1,050,088 $18,716,890
</TABLE>
(1) The Company will pay securities broker-dealers which solicit the
exercise of the L, X, and Y Warrants a commission equal to 7% of the exercise
price of Warrants exercised through them, except that no commissions will be
paid if, at the time of exercise, the Warrant exercise price is greater than
the trading market price for the Company's Common Stock. Net proceeds
reflect the payment of commissions on all Warrants exercised, although the
Company will not pay a commission on Warrants not exercised through
securities broker-dealers, which will result in increased net proceeds to the
Company. The proceeds to the Company do not reflect the deduction of other
expenses of this prospectus, estimated at $48,000, including printing,
accounting, legal, stock transfer, filing, and miscellaneous costs and fees.
(See "PLAN OF DISTRIBUTION.")
(2) The Company will receive no cash proceeds from the conversion of the
Preferred Stock or the issuance of Common Stock for services rendered, for
cancellation of indebtedness, or for the acquisition of property.
(3) Presentation assumes complete exercise of all Warrants and Options.
<PAGE>
(4) Represents the weighted average exercise price of Options for 50,000
shares at an exercise price of $3.69 per share, 30,000 shares at an exercise
price of $3.00 per share, and 18,500 shares at an exercise price of $4.00 per
share.
(5) Stock price shown is an estimated amount based on the closing bid
price on December 2, 1994. Such shares will be issued at such prices
approximately equal to the bid price of the Company's Common Stock on the
date of issuance or at a discount therefrom, as the board of directors deems
advisable at the time of issuance.
(6) Stock to be issued upon a cash sale thereof or upon cancellation of
indebtedness or for services rendered. Proceeds shown assumes sale of entire
number of shares at the current bid price. Total number of shares does not
include 10,000 shares to be issued for services and 54,000 shares to be
issued for certain nonproducing properties. Actual proceeds may differ
significantly.
(7) Assumes the complete exercise of the 1991 Underwriter Unit Warrant and
the issuance of 108,000 shares of Common Stock, 108,000 A Warrants and
108,000 B Warrants, and 216,000 shares of Common Stock on the complete
exercise of such A and B Warrants.
(8) Assumes the complete exercise of the Placement Agent Warrants and the
issuance of 70,000 shares of 1993 Series Preferred Stock, 70,000 X Warrants,
and 140,000 shares of Common Stock on the conversion of such Preferred Stock,
70,000 Y Warrants on the exercise of such X Warrants, and 140,000 shares of
Common Stock on the exercise of the X and Y Warrants.
(9) The maximum figures assumes the exercise of all of the X Warrants by
December 1, 1994, at $3.25 per share for gross proceeds of $2,492,750
(including those included in the Placement Agent Units), the issuance of Y
Warrants on the exercise of the X Warrants, and the exercise of all of the Y
Warrants at $4.00 per share for gross proceeds of $3,080,000. The minimum
figures assumes the exercise of all X Warrants after December 1, 1994, at
$4.00 per share for gross proceeds of $3,068,000 (including those included in
the Placement Agent Units), and the issuance of no Y Warrants.
The Company is offering up to 48,000 shares of Common Stock to be issued on
the conversion of Preferred Stock, consisting of 8,000 shares of Common Stock on
the conversion of 4,000 shares of 1993 Series Preferred Stock, each of which is
convertible into two shares of Common Stock, and 40,000 shares of Common Stock
on the conversion of 40,000 shares of 1991 Series Preferred Stock, each of which
is convertible into one share of Common Stock. The shares of 1993 Series and
1991 Series Preferred Stock have liquidation preferences of $5.00 and $1.25 per
share, respectively, are entitled to one vote per share, vote as a class with
the Common Stock, and do not have a right to a preferential dividend. The 1993
Series Preferred Stock is subject to redemption by the Company at any time after
December 15, 1995, pursuant to written notice given to the holders thereof not
less than 30 days prior to the date on which the Preferred Stock shall be
redeemed at $5.00 per share, subject to prior conversion by the holder. The
1991 Series Preferred Stock is subject to redemption by the Company at any time
after December 31, 1995, pursuant to written notice given to the holders thereof
not less than 30 days prior to the date on which the Preferred Stock shall be
redeemed at $1.25 per share, subject to prior conversion by the holder. (See
"DESCRIPTION OF SECURITIES" and "PLAN OF DISTRIBUTION.")
On October 30, 1994, 1,242,000 class B warrants (the "B Warrants") expired
by their terms without any warrants being exercised. In this offering, the
Company will issue, without requiring any payment to the Company, up to
1,242,000 class L warrants (the "L Warrants") to those persons who were holders
of record of the Company's B Warrants on October 30, 1994.
All of the warrants described herein are sometimes collectively referred to
as the "Warrants." Each L Warrant entitles the holder to purchase one share of
Common Stock at any time through December 31, 1995, at a purchase price of $6.00
per share, and at $8.00 thereafter through December 31, 1996. The L Warrants
are subject to redemption by the Company at a price of $0.10 per L Warrant on 30
days' prior written notice if the closing bid price of the Common Stock of the
Company as quoted on Nasdaq exceeds the L Warrant exercise price by at least 20%
for 20 of 30 trading days during a period ending within 10 days of the notice of
redemption. Each X Warrant entitles the holder to purchase, at any time through
December 16, 1994, for $3.25, one share of Common Stock and one Y Warrant, which
in turn entitles the holder to purchase, at any time through December 15, 1995,
for $4.00, one additional share of Common Stock. Each X Warrant not exercised
for $3.25 by December 16, 1994, is exercisable at $4.00 per share through
December 15, 1995. The X and Y Warrants are redeemable by the Company at $0.10
per Warrant at any time that the trading price for the Common Stock exceeds 150%
of the applicable exercise price as quoted on the Nasdaq Stock Market, during 45
consecutive trading days. (See "DESCRIPTION OF SECURITIES" and "PLAN OF
DISTRIBUTION.")
<PAGE>
The Company is offering up to 200,000 shares of Common Stock issuable on
exercise of the $2.00 Warrants granted in connection with the borrowing of funds
from an unrelated third party in April 1994. The $2.00 Warrants entitle the
holder to purchase up to 200,000 shares of the Common Stock at an exercise price
of $2.00 per share at any time prior to the earlier of April 30, 1996, or 60
days subsequent to the repayment of the loan. (See "DESCRIPTION OF SECURITIES"
and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS: Liquidity and Capital.")
The Company is offering to the holders of Options up to 98,500 shares of
Common Stock issuable on exercise of such Option with 50,000 shares of Common
Stock issuable on exercise of Options at $3.69 per share, 18,500 shares of
Common Stock issuable on exercise of Options at $4.00 per share, and 30,000
shares of Common Stock issuable on exercise of Options at $3.00 per share,
together with such additional shares as may be issuable under applicable
antidilution provisions. (See "DESCRIPTION OF SECURITIES.")
In connection with a November 1991 public offering in which the Company
issued 4,600 Units at $500 per Unit, the Company issued Warrants to the
underwriter in such offering (the "1991 Underwriter Unit Warrants") to purchase
400 additional Units (the "1991 Underwriter Units"), at a price of $550 per
Unit. (See "DESCRIPTION OF SECURITIES" and "PLAN OF DISTRIBUTION.")
In connection with the private placement in early 1993 of the 1993 Series
Preferred Stock, the Company issued to the placement agent in such offering
warrants ("1993 Placement Agent Warrants") to purchase for $5.50 per Warrant up
to 70,000 shares of 1993 Series Preferred Stock and 70,000 X Warrants. (See
"DESCRIPTION OF SECURITIES" and "PLAN OF DISTRIBUTION.")
The Company is offering up to 825,659 shares of Common Stock to be issued
for cash, in cancellation of indebtedness, for services rendered to the Company,
for property, or other consideration as determined by the board of directors.
Such shares will be issued from time to time at such prices approximately equal
to the bid price of the Company's Common Stock on the date of issuance or at a
discount therefrom, and upon such terms as the board of directors deems
advisable and in the Company's best interest at the time of issuance. The
Company presently intends to issue to unaffiliated third parties 10,000 shares
for services rendered, and 54,000 shares to acquire certain nonproducing
properties. (See "PLAN OF DISTRIBUTION.")
This prospectus also relates to the resale by certain selling shareholders
of shares of Common Stock issuable on the conversion of 1,316,210 shares of 1994
Series Preferred Stock now outstanding, which stock is convertible into one
share of Common Stock per share of 1994 Series Preferred Stock, and on the
exercise of 658,105 C Warrants now outstanding. In connection with the private
placement of the 1994 Series Preferred Stock which closed on July 18, 1994, the
Company issued to the placement agent in such offering warrants (the "1994
Placement Agent Warrants") to purchase for $4.40 per unit up to 65,811 units,
each unit consisting of two shares of 1994 Series Preferred Stock and one C
Warrant, for a total of 131,622 shares of 1994 Series Preferred Stock and 65,811
C Warrants. (See "DESCRIPTION OF SECURITIES" and "PLAN OF DISTRIBUTION.") This
Prospectus also relates to the resale by such placement agent of the Common
Stock issuable on the exercise of C Warrants and the conversion of 1994 Series
Preferred Stock, both issuable by the Company on exercise of the 1994 Placement
Agent Warrants.
The Selling Shareholders will offer their Common Stock and Warrant Shares
through or to securities brokers or dealers designated by them in the over-the-
counter market or in other transactions negotiated by the Selling Shareholders.
The Common Stock and Warrant Shares will be offered at current market price,
which may vary through the period during which the securities may be offered.
(See "PLAN OF DISTRIBUTION.") The Company will not receive any proceeds from
the sale of Common Stock or Warrant Shares by the Selling Shareholders.
The Selling Shareholders and any broker, dealer, or agent that participates
with the Selling Shareholders in the sale of the Common Stock or Warrant Shares
offered hereby may be deemed "underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), and any commissions or discounts
received by them and any profit on the resale of the Common Stock or Warrant
Shares purchased by them may be deemed to be underwriting commissions under the
Securities Act. (See "SELLING SHAREHOLDERS" and "PLAN OF DISTRIBUTION.")
<PAGE>
The Company's Common Stock, A Warrants, and B Warrants are traded in the
over-the-counter market and are included in the Nasdaq Stock Market under the
symbols "FORL," "FORLW," and "FORLZ," respectively. On December 2, 1994, the
Nasdaq Stock Market reported the closing bid price for the Company's Common
Stock at $2.94. (See "PRICE RANGE FOR COMPANY SECURITIES.")
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information can be inspected and copied
at the public reference facilities of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549; Room 1204, Everett McKinley Dirksen
Building, 219 South Dearborn Street Chicago, Illinois 60604; and Room 1100,
Jacob K. Javits Federal building, 26 Federal Plaza, New York, New York 10278.
Copies of such materials can be obtained from the public reference facilities of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
Additional information regarding the Company and the Common Stock offered
hereby is contained in the registration statement and exhibits thereto, of which
this Prospectus forms a part, filed with the Commission under the Securities
Act. This Prospectus omits certain information contained in the registration
statement. For further information, reference is made to the registration
statement and to the exhibits and other schedules filed therewith. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and where such contract or
other document is an exhibit to the registration statement, each such statement
is deemed to be qualified and amplified in all respects by the provisions of the
exhibit. Copies of the complete registration statement, including exhibits, may
be examined or copies obtained from the offices of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, on the payment of prescribed fees for
reproduction.
No person is authorized to give any information or make any representation
not contained in this Prospectus and, if given or made, such information or
representation should not be relied on as having been authorized. Neither the
delivery of this Prospectus nor the distribution of the Common Stock described
hereby shall, under any circumstances, create an implication that there has not
been a change in the information set forth herein since the date hereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's annual report on form 10-K for the fiscal year ended December
31, 1993, and its quarterly reports on form 10-Q for the quarters ended March
31, June 30, and September 30, 1994, and as amended on form 10-QSB/A as filed
December 8, 1994 are hereby incorporated by reference into this Prospectus. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of such person, a
copy of any or all of the documents referred to above which have been or may be
incorporated by reference in this Prospectus, other than certain exhibits to
such documents. Requests for such copies should be directed to Shareholder
Relations, Foreland Corporation, Union Terrace Office Bldg., 12596 West Bayaud,
Suite 300, Lakewood, Colorado 80228-2019; telephone (303) 988-3122.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
and financial statements appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus does not give effect to
the exercise of the over-allotment options described under "PLAN OF
DISTRIBUTION." The definition of certain terms used herein is included in
"Certain Definitions."
The Company
The Company is engaged in the exploration for oil in the Great Basin and
Range geologic province in Nevada (the "Great Basin"), an area that management
believes is one of the most promising unexplored onshore domestic areas with
potential for the discovery of major oil reserves. In continuing to advance
this exploration since its organization in 1985, the Company's strategy is to
generate exploration prospects with the most recent generally available
scientific techniques, expand and improve the Company's strategic land position,
and establish arrangements with other oil exploration firms active in Nevada to
obtain additional scientific data, leases, and funding. To date, the Company
has confirmed its exploration concepts through the discovery of the North Willow
Creek and Tomera Ranch Fields in Pine Valley, both of which are in the early
stages of evaluation with limited oil production and no material proved
reserves.
The Company has access to a large geophysical and geological data base
generated by its own efforts and that of others, including Gulf Oil Corporation
("Gulf"), Exxon USA, Inc. ("Exxon"), Santa Fe Energy Resources, Inc. (now,
Bridge Oil (USA) Inc.) ("Santa Fe"), Mobil Exploration and Producing USA, Inc.
("Mobil"), Chevron USA, Inc. ("Chevron"), and Enserch Exploration, Inc., and
Berry Petroleum Company ("Enserch/Berry"). This data base includes over 1,000
line miles of two dimensional ("2-D") seismic data, much of it reprocessed with
new analytical programs, newly obtained three dimensional ("3-D") seismic
information, and gravity studies, all of which are being integrated with
subsurface data obtained through drilling.
With a continuous leasing program since 1986, the Company has established
what management believes to be one of the larger property positions in Nevada's
most promising prospect areas, with approximately 179,000 gross acres under
lease. The leasing program continues as the Company acquires leases in
favorable new prospect areas and relinquishes leases with less potential. In
addition, the Company has the exclusive right to develop prospects and market
approximately 750,000 gross acres of mineral lands owned by Santa Fe.
In June 1993 the Company reached an agreement with Enserch/Berry that
designates the Company as operator to undertake a joint exploration program on
approximately 119,000 gross acres in four separate prospect areas in Pine,
Diamond, Little Smoky, and Antelope Valleys of northeastern Nevada. Both the
Company and Enserch/Berry contributed acreage and data and provide 50% of the
required funds for drilling and acquiring additional acreage and data.
In April 1993 the Company agreed with Frontier Oil Exploration Company
("Frontier") to undertake certain joint exploration activities on Frontier's
Newark Valley farmout prospect from Mobil and on the Company's Toano Draw
prospect that covers a portion of the Santa Fe acreage.
In July 1993, the Company acquired an approximately 2,800 gross acre lease
in Railroad Valley, Nevada, which included a portion of the Eagle Springs Field
with nine wells, then shut in, and one water injection well. Since this
acquisition, the Company reworked eight wells to return them to production,
drilled a new water injection well, and replaced and improved surface equipment
to handle increased production and to lower long term operating costs. As of
December 31, 1993, the Eagle Springs Field had estimated net remaining proved
reserves of 624,000 barrels of oil with future net cash flows discounted at 10%
to present value of $1,571,440. (See "BUSINESS: Eagle Springs.")
<PAGE>
In August 1994, the Company entered into an agreement with Plains Petroleum
Operating Company ("Plains") under which it agreed to provide, in successive
phases, approximately $1,900,000 of the next $2,400,000 in drilling to earn a
40% interest in the Company's Eagle Springs producing properties, approximately
$600,000 to earn a 50% interest in two prospects on Santa Fe acreage in North
Humboldt Valley and Dixie Flats, and approximately $800,000 for a detailed 3-D
seismic survey on an area of mutual interest in which the Company holds
substantial acreage in Pine Valley. (See "BUSINESS: Plains Agreement.")
The Company's management and technical team consists of individuals with a
broad mix of formal education and over 65 years of combined Nevada exploration
experience, including positions with major oil companies such as Gulf, Mobil,
and Chevron, all Nevada oil exploration pioneers. (See "MANAGEMENT.")
In mid-1994, the Company commenced the first phase of a two year, 14 well
drilling program in its Eagle Springs Field based on the Company's own 3-D
seismic study to evaluate horizons that are productive in existing wells. As of
the date of this prospectus, the first new Eagle Springs well is producing,
production casing has been set and testing is underway on the second, and
drilling has commenced on a third well. The Company also intends to drill
exploratory wells in the Hay Ranch, Tomera Ranch, and other prospect areas of
Pine Valley, and in Little Smoky and Antelope Valleys. During 1994 the Company
participated in two exploratory tests, one with Frontier on Mobil acreage in
Newark Valley and one on Yates Petroleum Corporation ("Yates") acreage in
Railroad Valley, both of which were plugged and abandoned.
The Company's principal executive offices are located at 12596 West Bayaud,
Suite 300, Lakewood, Colorado 80228-2019 and its telephone number is (303) 988-
3122.
Prior Sale of Preferred Stock, Warrants, and Options
The Company issued 1,316,210 shares of 1994 Series Preferred Stock and
658,105 C Warrants in a private placement completed in July 1994, for which the
Company received net proceeds of approximately $2,341,370. Each C Warrant
entitles the holder thereof to purchase at $3.00 one share of Common Stock
between October 31, 1994, and July 1, 1995. The terms of this offering were
determined by negotiations between the Company and the placement agent. (See
"DESCRIPTION OF SECURITIES.")
The 1993 Series Preferred Stock and X Warrants were issued by the Company
in a private placement completed in early 1993. In that offering, the Company
sold 700,000 shares of 1993 Series Preferred Stock and 700,000 X Warrants for
net proceeds of approximately $3,100,000. Since issuance, 696,000 shares of
1993 Preferred Stock have been converted to 1,392,000 shares of Common Stock and
3,000 X Warrants have been exercised to purchase 3,000 Y Warrants and 3,000
shares of Common Stock. If exercised by December 16, 1994, each X Warrant
entitles the holder to purchase for $3.25 one share of Common Stock and one Y
Warrant. If not exercised by December 16, 1994, each X Warrant entitles the
holder to purchase for $4.00 one share of Common Stock through December 15,
1995. Each Y Warrant entitles the holder to purchase for $4.00 one share of
Common Stock through December 15, 1995. The terms of this offering were
determined by negotiations between the Company and the placement agent. (See
"DESCRIPTION OF SECURITIES.")
The 1991 Series Preferred Stock was issued by the Company in October
1991. In that offering, the Company sold for $1.25 per share, 910,000 shares of
Preferred Stock, with each purchaser also receiving one Warrant for each two
shares of Preferred Stock, for a total of 455,000 Warrants, for net proceeds of
approximately $1,038,329. In addition, the Company issued to
Neidiger/Tucker/Bruner, Inc., a securities broker-dealer that acted as placement
agent in connection with the offering, Warrants to purchase 73,000 shares of
Common Stock at $1.25 per share at any time prior to February 15, 1996, of which
1,000 of such warrants remain unexercised. The terms of this offering were
determined by negotiations between the Company and the placement agent. In such
offering, certain of the Company's officers and directors and their affiliates
purchased an aggregate of 160,000 shares of Preferred Stock and 80,000 Warrants
for $200,000. (See "DESCRIPTION OF SECURITIES.")
<PAGE>
In connection with the borrowing of funds from an unrelated third party in
April 1994, the Company granted the lender the $2.00 Warrants to purchase up to
200,000 shares of the Common Stock at an exercise price of $2.00 per share at
any time prior to the earlier of April 30, 1996, or 60 days subsequent to the
repayment of the loan. (See "DESCRIPTION OF SECURITIES" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Liquidity and Capital.")
The Company is offering to the holders of Options up to 98,500 shares of
Common Stock issuable on exercise of such Option with 50,000 shares of Common
Stock issuable on exercise of Options at $3.69 per share, 18,500 shares of
Common Stock issuable on exercise of Options at $4.00 per share, and 30,000
shares of Common Stock issuable on exercise of Options at $3.00 per share,
together with such additional shares as may be issuable under applicable
antidilution provisions. (See "DESCRIPTION OF SECURITIES.")
In connection with a November 1991 public offering in which the Company
issued 4,600 Units at $500 per Unit, the Company issued Warrants to the
underwriter in such offering (the "1991 Underwriter Unit Warrants") to purchase
400 additional Units (the "1991 Underwriter Units"), at a price of $550 per
Unit. The Units and 1991 Underwriter Units are identical but for the following
differences: (1) the price per Unit; (2) the 1991 Underwriter Units and
underlying Warrants are not redeemable; and (3) the 1991 Underwriter Unit
Warrants are exercisable only between October 30, 1992, and October 29, 1996.
This Prospectus relates to the issuance by the Company of the following of its
securities with respect to such prior offering: (1) up to 400 1991 Underwriter
Units, issuable upon the exercise of the presently outstanding 1991 Underwriter
Unit Warrants; (2) up to 108,000 shares of Common Stock which comprise a portion
of the 400 1991 Underwriter Units; (3) up to 108,000 A Warrants which comprise a
portion of the 400 1991 Underwriter Units; (4) up to 108,000 B Warrants which
comprise a portion of the 400 1991 Underwriter Units; (5) up to 216,000 shares
of Common Stock issuable upon exercise of the A and B Warrants which comprise a
portion of the 400 1991 Underwriter Units; and (6) up to 1,242,000 shares of
Common Stock issuable upon exercise of the L Warrants which are to be issued to
the holders of B Warrants comprising a portion of the 4,600 Units held by the
public.
In connection with the private placement in early 1993 of the 1993 Series
Preferred Stock, the Company issued to the placement agent in such offering
warrants ("1993 Placement Agent Warrants") to purchase for $5.50 per unit up to
70,000 shares of 1993 Series Preferred Stock and 70,000 X Warrants. The 1993
Series Preferred Stock and the X Warrants to be issued to the placement agent
are identical to the 1993 Series Preferred Stock and the X Warrants described
above. This Prospectus relates to the issuance by the Company of the following
of its securities with respect to such prior offering: (1) up to 70,000
Placement Agent Units issuable on the exercise of the presently outstanding 1993
Placement Agent Warrants; (2) up to 70,000 shares of 1993 Series Preferred Stock
which comprise a portion of the 1993 Placement Agent Warrants; (3) up to 140,000
shares of Common Stock issuable on conversion of such Preferred Stock; (4) up to
70,000 X Warrants comprising a portion of the 1993 Placement Agent Warrants; (5)
up to 70,000 Y Warrants issuable on exercise of such X Warrants; (6) up to
140,000 shares of Common Stock issuable on exercise of the X and Y Warrants; (7)
up to 697,000 shares of Common Stock issuable on exercise of the X Warrants
which comprise a portion of the Units held by the public; (8) up to 697,000 Y
Warrants issuable on exercise of the X Warrants held by the public; and (9) up
to 700,000 shares of Common Stock on exercise of the Y Warrants issuable on the
exercise of the X Warrants held by the public.
In connection with the private placement of the 1994 Series Preferred Stock
which closed on July 8, 1994, the Company issued to the placement agent in that
offering warrants (the "1994 Placement Agent Warrants") to purchase for $4.40
per unit, up to 65,811 units, with each unit consisting of two shares of 1994
Series Preferred Stock and one C Warrant. The 1994 Series Preferred Stock and
the C Warrants to be issued to the placement agent are identical to the 1994
Series Preferred Stock and the C Warrants described above.
In 1991 the Company issued 1,242,000 class B Warrants ("B Warrants")
entitling the holder of each B Warrant to purchase one share of Common Stock at
any time through October 30, 1994, at $3.90 per share. These B Warrants expired
by their terms without any warrants being exercised. In this offering the
Company will issue, without requiring any payment to the Company, to each holder
of B Warrants as of October 30, 1994, the same number of L Warrants.
<PAGE>
Securities Offered by the Company
Common Stock to be Issued: Number
---------
On conversion of 1991 Preferred Stock 40,000
On conversion of 1993 Preferred Stock 8,000
On exercise of Warrants:
L Warrants at $6.00 to $8.00 1,242,000
X Warrants at $3.25 to $4.00 697,000
Y Warrants at $4.00 700,000
$2.00 Warrants 200,000
$1.25 Warrants 1,000
---------
2,840,000
On exercise of Options at a
weighted average $3.54 98,500
On exercise of 1991 Underwriter Unit Warrants:
Included in 1991 Underwriter
Unit Warrants 108,000
On exercise of A Warrants 108,000
On exercise of B Warrants 108,000 324,000
---------
On exercise of 1993 Placement Agent Warrants:
On conversion of
1993 Preferred Stock 140,000
On exercise of X Warrants 70,000
On exercise of Y Warrants 70,000 280,000
---------
For cash, services, property, or
cancellation of debt 825,659
---------
Total 4,416,159
1991 Underwriter Units 400
A Warrants on exercise of 1991
Underwriter Unit Warrant 108,000
B Warrants on exercise of 1991
Underwriter Unit Warrant 108,000
1993 Placement Agent Units 70,000
1993 Preferred Stock on exercise of
1993 Placement Agent Warrants 70,000
X Warrants on exercise of Placement
Agent Warrants 70,000
Y Warrants on exercise of X Warrants 767,000
L Warrants issuable to B Warrant Holders 1,242,000
Securities Offered by Selling Shareholders
Common Stock
Issuable on conversion of 1994
Preferred Stock 1,447,832
Issuable on exercise of C Warrants 723,916
---------
Total 2,171,748
Securities Outstanding:
Before the offering 13,442,852 Shares of Common Stock
After the offering and assuming the
complete conversion of
Preferred Stock, exercise
of Warrants and Options, and
issuance of stock for services
rendered, cash property and
cancellation of indebtedness(1) 20,030,759 Shares of Common Stock
(1) Excludes 1,182,000 shares issuable to officers, directors, and employees
on the exercise of vested options with a weighted average exercise price of
$1.86 per share. (See "DIRECTORS AND EXECUTIVE OFFICERS: Executive
Compensation and Benefits," "PRINCIPAL SHAREHOLDERS," "DESCRIPTION OF
SECURITIES: Preferred Stock, Warrants, and Options Outstanding," and "PLAN
OF DISTRIBUTION.")
<PAGE>
Use of Proceeds
Net proceeds of from $11,822,150 to $16,477,613 from the exercise of
Warrants at from $1.25 to $8.00, the exercise of Options at from $3.00 to $4.00,
the exercise of the 1991 Underwriter Unit Warrants at $550, and the exercise of
the 1993 Placement Agent Unit Warrants at $5.50 pursuant to this offering will
be used for geophysical exploration, acquisition of additional exploration
interests, and drilling in the Nevada Project. The Company will receive no net
proceeds from the conversion of the Preferred Stock or from the sale by the
Selling Shareholders of the Common Stock or the Warrant Shares. The Company
will also utilize for exploration of the Nevada Project net cash proceeds of up
to $2,239,277 from the sale of up to 761,659 shares at an assumed price of $2.94
(the bid price on the Nasdaq Stock Market at December 2, 1994), excluding 10,000
shares to be issued for services and 54,000 shares to be issued for property.
(See "USE OF PROCEEDS.")
Nasdaq Symbols:
Common Stock ...........FORL
L Warrants (proposed) ..FORLL
Offerees should not purchase these securities without carefully reading and
considering the risks involved and unless they are willing and able to accept
the complete loss of their investment. The securities offered hereby are
speculative and involve an unusually high degree of risk. (See "Risk Factors.")
Summary Financial Information
<TABLE>
<CAPTION>
Year Ended December 31, Ended September 30,
---------------------------------------------------- ----------------------------------
1991 1992 1993 1993 1994
--------------- ---------------- ---------------- ---------------- ----------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues .................$ 470,580 $ 174,657 $ 187,880 $ 146,386 $ 395,565
Net (loss) ............... (1,978,958) (1,676,098) (3,578,254) (2,029,513) (3,067,865)
Net (loss) per share ..... (0.29) (0.19) (0.34) (0.21) (0.24)
Weighted average number of
shares outstanding .. 6,901,000 8,649,000 10,405,000 9,753,000 12,825,000
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
----------------------------------
1992 1993 1994
----------------- ---------------- -----------------
Balance Sheet Data:
<S> ............................ <C> <C> <C>
Working capital (deficit) ........ $ 36,557 $ 677,980 $ 1,033,571
Total assets ..................... 2,800,882 6,596,443 6,556,338
Stockholders' equity ............. 2,118,405 5,521,402 4,889,224
</TABLE>
<PAGE>
RISK FACTORS
The acquisition of the Securities involves a high degree of risk. The
following factors, in addition to the other information and financial data set
forth elsewhere in this Prospectus, should be considered carefully in evaluating
the Company and its business before making an investment in the Securities
offered hereby.
The Company's Proposed Activities
Company's Ability to Continue as a Going Concern/Shortages of Working
Capital and Continuing Losses
As of September 30, 1994, the Company had limited working capital and no
credit lines or significant source of ongoing revenues. The Company has
incurred losses of $15,550,924 since its inception in 1985 and expects that its
accumulated deficit will increase. During 1993 the Company experienced a net
loss of $3,578,254. These losses continued into 1994, with a loss of $3,067,865
for the nine months ended September 30, 1994. The Company anticipates
continuing losses through 1994 and will require cash of approximately $180,000
to $220,000 per quarter for ongoing general and administrative expenses and an
average of approximately $40,000 per quarter for property maintenance costs. In
addition, the Company will incur substantial additional exploration costs,
depending on the level of its drilling activity, which may vary dramatically
from quarter to quarter. The Company's independent auditor's report on the
financial statements for the year ended December 31, 1993, as for preceding
fiscal years, contains an explanatory paragraph as to the Company's ability to
continue as a going concern. Proceeds from this offering, even if substantially
all offered securities are sold, will not change the fundamental financial
weakness of the Company. (See "FINANCIAL STATEMENTS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
Additional Possible Expenses Related to Capitalized Costs
The Company includes in oil and gas properties on its balance sheets costs
of wells in progress, which are capitalized until a decision is made to plug and
abandon or, if the well is still being evaluated, until one year after reaching
total depth, at which time such costs are charged to expense, even though the
well may subsequently be placed into production. The Company also charges to
expense the amount by which the total capitalized cost of proved oil and gas
properties exceeds the total undiscounted net present value of related reserves.
As a result of the foregoing policies, the Company expects that from time to
time capitalized costs will be charged to expense based on management's
evaluation of specific wells or properties or the disposition, through sales or
conveyances of fractional interests in connection with industry sharing
arrangements, of property interests for consideration in amounts that have the
effect of reducing the Company's total undiscounted net present value of oil and
gas properties below the total capitalized cost of proved oil and gas reserves.
For example, during the third fiscal quarter the Company reported a loss of
$434,521 as a result of the sale of certain Texas property interests at below
their capitalized costs of approximately $498,400. As part of the Company's
evaluation of its oil and gas properties in connection with the preparation of
the Company's annual financial statements, the Company obtains an engineering
evaluation of its reserves based on current engineering information, oil and gas
prices, and production costs, which may result in material changes in the total
undiscounted net present value of the Company's oil and gas reserves. The
Company would be required to charge to expense the amount by which the total
capitalized cost of proved oil and gas properties exceeds the amount of such
undiscounted net present value of the Company's oil and gas reserves. (See
"BUSINESS: Oil Properties.")
<PAGE>
Dependence on Joint Exploration Arrangements with Industry Participants
The Company has entered into a number of joint exploration agreements with
industry participants to obtain leases, scientific data, and funds for drilling
and other exploration. These agreements typically set forth obligations that
the Company must perform timely in order to earn specified property interests,
permit funding participants to terminate their participation at specified points
during the exploration program, and condition continuation of joint efforts on
obtaining satisfactory results. In the case of the Company's agreement with
Plains, Plains has the right after the first three wells at Eagle Springs are
completed to terminate its commitment to participate in funding the remaining 11
of the planned 14 well Eagle Springs drilling program. If Plains elects not to
continue beyond the first three wells, the Company would be required to fund all
of the remaining planned drilling, in which case it would be dependent on
proceeds from this offering and production revenue, which would delay or limit
planned Eagle Springs drilling. (See "BUSINESS: Plains Agreement.")
Limited Production Revenue
The Company has only recently established revenue from oil production from
its Eagle Springs, Nevada, property acquired during 1993. Production from
current wells is inadequate to meet the Company's ongoing expenses or to cover
any costs of exploration. There can be no assurance that ongoing oil production
in commercial quantities will be established or that oil reserves will be proved
as a result of the Company's exploration efforts. (See "BUSINESS.")
No Commercial Drilling Success to Date
Despite the expertise of management, the significant amount of data that
the Company has collected with respect to Nevada, and the expenditure of several
million dollars in property acquisition, data collection, and exploration since
1985, the Company has failed to establish any significant reserves or to develop
any material ongoing production as a result of its drilling program. The oil
production from the Eagle Springs Field was acquired by the Company in 1993 and
did not result from its exploration or drilling activities. Of the 26 wells
drilled to date, 18 were plugged and abandoned, two were completed for
production in the Eagle Springs Field, and four were completed for production
and are now producing a limited amount of oil per day while the Company
evaluates alternative production methods, one is awaiting completion, and one
was temporarily abandoned pending further evaluation. Although the Company
began to receive oil production revenue from the Eagle Springs Field in early
1994, the Company's success will continue to depend on the results of drilling,
evaluation, and testing of its various prospects. (See "BUSINESS" and
"FINANCIAL STATEMENTS.")
Need for Additional Funds
The nature, extent, and cost of exploring prospects in the Great Basin
province over several years cannot be predicted, but the total cost could amount
to tens of millions of dollars. Because of the size of the total exploration
possibilities and the Company's limited resources, it is likely that the
interest of the Company's shareholders in the Company and the interest of the
Company in its drilling prospects will continue to be diluted substantially as
the Company continues to obtain funding through the sale of additional
securities or through sharing arrangements with industry participants. There
can be no assurance that exploration funds will be available to the Company when
required or, if available, that such funds can be obtained on terms acceptable
or favorable to the Company. (See "FINANCIAL STATEMENTS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
Concentration of Activities in Frontier Area
Management of the Company has focused its efforts on acquiring lease
positions, developing data, and exploring and drilling in the Great Basin area
of Nevada, a largely unproved and unexplored geological province. While the
Company holds exploration rights to a significant number of acres, its holdings
are insignificant when compared to the size of the potential geological area.
Other than in the Eagle Springs Field, no significant ongoing commercial
production of oil has been established on the Company's properties. In
addition, the areas targeted by the Company, other than the Eagle Springs Field,
have geological, geophysical, drilling, completion, and production problems
which to date have prevented the Company and others with larger exploration
budgets from developing or establishing significant production or reserves.
There is no assurance that these problems can be overcome or that the Company's
drilling program will be commercially successful. (See "BUSINESS.")
<PAGE>
Dependence on Key Employees
The business of the Company is dependent on its management and technical
team and their substantial Nevada exploration experience, the loss of any one of
whom could adversely affect the Company's proposed activities. The Company does
not have and does not intend to acquire key man life insurance on any of its
executives. (See "DIRECTORS AND EXECUTIVE OFFICERS.")
Speculative Nature of Oil and Gas Industry
Exploration for oil is a highly speculative business. There is no way to
know in advance of drilling and testing whether any prospect will yield oil in
sufficient quantities to be economically feasible. The completion of a well for
production or the initiation of production in paying quantities does not
necessarily mean that the well will be economic because it may not produce
sufficient revenues to recover related costs and generate a financial return to
the Company.
High Operating Costs
The costs of exploring, drilling, producing, and transporting are higher in
the geological province targeted by management than they would be in a more
fully developed oil producing area. Access roads to drilling targets over
relatively long distances frequently have to be completed, drilling equipment
and services typically must be brought in from considerable distances, and there
is no collection pipeline so that any oil that is produced must be trucked to a
refinery, the nearest of which is in Salt Lake City, Utah, a distance of several
hundred miles. (See "BUSINESS: Oil Properties.")
Dependence on Oil Prices
The Company's oil exploration and production activities are dependent on
the prevailing price for oil, which is beyond the Company's control or
influence, and there is no assurance that the Company's wells can be produced at
levels in excess of related production costs. In an effort to limit the adverse
effects of extreme declines in oil prices, the Company has entered into
agreements with Crysen Refining, Inc. ("Crysen"), Salt Lake City, Utah, to sell
oil from its currently producing fields through August 1995 at minimum fixed
prices. Notwithstanding these agreements, if oil prices in general
substantially decline, it may become more difficult, if not impossible, for the
Company to obtain funding for its oil exploration program. (See "BUSINESS: Oil
Properties.")
Operating Risks and Uninsured Hazards
Oil drilling involves hazards such as fire, explosion, pipe failure, cave
in, collapse, encountering unusual or unexpected formations, pressures, and
other conditions, environmental damage, personal injury, and other occurrences
that could result in the Company incurring substantial losses and liabilities to
third parties. As is customary in exploration arrangements with other energy
companies under which specified drilling is to be conducted, the operator is
required to purchase and pay for insurance against risks customarily insured
against in the oil and gas industry by others conducting similar activities.
(See "BUSINESS: Operational Hazards and Insurance.") Nevertheless, the Company
may not be insured against all losses or liabilities that may arise from all
hazards because such insurance is unavailable at economic rates, because the
operator has not fulfilled its obligation to purchase such insurance, or because
of other factors. Any uninsured loss could have a material adverse effect on
the Company.
Risks of Adverse Weather
The Company's activities are subject to periodic interruptions due to
weather conditions, which may be quite severe at various times of the year.
Periods of heavy precipitation make travel to exploration or drilling locations
difficult and/or impossible, while extremely cold temperatures limit or
interrupt drilling, pumping, and/or production activities or increase operating
costs.
<PAGE>
Intense Competition in Oil and Gas Industry
The acquisition and exploration of oil and gas prospects are highly
competitive. Many of the Company's current and potential competitors engaged in
oil exploration in the Great Basin of Nevada have greater financial resources,
broader exploration programs, and a greater number of managerial and technical
personnel. Because the Company's resources will be limited even on successful
completion of this offering, there can be no assurance that it will be able to
compete effectively in the exploration for oil in Nevada. (See "BUSINESS:
Competition and Markets.")
Environmental and Other Governmental Regulation
Oil and gas operations are subject to comprehensive federal, state, and
local laws and regulations controlling the exploration for and sale of oil and
the possible effects of such activities on the environment. To date, the
Company has not been required to expend significant resources in order to
satisfy applicable environmental laws and regulations respecting its own
activities. Although management believes that the Company has substantially
completed certain remediation work that it agreed to undertake in connection
with the acquisition of the Eagle Springs Field, there can be no assurance that
additional work may not be required. In addition, present as well as future
legislation and regulations could cause additional expenditures, restrictions,
and delays in the Company's business, the extent of which cannot be predicted,
and may require the Company to curtail specific activities in some circumstances
or subject the Company to various governmental controls. Because federal energy
policies are subject to constant revisions, no prediction can be made as to the
ultimate effect of such governmental policies and controls on the Company. (See
"BUSINESS: Government Regulation.")
Proposed Energy Tax
The Clinton Administration has proposed and Congress has recently
considered a broad based energy tax that may reduce the economic return to
producers of oil or otherwise adversely affect the oil industry. (See
"BUSINESS: Government Regulation.")
General Risks Relating to Offering
Substantial Warrants and Options Outstanding
The Company has issued to employees, officers, directors, and others
providing services to the Company vested options to purchase up to 1,182,000
shares of Common Stock with exercise prices ranging from $1.31 to $4.00 per
share. Options to purchase a total of 307,000 shares contain a provision that,
on exercise, the holder is granted a new option covering the number of shares
for which the prior option was exercised, with the exercise price of the new
option fixed at the then fair market value of the Common Stock. In addition,
the Company has outstanding warrants to purchase a total of 2,909,105 shares of
Common Stock at a weighted average exercise price of $3.33 per share. The
existence of such options and warrants may prove to be a hindrance to future
financing by the Company, and the exercise of options and warrants may further
dilute the interests of the stockholders. The possible future sale of Common
Stock issuable on the exercise of such options and warrants could adversely
affect the prevailing market price of the Company's Common Stock. Further, the
holders of options may exercise them at a time when the Company would otherwise
be able to obtain additional equity capital on terms more favorable to the
Company. (See "DESCRIPTION OF SECURITIES: Preferred Stock, Warrants, and
Options Outstanding" and "PRINCIPAL SHAREHOLDERS.")
Issuance of Additional Common Stock
The Company has authorized 5,000,000 shares of Preferred Stock, par value
$0.001 per share, and 50,000,000 shares of Common Stock, par value $0.001 per
share. As of the date of this prospectus, 13,515,206 shares of Common Stock
were issued with 13,442,852 shares of Common Stock issued and outstanding, and
6,944,138 additional shares were reserved for issuance on the exercise or
conversion of options, warrants, and 1,561,832 shares of Preferred Stock issued
and outstanding or issuable on exercise of placement agent warrants. The
Company's board of directors also has authority, without action or vote of the
shareholders, percentage ownership of shareholders and may further dilute the
book value of the Company's Common Stock.
<PAGE>
Preferential Rights of Preferred Stock Outstanding
The Company has 40,000 shares of 1991 Preferred Stock, 4,000 shares of 1993
Preferred Stock, and 1,316,210 shares of 1994 Preferred Stock issued and
outstanding. The 1991 Preferred Stock has a liquidation preference of $1.25 per
share, the 1993 Preferred Stock has a liquidation preference of $5.00 per share,
and the 1994 Preferred Stock has a liquidation preference of $2.00 per share.
On liquidation or termination of the Company, an aggregate of $2,702,420 in
assets would be distributed to the holders of the currently issued and
outstanding Preferred Stock, after payment of all of the Company's obligations,
prior to any distribution to the holders of Common Stock. The Preferred Stock
votes as a single class with the Common Stock, except as otherwise required by
the corporate statutes of Nevada. If the Company seeks to amend its certificate
of incorporation to change the provisions relating to the Preferred Stock or to
approve a merger containing provisions that would require a class vote if they
were contained in an amendment to the certificate of incorporation, the approval
of each class of Preferred Stock affected thereby, voting as a separate class,
will be required. Consequently, the holders of a relatively minor number of
shares of Preferred Stock may be able to block such proposals, even in
circumstances where they would be in the best interests of the holders of Common
Stock. (See "DESCRIPTION OF SECURITIES: Preferred Stock, Warrants, and Options
Outstanding.")
No Shareholder Meetings or Reports
Since its formation, the Company has not held a meeting of its shareholders
for purposes of electing directors or for any other purpose and has not
distributed any annual report or financial information to its stockholders.
Under Nevada law, the Company has been required since inception to have an
annual shareholders' meeting for the election of directors, but has not done so
because of the costs involved in the preparation and mailing of required proxy
materials and holding meetings. In any year in which the Company has not held
or does not hold a shareholders' meeting, a shareholder may force the Company to
call such a meeting for the election of directors and such other purposes as may
come before the shareholders for consideration. This could result in a change
in management.
Determination of Purchase and Exercise Price
The conversion ratio of the Preferred Stock, the exercise prices of the
options and warrants, and the sales price of stock to be offered by the Company,
were determined by the Company, taking into account the history of, and recent
prices for, the Common Stock as quoted on Nasdaq at the time the Preferred
Stock, Options, and Warrants were issued, the business history and prospects of
the Company, the number of securities to be offered, and the general condition
of the securities market, all as assessed by the Company's management. Such
prices bear no relationship to the assets, earnings, or net tangible book value
of the Company or any other traditional criteria of value. (See "PLAN OF
DISTRIBUTION" and "DESCRIPTION OF SECURITIES.")
Substantial and Immediate Dilution
Persons purchasing the Common Stock will suffer a substantial and immediate
dilution to the net tangible book value below the purchase price of such Common
Stock. (See "DILUTION.")
No Dividends
The Company has not paid dividends in the past and does not plan to pay
dividends in the foreseeable future, even if it were profitable. Earnings, if
any, are expected to be used to advance the Company's exploration activities and
for general corporate purposes, rather than to make distributions to
shareholders. (See "DIVIDENDS.")
<PAGE>
Registration Rights of Existing Shareholders
The Company has previously granted to existing shareholders and holders of
options and warrants, including officers and directors, registration rights that
require the Company to include securities in future registration statements
filed by the Company, subject to the approval of the managing underwriter in
such future offerings and, in some cases, to file registration statements with
respect to the resale, exercise, or conversion of the securities held by the
holders of such registration rights, all at the expense of the Company. The
Company has obtained the effectiveness of a registration statement respecting
all of its registration obligations, subject to the requirement for updating
through supplements or post-effective amendments. (See "DESCRIPTION OF
SECURITIES: Registration Rights.")
USE OF PROCEEDS
No person has agreed to exercise any Options or Warrants, and there can be
no assurance that the Company will receive any proceeds from this offering. If
all Warrants and Options are exercised, of which there is no assurance, the
Company will receive net proceeds from the exercise of Warrants and Options as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Number of Securities Sales Price Commissions(1) Net Proceeds(1)
-------------------------------- ---------------- ----------------- -----------------
L Warrants 1,242,000 $6.00-$8.00 $0.42-$0.56 $6,930,360 to
$9,240,480
X Warrants 697,000 $3.25-$4.00 $0.23 to $0.28 $2,106,682 to
$2,592,840
Y Warrants 700,000 $4.00 $0.28 $0 to $2,604,000
$2.00 Warrants 200,000 $2.00 -- $400,000
$1.25 Warrants 1,000 $1.25 -- $1,250
Options(2) 98,500 $3.54 -- $348,500
Stock for Cash,
Services, Debt, or
Property(3) 761,659 $2.94 -- $2,239,277
1991 Underwriter Unit 400 Units at $550, consisting of 108,000 shares
Warrant and A and B Common Stock, 108,000 A Warrants at $2.25 and
Warrants 108,000 B Warrants at $3.90, and 216,000 shares
Common Stock on exercise of Warrants $884,200
1993 Placement Agent 70,000 Units at $5.50, consisting of 70,000 shares
Unit Warrant and X 1993 Series Preferred Stock, 70,000 X Warrants at
and Y Warrants $3.25-$4.00, 70,000 Y Warrants at $4.00, and
140,000 shares Common Stock on Warrant exercise $665,000 to
$892,500
Total Proceeds(4) $14,061,427 to
$18,716,889
<PAGE>
</TABLE>
(1)Net proceeds reflect the payment of the maximum amount of commissions of 7%
on all warrants exercised through securities broker-dealers. Warrants not
exercised through a broker-dealer and, therefore, not subject to a commission
will result in increased net proceeds to the Company, which will be used for
its Nevada exploration activities. Net proceeds do not deduct other costs of
the offering payable by the Company estimated at $48,000. (See "PLAN OF
DISTRIBUTION.")
(2)Sales price represents a weighted average of Options to purchase 50,000
shares at an exercise price of $3.69 per share, 30,000 shares at an exercise
price of $3.00 per share, and 18,500 shares at an exercise price of $4.00 per
share.
(3)Such net proceeds give effect to the sale of 761,659 shares at an assumed
price of $2.94 (the bid price on the Nasdaq Stock Market at December 2,
1994), and exclude 10,000 shares to be issued for services and 54,000 shares
to be issued for property.
<PAGE>
(4)The maximum figures assumes the exercise of all of the X Warrants by
December 16, 1994, at $3.25 per share for gross proceeds of $2,492,750
(including those included in the Placement Agent Units), the issuance of Y
Warrants on the exercise of the X Warrants, and the exercise of all of the Y
Warrants at $4.00 per share for gross proceeds of $3,080,000. The minimum
figures assume the exercise of all X Warrants after December 16, 1994, at
$4.00 per share for gross proceeds of $3,068,000 (including those included in
the Placement Agent Units), and the issuance of no Y Warrants.
To the extent that net proceeds are received from this offering, such
proceeds will be utilized to pay general and administrative expenses, to the
extent not funded from operating revenue, and for additional drilling,
geological and geophysical data gathering, or lease acquisition in the Company's
Nevada Project.
Pending the use of the net proceeds from the offering, such funds will be
invested in investment-grade, short-term, interest-bearing securities, including
government obligations and other money market instruments.
The Company will receive no net proceeds from the conversion of Preferred
Stock.
DIVIDENDS
The Company has not paid dividends on its Common or Preferred Stock and
does not anticipate that it will pay dividends in the foreseeable future. The
Company's issued and outstanding Preferred Stock does not have a preference on
dividends but participates with the Common Stock outstanding on a share for
share basis if dividends are declared and paid on the Common Stock, which is not
expected.
DILUTION
The net tangible book value of the Company as of September 30, 1994, was
$2,186,804 after deduction of a liquidation preference of $2,702,420 with
respect to the issued and outstanding Preferred Stock, or approximately $0.16
per share of Common Stock then issued and outstanding. "Net tangible book
value" per share represents the total tangible assets of the Company less total
liabilities and the liquidation preference of outstanding Preferred Stock,
divided by the number of shares of Common Stock outstanding at that date.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------- ---------- ---------- ---------- -------------------- ---------- ----------
1993 1991 L X Y Shares of
Preferred Preferred Warrants Warrants Warrants $2.00 Options Common
Stock(1) Stock(2) (3) (4) (5) Warrants (6) Stock(7)
---------- ---------- ---------- ---------- -------------------- ---------- ----------
Offering Exercise
price per share $2.50 $1.25 $6.00 $3.25 $4.00 $2.00 $3.54 $2.94
Net tangible book
value per share
attributable to
Common Stock at June 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16
30, 1994, as
adjusted(8)
Increase per share to
present shareholders
attributable to
issuance of Common 0.00 0.01 0.46 0.16 0.20 0.03 0.03 0.16
Stock in this
offering(9)
Net tangible book
value per share after
issuance of Common 0.16 0.17 0.62 0.32 0.36 0.19 0.19 0.32
Stock
Dilution of offering
or exercise price per (2.34) (1.08) (5.38) (2.93) (3.64) (1.81) (3.35) (2.62)
share
<PAGE>
</TABLE>
(1) All shares of 1993 Series Preferred Stock were originally issued at a
price of $5.00 per share, without ascribing any value to the X Warrants, have
a preference of $5.00 per share on liquidation of the Company, and are
convertible into two shares of Common Stock, for an equivalent cost of $2.50
per share of Common Stock.
(2) All shares of 1991 Series Preferred Stock were originally issued at a
price of $1.25 per share and have a preference of $1.25 on liquidation of the
Company, and are convertible into one share of Common Stock for an equivalent
cost of $1.25 per share of Common Stock.
(3) The L Warrants are exercisable at $6.00 per share if exercised by
December 31, 1995, and at $8.00 per share if exercised thereafter through
December 31, 1996. Net tangible book value per share would be increased by
$0.46 if the L Warrants were exercised at $6.00 and by $0.62 if exercised at
$8.00 per share. If exercised at $8.00 per share, the holders of L Warrants
would suffer dilution of $7.22 per share. All amounts reflect the payment of
applicable commissions.
(4) The X Warrants are exercisable at $3.25 per share if exercised by
December 16, 1994, and at $4.00 per share if exercised thereafter through
December 15, 1996. Net tangible book value per share would be increased by
$0.16 assuming 767,000 X Warrants were exercised at $3.25 and by $0.20 if
exercised at $4.00 per share. If exercised at $4.00 per share, the holders
of X Warrants would suffer dilution of $3.64 per share. All amounts reflect
the payment of applicable commissions.
(5) On the exercise of the Y Warrants, the net tangible book value would
be increased by $3,080,000, assuming the exercise of the Y Warrants issuable
on exercise of X Warrants that are issuable on the exercise of Placement
Agent Warrants. All amounts reflect the payment of applicable commissions.
(6) The offering price of the shares of Common Stock is based on the
weighted average exercise price of the Options.
(7) The offering price of the shares of Common Stock is based on the bid
price for the Company's Common Stock on the Nasdaq Stock Market on December
2, 1994.
(8) Net tangible book value at September 30, 1994, reduced by the
liquidation preference on 1991, 1993, and 1994 Preferred Stock outstanding,
for an adjusted net tangible book value of $2,186,804, or $0.16 per share.
(9) Each column gives effect to the issuance of Common Stock in the
transaction describe in the column heading and not to the issuance of all
Common Stock offered by this prospectus on the conversion of all Preferred
Stock and the exercise of all Warrants and Options (see below).
If all 4,416,159 shares of Common Stock offered by this prospectus were
issued on the conversion of all Preferred Stock, the exercise of all Warrants
and Options, and the sale of shares of Common Stock for cash, services,
property, or cancellation of debt at an assumed price of $2.94 per share, the
bid price of the Company's Common Stock on December 2, 1994, as quoted on the
Nasdaq Stock Market, and all 2,171,748 shares of Common Stock offered by the
Selling Shareholders were issued on conversion of 1994 Series Preferred Stock
and exercise of C Warrants held by them, the Company's net tangible book value
at September 30, 1994, as adjusted to give effect only to the issuance of Common
Stock pursuant to this offering, the conversion of 1994 Series Preferred Stock,
the exercise of the C Warrants and the receipt of proceeds from such
transactions after paying the applicable commissions, would be approximately
$23,945,470, or $1.20 per share for the 20,030,759 shares of Common Stock then
issued and outstanding. As such, anyone exercising these Options or Warrants,
converting the Preferred Stock, or purchasing Common Stock at a price in excess
of such amount would suffer substantial and immediate dilution.
<PAGE>
PRICE RANGE FOR COMPANY SECURITIES
The Company's Common Stock is traded in the over-the-counter market and is
quoted on Nasdaq under the symbol "FORL." The Company's B Warrants are also
traded on Nasdaq under the symbol "FORLZ." The following table sets forth the
high and low closing bid quotations for the Company's Common Stock and B
Warrants as quoted by Nasdaq for the periods indicated, based on interdealer bid
quotations, without markup, markdown, commissions, or adjustments (which may not
reflect actual transactions).
<TABLE>
<CAPTION>
Common Stock B Warrants
------------------------------ -----------------------------
High Low High Low
-------------- ------------- ------------- -------------
1992
<S> <C> <C> <C> <C>
First Quarter........... $2.00 $1.25 $0.3125 $0.1875
Second Quarter.......... $2.00 $1.25 $0.3125 $0.21875
Third Quarter........... $2.25 $0.9375 $0.3125 $0.21875
Fourth Quarter.......... $2.8125 $1.875 $0.53125 $0.3125
1993
First Quarter........... $4.50 $2.00 $1.3125 $0.4375
Second Quarter.......... $5.0625 $3.375 $1.6875 $1.0625
Third Quarter........... $4.25 $2.75 $1.3125 $0.5625
Fourth Quarter.......... $4.563 $2.688 $1.50 $0.9375
1994
First Quarter........... $3.50 $2.25 $0.6875 $0.625
Second Quarter.......... $2.68 $2.06 $0.62 $0.59
Third Quarter .......... $2.625 $2.25 $0.625 $0.50
</TABLE>
On December 2, 1994, the closing bid price of the Company's Common Stock on
Nasdaq was $2.94. On October 31, 1994, the Company had 2,001 Common Stock
shareholders of record.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements of the Company and related notes included
elsewhere in this Prospectus. The financial data as of December 31, 1993, and
the year then ended have been derived from the Consolidated Financial Statements
of the Company, which have been audited by Hein + Associates LLP independent
certified public accountants. The financial data as of December 31, 1989,
through 1992, and for each of the four years ended December 31, 1992, have been
derived from the Consolidated Financial Statements of the Company for such
periods, which have been audited by Barker & Folsom, independent certified
public accountants. The financial data as of September 30, 1994, and for the
nine months ended September 30, 1993 and 1994, have been derived from unaudited
financial statements prepared by the Company which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "FINANCIAL STATEMENTS.")
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
----------------------------------------------------------------- --------------------------
1989 1990 1991 1992 1993 1993 1994
----------- ----------- ----------- ------------ ------------ ----------- -----------
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $543,107 $457,757 $470,580 $174,657 $187,880 $146,386 $395,565
Net Income (Loss) (873,319) (1,304,738 (1,978,958 (1,676,098) (3,578,254) (2,029,513) (3,067,865)
Net Income (Loss)
Per Share (0.19) (0.23) (0.29) (0.19) (0.34) (0.21) (0.24)
Weighted Average
Number of Common
Shares Outstanding 4,740,000 5,782,000 6,901,000 8,649,000 10,405,000 9,753,000 12,825,000
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------- ---------------
1989 1990 1991 1992 1993 1994
------------ ------------ ------------ ------------ ----------- ---------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working Capital (Deficit) $(222,631) $ (54,173) $ 1,189,103 $ 36,557 $ 677,890 $1,033,571
..............
Total Assets.. 2,603,221 2,904,052 4,052,247 2,800,882 6,596,443 6,556,338
Long-Term Debt -- -- -- -- -- 400,000
Stockholders' Equity 487,669 654,839 3,165,250 2,118,405 5,521,402 4,889,224
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Since its organization in June 1985, the Company has been engaged
principally in oil exploration in the Great Basin of Nevada, leading to the
selection of drilling targets and the drilling of initial test wells on several
prospects. The Company has had only limited revenue, consisting of modest
amounts of interest income earned on net proceeds from the sale of securities
and revenue from producing properties. In 1993, the Company acquired and has
since returned to production eight wells in the Eagle Springs Field,
supplementing the Company's other limited production from its Tomera Ranch and
North Willow Creek oil discoveries.
To date, the Company has funded its exploration program principally from
the sale of securities. The Company also benefits from capital provided by oil
industry participants for drilling and other exploration of certain oil
prospects through joint arrangements typical in the oil industry.
Plan of Operation
Eagle Springs Drilling
The Company's strategy in acquiring the Eagle Springs property was to
increase revenue by returning existing wells to production and to identify
additional drilling locations to evaluate the horizons that are productive in
existing wells. Management believes that drilling in the Eagle Springs Field
involves lower risk as compared to the Company's other exploration drilling in
prospect areas with less drilling history and less available exploration data.
Management anticipates that if the planned Eagle Springs drilling program is
successful the increased revenue will be sufficient to meet ongoing cash
requirements for general, administrative, and property maintenance costs and, in
the long term, may contribute funds to exploration.
<PAGE>
The Company completed substantial work at Eagle Springs since its
acquisition in July 1993, reworking eight wells to return them to production,
subject to production interruptions from time to time until further well
treatment can be completed, and drilling a water injection well. Such work
included substantially renovating and upgrading surface facilities such as tank
batteries, piping, separators, and other equipment so that field production
facilities currently have substantial excess capacity available to service new
wells. Increased production resulting from additional drilling would be sold
under the Company's existing sales agreement and trucking arrangement. (See
"BUSINESS: Oil Properties.")
The Company estimates that there are about 30 additional possible drilling
locations within the estimated perimeter of the field under 10 acre well
spacing. The Company plans up to 14 additional wells during 1994 and 1995 to
evaluate horizons productive in existing wells in the Eagle Springs Field. Data
from a 3-D seismic survey of the field has been used in selecting the locations
for drilling the first three wells, which began in the third quarter of 1994,
and will be integrated with additional available drilling results and further
evaluated as an ongoing guide to drilling. The Company estimates that the Eagle
Springs drilling will cost approximately $350,000 per well for a dry hole or
$425,000 for a completed well, including related geophysical and geological
evaluation, for a total of up to $5,950,000 for the 14 wells planned for 1994
and 1995. With funds provided through the drilling arrangement with Plains, the
Company has funds available for approximately five of the seven wells scheduled
for 1994 and early 1995. Thereafter, the Company will schedule the remainder of
the 14 wells to be drilled as funds are available from production as the first
wells in the program are brought on line and from proceeds from the exercise of
Warrants and Options pursuant to this offering.
The initial 14 well phase of the drilling program will be undertaken on 20
acre spacing. The Company intends to evaluate engineering data from existing
wells together with any additional wells that may be productive to determine
whether a reduced well spacing from 20 to 10 acres, as previously approved by
Nevada regulatory authorities, may be warranted. If the Company concludes that
reduced well spacing would increase the financial return from the field, the
total number of available well locations would increase to approximately 30 and
extend the period during which the Eagle Springs Field could be developed beyond
1995.
If Plains elects to continue after the first three Eagle Springs wells, the
Company does not anticipate requiring additional funds for Eagle Springs
drilling for the first five of the 14 wells. (See "BUSINESS: Plains
Agreement.") The remaining nine wells of the 14 well drilling program are
planned for 1995 at an estimated cost of approximately $3,150,000 to $3,825,000,
to be shared 60% ($1,890,000 to $2,295,000) by the Company and 40% ($1,260,000
to $1,530,000) by Plains, if Plains elects to continue its participation with
the Company in Nevada. If Plains does not provide funding for Eagle Springs
drilling beyond the initial three wells, the Company will require proceeds from
this offering, from revenue from Eagle Springs production, or other sources to
complete the planned drilling. (See "USE OF PROCEEDS.")
Exploration Program
The Company requires substantial amounts of capital to advance its oil
exploration program, relying on funding provided through joint exploration
arrangements with other firms and utilizing its own capital provided principally
through the sale of securities. Under the Company's 1994 drilling program, it
plans two additional tests in Pine and Antelope Valleys under the Enserch/Berry
Agreement. A second Pine Valley test, as well as one in Little Smokey Valley,
both previously planned for 1994, have been scheduled for 1995. The Company's
working interest share of dry hole costs for this drilling program is estimated
at $700,000. In addition, in conjunction with Plains the Company may undertake
an evaluation of scientific data and possible additional data gathering over two
prospect areas in Dixie Flats and North Humboldt Valley as well as a 3-D seismic
survey in an area of Pine Valley, which would require Company expenditures of
from $650,000 to $1,000,000 by December 1995. The Company and Plains may also
drill one test in Dixie Flats or Huntington Valley under their joint exploration
agreement. The Company has funds available to complete the planned 1994
drilling and other exploration activity. The Company anticipates that it will
continue its exploration program with five to eight additional tests in 1995,
depending on the availability of required funds. (See "USE OF PROCEEDS" and
"BUSINESS.")
<PAGE>
The Company also plans to continue its geophysical and geological data
gathering and evaluation, property acquisition, and prospect evaluation,
depending on the availability of funds. This includes continuing to reprocess
seismic data available to the Company, completing 3-D seismic studies of
specific drilling prospects, and integrating of seismic, gravity, and drilling
data. In addition, the Company may undertake joint geophysical data acquisition
with others in which each participant bears a share of the costs for specific
surveys. The Company will continue its lease acquisition efforts in specific
prospect areas and, as it generates drilling proposals, seek funding for
drilling. It is not expected that new prospects generated during 1994 will be
drilled until 1995 or later. (See "BUSINESS: Plains Agreement.")
In seeking financing for proposed data gathering, land acquisition, or
drilling or other exploration of specific prospect areas, the Company typically
investigates both oil industry funding sources and the availability of capital
through the sale of securities. In considering participation from industry
sources, the Company assesses whether the potential industry participant can
provide scientific data and lease or other exploration rights in the prospect
area as well as required funding as compared to the dilution that may result to
the Company by sharing in any reserves that may be discovered. In analyzing the
availability of capital from the sale of securities, the Company considers
conditions in the capital markets generally, the anticipated marketability of
Company securities, and the dilution that may result to existing shareholders.
In selecting between available financing alternatives, management seeks the
source that management believes will result in lesser dilution in economic
return to its shareholders.
General, Administrative, and Property Maintenance
The Company requires cash for general and administrative expenses, for
maintaining its properties, and for other items that are required in order for
the Company to continue, as distinguished from costs to advance its ongoing
exploration program in Nevada. Currently management estimates that each quarter
it requires cash of $180,000 to $220,000 for ongoing general and administrative
expenses and approximately $40,000 to meet annual lease rental and other costs
on its properties, which exceed the Company's current net revenue from oil
production. During the first quarter of 1994, the Company received
approximately $93,000 revenue from oil sales based on net average daily
production of approximately 104 barrels of oil, with some wells not producing
the entire quarter. Related production costs were approximately $74,000 for the
quarter. During the second quarter of 1994, the Company received approximately
$124,000 from average net daily production of approximately 124 barrels per day.
Related production costs during the second quarter were approximately $77,000.
In the third quarter, the Company received approximately $109,000 revenue from
oil sales from average net daily production of approximately 95 barrels per day.
The related production costs for the third quarter were $166,000. (See
"BUSINESS: Oil Properties.") The Company has sources of revenues or funds to
meet estimated general and administrative and property maintenance costs for at
least the ensuing 12 months. Even if all wells planned for 1994 in Eagle
Springs were successful, the Company does not expect that revenues from
production would be received during the year to offset fully 1994 general and
administrative expenses and property holding costs.
Liquidity and Capital Resources
To date during 1994, the Company has received approximately $2,919,570 in
cash from borrowings and the sale of securities, which, together with current
levels of production revenue, management believes will provide sufficient cash
to meet ongoing general and administrative expenses and property maintenance
costs for the next 12 months, as discussed above. However, the Company will
need substantial amounts of additional funding in order to continue oil
exploration in Nevada, including completion of the full 14 well Eagle Springs
drilling program.
On April 30, 1994, the Company borrowed $400,000 from an unrelated third
party, secured by the Company's personal property, equipment, and production, to
provide interim financing to advance the Company's Eagle Springs drilling
program and to pay ongoing general and administrative expenses. The loan bears
interest at 8.4% per annum, payable quarterly, and is due on April 30, 1995,
unless extended for up to one year at the election of the Company. In
connection with the loan, the Company granted the lender options to purchase
200,000 shares of Common Stock at $2.00 per share at any time prior to the
earlier of April 30, 1996, or 60 days subsequent to the repayment of the loan.
The Company intends to extend this note for payment in 1996, unless earlier
canceled in consideration of the exercise of the related options. The Company
has not sought any other borrowings and has no available lines of credit or
other borrowing arrangements.
<PAGE>
During the third quarter of 1994, the Company received net proceeds of
approximately $2,341,370 from the sale of 1,316,210 shares of Preferred Stock
and 658,105 C Warrants to purchase one share of Common Stock at $3.00 per share
between October 1, 1994, and July 1, 1995.
The Company will continue to seek cash proceeds from the exercise of
Options and Warrants pursuant to this offering and from the sale of additional
Common Stock, Preferred Stock, Warrants, or other securities.
The auditor's report on the financial statements of the Company as of
December 31, 1993, contains an explanatory paragraph as to the ability of the
Company to continue as a going concern because of its limited working capital
and revenue and continuing losses from operations. As of September 30, 1994,
the Company had working capital of approximately $1,034,000 and had ongoing cash
requirements for general, administrative, and property maintenance expenditures
of from approximately $220,000 to $260,000 per quarter. From an offering closed
on July 8, 1994, the Company received approximately $2,341,370 from the sale of
securities, which, together with revenue from Eagle Springs and other
production, in management's opinion will be sufficient for the Company to meet
its cash requirements during at least the next 12 months and provide additional
funds with which to commence planned exploration.
Results of Operations
Nine Months Ended September 30, 1994
For the nine month period ending September 30, 1994, oil sales increased
$272,300 to $325,900 as compared to the same period in 1993, with the Eagle
Springs Field contributing approximately $272,600 of this increase. Well
service revenue decreased $11,300 due primarily to reduced water disposal fees.
Other income was approximately $11,900 lower in the first nine months of 1994 as
compared to the same period in 1993 as a result of decreased dividend and
interest income because of the declining balance of investment funds from the
second quarter 1993 securities offering.
The Company's oil and gas production expenses for the first nine months of
1994 increased $259,800 to $316,700 when compared to the same period in 1993
attributable principally to $258,800 in operating costs at Eagle Springs, which
was placed into production in early 1994 and included one-time repair,
maintenance and clean-up costs of $64,200. A 3-D seismic program expense of
$204,500, gravity and other seismic surveys of $72,000 for Buena Vista, Dixie
Flats and North Humboldt areas in Nevada, and other increases in exploration
expenses of $79,500 contributed to the $359,900 increase in oil and gas
exploration costs. Dry hole and abandonment expense increased due to the charge
to expense of $703,900 for the North Willow Creek no. 5-27 test drilled in
August 1993 that management concluded could not be placed into production by
August 1994, $70,500 for the Indian Springs no. 22-A test that was plugged and
abandoned, $32,700 for the Cedar Creek no. 2-1 dry hole and $86,300 for the
Willow Springs No. 34-31 dry hole. General and administrative expenses
increased approximately $358,300 as compared to the same nine month period in
1994. The major contributors to this increase were $203,800 associated with
expenses written off for the cancelled securities offering, and the $84,200 cost
on the guarantee of the selling price of N. Thomas Steele's residence. In 1993,
the Company reported a noncash compensation expense of $320,000 related to the
grant of below market options. The Eagle Springs Field added approximately
$147,800 and the North Willow Creek no. 6-27 added $67,500 of depletion expense
in 1994, as compared to 1993. Interest expense declined approximately $44,900
from interest accruing on the convertible promissory notes, the maturity date of
which was September 30, 1993.
<PAGE>
1992 and 1993
For the year ended December 31, 1993, total revenues increased $13,223 to
$187,880. The increase was due to increased oil sales resulting from the North
Willow Creek no. 6-27 well being placed into production during the last quarter
of 1993. Also contributing to increased oil revenue were sales during the
fourth quarter from wells returned to production in Eagle Springs.
The Company's operating expenses increased $1,915,379, or 103%, for the
year ended December 31, 1993, when compared to the year ended December 31, 1992,
due to increases in drilling activities that resulted in dry hole and
abandonment costs of $1,389,728. As a result of significant increases in
seismic activity and prospect development costs in 1993, oil and gas exploration
expenses increased from $416,260 to $860,214. A reduction in the estimated
recoverable quantities of oil from the Company's producing fields increased
depreciation and depletion costs from $60,194 to $356,676. During 1993 the
Company reported a non-cash compensation expense of $320,000 related to the
grant of below market options.
The Company's interest expense for the year ended December 31, 1993, was
$113,561 compared to $54,761 for the year ended December 31, 1992. This $58,800
increase resulted primarily from interest accruing on the convertible promissory
notes, the maturity date of which was extended to September 30,1993.
1991 and 1992
For the year ended December 31, 1992, total revenue was $174,657 which was
$295,923 less than the year ended December 31, 1991. The reduction in revenue
was principally due to the farmout to a third party of certain Texas properties,
which resulted in declines in oil and gas sales by $252,159 and well service
sales by $151,974.
Although the farmout resulted in the reduction of revenue, it also reduced
the Company's expenses associated with the properties involved. Total expenses
for the year ended December 31, 1992, were $1,850,755, which was a decrease of
$684,419 from 1991. General and administrative expenses decreased $317,325,
due, in part, to a reduction in professional service fees of $193,000 and the
reduction in the number of employees during 1992. As a result of the farmout of
the Texas properties, oil and gas production expenses decreased in 1992 by
$172,533 to $33,298, and depreciation and depletion expenses decreased by
$89,330 to $60,194. The Company did have increases in its bad debt allowance of
$223,118, primarily as a result of writing off $246,604 of amounts owed by
investors. Additionally, the bankruptcy of a debtor required the Company to
write off $54,489 that it did not believe would be recoverable from the
Company's retained interest in the Texas property. In addition, dry hole costs
associated with the Company's Nevada activities decreased $364,224.
1990 and 1991
For the year ended December 31, 1991, oil and gas sales from certain Texas
properties decreased by $131,352 as compared to 1990. The reduction in oil and
gas sales was principally due to a gradual decline in the price of oil from $21
a barrel to $14 a barrel and an approximately 3,000 barrel reduction in
production. Although oil and gas sales decreased, total revenue increased
$12,823 to $470,580 for 1991 from $457,757 for 1990. The increase was due to a
$49,602 increase in well service sales, dividend income of $16,819, and the fact
that there was a decrease of $78,710 in the loss on the sale of assets in 1991.
The Company's expenses increased by $708,253 over 1990. This increase was
due principally to dry hole costs of $625,558, of which there was none in 1990,
and oil and gas exploration costs of $358,576 for 1991 compared to $274,889 in
1990. The addition of a truck to assist in well servicing in Nevada also caused
well servicing costs to increase by $21,180, which was offset by the increase in
well service sales of $49,602. General and administrative expenses decreased by
$152,249 over 1990 partially offsetting the increase in other areas. Oil and
gas production costs increased by $ 16,290 over 1990.
<PAGE>
In 1991, a Company subsidiary, Krutex Energy Corporation ("Krutex"),
accounted for approximately $290,000 of the $309,680 in oil and gas sales and
approximately $121,290 of the $174,690 in well service sales. For 1991 Krutex
accounted for over 78% of the Company's total revenues and 30% of expenses.
Accounting Treatment of Certain Capitalized Costs
Included in oil and gas properties on the Company's balance sheets are
costs of wells in progress. Such costs are capitalized until a decision is made
to plug and abandon or, if the well is still being evaluated, until one year
after reaching total depth, at which time such costs are charged to expense,
even though the well may subsequently be placed into production. The Company
also charges to expense the amount by which the total capitalized cost of proved
oil and gas properties exceeds the total undiscounted net present value of
related reserves. As a result of the foregoing policies, the Company expects
that from time to time capitalized costs will be charged to expense based on
management's evaluation of specific wells or properties or the disposition,
through sales or conveyances of fractional interests in connection with industry
sharing arrangements, of property interests for consideration in amounts that
have the effect of reducing the Company's total undiscounted net present value
of oil and gas reserves below the total capitalized cost of proved oil and gas
properties. As part of the Company's evaluation of its oil and gas reserves in
connection with the preparation of the Company's annual financial statements,
the Company obtains an engineering evaluation of its properties based on current
engineering information, oil and gas prices, and production costs, which may
result in material changes in the total undiscounted net present value of the
Company's oil and gas reserves. The Company would be required to charge to
expense the amount by which the total capitalized cost of proved oil and gas
properties exceeds the amount of such undiscounted net present value of the
Company's oil and gas reserves. (See "BUSINESS: Oil Properties.")
Inflation
The Company's activities have not been, and in the near-term are not
expected to be, materially affected by inflation or changing prices in general.
The Company's oil exploration and production activities are generally affected
by prevailing sales prices for oil, however, and may make wells with low rates
of production uneconomical to operate. Because of the size of potential
discoveries in Nevada, the Company does not expect that short term declines in
oil prices would materially affect its exploration activities.
BUSINESS
General
The Company was organized in June 1985 to advance an exploration project in
the Great Basin of Nevada that had been initiated by Gulf. Following its
organization, the Company acquired rights to a geologic data base, assembled a
management team with supporting consultants, obtained funding from a private
placement and its initial public offering, and commenced the field geology phase
of its exploration project.
The Company's field geology identified an oil source rock and porosity
fairway in north and central Nevada in which the Company has concentrated its
lease acquisition and exploration program. The Company has funded its
exploratory drilling through arranging its own funding and obtaining funding
from industry participants that agree to complete specified drilling or other
exploration in order to earn an interest in an agreed area. Since 1986, the
Company has identified a number of drilling targets in Pine Valley and other
areas of Nevada and arranged Company and third-party funding for drilling a
number of test wells. To help fund future activities, in 1993 the Company
acquired and thereafter returned to production eight wells in the Eagle Springs
Field in Nevada and plans to drill additional wells to test horizons productive
in existing wells in an effort to increase production.
<PAGE>
The Company continues to increase and improve its geological and
geophysical expertise respecting the Great Basin of Nevada through its own
efforts and by obtaining data from third parties as part of joint exploration,
property acquisition, or data sharing arrangements and from drilling and other
field work in which the Company participates. In addition, all information is
continuously reanalyzed as additional drilling data is gathered and as new
computer modeling and other analytical tools become available to the industry.
This has enabled the Company to increase substantially its understanding of the
geology, location, potential, and other characteristics of the exploration
process.
Nevada Exploration
Background
During the early 1980s, the Great Basin of Nevada emerged as a possible new
frontier area for oil exploration. Conventional wisdom in the oil industry at
the time held that certain geological indicators pointed to north and central
Nevada as a possible repository of large (by continental United States
standards) petroleum deposits. Several of the nation's largest exploration
companies, including Exxon, Texaco, Inc., Gulf, Chevron, Mobil, and Amoco Corp.,
acquired substantial lease holdings and initiated exploration programs in
eastern and central Nevada during the early years of the decade.
Between 1980 and 1983, Gulf conducted a detailed study of the hydrocarbon
potential of north and central Nevada and other frontier exploration areas. The
study, conducted by Gulf personnel and by outside consultants, generated a mass
of raw data pertaining to the age and depositional history of potential
oil-bearing formations. In 1983, Gulf became the target of a takeover attempt
by Mesa Petroleum and subsequently was acquired by Chevron. In connection with
that acquisition, a number of Gulf's exploration projects were terminated,
including the study of Nevada.
The acquisition of Gulf by Chevron also led to the early retirement of a
number of Gulf employees. One such early retiree was Dr. Grant Steele, who had
been manager of geology for Gulf's central exploration group and was intimately
involved with the study of the Great Basin of Nevada.
Personal and professional interest in the potential of the Great Basin of
Nevada continued after his early retirement from Gulf in 1983. In 1985 Dr.
Steele organized the Company and recruited Kenneth L. Ransom, who had served
under Dr. Steele as a senior geologist with Gulf's central exploration group and
who had also been deeply involved with Gulf's study of the Great Basin of
Nevada.
The Company's goal is to secure a significant position in a potential new
oil province. In order to implement this plan, the Company acquired rights to
Gulf's data base, conducted additional geological survey work, acquired oil and
gas lease holdings in north and central Nevada, and arranged for the exploration
and development of its acreage. Virtually all of the Company's financial
resources were committed from the outset to this goal.
Nevada Geology
The Company's main area of interest focuses on an area in north central and
eastern Nevada that contains porous rocks and organically rich shales, marls,
and limestones. These formations were created in ancient geological times on an
underwater ledge (shelf edge) where an organic reef rich in plant and animal
life existed. Immediately to the west of this shelf edge, organically rich
shales and marls were deposited in a shallow basin formed by an outer, seaward
ridge farther to the west. Seaward of the outer ridge, a thick sequence of deep
water, organically rich shales, cherts, and sandstones were deposited. To the
east of the shelf edge was essentially a large stable shelf on which other
shallow water plant and animal life was living.
Subsequently (near the end of Devonian geologic time), a period of
thrusting occurred which emplaced the sediments previously formed in the deep
water basin over the shelf edge. This event, known as the Antler Orogeny,
provided the condition for the possible entrapment of hydrocarbons during later
geologic time. For a substantial geologic period thereafter (from Pennsylvanian
to early Tertiary time), the shelf edge was never buried deeply enough to mature
the overlying and adjacent basinal source rocks by subjecting them to sufficient
temperatures to produce hydrocarbons. Thereafter, however, probably during
basin and range development (Eocene to Miocene geologic times), the source rocks
were buried under sufficient cover to create the pressures and temperatures
necessary to mature and expulse their hydrocarbons.
<PAGE>
Formation folding plus faulting has enriched the area with numerous
unconventional structures which could act as traps for hydrocarbons. The size
of an individual trap could vary from a major downfaulted valley block, to folds
several miles across, to small fault traps against other vertically displaced
blocks, to overlapping carbonate sections detached during the emplacement of the
basin organically rich shales over the carbonate sections remaining in place.
These traps provide physical closure which, based on the known porosity of
formations within the traps, could theoretically provide hydrocarbon reservoirs.
The initial exploration efforts, the delineation of the potential porosity
region, and the location of the most favorable geological conditions for the
production and entrapment of hydrocarbons has enabled the Company to concentrate
on smaller subareas of principal exploratory interest, leading to the selection
of specific drilling prospects.
Business Strategy
The Company has assembled a management and technical team of persons with
specialized technical training and experience concentrated on Nevada oil
exploration. In all, the Company's technical team has over 65 years of combined
Nevada oil exploration experience with major oil companies such as Gulf, Mobil,
and Chevron. The Company believes that the working experience of its executives
in Nevada is a significant factor in the Company's exploration progress to date
and in its ability to act as operator under exploration arrangements with other
exploration firms such as Enserch/Berry, Santa Fe, and Yates. This team employs
the following strategies in guiding the Company's Nevada exploration.
. Take full advantage of the most advanced available scientific exploration
tools and techniques such as 3-D and reprocessed seismic data to generate
drilling prospects and select specific drilling locations.
. Generate promising exploration prospects in areas in which the Company
holds or believes that it can acquire a preemptive lease position and
upgrade lease holdings based on further prospect evaluation.
. Seek joint exploration agreements with other exploration firms active in
Nevada to obtain additional scientific data and expertise, land, and
funding.
. Reduce the risks of frontier area exploration by drilling in the Eagle
Springs Field to test horizons productive in existing wells.
. Continually generate prospect concepts for the long-term exploration of the
Great Basin.
Science
The Company seeks to utilize the most advanced available scientific tools
and techniques to evaluate the risk and exploration potential of specific
prospects. The Company's oil exploration model for the Great Basin of Nevada
was developed from a large data base collected, originally by Gulf and since
1985 by the Company. As a result of the Company's own work as well as
information sharing arrangements with others, the Company now has access to over
1,000 line miles of 2-D seismic data, much of it reprocessed with new analytical
programs, newly acquired high resolution 3-D seismic surveys, and gravity data
gathered by the Company as well as by Exxon, Santa Fe, Mobil, Chevron, Enserch,
and Berry Petroleum. Data from 3-D seismic, gravity, reprocessed seismic
surveys, and previous drilling are integrated as a guide to further exploration.
The Company believes that it benefits from the long-term involvement of the
Company's personnel in Nevada oil exploration and operations, which enhances the
Company's ability to share data and expertise with industry participants.
<PAGE>
Prospect Generation and Leasing
The Company's leasing program is coordinated with prospect generation and
exploration results. As areas of interest are identified, the Company attempts
to acquire leases or other exploration rights on what preliminarily appears to
be the most promising prospect areas in order to establish a preemptive lease
position prior to generating a specific drilling prospect. As specific prospect
evaluation advances, the Company may seek leases on additional areas or
relinquish leases on areas that appear less promising, thereby reducing lease
holding costs. As a result, the Company has substantially increased the size of
its gross acreage while, in management's opinion, improving the exploration
potential of its holdings.
Joint Exploration
The Company regularly seeks joint exploration arrangements with other oil
exploration firms active in Nevada to obtain access to additional scientific
data and technical expertise, particularly relatively expensive geophysical
data, including 3-D seismic. Joint exploration arrangements are sought with
firms that have significant lease positions in the prospect area and that can
bear a portion of the costs of specified further exploration. The Company also
utilizes joint exploration arrangements to spread the risks of specific
exploration, attempting to retain a larger interest by bearing a greater
proportion of the related costs in those prospect areas in which management
believes that the risks and reserve potential warrant such action. In
situations in which management perceives a higher degree of risk or a smaller
potential for the prospect, it seeks to retain a smaller interest and bear a
smaller share of related costs.
Drilling Near Existing Production
Further exploration drilling is required to delineate the extent of
productive horizons in individual fields and complete development where
warranted. In the Eagle Springs Field, the Company is now completing its own
3-D seismic and other geophysical and geological evaluation of possible
additional drilling locations to test the horizons that are productive in the
existing wells. The Company has surface facilities capable of handling
additional production, with the right to drill two tests to earn an interest in
additional acreage in the Eagle Springs Field. The Company also intends to
continue to drill exploration wells in the area of existing production in the
Tomera Ranch and North Willow Creek Fields to further evaluate reservoir extent
and characteristics, increase production, and obtain data that might benefit the
Company's overall exploration effort. The Company intends to pursue these
drilling objectives in Pine Valley as well as specific prospects in Railroad
Valley as involving somewhat lower risk than exploration testing in areas with
relatively less drilling history or other exploration success to date.
Long-Term Exploration
Management anticipates that it will take several years to explore fully the
target areas selected by the Company in the Great Basin of Nevada, as is the
case in many frontier areas of exploration, and believes that it is important to
provide for an ongoing presence for the Company in Nevada exploration. In such
a long term exploration effort, the results of early exploration serve as a
guide for identifying new prospects so it is important, in management's view, to
identify continually new prospect concepts and areas for possible future
exploration while advancing existing prospects to the drilling stage.
Through 1994, the Company intends to focus its activities on drilling in
its Eagle Springs Field to evaluate the horizons that are productive in existing
wells, to drill additional exploratory tests in Pine, Little Smoky, Antelope,
and Railroad Valleys of Nevada, to review the exploration potential of the Santa
Fe acreage, and to continue its acquisition of 3-D seismic data and reanalysis
of existing 2-D seismic data. (See "USE OF PROCEEDS.") The Company will also
continue its evaluation of data to identify additional exploration targets,
expand its lease holdings where warranted, and seek additional exploration
arrangements with other industry participants.
<PAGE>
Joint Exploration Agreements
Enserch/Berry Operating Agreement
In June 1993 the Company entered into an operating agreement with Enserch,
Dallas, Texas, and Berry, Taft, California, independent oil exploration and
production firms active in Nevada, to undertake a three year, six well joint
exploration program on approximately 119,000 gross leased acres in Pine,
Diamond, Little Smoky, and Antelope Valleys of northeastern Nevada. The Company
is designated as the operator for the proposed drilling as well as other
activities under the agreement. The Company and Enserch/Berry each contributed
approximately 50% of the gross acreage and will share, on the basis of the
Company 50% and Enserch/Berry 50%, in the costs of additional lease acquisition,
geophysical exploration, and drilling and in the revenues from oil produced.
The parties have identified four areas of mutual interest covering an aggregate
of 500,000 acres, in which are located the 119,000 gross leased acres now held
during 1994 the parties to this joint exploration arrangement intend to drill
four exploratory tests, two in Pine and one each in Antelope and Little Smoky
Valleys. In addition to the six required wells, during the term of the
agreement any party has the right to propose additional wells to explore new
prospects or develop discoveries. The joint exploration program continues to
May 1, 1996, at which the acreage contributed by each party to the joint
arrangement is returned to it, except for designated acreage surrounding wells
that have then been drilled under the joint arrangement. If the results of the
initial exploration warrant and the parties agree to proceed with additional
joint exploration, the proposed exploration of the area subject to this
agreement may take several years to complete. Proceeds from this offering have
been allocated to planned 1994 drilling under this arrangement. (See "USE OF
PROCEEDS.")
Willow Springs
In July 1994 the Company obtained from Yates the right to earn a 25%
interest in the Willow Springs prospect in Railroad Valley on an approximately
640 gross acre lease. In order to exercise its right and earn this interest,
the Company was required to pay 25% of the costs to drill a test well, the
Willow Springs no. 34-1 test well. The actual cost to drill the test well was
less than originally estimated and resulted in a dry hole cost to the Company of
approximately $86,300. The Company acted as operator and the test well was
plugged and abandoned in September 1994. The Company has an option to drill an
additional test by January 13, 1995. Offering proceeds have been allocated for
this drilling. (See "USE OF PROCEEDS.")
Frontier Exploration Agreement
On April 29, 1993, the Company entered into an exploration agreement with
Frontier for certain joint exploration activities in Newark Valley and the Toano
Draw area of Nevada. Under this agreement, as amended, the Company joined with
Frontier to explore up to six prospects involving over 55,000 gross acres in
Newark Valley, Nevada, that Frontier held through an exploration agreement with
Mobil. By participating in two earning wells drilled in 1993 and 1994, the
Company earned a 30% working interest in approximately 28,000 gross acres. The
Company and Frontier have elected not to drill any of the option tests and will
not, therefore, earn any interest in the remainder of the Newark Valley project,
Frontier relinquished its right to pursue exploration of the Toano Draw area.
Rustler Prospect
On September 28, 1994, the Company entered into an agreement with Mobil
under which the Company must drill one test well on or before April 1, 1995, on
the Rustler Prospect located in White Pine County, Nevada. Upon reaching casing
point on the well, the Company will have earned 75% of Mobil's interest in the
prospect area.
Santa Fe Marketing and Exploration
In December 1992, the Company entered into a three year exploration
agreement with Santa Fe, appointing the Company the exclusive marketing
representative for Santa Fe's fee mineral interest in northern Nevada. The
Company delineates exploration areas, defines prospects, and secures drilling
partners utilizing the Company's and Santa Fe's combined geological and
geophysical data base. The Company has generated two drillable prospects
affecting the Santa Fe lands in North Humboldt Valley and Dixie Flats and will
generate a third prospect by December 1994. If drilling is undertaken, the
Company and Santa Fe will each retain certain rights and interest in the
drilling and development of identified prospects within the lands covered by the
exploration agreement.
<PAGE>
Under the terms of the exploration agreement, the Company has access to
Santa Fe's proprietary geological and geophysical data respecting the Santa Fe
properties and adjacent lands, with the express right to reprocess seismic data,
utilizing improved analytical techniques and control data now available. If the
Company elects to gather or to purchase additional geological or geophysical
data for a mutually agreed exploration area, Santa Fe is precluded from granting
third parties exploration rights to such exploration area for one year. Santa
Fe has certain rights of access to the data developed by the Company on the
Santa Fe property.
On any drilling of Santa Fe lands arranged by the Company, Santa Fe and the
Company will share in lease bonuses, the right to acquire a working interest by
paying a portion of drilling and completion costs on any successful well, and
overriding royalties, with the option to convert the overriding royalties to
working interests in certain circumstances. The Company and Santa Fe each has a
right of first refusal to participate in any drilling prospects generated by the
other during the term of the exploration agreement.
The Company is required to release half of the remaining approximately
750,000 gross acres of Santa Fe lands from the exploration agreement by December
1994 and the remaining 375,000 acres by December 1995, when the agreement
expires, subject to any specific acreage subject to leases, farmouts, to other
arrangements reached under the agreement with the Company. The Company will
accelerate its review of the Santa Fe acreage with a view towards identifying
the most promising prospects and reaching drilling arrangements by December
1995.
Other Exploration Arrangements
The Company is continuing to negotiate with other interested parties to
fund further drilling on defined prospects in a number of locations in the Great
Basin of Nevada. The ultimate goal of the Company is to arrange for the
exploration and, if oil reservoirs are discovered, development of its holdings
using the Company's own limited financing, to the extent available. In some
instances, the Company may reach an agreement with other firms in which all
participants contribute acreage and available scientific data and bear a portion
of the costs of agreed drilling or other exploration, thereby earning a shared
ownership in the contributed acreage and production, if any. The nature and
extent of the Company's participation, share of costs, and interest retained in
various arrangements are dependent on the acreage it has under lease in the
target area, the amount of science it has available as compared to the other
participants, the relative financial strength of the participants, and the risks
and rewards perceived by the various participants. These arrangements are very
project specific and will vary from drilling prospect to drilling prospect.
Eagle Springs
In July 1993, the Company acquired an approximately 2,800 gross acre lease
in Railroad Valley, Nevada, with nine oil wells, then shut in, and one water
injection well. In connection with the acquisition, the Company implemented
certain in-field environmental remediation measures and resolved issues raised
by various regulatory agencies and the claims of entities which claimed an
ownership interest or had advanced funds or services to the field.
Subsequently, the Company acquired an additional lease on the remainder of the
Eagle Springs Field with three wells with limited intermittent production and
related equipment.
Wells drilled during the 1960s on the Eagle Springs property produced until
late 1992 from depths of from 5,900 to 7,200 feet and had total cumulative
production, as reported to the Nevada Department of Minerals, of 2,825,000
barrels of oil. The 14 wells drilled during development of the field between
1954 and 1965 reportedly had average per well daily production of approximately
150 barrels per day for the first year and approximately 100 barrels per day for
the first three years of production. During the last 12 months that the wells
acquired by the Company were in production, they produced an aggregate of
approximately 120 barrels of oil per day.
<PAGE>
The Company completed substantial work at Eagle Springs since its
acquisition in July 1993 and returned eight of the acquired wells in the Eagle
Springs Field to production, plus a water injection well. The Company estimates
that there are approximately 30 additional possible drilling locations within
the estimated perimeter of the field under 10 acre spacing, as now approved by
Nevada regulatory authorities. A 3-D seismic survey has been completed on the
field, and the data has been evaluated to select the initial drilling locations.
The 3-D seismic information will be evaluated and integrated with additional
available drilling results as an ongoing guide for drilling. Up to 14 wells are
scheduled for 1994 and 1995, with up to seven planned during 1994, to the extent
warranted by results as drilling progresses and subject to unexpected delays,
downtime, and similar unforeseen circumstances. As of the date of this
prospectus, three of the Eagle Springs wells have been drilled, the first of
which recently began production, the second of which is being completed for
production, and production casing is being set in a third well to test horizons
encountered during drilling.
When reworking the eight wells to return them to production, the Company
also substantially renovated and upgraded surface facilities such as tank
batteries, piping, separators, and other equipment in order to create
substantial excess capacity of field production facilities available to service
new wells to reduce production costs. Increased production resulting from
additional drilling would be sold under the Company's existing sales agreement
and trucking arrangement.
The Company intends to evaluate engineering data from existing wells
together with any additional wells that may be productive to determine whether a
reduced well spacing from 20 to 10 acres may be economically beneficial. If the
Company concludes that reduced well spacing would increase the financial return
from the field, the total number of available well locations would be increased,
which would correspondingly extend beyond 1995 the period during which the Eagle
Springs Field could be developed.
Further activities in the Eagle Springs Field are being conducted jointly
with Plains as discussed below.
In mid-1994, the Company commenced the first phase of a two year, 14 well
drilling program in its Eagle Springs Field based on the Company's own 3-D
seismic study to evaluate horizons that are productive in existing wells. The
Company also intends to drill exploratory wells in the Hay Ranch, Tomera Ranch,
and other prospect areas of Pine Valley, and in Little Smoky and Antelope
Valleys. During 1994 the Company participated in two exploratory tests, one
with Frontier on Mobil acreage in Newark Valley and one on Yates Petroleum
Corporation ("Yates") acreage in Railroad Valley, both of which were plugged and
abandoned.
Plains Agreement
On August 9, 1994, the Company entered into an agreement with Plains under
which it agreed to spend up to $1,920,000, which is 80% of the first $2,400,000,
for drilling additional wells in Eagle Springs to test horizons that are
productive in existing wells. Such expenditure by Plains will earn it a 40%
interest in the Eagle Springs Field, including existing producing wells and
reserves, effective August 1, 1994. After the initial $2,400,000 expenditure,
costs will be shared 60% by the Company and 40% by Plains. After the third
Eagle Springs well is drilled and either placed into production or plugged and
abandoned, as appropriate, Plains may terminate its obligation to participate in
further Eagle Springs drilling, in which case Plains will have earned a 40%
interest in only the three drilling or spacing units of the wells in which
Plains participated, and not in the remainder of the producing wells, reserves,
or leases. If Plains elects to continue to participate in Eagle Springs
drilling beyond the initial three wells, Plains will share with the Company the
costs of acquiring a 40% interest in a 240 acre Eagle Springs lease from
unaffiliated parties in October 1994.
Plains also has the right to earn an interest in the Company's acreage in
areas of mutual interest in Dixie Flats and North Humboldt Valley, prospects
developed by the Company on Santa Fe mineral interests under the Company's
agreement with Santa Fe. (See "Joint Exploration Arrangements" above.) The
Company and Plains will undertake a joint technical evaluation of existing
seismic data and determine whether a 3-D seismic survey is warranted in each of
these two prospect areas before selecting drill sites. Upon the completion of
any geophysical studies that the parties deem necessary and review of the data
obtained, the parties will select a drill site in each prospect area and proceed
to drill, with Plains bearing two-thirds of the cost of the initial well in each
area to earn a one-half interest in the Company's acreage within the prospect
area.
<PAGE>
In addition, Plains can pay $800,000 for a planned extended 3-D seismic
survey in an area of mutual interest in Pine Valley in order to earn a 40%
interest in the Company's acreage in the area. The purpose of the seismic work
will be to identify sites for future drilling tests.
Activities under the joint exploration arrangement with Plains are
conducted by the Company as operator, under the overall direction of a technical
committee made up of representatives of both parties. In addition to joint
exploration in each of the exploration areas under this agreement through 1998,
the Company has granted to Plains the right to participate in any other
exploration prospects that the Company elects to offer to third parties.
North Willow Creek and Tomera Ranch Discoveries
North Willow Creek
The North Willow Creek SPLC no. 1-27 well, drilled in 1987 to a total depth
of 7,678 feet, discovered an oil bearing structure at a depth of from 5,818 to
6,358 feet. The sustained production rate was a fraction of the production
capability of the well suggested by a stabilized swab test at the time of
drilling, notwithstanding the Company's employment of a number of techniques and
treatments to enhance production. In an effort to overcome these production
difficulties, in 1991 the Company drilled a sidetrack hole, the SPLC no. 1-27R,
but production from this well was also below expectations. Two additional
wells, the North Willow Creek no. 6-27 and no. 5-27, were drilled, extending the
productive area of the field. However, the Company experienced mechanical
problems in attempting to place the no. 5-27 well into production and determined
to delay completion, unless warranted by the results of further drilling and
completion efforts. The Company continues to experience production difficulties
that lead management to conclude that the wells are not producing to the
potential indicated by initial tests and engineering and geologic evaluation of
the productive horizons. In an effort to address these production difficulties,
the Company initiated additional work on the Willow Creek no. 6-27 well during
the third quarter of 1994 and is continuing to test pump the well to analyze the
treatment results. If the initial results from reworking the no. 6-27 well
warrant, the Company also intends to rework the SPLC no. 1-27R to increase
production and to complete the North Willow Creek no. 5-27 well to attempt to
place it into production. Since it appeared that the North Willow Creek no.
5-27 well could not be placed into production by August 1994, capitalized costs
of approximately $704,000 were charged to expense during the quarter ended June
30, 1994.
As of December 31, 1993, the Company's independent engineering report
estimated that the North Willow Creek Field contained 32,000 barrels of
recoverable oil with a net present value, discounted at 10%, of $135,403.
Tomera Ranch
The Tomera Ranch discovery well, the SPLC no. 1-5, drilled by another
operator under a joint exploration arrangement with the Company, reached a total
depth of approximately 5,800 feet in August 1987, casing was set to a depth of
4,641 feet, and the well was completed for production in the Indian Wells
formation at between 1,864 and 1,950 feet. This discovery well of the Tomera
Ranch Field subsequently produced intermittently in limited amounts. When this
well was placed into production, the Company could not obtain access to a water
disposal well necessary to continue production and was forced to shut in the
well. In 1992, the Company converted the SPLC no. 1-5 well to a water disposal
well and drilled an adjacent well, the SPLC no. 1-5R, as a replacement
production well. In 1990, the no. 33-1 well was completed for production in the
Tomera Ranch Field, but was not placed into production until the Company
completed the water injection well at Tomera Ranch in 1992. Since then, the
SPLC no. 1-5R and no. 33-1 Tomera Ranch wells have had limited sustained
production. The Company's independent engineer assigned no proved reserves in
the Tomera Ranch Field at December 31, 1993.
Both the North Willow Creek and Tomera Ranch wells hold acreage over
productive zones that the Company believes can be produced at higher rates with
additional evaluation and reworking, including chemical treatments, heat
treatments, hydraulic fracturing treatments, and other alternative measures. In
July 1994, the Company initiated a hydraulic fracturing treatment of the
productive horizons in North Willow Creek well. There can be no assurance that
such efforts will be successful or that the wells will produce in paying
quantities. If such efforts are successful, the Company plans additional
evaluation drilling as warranted.
<PAGE>
Exploration Status
Pine Valley
The Papoose Canyon test well was drilled by the Company in 1992 and had
promising oil shows in several zones, but none was deemed significant enough to
attempt completion of this test, although the shows provided important
geological information which will allow further refinement of the geophysical
and geological data to potentially locate an "up dip" drill site.
The Company has participated in two wells in the Hay Ranch area. The
first, the West Hay Ranch no. 12-1, was drilled by another operator and was
subsequently plugged and abandoned. The Hay Ranch no. 1-17 was drilled by the
Company in 1993. Oil shows were encountered over a 1,000 foot thick interval,
and a drillstem test was performed on one of the lower zones. This test well
has been temporarily abandoned, and additional testing, directional drilling,
and deepening operations are all being considered for 1994. The rock section
with oil shows in the no. 1-17 well is not present in the no. 12-1 well,
indicating a "pinchout" of those prospective horizons, a common geological
phenomenon which is often associated with oil traps.
Three exploratory test wells in which the Company participated were drilled
in the northern part of Pine Valley within five miles of the Tomera Ranch Field.
Each had varying degrees of oil shows. The most encouraging was the Tomera
Ranch South no. 9-1, drilled by another operator in 1993. Promising oil shows
were encountered in this test well, but attempts to log and test this hole were
prevented by unstable hole conditions shallow in the well. The drilling results
are being integrated with the geophysical data to guide further testing of this
prospect. A second test, the Ferdelford no. 34-1, was also drilled in 1993 by
another operator. Along with the Evans Flat no. 11-1 test, drilled by another
operator in 1993, and newly acquired seismic data, these tests are being
utilized to evaluate additional drilling targets in Pine Valley. The Company
recently increased its acreage position in this area by acquiring all of the
previous operator's acreage in the Tomera Ranch area, including the previous
operator's interest in the Tomera Ranch no. 33-1 well. The Company will now
proceed with additional seismic exploration for use in positioning potential
drilling sites.
The Company also has exploration efforts in this area with Enserch/Berry.
With funding provided jointly by the Company and Enserch/Berry, the Company has
acquired additional seismic data to define two drilling prospects to be drilled
in 1994.
Little Smoky and Antelope Valley
The Company continues active exploration of these two valleys under the
agreement with Enserch/Berry. Substantial seismic surveys were completed late
in 1993, leading to the drilling of two test wells. Although these tests were
plugged and abandoned, these wells both added significantly to the Company's
information in these two sparsely drilled yet promising prospect valleys. The
Company and Enserch/Berry plan to drill an additional test well in each of these
valleys during 1994.
Newark Valley
The Company is utilizing the extensive seismic information available to it
through its agreement with Frontier and Mobil for ongoing geological evaluation
of this area. The two test wells in which the Company participated in this
valley, the Buck Station and the Indian Springs prospects, encountered
encouraging oil shows which were subsequently tested, but both tests were
plugged and abandoned. The well information is being integrated with the
seismic data to identify a potential "up dip" location to the Buck Station test
for future drilling.
<PAGE>
Railroad Valley
In September 1994, the Company drilled an exploratory well in the Willow
Springs prospect in Railroad Valley that was plugged and abandoned. The Company
does not expect any further activities on the prospect.
Oil Properties
The Company's principal oil and gas properties are located in Nevada. See
"Certain Definitions" for terms used below.
Wells and Acreage
Shown below is a tabulation of the productive wells owned by the Company in
Nevada as of September 30, 1994.
Productive Oil Wells
- -----------------------
Gross Net
- ---------- ----------
13 12.65
Set forth below is information respecting the developed and undeveloped
acreage owned by the Company in Nevada as of September 30, 1994.
Developed Acreage Undeveloped Acreage
- ---------------------- -----------------------
Gross Net Gross Net
- ---------- ---------- ----------- -----------
4,120 3,320 189,000 115,000
The Company's leases in Eagle Springs (3,040 gross and 2,240 net acres),
Tomera Ranch (680 gross and 680 net acres), and North Willow Creek (400 gross
and 400 net acres) are held by production. The Company's undeveloped leases
have various primary terms ranging from one to ten years. Management believes
that the expiration of any individual or group of related undeveloped leasehold
interests would not have a material adverse effect on the Company. Annual
rentals on all undeveloped leases aggregate approximately $149,000. In addition
to the above acreage, the Company has certain marketing and exploration rights
to approximately 750,000 gross acres of Santa Fe mineral interest in northern
Nevada as discussed above until December 1994 and rights to 375,000 acres
thereafter until December 1995.
Drilling Activities
Set forth below is a tabulation of wells completed in the period indicated
in which the Company has participated and the results thereof for each of the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, Ended September 30, 1994
----------------------------------------------------------- ------------------------
1991 1992 1993
------------------ ----------------- ------------------
Gross Net Gross Net Gross Net Gross Net
--------- ------- -------- ------- -------- --------- ------ ---------
Exploratory:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dry................ -- -- 1 1 6 3.5 2.0 .55
Oil................ 1 1 1 1 -- -- -- --
Gas................ -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- ---------
Totals......... 1 1 2 2 6 3.5 2.0 .55
Development:
Dry................ 1 .5 -- -- -- -- -- --
Oil................ -- -- -- -- 1 1 -- --
Gas................ -- .5 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- ---------
Totals......... 1 .5 -- -- 1 1 -- --
========= ======== ======== ======== ======== ========= ======= =========
</TABLE>
<PAGE>
Production and Sale of Oil
The following table summarizes certain information relating to the
Company's net oil produced and sold from the Company's Nevada properties, after
royalties during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,(1) 1994(2)
------------------------------------ -------------------------------------
First QuarterSecond Quar Third Quarter
------------------------ -------------
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average net daily production of oil 57 13 16 106 124 95
(Bbls)
Average sales price of oil ($ per $12.65 $11.82 $11.45 $9.50 $10.81 $11.57
Bbl)(3)
<FN>
(1) Represents production from the Company's North Willow Creek and Tomera Ranch properties only.
(2) Represents production from North Willow Creek, Tomera Ranch and Eagle Springs. Production from Eagle Springs started in
January 1994, and accounts for about 85% of the Company's oil production. Represents oil produced and sold net to the Company's
interest from the eight wells the Company acquired, reworked, and returned to production commencing in early January 1994, net of
production royalties. However, certain of the wells have been shut-in from time to time, sometimes for entire months. Other
wells have been shut-in for shorter periods during particular months because of mechanical problems. Two wells, which are
producing sporadically, need certain remedial work, the cost of which is estimated at $75,000 to $100,000 to be funded from the
Company's present financial resources. The Company intends to undertake such work when its schedule permits and when appropriate
rig and equipment are available in the area.
(3) The oil from the Eagle Springs and Pine Valley, Nevada, wells is sold to Crysen Refining, Inc., Salt Lake City, Utah, an
unrelated purchaser, under agreements continuing through August 1995, and from month-to-month thereafter, unless terminated by
either party, at a price equal to Amoco Oil Company's Wyoming per barrel sour crude oil posted price, adjusted for gravity and
oil quality, less transportation of $3.20 or $2.90 per barrel, depending on the producing field, but in no case less than $9.50
per barrel after deduction of all charges. For example, during the months of January through March and much of April and May,
the Company received the minimum sales price of $12.70 per barrel, before deducting approximately $3.20 per barrel transportation
charge, for a net sales price of $9.50 per barrel. The sale of oil is subject to price adjustments, production curtailments, and
similar provisions common in oil and gas purchase contracts.
</TABLE>
The average production cost per barrel of oil, which includes lifting costs
(electricity, fuel, water, disposal, repairs, maintenance, pumper, and similar
items), and production taxes, were $9.64 for 1991, $5.56 for 1992, $7.95 for
1993, and $7.33 for the first nine months of 1994. Production costs relating to
Nevada production for part of 1991 and all of 1992 and 1993 include costs
associated with various production testing measures on the Tomera Ranch and
North Willow Creek wells and fixed costs allocable to a limited number of wells.
The substantial increase in average daily production in 1994 is attributable to
returning the Eagle Springs wells to production during that period. Production
costs are inordinately high per barrel of oil presently being produced due to
start up costs associated with the revamped production facility and repairs to
equipment that had been shut down without maintenance for over a year. In early
1994, the Company incurred additional costs of operating in winter due to energy
costs for heating the oil and operating the wells using propane as its main fuel
to generate power for the pumping units. Overall operating costs are a
combination of costs associated with each well and costs associated with
operation of the entire field. As additional wells are added to the production
system, the field operating costs will be spread among additional wells,
lowering the impact of such costs on each well and per barrel produced. In
addition, the Company will also be changing to more cost effective energy
sources for continuing production in a further effort to control costs. Because
of the foregoing, the Company expects that production costs per barrel will
continue to be high unless and until the amount of production increases
sufficiently to obtain economics of scale and dilute the impact of high fixed
operating costs. In addition, operating costs may continue to vary materially
due to the costs of ongoing treatment or reworking of existing wells and the
impact of the other factors discussed above.
Oil sales in 1991 included sales from certain properties in Texas from
which the Company received no production revenue after December 1991.
The Company did not have any gas production or sales during any of the
relevant periods.
<PAGE>
Texas Interests
The Company's wholly owned subsidiary, Krutex Energy Corporation
("Krutex"), holds an interest in approximately 125 producing shallow oil and gas
wells in the West Salt Flat Field encompassing approximately 495 gross acres in
Caldwell County, Texas. Pursuant to an April 1993 agreement with an unrelated
third party operator (the "Operator"), the Operator received all revenues from
production from the properties and bore all operating expenses through November
1, 1994. Prior to that date, the Operator had the right to earn 75% of Krutex's
interest in the properties upon completing specified reworking of 16 wells
located in the field. If the Operator failed to complete the 16 well reworking
program, the Operator's interest in the leases will terminate. If the Operator
timely completed the well reworking or established continuous production at a
rate of at least 300 barrels per day by November 1, 1994, the Operator had the
right to purchase Krutex's remaining interest at a price equivalent to Krutex's
share of the proved developed oil and gas reserves estimated to be recoverable
in 10 years, multiplied by 10 % of the price for west Texas crude oil for
November 1994. On signing the agreement, the Operator agreed to pay Krutex
$150,000 in monthly installments of $5,555, all of which has now been paid. In
October 1994, Krutex entered into a new agreement with the Operator under which
it agreed to a cash payment of $50,000 to Krutex in lieu of the well reworking
obligation referred to above to earn 75% of Krutex's working interest in the
field. In addition, Krutex granted the Operator an option to purchase Krutex's
remaining 25% working interest for $25,000 through February 2, 1995. The
Operator waived a payment of $12,500 by Krutex respecting the previous
acquisition of certain third-party interests affecting the leases.
The foregoing Texas properties are not included in the Company's principal
oil and gas properties described in the tables above for several reasons. The
Company does not now share in revenue or expenses attributable to the leases.
In addition, the wells are only marginally economically viable in the absence of
substantial reworking that can be undertaken by the Operator as discussed above,
with limited potential for increased financial return due to the Operator's
option to acquire Krutex's interest. The Company does not intend to devote
management or financial resources to the Texas properties in view of the
Company's priority on its Nevada exploration. These properties are included in
the Company's oil and gas properties at December 31, 1993, at a net capitalized
cost of $517,600, with related undiscounted future net revenues, as estimated by
Ehnot Engineering Company, independent petroleum engineer, Arlington, Texas, of
$1,326,000 (discounted at 10 % to present value at December 31, 1993, of
$489,000). As a result of the October 1994 transaction referred to above, for
the third fiscal quarter the Company reported a loss of $434,521, reflecting the
disposition of the Texas property interests below their capitalized cost of
approximately $498,400. (See FINANCIAL STATEMENTS, Note 9, "Supplemental
Information on Oil and Gas Producing Activities and Oil and Gas Reserve
Information.")
Competition and Markets
The Company competes with numerous other firms and individuals in its
activities. The Company's competitors include major oil companies and other
independent operators, many of which have financial resources, staffs, and
facilities substantially larger than those of the Company. Competition in the
oil and gas industry is intense.
The Company faces intense competition in obtaining risk capital for test
drilling within the Great Basin province. Management believes that competition
for drilling funds from such sources is principally dependent on an analysis by
the potential industry participant of the costs of drilling and related
activities, the likelihood of discovering oil or other hydrocarbons in
commercial quantities, and the potential size of oil reserves which may
eventually be established.
The Company believes that an important consideration in obtaining risk
capital for drilling, new exploration rights, and joint exploration and
development arrangements with other industry participants is the amount and
quality of the Company's scientific data and exploration experience in Nevada.
The Company also believes that it benefits from its use of reprocessed 2-D
seismic and 3-D seismic data and its experience in correlating that data with
the results of actual drilling.
<PAGE>
In its efforts to obtain oil leases within the Great Basin, the Company
encounters competition from lease speculators, independent oil firms, and major
oil companies. The ability to acquire leases is generally determined by the
amount of cash paid to acquire the lease, the royalty or other interest retained
by the transferor, and the nature of any commitment to drill on the lease
acreage. The Company seeks to acquire leases in those areas that have been
identified through geological and geophysical data as having potential to
produce oil in sufficient quantities to be economic.
The availability of a ready market for production and the prices obtained
for production of oil depend on a number of factors beyond the Company's
control, the effects of which cannot be accurately predicted. Such factors
include the extent of domestic production and imports of oil; the competitive
position of oil as a source of energy vis-a-vis gas, coal, atomic energy,
hydroelectric power, and other energy forms; the refining capacity of
prospective purchasers; transportation costs; the availability and capacity of
pipelines and other means of transportation; and the effect of federal and state
regulation on production, transportation, and sale of oil.
Government Regulation
The exploration for and production of oil in the United States are subject
to extensive regulation by both federal and state authorities. The following
discussion concerning regulation of the oil and gas industry is necessarily
brief and is not intended to constitute a complete discussion of the various
statutes, rules, regulations, and governmental orders to which operations of the
Company may be subject.
Environmental Regulations
Operations of the Company are subject to numerous laws and regulations
governing the discharge of materials into the environment, the remediation of
environmental impacts, and other matters relating to environmental protection,
which affect the Company's operations and costs. It is probable that state and
federal environmental laws and regulations will become more stringent in the
future. Proposed legislation to reauthorize the Federal Resource Conservation
and Recovery Act would have reclassified a significantly greater portion of oil
and gas production waste as "hazardous waste." If this proposed legislation had
been enacted, the stricter disposal requirements for hazardous wastes would have
had a significant impact on the operating costs of the Company and the oil and
gas industry in general, resulting in a significant number of wells becoming
uneconomic. There can be no assurance that measures to further regulate the
disposal of oil waste may not be adopted. Environmental laws and regulations
are frequently changed so the Company is unable to predict the ultimate cost of
compliance.
In connection with the acquisition of the Eagle Springs property, the
Company performed limited environmental inquiries and agreed to undertake
certain work to remediate a contaminated drilling pit at a former water
injection well site. That work was completed in coordination with federal and
state supervising agencies in early 1994. As a negotiated term of the
acquisition of the Eagle Springs lease, the Company agreed to indemnify the
secured creditor from which the Company acquired a portion of its property
interests against claims for environmental liability. The Company does not
believe that it has any material continuing financial obligation respecting
remediation of environmental matters involving the Eagle Springs property;
however, there can be no assurance that the remediation efforts have completely
eliminated the environmental problems at Eagle Springs or that new problems will
not develop in the future.
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and regulations
requiring permits for drilling, drilling bonds, and reports concerning
operations. Such regulations also cover the location of wells, the method of
drilling and casing wells, the surface use and restoration of well locations,
and the plugging and abandoning of wells. Nevada also has statutes and
regulations governing a number of environmental and conservation matters,
including the unitization and pooling of oil properties and establishment of
maximum rates of production from oil wells.
<PAGE>
Proposed Energy Tax
A broad-based energy tax has been proposed by President Clinton and has
received significant attention by Congress and the media. The proposal includes
a version of an energy tax, which is a tax based upon the BTU content of fossil
fuels consumed. Such an energy tax, if enacted, may be imposed on oil
production at the wellhead, in which case the producer of oil may not be able to
pass such tax on to the oil purchaser, which may reduce the economic return to
oil producers. It is not certain what version of an energy tax might be
adopted, and consequently, the effect on the Company is uncertain.
Federal Leases
The Company conducts significant portions of its activities under federal
oil and gas leases. These operations must be conducted in accordance with
detailed federal regulations and orders which regulate, among other matters,
drilling and operations on these leases and calculation and disbursement of
royalty payments to the federal government.
Title to Properties
Substantially all of the Company's working interests are held pursuant to
leases from third parties. The Company performs only a minimal title
investigation before acquiring undeveloped properties, and a title opinion is
typically obtained only prior to the commencement of drilling operations. The
Company has obtained other documentary confirmation of title on its principal
producing properties and believes that it has satisfactory title to such
properties. The Company's properties are subject to customary royalty
interests, liens for current taxes, and other common burdens which the Company
believes do not materially interfere with the use of such properties and whose
economic effect has been appropriately reflected in the Company's acquisition
costs of such properties.
Operational Hazards and Insurance
The Company's operations are subject to the usual hazards incident to the
drilling for and the production of oil, such as blowouts, cratering, explosions,
uncontrollable flows of oil or well fluids, fires, pollution, releases of toxic
gas, and other environmental hazards and risks. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage, and suspension of operations.
The Company maintains insurance of various types to cover its operations.
The Company has general liability insurance of $1 million per occurrence, with a
$2 million aggregate limitation, including coverage for certain oil industry
activities. The Company's insurance does not cover every potential risk
associated with the drilling and production of oil. In particular, coverage is
not available for certain types of environmental hazards. The occurrence of a
significant adverse event, the risks of which are not fully covered by
insurance, could have a materially adverse effect on the Company. Moreover, no
assurance can be given that adequate insurance will be available at reasonable
rates or that the Company or the operators of wells in which the Company owns an
interest will elect to maintain certain types or amounts of insurance.
Employees
The Company has 11 employees, including five executive officers (all of
whom are also directors), two technical employees in addition to the executive
officers, and three administrative employees. (See "DIRECTORS AND EXECUTIVE
OFFICERS.")
Legal Proceedings
The Company is not a party to any material legal proceeding, and none has
been threatened by or, to the best of the Company's knowledge, against the
Company.
<PAGE>
Offices
The Company's principal executive offices located at 12596 West Bayaud,
Suite 300, Lakewood, Colorado 80228-2019, are rented from an unrelated party
under a lease expiring September 1, 1998, and requiring monthly payments of
$3,553 plus certain common area charges. The Company also maintains a field
operations office at 2561 South 560 West, Suite 200, Woods Cross, Utah 84087.
The Company is considering expanding its principal executive offices to
accommodate additional personnel.
DIRECTORS AND EXECUTIVE OFFICERS
Executive Officers and Directors
The following table sets forth the name, age, and position of each director
and executive officer of the Company.
Name Age Position
- ----------------------- ------ -------------------------------------
Dr. Grant Steele... 70 Chairman and Director
N. Thomas Steele... 50 President and Director
Kenneth L. Ransom.. 37 Vice-President, Exploration and
Director
Bruce C. Decker.... 43 Vice-President and Director
Dennis J. Gustafson 47 Vice-President, Land and Director
All directors and executive officers of the Company serve for one year and
until their respective successors are elected and qualified. Dr. Grant Steele
is the uncle of N. Thomas Steele. There is no family relationship among any of
the other officers and directors of the Company. Each of the officers is a
full-time employee of the Company. It has entered into employment agreements
with N. Thomas Steele, Kenneth L. Ransom, Bruce C. Decker, and Dennis J.
Gustafson. See "Employment Agreements" below. Other officers serve at the
pleasure of the board of directors.
Dr. Grant Steele. Dr. Steele, the Company's co-founder and chairman, has
been an executive officer and chairman of the Company since its organization in
1985. Prior to forming the Company, he was employed by Gulf Oil Corporation
from 1953 to 1983. From 1973 to 1980, Dr. Steele was Chief Geologist/U.S. for
Gulf Oil. His knowledge of Nevada dates back to his Ph.D work on the
Pennsylvanian and Permian Systems of the eastern Great Basin. While with Gulf,
he completed several studies, each spanning a number of years, in eastern
Nevada. Dr. Steele graduated from the University of Utah, Salt Lake City, Utah,
in 1949 with a bachelor of science degree and earned his doctorate in geology
from the University of Washington in 1959. He is a certified professional
geologist and an active member of the American Association of Petroleum
Geologists, which awarded him a distinguished service award in 1984, the Houston
Geological Society, and the Society of Economic Paleontologists and
Mineralogists.
N. Thomas Steele. Mr. Steele, co-founder and president, has been an
officer and director of the Company since its organization in 1985. He was
elected president in May 1993. Prior to joining the Company in 1985, he was the
president of Magnum Resources, Inc., Ogden, Utah, which was engaged in mineral
exploration in Nevada and Utah.
<PAGE>
Kenneth L. Ransom. Mr. Ransom, has been vice-president of exploration and
a director since the Company's founding in 1985. Mr. Ransom was senior
geologist under Dr. Steele at Gulf Oil from 1981 to 1985, involved principally
in its Nevada area study. He earned a bachelor of science degree in geological
engineering from the Colorado School of Mines in 1979 and a master's degree in
geological sciences from Brown University in 1981. Mr. Ransom is a member of
the American Association of Petroleum Geologists and the Geological Society of
America and has published numerous papers on Nevada exploration and geology.
Bruce Decker. Mr. Decker, has been an officer and director of the Company
since 1991. Mr. Decker was an officer of Krutex Energy Corporation from 1983
through its acquisition by the Company in 1989. Mr. Decker received his
bachelor's degree in finance and management from the University of Utah in 1973.
Dennis J. Gustafson. Mr. Gustafson received his bachelor's degree from
Iowa State University in 1973, and has been active since then in the oil and gas
industry. In 1973 he joined Mobil's Central Region Marketing and Refining
Division and held various positions in their Marketing Department prior to
joining Mobil's Exploration and Production Division in Denver as a landman in
1981, where he managed fee mineral interests, various acquisitions, and farmouts
and farmins. As Mobil's land advisor for the Denver division, he directed
Mobil's land activities in Nevada and negotiated Mobil's major Nevada
development contract with the BLM, renegotiated the Mobil/Chevron Nevada joint
venture agreement, and managed the leasing of over 500,000 acres in Nevada. Mr.
Gustafson left Mobil and joined the Company in 1993 as a director and executive
officer.
Significant Employees
Jerry Hansen. Mr. Hansen, who joined the Company in 1986, is senior
structural geologist for the Company with primary responsibility for generating
and developing exploration proposals and drilling prospects for the Company. He
has 12 years of oil and gas experience directed toward prospect generation and
evaluation in the Powder River Basin, Gulf Coast, and primarily, in Nevada. He
graduated with degrees in geology from the University of Colorado in 1973 and
the University of Arizona in 1982. As senior structural geologist for the
Company, Mr. Hansen's primary responsibility is in the generation and
development of drillable prospects from inception to actual wellsite operations.
Carl Schaftenaar. Mr. Schaftenaar, who joined the Company in 1993, has
been a geophysicist and geologist in the oil industry for 12 years. He holds a
bachelor's degree in geology from Hope College, Holland, Michigan, and a master
of science degree in geophysics from Texas A&M University. Mr. Schaftenaar
worked for Chevron USA on exploration and development projects in Nevada and the
Rocky Mountain area from 1982 to 1992. As senior geophysicist, Mr. Hansen is
responsible for the acquisition and analysis of proprietary two- and
three-dimension seismic programs of the Company.
Ralph Nelms. Mr. Nelms, who joined the Company in 1994, is a registered
professional petroleum engineer with 18 years oil and gas experience. He holds
a bachelor's degree in petroleum engineering and mining engineering from the
Colorado School of Mines and a masters in business administration degree from
Regis University. Mr. Nelms is currently completing work on a masters degree in
petroleum engineering at the Colorado School of Mines. Mr. Nelms has worked as
a petroleum engineer for Sun Oil Company, SAIC, Coors Energy Company, Windsor
Gas Processing, Inc., and Mission Oil Company in the Gulf Coast and the Rocky
Mountain area. Mr. Nelms has experience in oil and gas well drilling,
production, reservoir engineering, property acquisitions, oil and gas economics,
and reserve analysis. Mr. Nelms is responsible for providing engineering and
field supervision support of the Company's Eagle Springs Field drilling and
development program and for overall Nevada exploitation.
<PAGE>
Executive Compensation and Benefits
Summary Compensation
The following table sets forth the annual and long term compensation earned
by, awarded to, or paid to each person who served as chief executive officer of
the Company during the last fiscal year. None of the Company's other executive
officers as of the end of the last fiscal year received total annual salary and
bonuses in excess of $100,000 for all services rendered in all capacities to the
Company and its subsidiaries. The Company provides to all of its full time
employees, including executive officers and directors, health insurance and
miscellaneous other benefits.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
---------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted Securities All Other
Name and Year Compen- Stock Underlying LTIP Compen-
Principal Ended Salary Bonus sation Award(s) Options/ SARs Payouts sation
Position Dec. 31 ($) ($) ($) ($) (#) ($) ($)
- ------------------------------------------- ------ -------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
N. Thomas Steele
President, CEO 1993 $74,700 -- -- -- 117,000 (1) -- $27,313 (2)
(May-Dec) 1992 $69,000 -- -- -- -- -- $7,847 (3)
1991 $72,000 (4) -- -- -- -- -- --
Grant Steele 1993 $37,500 (5) -- -- -- 45,000 (1) -- --
(Jan-May) 1992 -- (6) -- -- -- -- -- --
1991 -- (6) -- -- -- -- -- --
</TABLE>
(1) Includes stock appreciation rights with respect to appreciation on
45,000 shares of the Company's Common Stock above $4.56, the trading price of
the Company's Common Stock on the date of grant. Such stock appreciation
rights vest as to 15,000 shares on the date of grant, as to an additional
15,000 shares on the first anniversary of the date of grant, and as to the
remaining 15,000 shares on the second anniversary of the date of grant. The
terms of these stock appreciation rights were not determined in arm's length
negotiations.
(2) During 1993, the Company reimbursed such amount for moving expenses
incurred by Mr. Steele in relocating his residence to Colorado and granted
him certain options. (See "CERTAIN TRANSACTIONS: Relocation Agreement.")
(3) Represents the amounts paid by the Company for medical insurance for
Mr. Steele and his family.
(4) During 1991, the Company reimbursed N. Thomas Steele, Inc., owned by
Mr. Steele, for advisory services, including the services of Mr. Steele.
(5) Accrued through May 1993, but not paid or accrued since that date.
Dr. Steele has agreed not to seek payment of such amount for at least one
year subsequent to the date of this Prospectus.
(6) Grant Steele was authorized to receive a $90,000 salary by the board
of directors for each of 1991 and 1992, but Dr. Steele waived his right to
such salary.
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table sets forth information respecting all individual grants
of options and stock appreciation rights ("SARs") made during the fiscal year
ended December 31, 1993, to the named executive officers of the Company.
<PAGE>
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities
Underlying % of Total Exercise or Base
Options/SARs Options/SARs Granted Price Expiration
Name Granted (#) to Employees During Fiscal Y($/share) Date
- ----------------------------- ----------------- ----------------------------------------- ----------------
<S> <C> <C> <C> <C>
N. Thomas Steele 72,000(1) 28.6% $1.50 May 19, 1998
45,000(2) 17.9% $4.56 May 19, 1998
Grant Steele... 45,000(2) 17.9% $4.56 May 19, 1998
</TABLE>
(1) Options to purchase 72,000 shares of Common Stock at any time through
May 19, 1998, at an exercise price of $1.50 per share, payable in cash,
pursuant to a promissory note, by delivery of shares of the Company stock, or
by the cancellation of options. The terms of these options were not
determined in arm's length negotiations.
(2) Stock appreciation rights with respect to appreciation on 45,000
shares of the Company's Common Stock above $4.56, the trading price of the
Company's Common Stock on the date of grant. Such stock appreciation rights
vest as to 15,000 shares on the date of grant, as to an additional 15,000
shares on the first anniversary of the date of grant, and as to the remaining
15,000 shares on the second anniversary of the date of grant. The terms of
these stock appreciation rights were not determined in arm's length
negotiations
Aggregate Option/SAR Exercises in Last Fiscal Year and Year End Option/SAR
Values
The following table sets forth information respecting the exercise of
options and SARs during the fiscal year ended December 31, 1993, by the named
executive officers of the Company and the fiscal year end values of unexercised
options and SARs.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at FY Options/SARs at
End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
on Exercise (#) Value Realized ($) Unexercisable Unexercisable
------------------- ------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
N. Thomas Steele -- -- 452,000/15,000(1) $588,693 (2)/--
Grant Steele -- -- 330,000/15,000(1) $414,000 (2)/--
</TABLE>
(1) Includes stock appreciation rights with respect to appreciation on
45,000 shares of the Company's Common Stock above $4.56, the trading price of
the Company's Common Stock on the date of grant. Such stock appreciation
rights vest as to 15,000 shares on the date of grant, as to an additional
15,000 shares on the first anniversary of the date of grant, and as to the
remaining 15,000 shares on the second anniversary of the date of grant. The
foregoing table gives effect to SARs on 30,000 shares vesting in May 1993 and
1994 for each of the named executives. The terms of these stock appreciation
rights were not determined in arm's length negotiations.
(2) Based on the closing bid price for the Company's common stock of $2.88
on December 31, 1993. Such closing bid price was $2.94 on December 2, 1994.
<PAGE>
Director Compensation
As all of the Company's directors are also employees, the Company has not
and does not intend to compensate such individuals for their service as
directors of the Company.
Employment Agreements
The Company entered into employment agreements with N. Thomas Steele,
Kenneth L. Ransom, Bruce C. Decker, and Dennis J. Gustafson at annual salaries
of $125,000, $119,000, $119,000, and $72,000 respectively, subject to reduction
to $85,000, $77,760, $75,600, and $60,000 respectively, until the Company
obtains net oil production levels of 500 barrels per day. Each such employment
agreement is for a three-year term and is automatically extended on each
anniversary date of the agreement for an additional three-year term. The
employment agreements contain covenants not to compete for two years after
termination of employment, restrictions on the disclosure of confidential
information, provisions for reimbursement of expenses and payment of major
medical insurance coverage, and an agreement of the Company to register
securities of the Company held by such persons at the request of the employees.
In addition, under the employment agreements, the Company agreed to award to
each such officer stock appreciation rights to 45,000 shares of Common Stock,
vesting 15,000 shares at the date of grant and 15,000 on each of the next two
succeeding anniversary dates.
1994 Officer, Director, and Employee Options
On September 16, 1994, outstanding options were exercised to purchase
Common Stock as follows: Grant Steele, 200,000 shares at $1.50; N. Thomas
Steele, 200,000 shares at $1.50; Kenneth L. Ransom, 200,000 shares at $1.50;
Bruce C. Decker, 25,000 shares at $2.25; and Dennis J. Gustafson, 25,000 shares
at $2.25. Pursuant to the terms of the options exercised, each optionee paid
the purchase price of the options by the delivery of a promissory note payable
in three equal, consecutive installments of principal plus interest on the
unpaid balance at 7% per annum, payable annually commencing on the first
anniversary of the exercise. The note installments are payable in cash or the
delivery of Common Stock or other options valued at the trading price at the
time of payment. In connection with the issuance of shares on the exercise of
such options, Grant Steele, N. Thomas Steele, and Kenneth L. Ransom each
returned 24,118 shares, for an aggregate of 72,354 shares, of Common Stock to
satisfy withholding obligations of the Company, as provided for in the terms of
the options exercised. Also pursuant to the terms of the options exercised, the
Company automatically granted new five year options to purchase Common Stock at
$2.125, the market price for the Common Stock at the time of exercise, as
follows: Grant Steele, 200,000 shares; N. Thomas Steele, 200,000 shares;
Kenneth L. Ransom, 200,000 shares; Bruce C Decker, 25,000 shares; and Dennis J.
Gustafson 25,000 shares. These transactions were not the result of arm's length
negotiations.
On October 6 , 1994, the Company granted to employees five year options to
purchase an aggregate of 105,000 shares at $3.00 per share, of which 10,000
options are currently exercisable, 31,000 vest and become exercisable after one
year, 32,000 vest and become exercisable after two years, and 32,000 vest and
become exercisable after three years, provided that the employee in each case
is, or has been within the preceding 30 days, an employee of the Company.
Limitation of Liability and Indemnification
The articles of incorporation of the Company limit or eliminate the
personal liability of directors for damages for breaches of their fiduciary
duty, unless the director has engaged in intentional misconduct, fraud, or a
knowing violation of law, or paid a dividend in violation of the Nevada Revised
Statutes.
The Company's articles of incorporation and bylaws further provide for the
indemnification of officers and directors for certain civil liabilities,
including liabilities arising under the Securities Act. In the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this prospectus, 1994,
the outstanding Common Stock of the Company owned of record or beneficially by
each person who owned of record, or was known by the Company to own
beneficially, more than 5% of the Company's shares of Common Stock issued and
outstanding, and the name and share holdings of each director and all of the
executive officers and directors as a group:
<TABLE>
<CAPTION>
Percentage
of Ownership (2)
_____________________________
Number of Common Before After
Name of Beneficial Owner Nature of Ownership Shares Owned(1) Offering Offering
- --------------------------------- ------------------------ ---------------------- -------------- -------------
Principal Shareholders
<S> <C> <C> <C> <C>
Grant Steele Direct 530,882(3) 3.9 2.7
Options 300,000(4) 2.2 1.5
----------------------
Total 830,882 6.0 4.1
N. Thomas Steele Direct 371,215 2.8 1.9
Options 422,000(5) 3.1 2.1
----------------------
Total 793,215 5.7 3.9
Kenneth L. Ransom Direct 426,420 3.2 2.1
Options 300,000(6) 2.2 1.5
----------------------
Total 726,420 5.3 3.6
Directors and Executive Officers
Grant Steele - - - - - - - - - - - - - - - - See Above - - - - - - -
N. Thomas Steele - - - - - - - - - - - - - - - - See Above - - - - - - -
Kenneth L. Ransom - - - - - - - - - - - - - - - - See Above - - - - - - -
Bruce C. Decker Direct 85,195 0.6 0.4
Options 75,000(7) 0.6 0.4
----------------------
Total 160,195 1.2 0.8
Dennis J. Gustafson Direct 29,500(8) 0.2 0.1
Options 25,000(9) 0.2 0.1
----------------------
Total 54,500 0.4 0.3
All Executive Officers and Direct 1,443,212 10.7 7.2
Directors as a Group (5 persons)
Options 1,122,000 7.7 5.4
----------------------
Total 2,565,212 17.6 12.1
<FN>
<PAGE>
(1) Except as otherwise noted, shares are owned beneficially and of record, and such record shareholder has sole voting,
investment, and dispositive power. The address of all such persons for purposes of this table is deemed to be the address of the
Company.
(2) Calculations of total percentages of shares outstanding for each individual assumes the exercise of options held by that
individual to which the percentage relates. Percentages calculated for totals of all executive officers and directors as a group
assume the exercise of all options held by the indicated group. Percentages of ownership after offering includes all shares of
Common Stock offered by the Company and all shares of Common Stock to be sold by the Selling Shareholders.
(3) Includes 80,000 shares held of record by the Grant Steele individual retirement account, over which Dr. Steele exercises
sole investment, voting, and dispositive power.
(4) Includes options to acquire 100,000 shares of Common Stock at an exercise price of $1.50 per share at any time prior to
December 1, 1996 and options to acquire 200,000 shares at an exercise price of $2.125 per share at any time prior to September
16, 1999. The options to acquire 100,000 shares at $1.50 per share contain a provision that, on exercise, the holder is granted
a new option covering the number of shares for which the prior option was exercised, with the exercise price of the new option
fixed at the then fair market value of the Common Stock.
(5) Includes options to acquire 116,667 shares of Common Stock at an exercise price of $1.50 per share and 33,333 shares at an
exercise price of $1.31 per share at any time prior to December 1, 1996, options to acquire 72,000 shares at $1.50 per share at
any time prior to May 19, 1998, and options to acquire 200,000 shares at an exercise price of $2.125 per share at any time prior
to September 16, 1999. The options to acquire 116,667 shares contain a provision that, on exercise, the holder is granted a new
option covering the number of shares for which the prior option was exercised, with the exercise price of the new option fixed at
the then fair market value of the Common Stock.
(6) Includes options to acquire 65,333 shares of Common Stock at an exercise price of $1.50 per share at any time prior to
December 1, 1996, options to acquire 34,667 shares at $1.31 per share at any time prior to December 1, 1996, and options to
acquire 200,000 shares at $2.125 per share at any time prior to September 16, 1999. The options to acquire 65,333 shares contain
a provision that, on exercise, the holder is granted a new option covering the number of shares for which the prior option was
exercised, with the exercise price of the new option fixed at the then fair market value of the Common Stock.
(7) Includes options to acquire 25,000 shares of Common Stock at $1.81 per share and options to acquire 25,000 shares at $3.38
per share, both expiring July 15, 1996, and options to acquire 25,000 shares at $2.125 per share expiring September 16, 1999.
The options to acquire 25,000 shares at $3.38 per share contain a provision that, on exercise, the holder is granted a new option
covering the number of shares for which the prior option was exercised, with the exercise price of the new option fixed at the
then fair market value of the Common Stock.
(8) Represents shares owned by the individual retirement account of Mr. Gustafson, over which he exercises sole investment,
voting and dispositive power.
(9) Includes options to acquire 25,000 shares of Common Stock at an exercise price of $2.125 per share at any time prior to
September 16, 1999.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Salary Deferrals and Waivers
Because of shortages of cash and working capital suffered by the Company
during recent periods, certain officers and directors of the Company agreed to
defer or waive all or portions of their previous salaries. During 1990, Dr.
Grant Steele agreed to waive payment of all of his $90,000 annual salary and has
agreed to forego all salary after January l, l991, until the Company has
sufficient liquidity and financial resources, in Dr. Steele's opinion, to resume
payment. The officers and directors have also agreed to not seek payment of the
amounts due to them for at least one year subsequent to the date of this
Prospectus. As of September 30, 1994, the Company owed $346,455 in deferred
salaries. The officers and directors to whom the deferred salaries are owed
have advised the Company that they will not seek payment of such amounts if such
payment would jeopardize the ability of the Company to continue or unless the
net amount received, after paying applicable withholding taxes, was used to pay
notes for stock purchased on the previous exercise of stock options or for the
exercise of additional options now outstanding.
<PAGE>
Certain Loans
In June 1991, the Company loaned Messrs. Decker, an officer and director of
the Company, and Richins, a former officer and director, an aggregate of
$123,421, repayable with interest at the prime rate and secured by a pledge of
the obligation of the Company to such persons for accrued but unpaid back
salaries of approximately $156,720. Proceeds from these loans were used to
purchase 80,000 shares of Preferred Stock and 80,000 warrants for $ 100,000 in
the Company's 1991 private placement and to pay $23,421 in interest and
principal on the notes due on a partially owned subsidiary on the purchase from
it of the Company's Common Stock. The notes were originally due in June 1992,
but the Company has not sought, nor will it seek, payment of the notes until
back salaries owed these individuals are paid. At September 30, 1994, $218,491
was due under the notes.
Future transactions with officers, directors, or 5% shareholders will be on
terms no less favorable than could be obtained from independent third parties.
Any future loans to officers, directors, or 5% shareholders will be for a bona
fide business purpose and approved by a majority of the disinterested members of
the board of directors.
Relocation Agreement
In May 1993, the Company agreed to pay all of the expenses of N. Thomas
Steele in connection with his relocation from Utah to Colorado in order to
become president of the Company and to grant Mr. Steele options to purchase
72,000 shares of Common Stock at $1.50 per share. The Company also agreed to
pay Mr. Steele $175,000, the difference between the balance of the loans secured
by his residence in Utah and $375,000, the then estimated market value of the
house, and to pay monthly mortgage obligations until the house was sold. In the
third quarter of 1994, the Company sold the house for approximately $300,000 and
recognized a loss of approximately $84,200.
DESCRIPTION OF SECURITIES
The Company's authorized capital consists of 50,000,000 shares of Common
Stock, par value $0.001 per share and 5,000,000 shares of Preferred Stock, par
value $0.001 per share. The Company has C, X, and Y Warrants issued and
outstanding. Prior to October 30, 1994, the Company also had B Warrants issued
and outstanding. On October 30, 1994, the B Warrants expired pursuant to their
terms, without any warrants being exercised. In this offering, the Company will
issue L Warrants to the holders of record of the B Warrants on October 30, 1994.
The following description of the Company's securities is qualified in its
entirety by the provisions of the Company's articles of incorporation, bylaws,
and warrant agreements, copies of which are filed as exhibits to the
registration statement of which this Prospectus forms a part.
Common Stock
The holders of the Common Stock are entitled to one vote per share on each
matter submitted to a vote at any meeting of shareholders. Shares of Common
Stock do not carry cumulative voting rights and, therefore, a majority of the
shares of outstanding Common Stock (and voting Preferred Stock) will be able to
elect the entire board of directors and, if they do so, minority shareholders
would not be able to elect any persons to the board of directors. The Company's
bylaws provide that one-third of the issued and outstanding shares of the
Company shall constitute a quorum for shareholders' meetings, except with
respect to certain matters for which a greater percentage quorum is required by
statute or the bylaws.
<PAGE>
Shareholders of the Company have no preemptive rights to acquire additional
shares of Common Stock or other securities. The Common Stock is not subject to
redemption and carries no subscription or conversion rights. In the event of
liquidation of the Company, the shares of Common Stock are entitled to share
equally in corporate assets after satisfaction of all liabilities and the
payment of any liquidation preference to the holders of the 1991, 1993, and 1994
Preferred Stock.
Holders of Common Stock are entitled to receive such dividends as the board
of directors may from time to time declare out of funds legally available for
the payment of dividends. The Company seeks growth and expansion of its
business through the reinvestment of profits, if any, and does not anticipate
that it will pay dividends in the foreseeable future.
The board of directors has the authority to issue the authorized but
unissued shares of Common Stock without action by the shareholders. The
issuance of such shares would reduce the percentage ownership held by persons
purchasing Securities in this offering and may dilute the book value of the then
existing shareholders.
Preferred Stock, Warrants, and Options Outstanding
As of the date of this prospectus, the Company had the following Preferred
Stock, options, and warrants outstanding as discussed in detail below.
Weighted
Average
Price Per
Number of Share of
Shares of Common Stock
Common Stock or or
Common Stock Common Stock
Description Equivalent Equivalent
- ------------------------------------------ ---------------- ---------------
Preferred Stock
1991 Series...................... 40,000 $1.25
1993 Series...................... 8,000 2.50
1994 Series...................... 1,316,210 2.00
---------------- ---------------
1,364,210 1.98
Warrants to purchase Preferred Stock 271,622 2.48
Warrants to purchase warrants to purchase
Common Stock....................... 1,118,811 3.72
Warrants to purchase Common Stock.. 2,909,105 3.34
Options to purchase Common Stock... 1,280,500 1.99
---------------- ---------------
6,944,248 2.85
================ ===============
Preferred Stock
The Company has 40,000 shares designated as 1991 Preferred Stock, 4,000
shares designated as 1993 Preferred Stock, and 1,316,210 shares designated as
1994 Preferred Stock issued and outstanding as of the date of this Prospectus.
The Company has no current plans to issue any additional Preferred Stock, except
70,000 shares of 1993 Preferred Stock to be issued on the exercise of the
outstanding 1993 Placement Agent Warrants and 131,622 shares of 1994 Preferred
Stock to be issued on the exercise of the outstanding 1994 Placement Agent
Warrants. The Company's articles of incorporation provide that the board of
directors of the Company has authority, without action by the shareholders, to
issue the authorized but unissued Preferred Stock in one or more series, and to
determine the voting rights, preferences as to dividends and liquidation,
conversion rights, and other rights of such series.
The 1991 and 1994 Preferred Stock is convertible, at the election of the
holder, into the Company's Common Stock at the rate of one share of Preferred
Stock for one share of Common Stock. The 1993 Preferred Stock is convertible,
at the election of the holder, into the Company's Common Stock at the rate of
one share of 1993 Preferred Stock for two shares of Common Stock. This
prospectus relates to the issuance of shares of Common Stock on conversion of
the 1991, 1993, and 1994 Preferred Stock. The 1991 Preferred Stock carries a
preference of $1.25 per share on dissolution and liquidation of the Company, the
1993 Preferred Stock carries a preference of $5.00 per share, and the 1994
Preferred Stock carries a liquidation preference of $2.00 per share. The
Preferred Stock votes as a single class with the Common Stock except as
otherwise provided by the corporate laws of the state of Nevada. Shares of 1991
and 1994 Preferred Stock are entitled to one vote per share, and shares of the
1993 Preferred Stock are entitled to two votes per share. None of the issued
and outstanding Preferred Stock is entitled to preferential dividends, but
participates with the Common Stock in the unlikely event that a dividend is
declared.
<PAGE>
The 1991 Preferred Stock is redeemable at $1.25 per share at any time after
December 31, 1995, the 1993 Preferred Stock is redeemable at $5.00 per share at
any time after December 15, 1995, and the 1994 Preferred Stock is redeemable at
$4.00 per share at any time after March 31, 1996. In each case the Preferred
Stock can be converted prior to the redemption date fixed in the notice.
Warrants
The Company has issued and outstanding the following warrants to purchase
Common Stock and has reserved an equivalent number of shares of Common Stock for
issuance on exercise of such warrants. Each of the warrants described below is
governed by a warrant agreement between the Company and the warrant agent. The
following summary is subject to the detailed provisions of the warrant agreement
governing such warrants.
Holders of warrants are deemed to be shareholders of the Company only to
the extent of the shares of Common Stock held by them. Holders of warrants, as
such, are not entitled to vote with respect to matters submitted to the
shareholders of the Company, are not entitled to participate in dividends, if
any, and do not have ownership rights on termination or liquidation of the
Company.
$1.25 Warrants
The Company has issued and outstanding 1,000 warrants to purchase Common
Stock at an exercise price of $1.25 per Warrant (the "$1.25 Warrants") through
February 15, 1996.
$2.00 Warrants
The Company has issued and outstanding 200,000 warrants to purchase Common
Stock at an exercise price of $2.00 per Warrant (the "$2.00 Warrants") through
April 30, 1996.
A and B Warrants
Prior to October 30, 1994, the Company had issued and outstanding 1,242,000
B Warrants ("B Warrants") to purchase one share of Common Stock at an exercise
price of $3.90 at any time prior to October 30, 1994. On October 30, 1994, the
B Warrants expired pursuant to their terms without any Warrants being exercised.
In this offering, the Company will issue L Warrants to the holders of record of
the B Warrants on October 30, 1994. The underwriter in the offering in which
the B Warrants were sold has an option to acquire 400 Units, entitling the
underwriter to purchase up to 108,000 shares of Common Stock, 108,000 A
Warrants, and 108,000 B Warrants at a price of $2.04. The underwriter's A and B
Warrants are not redeemable and are exercisable only between October 30, 1992,
and October 30, 1996, at an exercise price of $2.25 and $3.90, respectively, to
acquire one share of Common Stock for each A and B Warrant exercised.
<PAGE>
L Warrants
The Company will issue L Warrants to those persons who are holders of
record of B Warrants on October 30, 1994, at the rate of one L Warrant for each
B Warrant held. Each L Warrant entitles the holder to purchase one share of
Common Stock at $6.00 through December 31, 1995, or at $8.00 thereafter through
December 31, 1996.
The L Warrants are subject to redemption by the Company at a price of $0.10
per L Warrant on 30 days' prior written notice if the closing bid price of the
Common Stock of the Company as quoted on Nasdaq exceeds the L Warrant exercise
price by at least 20% for 20 of 30 trading days during a period ending within 10
days of the notice of redemption. All L Warrants in any class must be redeemed
if any L Warrant in that class is redeemed. L Warrants may be exercised during
the 30 day period after notice of redemption has been given.
X and Y Warrants
The Company has issued and outstanding 697,000 X Warrants to purchase one
share of Common Stock at an exercise price of $3.25-$4.00 and 3,000 Y Warrants
to purchase one share of Common Stock at an exercise price of $4.00. Each X
Warrant originally entitled the holder to purchase one share of Common Stock and
one Y Warrant for $3.25 at any time through December 1, 1994. By action of the
board of directors of the Company, holders of the X Warrants will be entitled to
exercise such Warrants at the $3.25 exercise price on or before the date that is
five business days after the effective date of the registration statement of
which this prospectus is a part. If the closing bid quotation for the Company's
Common Stock on Nasdaq is at least $4.25 for 10 of 15 consecutive trading days,
the Company may notify all X Warrant holders of record that the period during
which the X Warrants can be exercised at $3.25 per share will expire 30 days
after the date of such notice. Each Y Warrant entitles the holder to purchase,
at any time through December 15, 1995, one share of Company Common Stock for
$4.00 per share. X Warrants not exercised at $3.25 during the above period, are
exercisable through December 15, 1995, at an exercise price of $4.00 per share
of Common Stock, with no additional Y Warrant issuable.
The X and Y Warrants are subject to redemption by the Company during the
Warrant exercise period at a redemption price of $0.10 per Warrant if at any
time during the Warrant exercise period, the price of the Common Stock on the
over-the-counter market, as quoted on Nasdaq, exceeds 150% of the applicable
exercise price, for 20 consecutive trading days during a 30 day period ending
within 10 days preceding the date of notice of redemption, or if not quoted on
Nasdaq or listed on an exchange, as reported on the electronic bulletin board
or, if not on the electronic bulletin board, on any other reliable medium of
quotation. All outstanding X and Y Warrants must be redeemed if any are
redeemed. Such Warrants may be exercised during the period after notice of
redemption has been given and prior to the redemption date.
C Warrants
The Company currently has 658,105 C Warrants issued and outstanding. Up to
an additional 65,811 C Warrants are issuable on the exercise of the 1994
Placement Agent Unit Warrant. Each C Warrant entitles the holder to purchase,
at any time between October 31, 1994, and July 1, 1995, for an exercise price of
$3.00, one share of Common Stock. After July 1, 1995, each C Warrant that has
not been exercised will expire.
The C Warrants are subject to redemption by the Company prior to the
expiration of the applicable Warrant exercise period, provided, there is an
effective Securities Act registration statement covering the issuance of the
Common Stock, at a redemption price of $0.10 per Warrant. The C Warrants may be
called for redemption at any time that the closing bid quotation for the
Company's Common Stock exceeds $4.50 as quoted on Nasdaq during 10 consecutive
trading days ending within 30 days preceding the date of notice of redemption,
or if not quoted on Nasdaq or listed on an exchange, as reported on the
electronic bulletin board or, if not on the electronic bulletin board, on any
other reliable medium of quotation. The C Warrants may be exercised during the
30 day period after such notice of redemption has been given but, if not
exercised, shall thereafter be redeemed.
The C Warrants exercise period may be extended by action of the board of
directors of the Company. Amendments to the C Warrants are permissible at the
election of the board of directors so long as the amendments do not adversely
affect the Warrant holder. Prior to exercise, holders of the C Warrants will
not possess any rights as a shareholder of the Company solely by reason of
holding such Warrants.
<PAGE>
The C Warrants may not be exercised in the absence of an effective
registration statement under the Securities Act and registration or
qualification under applicable state securities laws or an available exemption
from such registration requirements pertaining to the shares issuable on
exercise of the C Warrants. The Company has agreed to prepare and file a
registration statement under the Securities Act and applicable blue sky laws.
Options
The Company has issued and outstanding options to purchase up to 1,280,500
shares of Common Stock at a weighted average exercise price of $1.99 per share,
including options to purchase 1,182,000 shares of Common Stock at a weighted
average exercise price of $1.86 per share of Common Stock issued to executive
officers, directors and employees of the Company.
As part of the offering to which this prospectus relates, the Company is
offering up to 98,500 shares of Common Stock issuable on exercise of Option by
unaffiliated parties with 50,000 shares of Common Stock issuable on exercise of
Options at $3.69 per share, 18,500 shares of Common Stock issuable on exercise
of Options at $4.00 per share, and 30,000 shares of Common Stock issuable on
exercise of Options at $3.00 per share, together with such additional shares as
may be issuable under applicable antidilution provisions.
General
Each of the foregoing warrants and options contain provisions that protect
the holders thereof against dilution by adjustment in the number of shares of
Common Stock purchasable on exercise of the warrants and options in certain
events such as stock splits or stock dividends. In the event the number of
warrant or option shares purchasable is increased, through the operation of the
anti-dilution provisions, the exercise price will be reduced proportionately.
Conversely, if the number of warrant or option shares purchasable is decreased,
the exercise price will be increased proportionately.
Registrar and Transfer Agent
The registrar and transfer agent of the Company's securities is Atlas Stock
Transfer Corporation, 5899 South State Street, Salt Lake City, Utah 84107,
telephone (801) 266-7151.
Shares Eligible for Future Sale; Registration Rights
All of the Company's issued and outstanding shares of Common Stock, except
650,000 shares recently acquired by officers and directors upon exercise of
their options, have either been issued pursuant to a registration statement or
have been held for over three years and are, therefore, currently available for
immediate sale, subject to compliance with Rule 144 by executive officers and
directors of the Company.
No holder of securities subject to such rights has exercised their
registration rights with respect to the registration of Securities in connection
with this offering.
<PAGE>
SELLING SHAREHOLDERS
The following table provides certain information, as of the date of this
Prospectus, respecting the Selling Shareholders, the shares of securities held
by them, to be sold, and to be held following the offering, assuming the sale by
such Selling Shareholders of all 1,974,315 shares of Common Stock offered for
cash. The total for each Selling Shareholder gives effect to the purchase of
Common Stock on the conversion of all Preferred Stock and the exercise of all
Warrants held by such Selling Shareholder.
<TABLE>
<CAPTION>
Securities
------------------------------------------------------------------------
Now Owned After Offering
-------------------------- ------------------------
Selling Shareholders Number Percent(1) To Be Sold Number Percent(1)
- ---------------------------------- ----------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Joe and David LaPorte
1994 Preferred Stock 20,000 1.5 20,000 -- --
C Warrants 10,000 1.5 10,000 -- --
------ ------
Total 30,000 * 30,000 -- --
Brian R. and Deborah Forsey
1994 Preferred Stock 12,500 * 12,500 -- --
C Warrants 6,250 * 6,250 -- --
------ -------
Total 18,750 * 18,750 -- --
Nisso Raul Franco
1994 Preferred Stock 34,000 2.6 34,000 -- --
C Warrants 17,000 2.6 17,000 -- --
------ ------
Total 51,000 * 51,000 -- --
Lawrence M. Hjermstad
Common Stock(2) 38,230 * -- 38,230 *
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 - --
------- ------- ---------
Total 56,230 18,000 38,230 *
38,230
Wayne Canale
1994 Preferred Stock 44,000 3.3 44,000 -- --
C Warrants 22,000 3.3 22,000 -- --
X Warrants 20,000 2.9 -- 20,000 *
------ ---------- ------
Total 86,000 * 66,000 20,000 *
Edward & Shari K. Hoppenrath
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
X Warrants 4,500 * -- 4,500 *
------- ---------- -----
Total 22,500 * 18,000 4,500 *
Kevin L. Spencer IRA
1994 Preferred Stock 6,000 * 6,000 -- --
C Warrants 3,000 * 3,000 -- --
----- -----
Total 9,000 * 9,000 -- --
PRS Investments
1994 Preferred Stock 22,530 1.7 22,530 -- --
C Warrants 11,265 1.7 11,265 -- --
------ ------
Total 33,795 * 33,759 -- --
Robert W. Hoffman(3)
Common Stock 3,900 * -- 3,900 *
1994 Preferred Stock 23,000 1.7 23,000 -- --
C Warrants 11,500 1.7 11,500 -- --
X Warrants 20,000 2.9 -- 20,000 *
------ ----------- ------
Total 58,400 * 34,500 23,900 *
<PAGE>
Securities
------------------------------------------------------------------------
Now Owned After Offering
-------------------------- ------------------------
Selling Shareholders Number Percent(1) To Be Sold Number Percent(1)
- ---------------------------------- ----------- ----------- ------------- ---------- -----------
Joan Cacioppo
1994 Preferred Stock 10,000 * 10,000 -- --
C Warrants 5,000 * 5,000 -- --
X Warrants 5,000 * -- 5,000 *
------- ---------- -----
Total 20,000 * 15,000 5,000 *
Barney J. Cacioppo
1994 Preferred Stock 10,000 * 10,000 -- --
C Warrants 5,000 * 5,000 -- --
X Warrants 5,000 * -- 5,000 *
------- ---------- -----
Total 20,000 * 15,000 5,000 *
Richard J. and Mary M. Pulciani
Common Stock 7,000 * -- 7,000 *
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
X Warrants 10,000 * -- 10,000 *
B Warrants(4) 10,000 * -- 10,000 *
------ ------ ------
Total 45,000 * 18,000 27,000 *
Albert Vivo
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
------- -------
Total 18,000 * 18,000 -- --
Barry J. Gross and Lynn K.
Gross(5)
1994 Preferred Stock 177,046 13.5 177,046 -- --
C Warrants 88,523 13.5 88,523 -- --
--------- --------
Total 265,569 1.9 265,569 -- --
Mark S. and Frances Ann Wagner
1994 Preferred Stock 37,500 2.8 37,500 -- --
C Warrants 18,750 2.8 18,750 -- --
------ ------
Total 56,250 * 56,250 -- --
Harry J. Aretakis M.D.P.C.
Pft S PL & TR
1994 Preferred Stock 25,500 1.9 25,500 -- --
C Warrants 12,750 1.9 12,750 -- --
------ ------
Total 38,250 * 38,250 -- --
Steve Aiello and Isabelle A.
Aiello
1994 Preferred Stock 30,000 2.3 30,000 -- --
C Warrants 15,000 2.3 15,000 -- --
------ ------
Total 45,000 * 45,000 -- --
Joseph H. Call
1994 Preferred Stock 23,124 1.8 23,124 -- --
C Warrants 11,562 1.8 11,562 -- --
X Warrants 10,000 1.4 -- 10,000 *
------ ---------- ------
Total 44,686 * 34,686 10,000 *
Dr. William G. Field
Common Stock 14,250 * -- 14,250 *
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
------- ------- ------ --
Total 32,250 * 18,000 14,250 *
<PAGE>
Securities
------------------------------------------------------------------------
Now Owned After Offering
-------------------------- ------------------------
Selling Shareholders Number Percent(1) To Be Sold Number Percent(1)
- ---------------------------------- ----------- ----------- ------------- ---------- -----------
Donald Holtzman
Common Stock(6) 155,563 1.2 -- 155,563 1.0
1994 Preferred Stock 147,140 11.2 147,140 -- --
C Warrants 73,570 11.2 73,570 -- --
-------- -------- ----------
Total 376,273 2.8 220,710 155,563 1.0
Larry A. Papier
1994 Preferred Stock(7) 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
X Warrants 20,000 2.9 -- 20,000 *
------ ---------- ------
Total 38,000 * 18,000 20,000 *
Steven Tsengas
Common Stock 21,000 * -- 21,000 *
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 - --
X Warrants 10,000 1.4 -- 10,000 *
------ ---------- ------
Total 49,000 * 18,000 31,000 *
Charles J. and Deborah A. Ehnot
Common Stock(8) 14,619 * -- 14,619 *
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
------- ------- ------
Total 32,619 * 18,000 14,619 *
K. Bruce Jones(9)
Common Stock 10,000 * -- 10,000 *
1994 Preferred Stock 200,000 15.2 200,000 -- --
C Warrants 100,000 15.2 100,000 -- --
X Warrants 5,000 * -- 5,000 *
--------- ------ ------------ ------
Total 315,000 2.3 300,000 15,000 *
15,000
Ronald C. and Joy L. Tepner
1994 Preferred Stock 18,000 1.4 18,000 -- --
C Warrants 9,000 1.4 9,000 -- --
------- -------
Total 27,000 * 27,000 -- --
Robert M. Herber(10)
Common Stock 2,775 * -- 2,775 *
1994 Preferred Stock 24,000 1.8 24,000 -- --
C Warrants 12,000 1.8 12,000 -- --
------ ------ --------
Total 38,775 * 36,000 2,775 *
Ben J. Chilcutt
Common Stock 15,000 * -- 15,000 *
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
X Warrants 10,000 1.4 -- 10,000 1.4
------ --------- ---------
Total 43,000 * 18,000 25,000 *
Kenneth W. Dietz
1994 Preferred Stock 6,000 * 6,000 -- --
C Warrants 3,000 * 3,000 -- --
----- -----
Total 9,000 * 9,000 -- --
<PAGE>
Securities
------------------------------------------------------------------------
Now Owned After Offering
-------------------------- ------------------------
Selling Shareholders Number Percent(1) To Be Sold Number Percent(1)
- ---------------------------------- ----------- ----------- ------------- ---------- -----------
Daniel J. Kohn and Nancy Kohn
Common Stock(7) 3,000 * -- 3,000 *
1994 Preferred Stock 23,120 1.8 23,120 -- --
C Warrants 11,560 1.8 11,560 -- --
X Warrants 10,000 1.4 -- 10,000 *
B Warrants 8,000 * -- 8,000 *
------- ---------- -------
Total 55,680 * 34,680 21,000
Barbara J. VanNorman-McGary
1994 Preferred Stock 5,000 * 5,000 -- --
C Warrants 2,500 * 2,500 -- --
X Warrants 2,000 * -- 2,000 *
----- -------- -----
Total 9,500 * 7,500 2,000 *
Josphine A. Kerr
1994 Preferred Stock 85,000 6.5 85,000 -- --
C Warrants 42,500 6.5 42,500 -- --
X Warrants 40,000 5.7 -- 40,000 *
-------- ------------ ------
Total 167,500 1.2 127,500 40,000 *
KRI Growth Stocks, Inc.
1994 Preferred Stock 24,000 1.8 24,000 --
C Warrants 12,000 1.8 12,000 -- --
X Warrants 10,000 1.4 -- 10,000 *
------ ---------- ------
Total 46,000 * 36,000 10,000 *
Van Henry Archer, Jr.
Common Stock 47,000 * -- 47,000 *
1994 Preferred Stock 5,000 * 5,000 -- --
C Warrants 2,500 * 2,500 - --
------- ----- ---------
Total 54,500 * 7,500 47,000 *
Lawrence W. McGary
Common Stock 10,000 * -- 10,000 *
1994 Preferred Stock 5,750 * 5,750 -- --
C Warrants 2,875 * 2,875 -- --
X Warrants 20,000 2.9 -- 20,000 *
------ -------- ------
Total 38,625 * 8,625 30,000 *
Elva G. Rapanotti, D.D.S. P.C.
1994 Preferred Stock 6,000 * 6,000 -- --
C Warrants 3,000 * 3,000 -- --
----- -----
Total 9,000 * 9,000 -- --
Christopher Lloyd
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
------- -------
Total 18,000 * 18,000 -- --
Paul R. Yoder
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
------- -------
Total 18,000 * 18,000 -- --
Nancy B. Burghardt
Common Stock(11) 3,350 * -- 3,350 *
1994 Preferred Stock 10,000 * 10,000 -- --
C Warrants 5,000 * 5,000 -- --
------- ------- ---------
Total 18,350 * 15,000 3,350 *
<PAGE>
Securities
------------------------------------------------------------------------
Now Owned After Offering
-------------------------- ------------------------
Selling Shareholders Number Percent(1) To Be Sold Number Percent(1)
- ---------------------------------- ----------- ----------- ------------- ---------- -----------
Jean-Pierre Brault
Common Stock(12) 55,000 * -- 55,000 *
1994 Preferred Stock 48,000 3.6 48,000 -- --
C Warrants 24,000 3.6 24,000 -- --
X Warrants 10,000 1.4 -- 10,000 *
------ ---------- ---------
Total 137,000 * 72,000 65,000 *
Robert G. Watt(13)
1994 Preferred Stock 24,000 * 24,000 -- --
C Warrants 12,000 * 12,000 -- --
X Warrant 10,000 1.4 -- 10,000 *
------- ---------- ------
46,000 * 36,000 10,000 *
Green Cay LTD
1994 Preferred Stock 24,000 1.8 24,000 -- --
C Warrants 12,000 1.8 12,000 -- --
------ ------
Total 36,000 * 36,000 -- --
Paul C. Campbell and
Carolyn L. Campbell
Common Stock 5,000 * -- 5,000 *
1994 Preferred Stock 6,000 * 6,000 -- --
C Warrants 3,000 * 3,000 -- --
------- ------- ---------
Total 14,000 * 9,000 5,000 *
Harry Doyle
1994 Preferred Stock 6,000 * 6,000 -- --
C Warrants 3,000 * 3,000 -- --
----- -----
Total 9,000 * 9,000 -- --
Peter and Ruth Medding
1994 Preferred Stock 30,000 2.3 30,000 -- --
C Warrants 15,000 2.3 15,000 -- --
------ ------
Total 45,000 * 45,000 -- --
Malcolm G. and Lavern E. Thomas
1994 Preferred Stock 12,000 * 12,000 -- --
C Warrants 6,000 * 6,000 -- --
------- -------
Total 18,000 * 18,000 -- --
Totals
Common Stock 405,687 3.0 -- 405,687 2.6
1994 Preferred Stock 1,316,210 100.0 1,316,210 -- --
C Warrants 658,105 100.0 658,105 -- --
X Warrants 221,500 31.8 -- 221,500 1.4
B Warrants(4) 18,000 1.4 -- 18,000 *
--------- -------- --------
Total 2,619,502 16.7 1,974,315 645,187 4.1
<FN>
*Less than one percent.
(1) Percentage figures respecting the 1994 Preferred Stock and the C Warrants are based on 1,316,210 shares of 1994 Preferred
Stock and 658,105 C Warrants issued and outstanding and held by the Selling Shareholders. Percentage figures respecting the X
Warrants and B Warrants are based on 697,000 X Warrants and 1,242,000 B Warrants issued and outstanding. Percentage figures
respecting the total securities now owned give effect to the conversion of all 1994 Preferred Stock and the exercise of all C and
other Warrants by such Selling Shareholder. Percentage figures respecting the securities owned after the offering give effect to
the conversion of all 1994 Preferred Stock and the exercise of all C and other Warrants by all Selling Shareholders.
(2) Figures respecting Common Stock include 21,775 shares held by Lawrence Hjermstad jointly with Dale L. Hjermstad; 14,455
shares held in broker accounts; and 2,000 shares held by Margaret G. Hjermstad.
(3) Common Stock and X Warrants held as trustee.
<PAGE>
(4) B Warrants, which expired by their terms on October 30, 1994, are being replaced by L Warrants pursuant to this offering.
(5) Figures respecting the 1994 Preferred Stock include 25,020 shares held by Gary J. Gross IRA; 7,560 shares held by Lynn K.
Gross IRA; 20,538 shares held by Garry J. Gross, trustee, PSP; 88,928 shares held by Barry J. Gross trustee EPP; 10,000 shares
held by Barry J. Gross custodian for Lydia R. Gross UGMA; and 25,000 shares held jointly. Figures respecting the C Warrants
include 12,510 shares held by Garry J. Gross IRA; 3,780 shares held by Lynn K. Gross IRA; 10,269 shares held by Gary J. Gross,
trustee, PSP; 44,464 shares held by Barry J. Gross trustee EPP; 5,000 shares held by Barry J. Gross custodian for Lydia R. Gross
UGMA; and 12,500 shares held jointly.
(6) Includes 48,146 shares held by Donald Holtzman; 100 shares held by Donald Holtzman as custodian for a minor child; 84,512
shares held by Elisa B. Holtzman, the sister of Donald Holtzman; 22,705 shares of Eliza Holtzman as custodian for a minor child;
and 100 shares held by Linda Holtzman, the sister of Donald Holtzman.
(7) Shares held of record but shareholder disclaims beneficial ownership.
(8) Includes 4,499 shares owned by Charles Ehnot jointly with Deborah A. Ehnot; 8,000 shares owned by Charles Ehnot jointly
with Charles J. Ehnot; 720 shares held by Deborah A. Ehnot as custodian for a minor child; and 1,400 shares owned solely by
Charles Ehnot.
(9) Common Stock held directly by K. Bruce Jones.
(10) Includes 1,000 shares of Common Stock, 12,000 shares of 1994 Preferred Stock, and 6,000 C Warrants held as trustee.
(11) Shares of Common Stock held jointly with George C. Burghardt.
(12) Includes 48,000 shares held directly and 7,000 shares held as trustee.
(13) Includes 12,000 shares of 1994 Preferred Stock and 6,000 C Warrants held as trustee.
</TABLE>
PLAN OF DISTRIBUTION
Conversion of Preferred Stock
Each share of Preferred stock may be converted into the applicable number
of shares of Common Stock at any time at the election of the holder of the
Preferred Stock by the delivery to the Company at its principal executive
offices at Foreland Corporation, Union Terrace Office Bldg., 12596 West Bayaud,
Suite 300, Lakewood, Colorado 80228-2019, of the certificate for the Preferred
Stock to be converted, together with a written election to convert, indicating
the number of shares to be converted, signed by the holder thereof.
Certificates representing the Preferred Stock to be converted need not be
endorsed for transfer unless the certificate for the Common Stock to be issued
is to be issued in a name difference from that in which the certificate for the
Preferred Stock is registered. If less than the total number of shares
represented by an individual certificate is to be converted, a new certificate
of like tenor will be issued to the holder for the shares of Preferred Stock not
converted. Certificates for the shares of Common Stock issued upon such
conversion will be issued promptly following the conversion.
Exercise of Warrants and Options
The Warrants and Options may be exercised, at the discretion of the Warrant
holder or Option holder, by the delivery to the Company at its principal
executive offices at Foreland Corporation, Union Terrace Office Bldg., 12596
West Bayaud, Suite 300, Lakewood, Colorado 80228-2019, of the Warrant or Option
accompanied by an election of exercise and payment of the purchase price for
each share of Common Stock purchased in accordance with the terms of such
Warrant or Option. Payment on the exercise of Warrants must be made in the form
of cash or check payable to the order of the Company.
The Company will pay to securities broker-dealers that solicit the exercise
of Warrants a commission of 7% of the exercise price of Warrants exercised by
them, except that no commissions will be paid if, at the time of exercise, the
Warrant exercise price is greater than the trading market price for the
Company's Common Stock. Such soliciting broker-dealers may be deemed
"underwriters" within the meaning of the Securities Act, any commissions
received by them may be deemed underwriting commissions under the Securities
Act. Payment of such commission will be made within five business days after
receipt by the Company of notice of exercise of the Warrant, the collection of
good funds of all payments transmitted by check, and the acceptance of such
exercise. In order to ensure compensation for Warrants exercised through
broker-dealers, the documents relating to exercise of such Warrants must be
transmitted to the Company through such broker-dealers.
<PAGE>
Sale of Common Stock by Company
The Company will offer up to 825,659 shares of Common Stock issuable for
cash, upon cancellation of indebtedness, for services rendered, or for other
consideration as determined by the board of directors. Such shares will be
issued from time to time at such prices approximately equal to the bid price of
the Company Stock, on the date of issuance, or at a discount therefrom, as the
board of directors deems advisable. The shares will be offered through N.
Thomas Steele, president and a director of the Company, who will participate in
such offering in reliance on the exemption from being deemed a broker-dealer as
set forth in rule 3a-4 as promulgated under the Securities Exchange Act of 1934,
as amended, in those jurisdictions where sales by such persons are permitted.
No commissions, discounts, or other fees will be paid by the Company in
connection with the offer and sale of such Common Stock. Officers and directors
do not intend to purchase any of such shares.
The total of 825,659 shares of Common Stock that may be sold directly by
the Company includes the following: 10,000 shares to be issued for financial
advisory and investor relations services rendered by unaffiliated persons, and
54,000 shares to Kanowa Petroleum, Inc., Gillette, Wyoming, and D&R Investments,
Gillette, Wyoming, as partial consideration for the purchase by the Company from
such persons of an oil and gas lease covering approximately 240 gross acres in
the Eagle Springs Field in Nevada, with related equipment. The terms of the
foregoing transactions were the result of arm's length negotiations.
Determination of Conversion, Exercise, Sales, and Prices
The exercise prices of the Underwriter Units, Warrants, and Options were
determined at the time of the issuance by the board of directors, based on the
historical and future trading prices for the Common Stock in the over-the-
counter market, the possible results of exploration in the Nevada Project, and
the Company's anticipated need for additional capital. The terms of the
foregoing securities were not determined through arm's length negotiations.
(See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
The conversion prices of the Preferred Stock were determined by the board
of directors based on the anticipated marketability of the restricted Preferred
Stock, the Company's need for additional financing, and the approximate trading
price for Common Stock in the over-the-counter market at the time of issuing the
Preferred Stock.
The exercise prices of the Underwriter Units, Warrants, and Options and the
conversion prices of the Preferred Stock bear no relationship to the assets,
earnings, or book value of the Company or any other recognized criteria of
value.
The sales prices of the shares of Common Stock to be sold by the Company
for cash, services, property, or on the exercise of options has been or will be
determined by the board of directors from time to time at prices approximately
equal to the price of the Company's common Stock at the time of the Transaction
or at a discount therefrom, as the board of directs deems advisable and in the
Company's best interest.
Sale of Common Stock by Selling Shareholders
<PAGE>
The Common Stock and the Warrant Shares to be sold by the Selling
Shareholders may be sold by them from time to time directly to purchasers.
Alternatively, the Selling Shareholders may, from time to time, offer the Common
Stock or Warrant Shares for sale in the over-the-counter market through or to
securities brokers or dealers that may receive compensation in the form of
discounts, concessions, or commissions from the Selling Shareholders and/or the
purchasers of Common Stock and Warrant Shares for whom they may act as agent.
The Selling Shareholders, and any dealers or brokers that participate in the
distribution of the Common Stock or Warrant Shares, may be deemed to be
"underwriters" as that term is defined in the Securities Act, and any profit on
the sale of Common Stock or Warrant Shares by them and any discounts,
commissions, or concessions received by any such dealers or brokers may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Common Stock or Warrant Shares may be sold by the Selling Shareholders
from time to time in one or more transactions at a fixed offering price, which
may be changed, or at varying prices determined at the time of sale or at
negotiated prices. The Company will pay expenses of this offering incident to
the offering and sale of the Common Stock and Warrant Shares to the public other
than commissions and discounts of dealers or brokers. The Company does not
intend to enter into any arrangement with any securities dealer concerning
solicitation of offers to purchase the Common Stock or Warrant Shares.
Determination of Offering Price
With respect to the shares of Common Stock offered for cash sale or upon
cancellation of indebtedness or for services rendered, such shares shall be
issued from time to time at such prices approximately equal to the bid price of
the Company's Common Stock on the date of issuance, and upon such terms as the
board of directors deems advisable in the Company's best interest at the time of
issuance.
LEGALITY OF SECURITIES
The law firm of Kruse, Landa & Maycock, L.L.C., Salt Lake City, Utah,
counsel to the Company, has rendered an opinion that the shares of Common Stock
and Warrants issuable pursuant to this prospectus will be, when issued, legally
issued, fully paid, and nonassessable under the Nevada corporation laws.
Members of such firm own beneficially or share voting, dispositive, and
investment authority over less than 0.5% of the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1993, and the year then ended included in this Prospectus have been audited by
Hein + Associates LLP certified public accountants, as stated in their report,
and have been so included in reliance on the authority of such firm as experts
in accounting and auditing. The consolidated financial statements of the
Company as of December 31, 1992, and the two years then ended included in this
Prospectus have been audited by Barker & Folsom, certified public accountants,
as stated in their reports, and have been so included in reliance on the
authority of such firm as experts in accounting and auditing.
The estimates of oil and gas reserves of the Company respecting its Texas
Properties are included herein in reliance upon the authority of Ehnot
Engineering Company, independent petroleum engineers, Arlington, Texas, in
reliance on their authority as experts in petroleum engineering.
CERTAIN DEFINITIONS
The following terms related to the oil and gas industry are used throughout
this Prospectus.
<PAGE>
Area of mutual interest. An area identified by joint partners in which
they agree to share, on a specified basis, lease acquisitions, exploration,
science, drilling costs, and production, if any.
Basin. A natural water-filled depression on the earth's surface in which
sediments are collected over millions of years.
Completion. The work required after drilling a successful well to make the
well ready for production.
Completion cost. The additional cost incurred after a well has been
drilled to total depth and; tested in order to make the well ready for
production.
Drill stem test. A test conducted during the drilling process to test a
potential producing formation. The drill string is pulled out of the hole, the
drill bit is removed, and a special testing device attached to the end of the
drill string before lowering it back into the hole. Information is then
collected on the amount and quality of formation fluids recovered and the
accompanying pressures to assist in determining whether or not the zone can be
commercially produced.
Dry hole cost. The cost of drilling a well to total depth, testing, and
plugging and abandoning the test as a dry hole, as opposed to completing the
well for production.
Exploratory well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
Fee mineral interest. The ownership of all rights to minerals (including
oil and gas) as they naturally occur in place at or below the surface of the
land. Ownership of the mineral interest includes the right to make reasonable
use of the surface to explore for and produce minerals.
Formation. A layer of rock having characteristics that are distinct and
recognizable. Formations can range in thickness from a few feet to hundreds of
feet.
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to an individual geological structural feature and/or
stratigraphic condition.
Gravity. A measurement of the density of liquid oil that is inversely
related to specific gravity. The higher the oil gravity, the lighter the oil.
Gross well or Acre. A well or acre in which the working interest is owned.
The number of gross wells is the total wells in which a working interest is
owned, whether it is a small working interest or 100% of the working interest.
Lease. A contract by which the owner of the mineral rights to a property
conveys to another party the exclusive right to explore for and develop oil on
the property for a specified period of time.
Lifting costs. Costs incurred to operate and maintain wells and related
equipment and facilities, including depreciation and applicable operating costs
of support equipment and facilities, and other costs of operating and
maintaining those wells and related equipment and facilities.
Net well or acre. A net well or acre is deemed to exist when the sum
fractional ownership working interests in gross wells or acres equals one.
Operator. The working interest owner responsible for the drilling,
completion, and production operations of a well and the physical maintenance of
the leased property.
Overriding royalty interest. An interest in an oil and gas property
entitling the owner to a share of oil and gas production free of costs of
production.
<PAGE>
Plugged and abandoned. The process of setting cement plugs in a dry hole
or a producing well if it is no longer economically productive.
Present value of estimated future net revenues. Estimated future net
revenues discounted at a rate of 10% per year.
Productive well. A well that is producing oil or gas or that is capable of
production.
Proved reserves. The estimated quantities of oil, gas, and gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions.
Proved undeveloped reserves. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
Reservoir rock. Any rock having enough porosity to contain appreciable
hydrocarbons.
Seismic surveying. The procedure of sending pulses of sound from the
surface and recording the echoes reflected back to the surface. By estimating
the speed at which sound travels through various layers or formations of rock,
it is possible to estimate the depth of the reflecting surface and to infer the
structure of the reflecting formation.
Show. An indication of oil or gas observed and recorded during the
drilling of a well.
Source rock. Sedimentary rock containing organic carbon. After being
subject to high temperatures and pressures, the organic material can be
transformed to hydrocarbons which are then usually expelled from the source rock
to surrounding porous rock formations.
Trap. A natural configuration of layers of rock in which non-porous or
impermeable rocks act as a barrier to the natural buoyant flow of hydrocarbons
up through reservoir rock.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest which gives the owner the right
to drill, produce, and conduct operating activities on the property and a share
of production from the property the interest covers.
Well spacing or spacing unit. The size (amount of surface area) of a
parcel of land on which only one producing well is permitted to be drilled to a
specific reservoir. It is intended that the single well should drain, or should
nearly drain, all of the recoverable oil or gas from the area of the reservoir
that lies within the spacing unit. Well spacing is regulated by the state in
which the well is situated, based on an engineering evaluation of the reservoir
characteristics.
<PAGE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports F-2
Consolidated Balance Sheets - As of December 31, 1992 and 1993,
and September 1994 (Unaudited) F-4
Consolidated Statements of Operations - For the Years Ended December 31,
1991,1992, and 1993, and the Nine Months Ended September 30, 1993
and 1994 (Unaudited) F-5
Consolidated Statement of Stockholders' Equity - For the Period from
January 1, 1991 through September 30, 1994 (Unaudited) F-6
Consolidated Statements of Cash Flows - For the Years Ended December
31, 1991, 1992, and 1993, and the Nine Months Ended September 30,
1993 and 1994 (Unaudited) F-8
Notes To Consolidated Financial Statements F-9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Foreland Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Foreland
Corporation and subsidiaries as of December 31, 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Foreland
Corporation and subsidiaries as of December 31, 1993, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. As discussed in Note 2 to the financial statements, the Company has
suffered losses from inception, and anticipates the need for additional cash to
fund its operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also discussed in Note 2. The financial statements do not
include any adjustment that might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 9, 1994
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Foreland Corporation
We have audited the accompanying consolidated balance sheets of Foreland
Corporation and its subsidiary as of December 31, 1992 and 1991, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material aspects, the financial
position of Foreland Corporation and its subsidiary as of December 31, 1992 and
1991, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Foreland Corporation will continue as a going concern. As discussed in Note 1
to the financial statements, the Company has suffered recurring losses from
operations, which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BARKER & FOLSOM
Certified Public Accountants
Ogden, Utah
June 18, 1993
<PAGE>
<TABLE>
<CAPTION>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPT. 30,
---------------------------------------------------
1992 1993 1994
---------------- --------------- -----------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 239,172 $958,473 $1,589,269
Marketable securities 189,911 186,707 -
Accounts receivable - trade, less
allowance of $32,025, $-0-,
and $-0-, respectively 11,789 232,671 565,022
Note receivable, less allowance of
$54,489, $-0-, and $-0-,
respectively 150,000 83,333 -
Advances to officer 4,137 179,830 5,071
Inventory 40,612 96,476 130,947
Prepaid expenses and other 83,413 15,531 10,376
---------------- ---------------- --------------
Total current assets 719,034 1,753,021 2,300,685
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, under the 2,786,095 5,797,010 4,697,820
successful efforts method
Other property and equipment 35,855 114,469 128,584
---------------- ---------------- --------------
2,821,950 5,911,479 4,826,404
Less accumulated depreciation,
amortization and depletion (816,650) (1,173,326) (684,539)
---------------- --------------- --------------
2,005,300 4,738,153 4,141,865
OTHER ASSETS 76,548 105,269 113,788
---------------- --------------- --------------
TOTAL ASSETS $ 2,800,882 $ 6,596,443 $ 6,556,338
================ =============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued $ 30,808 $ 753,454 $ 920,659
expenses
Officers' salaries payable 326,669 321,587 346,455
Convertible promissory notes 325,000 -- --
---------------- --------------- ---------------
Total current liabilities 682,477 1,075,041 1,267,114
LONG-TERM DEBT - - 400,000
COMMITMENTS AND CONTINGENCIES (Notes 2,
3, 7, 8, and 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value,
5,000,000 shares authorized:
1991 Convertible Preferred
Stock, 524,600, 74,600, and
40,000 shares issued and
outstanding, respectively,
liquidation preference $1.25
per share 525 75 40
1993 Convertible Preferred
Stock, 0, 4,000, and 4,000
shares issued and outstanding,
respectively, liquidation
preference $5.00 per share - 4 4
1994 Convertible Preferred
Stock, 0,0, and 1,316,210
sharesissued and outstanding,
respectively, liquidation
preference $2.00 per share - - 1,316
Common stock, $.001 par value,
50,000,000 shares authorized;
9,212,284, 12,692,106, and
13,515,206 shares issued,
respectively 9,220 12,692 13,515
Additional paid-in capital 11,231,511 18,232,193 21,890,325
Treasury stock at cost, 0, 0, and
72,354 shares, respectively - - (153,752)
Less note and stock subscriptions
receivable (218,046) (240,503) (1,311,300)
Accumulated deficit (8,904,805) (12,483,059) (15,550,924)
---------------- --------------- ---------------
Total stockholders' equity 2,118,405 5,521,402 4,889,224
---------------- --------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY $ 2,800,882 $ 6,596,443 $ 6,556,338
================ ============== ===============
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- -------------------------
1991 1992 1993 1993 1994
-------- --------- -------- -------------- --------------
(Unaudited) (Unaudited)
REVENUES:
<S> <C> <C> <C> <C> <C>
Oil sales $ 309,680 $ 57,521 $ 75,748 $ 53,631 $ 325,935
Well service sales 174,690 22,716 21,589 35,230 23,971
Other income, net (13,790) 94,420 90,543 57,525 45,659
-------------- -------------- -------------- -------------- --------------
Total revenues 470,580 174,657 187,880 146,386 395,565
EXPENSES:
Oil and gas production 205,831 33,298 59,023 56,867 316,680
Oil and gas exploration 358,576 416,260 860,214 345,937 705,870
Well service costs 51,537 11,292 10,947 3,366 1,054
Dry hole and
abandonment costs 625,558 261,331 1,389,728 864,961 893,487
General and
administrative 997,826 680,501 655,985 412,285 770,551
Loss on sale of assets - - - - 434,521
Compensation - below
market options - - 320,000 320,000 3,125
Bad debt allowance 110,000 333,118 - - 8,797
Depreciation,depletion,
and amortization 149,524 60,194 356,676 67,864 269,637
Interest expense 36,322 54,761 113,561 104,619 59,708
-------------- -------------- -------------- -------------- --------------
2,535,174 1,850,755 3,766,134 2,175,899 3,463,430
-------------- -------------- -------------- -------------- --------------
LOSS BEFORE MINORITY
INTEREST (2,064,594) (1,676,098) (3,578,254) (2,029,513) (3,067,865)
MINORITY INTEREST 85,636 -- -- -- --
-------------- -------------- -------------- -------------- --------------
NET LOSS $(1,978,958) $(1,676,098) $(3,578,254) $(2,029,513) $(3,067,865)
============== ============== ============== ============== ==============
NET LOSS PER COMMON SHARE $ (.29) $ (.19) $ (.34) $ (.21) $ (.24)
============== ============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING 6,901,000 8,649,000 10,405,000 9,753,000 12,825,000
============= ============== ============== ============== ==============
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM JANUARY 1, 1991 THROUGH SEPTEMBER 30, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
(note-for presentation purposes, the following table has been divided into two parts. The column "stockholder's equity" in the
second part tabulates entire rows from both parts.)
ADDITIONAL
PAID-IN
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1991 - $ - 6,346,962 $ 6,347 $6,255,557
Stock issued for compensation 4,600 5 14,800 15 28,855
Exercise of common stock
options - - 67,871 68 101,740
Sale of common stock, net of
offering costs - - 1,242,000 1,242 1,969,858
Sale of preferred stock, net
of offering costs 910,000 910 - - 972,044
Common stock issued to
purchase minority interest - - 775,857 775 1,172,707
Waived executive compensation - - - - 90,000
Net loss - - - - -
----------- ----------- ------------ ------------ --------------
BALANCES, December 31, 1991 914,600 915 8,447,490 8,447 10,590,761
Stock issued for compensation - - 40,000 40 56,210
Preferred exchanged for common (390,000) (390) 390,000 390 -
Underwriter warrants to common - - 72,000 72 89,928
Costs of capital offering
costs - - - - (7,492)
Exercise of option - - 15,000 15 14,985
Conversion of notes payable
and accrued interest - - 65,000 65 100,810
Exercise of preferred warrants - - 196,000 196 296,304
Common stock canceled - - (4,781) (5) 5
Waived executive compensation - - - - 90,000
Payment of note receivable - - - - -
Accrued interest - - - - -
Net loss - - - - -
----------- ----------- ------------ ------------ --------------
BALANCES, December 31, 1992 524,600 525 9,220,709 9,220 11,231,511
Stock issued for compensation - - 5,000 5 10,933
Preferred stock exchanged for
common (450,000) (450) 450,000 450 -
Redemption of shares - - (93) - (250)
Preferred stock offering 700,000 700 - - 3,125,842
Conversion of promissory notes
to common - - 162,500 163 324,837
Conversion of preferred to
common (696,000) (696) 1,392,000 1,392 (696)
Exercise of preferred warrants - - 217,000 217 379,533
Exercise of Class A warrants - - 1,241,990 1,242 2,793,236
Exercise of X warrants - - 3,000 3 9,747
Waived executive compensation - - - - 37,500
Accrued interest - - - - -
Options issued below market - - - - 320,000
Net loss - - - - -
----------- ----------- ------------ ------------ --------------
BALANCES, December 31, 1993 78,600 79 12,692,106 12,692 18,232,193
Preferred stock exchanged for
common (unaudited) (34,600) (35) 34,600 35 -
Stock issued for promissory
notes(unaudited) - - 701,900 702 1,115,598
Exercise of options
(unaudited) - - 86,600 86 178,114
Stock issued below market
(unaudited) - - - - 24,366
Preferred stock offering
(unaudited) 1,316,210 1,316 - - 2,340,05
Receipt of payment of notes
for stock (unaudited) - - - - -
Return of stock for tax
liability (unaudited) - - - - -
Accrued interest (unaudited) - - - - -
Net loss (unaudited) - - - - -
----------- ----------- ------------ ------------ --------------
BALANCES, September 30, 1994
(unaudited) 1,360,210 $1,360 13,515,206 $ 13,515 $21,890,325
=========== =========== ============ ============ =============
<CAPTION>
ACCUMULATED TREASURY STOCK SUBSCRIPTIONS STOCKHOLDERS'
--------------
DEFICIT SHARES AMOUNT RECEIVABLE EQUITY
------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1991 $(5,249,749) (73,219) $(274,571) $(82,745) $654,839
Stock issued for ompensation - - - - 28,875
Exercise of common stock
options - - - - 101,808
Sale of common stock, net of
offering costs - - - - 1,971,100
Sale of preferred stock, net
of offering costs - - - (123,421) 849,533
Common stock issued to
purchase minority interest - 73,219 274,571 - 1,448,053
Waived executivecompensation - - - - 90,000
Net loss (1,978,958) - - - (1,978,958)
---------------- ---------- ---------- ----------------- -------------
BALANCES, December 31, 1991 (7,228,707) - - (206,166) 3,165,250
Stock issued for compensation - - - - 56,250
Preferred exchanged for common - - - - -
Underwriter warrants to common - - - - 90,000
Costs of capital offering
costs - - - - (7,492)
Exercise of option - - - - 15,000
Conversion of notes payable
and accrued interest - - - - 100,875
Exercise of preferred warrants - - - - 296,500
Common stock canceled - - - - -
Waived executive compensation - - - - 90,000
Payment of note receivable - - - 15,000 15,000
Accrued interest - - - (26,880) (26,880)
Net loss (1,676,098) - - - (1,676,098)
---------------- ---------- --------- ----------------- ------------
BALANCES, December 31, 1992 (8,904,805) - - (218,046) 2,118,405
Stock issued for compensation - - - - 10,938
Preferred stock exchanged for
common - - - - -
Redemption of shares - - - - (250)
Preferred stock offering - - - - 3,126,542
Conversion of promissory notes
to common - - - - 325,000
Conversion of preferred to
common - - - - -
Exercise of preferred warrants - - - - 379,750
Exercise of Class A warrants - - - - 2,794,478
Exercise of X warrants - - - - 9,750
Waived executive compensation - - - - 37,500
Accrued interest - - - (22,457) (22,457)
Options issued below market - - - - 320,000
Net loss (3,578,254) - - - (3,578,254)
---------------- -------------- ------ ----------------- -------------
BALANCES, December 31, 1993 (12,483,059) - - (240,503) 5,521,402
Preferred stock exchanged for
common (unaudited) - - - - -
Stock issued for promissory
notes(unaudited) - - - (1,116,300) -
Exercise of options
(unaudited) - - - - 178,200
Stock issued below market
(unaudited) - - - - 24,366
Preferred stock offering
(unaudited) - - - - 2,341,370
Receipt of payment of notes
for stock (unaudited) - - - 63,800 63,800
Return of stock for tax
liability (unaudited) - 72,354 (153,752) - (153,752)
Accrued interest (unaudited) - - - (18,297) (18,297)
Net loss (unaudited) (3,067,865) - - (3,067,865)
---------------- ---------- ---------- ---------------- -------------
BALANCES, September 30, 1994
(unaudited) $(15,550,924) 72,354 $(153,752) $(1,311,300) $ 4,889,224
=============== ======== ========== =============== ===============
</TABLE>
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1991 1992 1993 1993 1994
------------ -------------------------- ------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net loss $(1,978,958) $(1,676,098) $(3,578,254) $(2,029,513) $(3,067,865)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation, depletion and
amortization 149,524 60,194 356,676 67,864 269,637
Bad debt allowance 110,000 246,604 - - 8,797
Waived executive compensation 90,000 90,000 37,500 37,500 -
Other income (loss) 26,939 (16,884) - - -
Lease abandonment and dry hole costs 466,611 261,331 - 864,961 790,170
Issuance of stock for services 28,875 56,250 10,938 10,938 -
Accrued note receivable interest - (23,506) (22,457) (15,957) (18,297)
Minority interest (69,547) - - -
Below market stock options - - 320,000 320,000 24,366
Loss on sale of assets - - - 434,521
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable (92,021) 110,318 (220,882) (333,788) (341,148)
Advances to officer - 4,137 (175,693) (189,815) 174,759
Inventory 25,355 - (55,864) (138,279) (34,471)
Prepaids and other 81,548 (30,203) 63,551 25,655 5,155
Increase (decrease) in:
Accounts payable 101,831 (264,443) 722,646 503,283 13,453
Salaries payable 52,881 88,587 (5,082) 35,134 24,868
------------ ------------- ------------ ------------- -------------
Net cash used in operating (1,006,962) (1,093,713) (2,546,921) (842,017) (1,716,055)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (2,021,100) - 189,911 (186,798) ---
Proceeds from sale of marketable
securities 498,240 1,351,000 (186,707) 189,911 186,707
Proceeds from sale of property and
equipment 200,000 - - - -
Additions to oil and gas properties (791,918) (641,862) (3,009,154) (2,449,963) (947,814)
Purchase of other property (20,908) (26,601) (80,375) (36,865) (22,634)
Proceeds from note receivable -- -- 66,666 66,666 83,333
------------ ------------- ------------ ------------- -------------
Net cash (used in) provided by
investing activities (2,135,686) 682,537 (3,019,659) (2,417,049) (700,408)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock, net 2,944,054 (7,492) 3,126,542 3,126,542 2,341,370
Proceeds from exercise of warrants
and options - 401,500 3,183,978 901,742 178,200
Proceeds from sale of assets - - - - 63,889
Payment of long-term debt and
promissory notes (5,356) (20,000) - - -
Issuance of stock for interest on
convertible notes - 100,875 - - -
Receipt of note payment for stock - - - - 63,800
Increase in restricted cash - - (24,389) (24,000) -
Redemption of shares and debenture (110,465) - (250) (250) -
Proceeds from long-term debt - - -- -- 400,000
------------ ------------- ------------ ------------- -------------
Net cash provided by financing
activities 2,828,233 474,883 6,285,881 4,004,034 3,047,259
----------- ------------- ------------ ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (314,415) 63,707 719,301 744,968 630,796
CASH AND CASH EQUIVALENTS, beginning
of year 489,880 175,465 239,172 239,172 958,473
------------- ------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $175,465 $239,172 $958,473 $984,140 $1,589,269
============ ============= ============ ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $36,322 $18,279 $ - $ - $ -
============ ============= ============ ============= =============
Non-cash investing and financing
activities $ - - $22,457 $16,139 $18,297
============= ============ ============ ============= =============
Notes payable and accrued
interest converted to common
stock $ - $100,875 $325,000 $ - $ -
============= ============ ============ ============= ============
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1993, is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Organization and Purpose - Foreland Corporation (Foreland) was
incorporated in Nevada in 1985 to engage in oil exploration. Activities to date
have focused primarily in north-central Nevada.
Principles of Consolidation - The consolidated financial statements include the
accounts of Foreland and its wholly-owned subsidiaries, Krutex Energy
Corporation (Krutex), and Eagle Springs LLC (Eagle Springs) collectively
referred to as the Company. All significant intercompany transactions and
balances have been eliminated in consolidation.
Oil and Gas Properties - The Company uses the successful efforts method of
accounting for oil and gas producing activities. Costs to acquire mineral
interests in oil and gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip development wells are capitalized.
Costs to drill exploratory wells that do not find proved reserves, geological
and geophysical costs, and costs of carrying and retaining unproved properties
are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of-production
method. Support equipment and other property and equipment are depreciated over
their estimated useful lives.
Costs of exploratory wells in progress are capitalized and excluded from
depletion until such time as proved reserves are established or impairment is
determined, generally not greater than one year from completion of drilling.
On sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
On sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
<PAGE>
Other Property and Equipment - Property and equipment are stated at cost.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives (ranging from 3 to 10 years) of the
respective assets. The cost of normal maintenance and repairs is charged to
operating expenses as incurred. Material expenditures which increase the life
of an asset are capitalized and depreciated over the estimated remaining useful
life of the asset. The cost of properties sold, or otherwise disposed of, and
the related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.
Marketable Securities - Marketable securities are recorded at the lower of cost
or market. The cost of marketable securities sold is determined on the average
cost method and realized gains or losses are reflected in the statement of
operations. Dividend and interest income are accrued as earned.
Marketable securities and unrealized gains consists of the following as of
December 31, 1993:
Cost basis $187,000
Market value 190,000
----------
Unrealized gain $3,000
==========
Inventory - Inventory, which consists primarily of tubular goods and oil field
materials and supplies is stated at the lower of cost (average cost method) or
market.
Income Taxes - In fiscal 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which changed the criteria for measuring the provision for income taxes
and recognizing deferred tax assets and liabilities in the accompanying
financial statements. SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined, based on the difference between the
financial statements and tax base of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Net Loss Per Share - The net loss per share calculation was based on the
weighted average number of shares outstanding during the period. Options and
warrants outstanding have been excluded from the net loss per share calculation
inasmuch as the effect would be antidilutive.
Cash Equivalents- For purposes of the statements of cash flows, the Company
considers all instruments purchased with an original maturity of three months or
less to be cash equivalents.
<PAGE>
Unaudited Interim Information - The balance sheet as of September 30, 1994 and
the statements of operations for the nine months ended September 1993 and 1994
were taken from the Company's books and records without audit. However, in the
opinion of management, such information includes all adjustments (consisting
only of normal recurring accruals) which are necessary to properly reflect the
financial position of the Company as of September 30, 1994 and the results of
operations for the nine months ended September 30, 1993 and 1994. The results
of operations for the interim periods presented are not necessarily indicative
of those to be expected for the year.
2. BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared on the
going concern basis, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company has
suffered cumulative losses of approximately $15,550,924 since inception, and the
ability of the Company to continue as a going concern is dependent on its
ability to successfully develop its oil and gas properties and ultimately
achieve profitable operations.
Management's plans in this regard are as follows:
The Company will continue to seek cash proceeds from the exercise of options and
warrants currently outstanding and from the sale of additional common stock,
preferred stock, warrants, or other securities for cash. If inadequate funds
are received from security offerings, the Company will seek required operating
capital through interim debt financing, the farmout of drilling prospects, the
sale of leases, or drilling prospects or exploration rights on specific
prospects, the sale of geological and geophysical data gathered by the Company
since 1985 in Nevada, or through other means. The Company has previously
attempted to retain a large percentage interest in drilling prospects in lieu of
an initial cash payment in negotiating for exploration funds or the sale of
individual prospects, but in the future the Company may negotiate for a reduced
retained percentage interest in a prospect in an effort to obtain an initial
cash payment. There is no assurance that any such efforts would be successful.
Officers, directors and key employees have advised the Company in writing that
they would agree to continue to defer a portion of their salaries if necessary
for the Company to continue.
The Company will continue to rely on funding its exploration drilling program
and on spreading the risk inherent in this type of drilling by entering into
drilling partnerships with others. In order to fund a continued drilling
program, the Company may need to dispose of partial interests in its existing
projects, raise additional capital through continued sale of securities, or
sponsor oil and gas investor participation programs. The Company is continuing
with negotiations with various other exploration firms to fund additional
drilling in Nevada, but there is no assurance that arrangements can be reached
on terms acceptable or favorable to the Company.
<PAGE>
While the Company anticipates future oil revenues from its Eagle Springs, Tomera
Ranch and Willow Creek discoveries, there is no assurance that the Company's
operating requirements will be satisfied.
The Company believes that its present financial resources, along with intended
continuous sale of securities throughout 1994 will enable it to meet its
requirements for capital and liquidity through the end of 1994. The Company's
liquidity requirements thereafter are not presently known inasmuch as they are
substantially dependent on the results of drilling in Nevada.
3. RELATED PARTY TRANSACTIONS:
The Company owed $326,669, $321,587, and $346,455 in salaries and interest to
its officers and directors at December 31, 1992 and 1993, and September 30,
1994, respectively.
In June 1991, the Company loaned an officer and director, and a former officer
and director, an aggregate of $123,421, repayable with interest at the prime
rate and collateralized by a pledge of the obligation of the Company to such
persons for accrued but unpaid back salaries of approximately $156,720.
Proceeds from these loans were used to purchase $100,000 in preferred stock and
Warrants and to pay $23,421 in interest and principal on the notes due Krutex on
the purchase from it of the Company's common stock. The notes were originally
due in June 1992, but the Company has agreed not to seek $202,809, including
additional advances and accrued interest, payment of the notes until back
salaries owed these individuals (totaling $211,930 at December 31, 1993) are
paid. At December 31, 1993, $202,809, including accrued interest, was due under
the notes.
Although the Board approved compensation of $90,000 annually for the Company's
former president, due to a lack of operating profitability, he waived his
compensation. However, the waived compensation was recorded as an expense and
offset to paid-in capital. Effective May 19, 1993, the former president
resigned as president of the corporation, but still retains his position as
chairman of the Board of Directors.
In May 1993, in connection with the Company's move to Denver, Colorado, the
Company agreed to: 1) pay for all relocation expenses incurred by the
president; 2) pay the president's mortgage payments and maintenance costs on his
former residence; 3) grant the president options to purchase 72,000 shares of
the Company's common stock at $1.50 per share; 4) guarantee a minimum sales
price of $375,000 on his former residence; and 5) advance the president up to
$175,000. In September 1994, the Company sold the residence and received
approximately $290,000 net of selling costs and recognized a loss on the
transaction of approximately $85,000.
<PAGE>
4. STOCKHOLDERS' EQUITY:
1991 Offering - During November 1991, the Company received net proceeds of
$1,971,100 from a public offering of 4,600 units. Each unit consists of 270
shares of common stock, 270 A warrants to purchase common stock at $2.25 per
share, and 270 B warrants to purchase common stock at $3.90 per share. The
warrants are exercisable through October 30, 1994, unless earlier called for
redemption for $.10 per warrant if the NASDAQ price for Foreland's common stock
exceeds $2.70 per share in the case of A warrants, and $4.68 per share in the
case of B warrants.
In conjunction with 1991 common stock offering, the Company issued to the
underwriter for $100, 400 underwriter unit warrants consisting of 108,000 Class
A warrants, 108,000 Class B warrants, and 108,000 shares of common stock. The
underwriter's unit warrants are priced at 110% of the initial public offering
price of $1.85 per share, or $2.04 per share. Warrants can be exercised at the
price of $2.25 per share for Class A warrants and $3.90 per share for Class B
warrants.
On July 23, 1993, Foreland notified holders of its Class A warrants that
Foreland would redeem the warrants at $.10 each if not exercised by October 1,
1993. During 1993, the holders of Class A warrants purchased 1,241,990 shares
of common stock at $2.25 per share for total proceeds of $2,794,478.
1991 Preferred Stock Offering - During 1991, the Company sold 910,000 shares of
preferred stock in a private placement at $1.25 per share for net proceeds of
$972,954. The purchasers of preferred stock also received two-year warrants
(the 1991 warrants) to purchase an aggregate of 455,000 shares of common stock
at $1.50 per share during the first year and $1.75 per share during the second
year. The sales agent for the private placement received warrants to purchase
an aggregate of 73,000 shares of common stock at $1.25 per share.
During 1992, the holders of the 1991 warrants purchased 186,000 shares of common
stock at $1.50 per share, and 10,000 shares of common stock at $1.75 per share
for total proceeds of $296,500. During 1993, holders of the 1991 warrants
purchased 217,000 shares of common stock at $1.75 per share for a total of
$379,750.
During the fourth quarter of 1992, 72,000 of the 73,000 underwriter warrants
issued in connection with the 1991 preferred private placement were exercised at
$1.25 per share for total proceeds of $90,000.
1993 Private Placement - During May 1993, the Company completed a private
placement offering totaling $3,500,000 for the sale of 700,000 units, each unit
consisting of one share of 1993 convertible preferred stock, par value $.001,
and one X warrant, yielding net proceeds of approximately $3,126,542, after
placement commissions and other costs of the offering. Each X warrant entitles
the holder to purchase, at any time through December 1, 1994 (or upon 30-day
notice by the Company if the Company's common stock trades above $4.25 for 10 of
15 consecutive trading days), one share of the Company's common stock, and one
Y warrant to purchase for $4.00 per share an additional share of common
stock through December 15, 1995. X warrants not exercised by December 1, 1994
will be exercisable at $4.00 per share thereafter through December 15, 1995, but
will not receive Y warrants. At the election of the holder, each share of 1993
preferred stock may be converted into two shares of common stock. The 1993
preferred stock is also redeemable at any time after December 14, 1995, at $5.00
per share. During 1993, preferred stockholders elected to convert 696,000
shares of 1993 preferred stock to 1,392,000 shares of common stock. The Company
issued to the underwriter in this placement 70,000 X warrants exercisable at
$3.25 and 70,000 Y warrants exercisable at $4.00.
<PAGE>
At the election of the Company, the X and Y warrants may be called for
redemption at a price of $.10 per warrant at any time that the closing bid for
the Company's common stock, as quoted on the NASDAQ Stock Market, for 45
consecutive trading days within 10 days preceding the notice of redemption,
exceeds 150% of the applicable warrant exercise price. The exercise periods for
the X and Y warrants may be extended at the discretion of the Company by action
of its Board of Directors and notice to the warrant holders.
1994 Private Placement. In July of 1994, the Company issued 1,316,210 shares of
1994 Convertible Redeemable Preferred Stock and 658,105 C Warrants for net
proceeds of $2,341,370. The offering consisted of 658,105 units at $4.00 per
unit. Each unit consists of two shares of preferred stock and one C Warrant.
At the election of the holder, each share of preferred stock may be converted at
any time after October 31, 1994, into one share of common stock. The 1994
preferred stock is redeemable at any time after March 31, 1996, at $4.00 per
share at the Company's option, and has a liquidation preference of $2.00 per
share. Each C Warrant entitles the holder to purchase, at any time between
October 31, 1994, and July 1, 1995, for an exercise price of $3.00, one share of
common stock. The Company issued to the placement agent in this offering
warrants to purchase 65,811 units at $4.40 per unit.
Other - In connection with the Company's initial public offering, warrants to
purchase 23,500 shares of common stock at $1.25 through February 15, 1996 were
issued to the underwriter.
During 1992, 40,000 shares of common stock were issued for $56,250 as
compensation for services.
In September 1992, the Company issued 65,000 shares of common stock in
settlement of notes payable and accrued interest of $100,875.
The Company issued 5,000 shares of common stock valued at $10,938, the
approximate market price for the stock at the date of issuance, as compensation
for professional services rendered during the first quarter of 1993.
During the second quarter of 1994, options were exercised for 86,600 shares of
common stock for $178,200 in cash and 51,900 shares for $103,800 in promissory
notes.
<PAGE>
Options - In 1985, the Company granted to its founders, who were also directors
and officers, options to purchase 1,100,000 shares of the Company's common stock
at a purchase price of $1.50 per share. During 1989, the Board extended to June
15, 1992, the 1985 options held by the Company's current directors to purchase,
in the aggregate, up to 1,050,000 shares of common stock. In addition, the 1985
options were revised to provide that on exercise of any of the options to
purchase 1,050,000 shares of common stock, the Company will grant new five-year
options for an equal amount of shares at a new exercise price to be equal to the
trading price for the Company's common stock as of the date of grant. In April
1991, the officers and directors agreed to the extension of the options through
1996 and waived their rights to 100,000 options. In 1991, options for 67,781
shares were exercised at $1.50 per share, and new options for 67,781 shares at
$1.31 per share through December 1996 were granted.
On July 15, 1991, options to purchase 25,000 shares at $1.81 and 25,000 shares
at $3.38 through July 15, 1996 were granted to an officer and director. Upon
exercise of the 25,000 options at $3.38, new options for an equal number of
shares at a new exercise price equal to the trading price of the Company's
common stock at the date of grant will be issued.
In April 1994, options to purchase a total of 50,000 shares at $2.25 through
April 1999 were granted to two officers and directors. Upon exercise of the
options, new options for an equal number of shares at an exercise price equal to
the trading price of the Company's common stock at the date of grant will be
issued.
On September 16, 1994, outstanding options, including the options granted in
April 1994, were exercised to purchase Common Stock as follows: Grant Steele,
200,000 shares at $1.50; N. Thomas Steele, 200,000 shares at $1.50; Kenneth L.
Ransom, 200,000 shares at $1.50; Bruce C. Decker, 25,000 shares at $2.25; and
Dennis J. Gustafson, 25,000 shares at $2.25. Pursuant to the terms of the
options exercised, each optionee paid the purchase price of the options by the
delivery of a promissory note payable in three equal, consecutive installments
of principal plus interest on the unpaid balance at 7% per annum, payable
annually commencing on the first anniversary of the exercise. The note
installments are payable in cash or the delivery of Common Stock or other
options valued at the trading price at the time of payment. In connection with
the issuance of shares on the exercise of such options, Grant Steele, N. Thomas
Steele, and Kenneth L. Ransom each returned 24,118 shares, for an aggregate of
72,354 shares, of Common Stock to satisfy withholding obligations of the
Company, as provided for in the terms of the options exercised. Also pursuant
to the terms of the options exercised, the Company automatically granted new
five year options to purchase Common Stock at $2.125, the market price for the
Common Stock at the time of exercise, as follows: Grant Steele, 200,000 shares;
N. Thomas Steele, 200,000 shares; Kenneth L. Ransom, 200,000 shares; Bruce C
Decker, 25,000 shares; and Dennis J. Gustafson 25,000 shares. These
transactions were not the result of arm's length negotiations.
On October 6, 1994, the Company granted to employees five-year options to
purchase an aggregate of 105,000 shares of Common Stock at $3.00 per share, of
which 10,000 options are currently exercisable, 31,000 vest and become
exercisable after one year, 32,000 vest and become exercisable after two years,
and 32,000 vest and become exercisable after three years, provided that the
employee in each case has been, within the preceding 30 days, an employee of the
Company.
<PAGE>
On October 6, 1994, the Company granted to a non-affiliated person options to
purchase 30,000 shares of Common Stock at an exercise price of $3.00 through
October 6, 1999.
Warrants - The Company will issue L Warrants to those persons who are holders of
record of B Warrants on October 30,1994, at the rate of one L Warrant for each B
Warrant held. Each L Warrant entitles the holder to purchase one share of
Common Stock at $6.00 through December 31, 1995, or at $8.00 thereafter through
December 31, 1996.
The L Warrants are subject to redemption by the Company at a price of $0.10 per
L Warrant on 30 days' prior written notice if the closing bid price of the
Common Stock of the Company, as quoted on Nasdaq, exceeds the L Warrant exercise
price by at least 20% for 20 of 30 trading days during a period ending within 10
days of the notice of redemption. All L Warrants in any class must be redeemed
if any L Warrant in that class is redeemed. L Warrants may be exercise during
the 30 day period after notice of redemption has been given.
SARS - In 1993, the Company granted a total of 180,000 Stock Appreciation Rights
(SARS) to officers. The SARS vest 1/3 upon grant, 1/3 on the first anniversary
date of the grant, and 1/3 on the second anniversary date of the grant. The
SARS grant entitles the officers to receive cash, stock or a combination of both
in an amount equal to the amount by which the fair market value of the Company's
common stock on the date the SARS is exercised exceeds $4.56 per share. The
SARS granted expire in May 1998.
In June 1994, the Company granted 45,000 Stock Appreciation Rights (SARs) to an
executive officer and director. The SARs vest 1/3 upon grant, 1/3 on the first
anniversary date of the grand, and 1/3 on the second anniversary date of the
grant. The SARs grant entitles the officer to receive cash, stock, or a
combination of both in an amount equal to the amount by which the fair market
value of the Company's common stock on the date of the SARs is exercised exceeds
$2.50 per share. The SARs granted expire in June 1999.
<PAGE>
Summary - The following summarizes the options and warrants currently
outstanding and exercisable:
EXPIRATION DATES
----------------
Options (price per share):
--------------------------
Officers and directors:
Exercise price of $3.38 July 1996 25,000
Exercise price of $1.81 July 1996 25,000
Exercise price of $1.50 December 1996 -
May 1998 354,000
Exercise price of $1.31 December 1996 68,000
Exercise price of $2.125 September 1999 650,000
Others:
Exercise price of $4.00 October 1995 18,500
Exercise price of $3.69 June 1995 50,000
Exercise price of $2.50 April 1998 20,000
Exercise price of $1.50 April 1998 30,000
Exercise price of $3.00 October 1999 40,000
----------
Total options 1,280,500
Warrants (price per share):
---------------------------
Exercise price of $4.00 (Y warrants)December 1995 3,000
Exercise price of $6.00-8.00 (L warrants)December 1996 1,242,000
Exercise price of $3.25 (X warrants)December 1995 697,000
Exercise price of $2.04 (Placement Agent)October 1996 108,000
Exercise price of $1.25 (Underwriter)February 1996 1,000
Exercise price of $2.00 (CapitalPro)April 1996 200,000
Exercise price of $3.00 (C Warrants)July 1995 658,105
----------
Total warrants 2,909,105
----------
Total options and warrants issued and outstanding 4,189,605
==========
The above table does not include 1,118,811 warrants to purchase Common Stock
purchase warrants currently issued and outstanding. It also does not include
options with an exercise price of $3.00 issued to employees on October 6, 1994,
of which 31,000 vest and become exercisable after one year from issuance, 32,000
vest and become exercisable after two years, and 32,000 vest and become
exercisable after three years, provided that the employee in each case has
been, within the preceding 30 days, an employee of the Company.
5. INCOME TAXES:
The Company adopted the liability method of accounting for income taxes as
prescribed by Statement of Financial Accounting Standards No. 109 (SFAS 109)
effective January 1, 1993. Financial statements of prior years have not been
restated to apply the new method retroactively. The change in accounting method
had no effect on net loss for 1993 or prior years.
<PAGE>
Deferred tax assets (liabilities) are comprised of the following at December 31,
1993:
LONG-TERM
-----------
Deferred assets (liabilities):
Net operating loss carryforward $5,700,000
Property and equipment basis differences (400,000)
Below-market stock options 100,000
-----------
Net deferred tax assets 5,400,000
Less valuation allowance (5,400,000)
-----------
Net deferred tax assets $ --
===========
The Company has had no taxable income under Federal or state tax laws.
Therefore, no provision for income taxes was included. The Company has a net
operating loss carryforward of approximately $15,500,000 for income tax
purposes. A portion of these net operating loss carryforwards are subject to
reduction or limitation of use as a result of certain consolidated return filing
regulations.
Because a net loss is shown for both tax and financial reporting purposes, a
provision for deferred taxes has not been made. The loss carryforwards for
income tax purposes of Foreland expire as follows:
YEAR OF
EXPIRATION
- -------------
1999 $ 270,000
2000 90,000
2001 640,000
2002 1,630,000
2003 1,430,000
2004 1,020,000
2005 1,280,000
2006 1,860,000
2007 1,680,000
2008 5,600,000
------------
$15,500,000
============
6. MAJOR CUSTOMER:
Over 90% of Krutex's oil and gas sales for the years ended December 31, 1991 and
1992 were to a single crude oil company. All of Foreland's oil sales were to a
single crude oil company for the years ended December 31, 1991, 1992, and 1993,
respectively.
<PAGE>
7. NOTE PAYABLE:
On April 30, 1994, the Company borrowed $400,000 from an unrelated third party,
collateralized by personal property of the Company, to provide interim financing
to advance the Company's drilling program in its Eagle Springs Field and to pay
ongoing general and administrative expenses. In connection with the loan, the
Company granted the lender options to purchase 200,000 shares of Common Stock at
$2.00 per share at any time prior to the earlier of two years subsequent to the
date of the loan or 60 days subsequent to the repayment of the loan. The loan
bears interest at 8.4% per annum, payable quarterly, and is due on April 30,
1995, unless extended for up to one year at the election of the Company. The
Company intends to extend the due date and has therefore classified the note as
long-term as of September 30, 1994.
8. OPERATING LEASES:
The Company currently rents administrative office space and equipment under
noncancelable leases. Total expenses incurred for leases amounted to $43,782,
$50,390, and $55,205, for December 31, 1991, 1992, and 1993, respectively.
The total minimum rental commitments without regard to the cancellation
provision as of December 31 are as follows:
YEAR
ENDED
- ------------
1994 $ 54,276
1995 46,882
1996 49,949
1997 52,200
1998 29,393
-------------
$ 232,700
=============
<PAGE>
9. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES AND OIL AND
GAS RESERVE INFORMATION:
All oil and gas operations of the Company and its subsidiaries are conducted in
the United States. Capitalized costs relating to oil and gas producing
activities are as follows:
DECEMBER 31,
----------------------
1992 1993
------- ------
Proved oil and gas producing properties, at
cost $2,264,208 $3,194,443
Wells in progress - 1,751,719
Unproved properties 464,910 786,051
Disposal or injection well facilities 56,941 64,797
------------ ------------
2,786,059 5,797,010
Accumulated depreciation, depletion,
amortization (807,792) (1,152,588)
------------ ------------
$1,978,267 $4,644,422
============ ============
Subsequent to December 31, 1993, $827,000 of the amount shown above as wells in
progress was reclassified as a disposal or injection well, $803,000 was charged
to expenses as dry hole and abandonment costs, and $122,000 was transferred to
producing properties.
In August 1994, the Company entered into an agreement, dated August 9, 1994,
with Plains Petroleum ("Plains"), whereby Plains agreed to spend up to
$1,920,000, which is 80% of the first $2,400,000, for drilling additional wells
in Eagle Springs. Such expenditures will earn Plains a 40% interest in the
Eagle Springs field, effective August 1, 1994. After the initial $2,400,000 is
spent, cost will be shared 60% by the Company and 40% by Plains.
Costs, both capitalized and expensed, incurred in oil and gas producing
activities during the three years ended December 31 are as follows:
DECEMBER 31,
------------------------------------
1991 1992 1993
--------- --------- --------
Acquisition costs $309,547 $ - $843,871
========= ========= ==========
Exploration costs $984,134 $647,591 $2,249,942
========= ========= ==========
Development costs $616,612 $641,862 $2,166,883
========= ========= ==========
<PAGE>
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) - Reserve
calculations involve the estimation of future net recoverable reserves of oil
and gas and the timing and amount of future net revenues to be received
therefrom. These estimates are based on numerous factors, many of which are
variable and uncertain. Accordingly, it is common for the actual production and
revenues to vary from earlier estimates. Estimates made in the first few years
of production from a property are not likely to be as reliable as later
estimates based on longer production history. Hence, reserve estimates and
estimates of future net revenues from production may be subject to substantial
revision from year to year. Reserve information presented herein is based on
reports prepared by independent petroleum engineers. The reserve quantity
information and standardized measure for 1992 and 1991 do not include any
amounts for the Company's Nevada properties because at that time the Company was
not able to evaluate that quantities of oil that might be recovered based on the
available geological and engineering data, due to the then erratic production
and short production history of the wells.
Proved oil and gas reserves are the estimated quantities of crude oil, which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed oil and gas reserves are those expected
to be recovered through existing wells with existing equipment and operating
methods. However, reserve information should not be construed as the current
market value of the Company's oil and gas reserves or the costs that would be
incurred to obtain equivalent reserves.
Set forth below is the unaudited summary of the changes in the net quantities of
the Company's proved crude oil reserves.
Barrels
-------------
Proved reserves, January 1, 1991 542,000
Production (17,000)
------------
Proved reserves, December 31, 1991 525,000
Production (19,000)
------------
Proved reserves, December 31, 1992 506,000
Acquisition of proved reserves 627,000
Production (29,000)
Revisions in previous
estimates 40,000
------------
Proved reserves, December 31, 1993 1,144,000
============
Proved developed reserves:
December 31, 1991 74,000
============
December 31, 1992 91,000
============
December 31, 1993 754,000
============
The Company's proved reserves (in barrels) are located in the following states:
Proved
Proved Developed
Reserves Reserves
-------------- ----------------
Nevada 650,000 650,000
Texas 494,000 104,000
------------- ----------------
Total 1,144,000 754,000
============= ================
<PAGE>
As indicated, a substantial portion of the Company's proved oil and gas reserves
(all in Texas) are undeveloped, which will require estimated future development
costs of approximately $2,800,000 for both 1994 and 1995. The Company's wholly-
owned subsidiary, Krutex, holds an interest in approximately 125 producing
shallow oil and gas wells in the West Salt Flat Field encompassing approximately
495 gross acres in Caldwell County, Texas. Pursuant to an April 1993 agreement
with an unrelated third party operator (the "Operator"), the Operator receives
all revenues from production from the properties and bears all operating
expenses through November 1, 1994. Prior to that date, the Operator can earn
75% of Krutex's interest in the properties upon completing specified reworking
of 16 wells located in the field. If the Operator fails to complete the 16 well
reworking program, the Operator's interest in the leases will terminate. If the
Operator timely completes the well reworking or establishes continuous
production at a rate of at least 300 barrels per day by November 1, 1994, the
Operator has the right to purchase Krutex's remaining interest at a price
equivalent to Krutex's share of the proved developed oil and gas reserves
estimated to be recoverable in 10 years, multiplied by 10% of the price for west
Texas crude oil for November 1994. On signing the agreement, the Operator
agreed to pay Krutex $150,000, of which $22,222 remained payable at June 30,
1994. The reserves associated with these properties of approximately $489,000
in discounted future net cash flows are included in the Company's standardized
measure of future net cash flows. These properties were sold in October 1994
(see Note 10.)
The following is the unaudited standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves. Future
net cash flows were computed using year-end prices and costs and appropriate
year-end tax rates (adjusted for permanent differences, tax credits and loss
carryforward that relate to existing proved oil and gas reserves in which the
Company has an interest).
DECEMBER 31,
------------------------------------
1991 1992 1993
---------------------- --------
Future cash inflows $7,585,000 $7,355,000 $12,445,000
Future development and (4,152,000) (4,045,000) (7,557,000)
production costs
Future income tax expense (545,000) (640,000) --
------------- -------------- -------------
Future net cash flows 2,888,000 2,780,.000 4,888,000
10% annual discount for
estimated timing
of cash flows (1,633,000) (1,565,000) (2,692,000)
------------ ------------- --------------
Standardized measure of
discounted future
net cash flows $1,255,000 $1,215,000 $2,196,000
=========== ============= ==============
<PAGE>
The following is a summary by state of the standardized measure of discounted
future net cash flows as of December 31, 1993:
Nevada $1,707,000
Texas 489,000
---------------
Total $2,196,000
===============
The following are the unaudited principal sources of changes in the standardized
measure of discounted future net cash flows:
DECEMBER 31,
------------------------------------
1991 1992 1993
---------- --------- --------
Standardized measure, beginning
of year $3,050,000 $1,255,000 $1,215,000
Sales of oil and gas, net of
production costs (255,000) (290,000) (17,000)
Acquisition of minerals in place -- -- 3,163,000
Net change due to revisions in
quantity estimates -- -- 120,000
Net change due to changes in
price and production costs and
other (3,355,000) (20,000) (3,150,000)
Net change in future development
costs -- -- 472,000
Net change in income taxes 575,000 20,000 298,000
Accretion of discount 1,240,000 250,000 122,000
------------- -------------- -------------
Standardized measure, end of
year $1,255,000 $1,215,000 $2,196,000
============= ============== ==============
<PAGE>
10. SUBSEQUENT EVENTS
In October 1994, Krutex entered into an agreement with an unrelated third party
operator under which the operator agreed to pay Krutex $50,000 to earn 75% of
Krutex's working interest in the West Salt Flat Field. In addition, Krutex
granted the operator an option to purchase Krutex's remaining 25% interest for
$25,000 through February 2, 1995. This transaction has an effective date of
October 1, 1994, and resulted in a loss of $434,521, which was recorded in the
third quarter 1994.
In October 1994, the Company, through its wholly owned subsidiary Eagle Springs
Production Limited Liability Company purchased for $225,000, payable in $90,000
cash and 54,000 shares of Foreland Corporation common stock, with a basis price
of $2.50 per share, Kanowa Petroleum, Inc.'s interest in 240 acres and four
wells. In accordance with the Plains Petroleum Operating Company agreement,
Plains advanced $90,000 for its 40% interest in the lease and four wells;
however, if Plains terminates its agreement with Foreland after the drilling of
the three initial wells, Foreland will reimburse Plains for the $90,000 it has
advanced.
<PAGE>
- -------------------------------------
FORELAND CORPORATION
PROSPECTUS
DECEMBER 9, 1994
TABLE OF CONTENTS
- -------------------------------------
Section Page
SUMMARY 6
RISK FACTORS 11
USE OF PROCEEDS 16
DIVIDENDS 17
DILUTION 17
PRICE RANGE FOR COMPANY
SECURITIES 19
SELECTED FINANCIAL DATA 19
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL RESULTS
OF OPERATION AND FINANCIAL
CONDITION 20
BUSINESS 25
DIRECTORS AND EXECUTIVE OFFICERS 39
PRINCIPAL SHAREHOLDERS 44
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 45
DESCRIPTION OF SECURITIES 46
SELLING SHAREHOLDERS 51
PLAN OF DISTRIBUTION 56
EXPERTS 58
CERTAIN DEFINITIONS 58
INDEX TO FINANCIAL STATEMENTS F-1
No dealer, salesman, or other person has been authorized in connection with this
offering to give any information or to make any representation other than as
contained in this prospectus and, if made, such information or representation
must not be relied on as having been authorized by the Company. This prospectus
does not constitute an offer to sell or the solication of an offer to buy any
securities covered by this prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or soliciatation in such state
or jurisdiction.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on form S-2 and has duly caused this amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Lakewood, state of Colorado, on the
6th day of December, 1995.
FORELAND CORPORATION
(Registrant)
By: /s/ N. Thomas Steele
-------------------------------
N. Thomas Steele, President
Pursuant to the requirements of the Securities Act, this amendment to the
Registration Statement has been signed below by the following persons in the
capacities indicated and on the 6th day of December, 1995.
----------|
/s/ N. Thomas Steele |
- ------------------------------ |
|
N. Thomas Steele, Director and President |
(Principal Executive and Financial Officer) |
|
/s/ Grant Steele |
- ------------------------------ |
|
Grant Steele, Director |
|
/s/ Kenneth L. Ransom |
- ------------------------------ |
|
Kenneth L. Ransom, Director |
|
|--- By: /s/ N. Thomas Steele
- ------------------------------ | ---------------------------
Bruce C. Decker, Director | N. Thomas Steele,
| Attorney-In-Fact
|
/s/ Dennis J. Gustafson |
- ------------------------------ |
-----------|
Dennis J. Gustafson, Director |
