As Filed: April 29, 1996 SEC File No. 33-86076
====================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective
Amendment No. 4
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 (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code Number)
organization)
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. In lieu of the annual report to
security holders, the registrant elects to deliver its anual report on Form 10-
K, as amended, pursuant to Item 11(a)(1) of this form.
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>
POST-EFFECTIVE
AMENDMENT NO. 4 DATED APRIL 29, 1996
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,
1995, is hereby incorporated by reference into this Amendment and the
Prospectus.
Sale of Securities by Selling Shareholders
The Prospectus originally included the resale by certain selling
shareholders of shares of Common Stock issuable on conversion of shares of 1994
Series Preferred Stock and exercise of C Warrants held by them and the resale by
a placement agent of shares of Common Stock issuable on conversion of shares of
1994 Series Preferred Stock and exercise of C Warrants, such securities issuable
to the placement agent on exercise of warrants held by the placement agent. The
resale of all such securities by selling shareholders will now be included in
the Company's registration statement on form S-3.
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:
Number of Securities Sales Commissions Net
Price (1) Proceeds(1)
[S] [C] [C] [C] [C]
L Warrants 1,242,000 $6.00- $0.42-$0.56 $6,930,360
$8.00 to
$9,240,480
$1.50 Warrants 200,000 $1.50 -- $300,000
Options 30,000 $1.50(2) -- $45,000
1991 400 Units at $552, consisting of
Underwriter 138,000 shares Common Stock,
Unit Warrant 138,000 A Warrants at $2.25 and
and A and B 138,000 B Warrants at $3.90, and
Warrants 276,000 shares Common Stock on
exercise of such Warrants -- $1,069,500
1993 Placement 70,000 Units at $5.50, consisting
Agent Unit of 70,000 shares 1993 Series
Warrant(3) Preferred Stock -- $385,000
-----------
Total Proceeds $8,729,860
to
- -
$11,039,980
(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 $84,000. (See Prospectus:
"PLAN OF DISTRIBUTION.")
(2)Originally exercisable for $3.00 per share. The Company has reduced the
exercise price.
(3)The 1993 Placement Agent Unit Warrant originally included 70,000 X Warrants
and 70,000 Y Warrants issuable on exercise of X Warrants. All X and Y
Warrants have now expired. the foregoing table is adjusted to reflect such
expirations.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses in connection with the
distribution of the securities being registered:
Securities and Exchange Commission
registration fee$ 5,624
Attorneys' fees 50,000
State "blue sky" fees and expenses
(including attorneys' fees) 15,000
Accounting fees and expenses 6,000
Printing expenses 5,000
Miscellaneous 2,376
-------
Total $84,000
=======
All expenses, except the SEC fees, are estimates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 78.037 and 78.751 of the Nevada Revised Statutes and article VII of the
Company's articles of incorporation provide for indemnification of the Company's
directors and officers in a variety of circumstances, which may include
liabilities under the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Copies of the following documents are included as exhibits to this Registration
Statement, pursuant to item 601 of Regulation S-K.
Exhibit Index.
SEC
Exhibit Reference
No. No. Title of Document Location
Item 1 Underwriting Agreement
1.01 1 Form of agreement between the Company Original
and broker-dealers soliciting the Filing*
exercise of Warrants
Item 4. Instruments Defining the Rights of
Security Holders, Including Indentures
4.01 4 Specimen Common Stock Certificate Incorporated
by
Reference(1)
4.02 4 Designation of Rights, Privileges, and Incorporated
Preferences of 1991 Series Preferred by
Stock Reference(1)
4.03 4 Designation of Rights, Privileges and Incorporated
Preferences of 1994 Series Convertible by
Preferred Stock Reference(6)
4.04 4 Designation of Rights, Privileges and Incorporated
Preferences of 1995 Series Convertible by
Preferred Stock Reference(8)
4.05 4 Designation of Rights, Privileges, and Incorporated
Preferences of 1996 Series 6% by
Convertible Preferred Stock Reference(10)
4.06 4 Form of Underwriter's Warrant to Original
Purchase Units Filing*
4.07 4 Warrant Agreement between the Company Incorporated
and Atlas Stock Transfer Corporation by
relating to X and Y Warrants Reference(3)
4.08 4 Amendment to Warrant Agreement between Incorporated
the Company and Atlas Stock Transfer by
Corporation relating to X and Y Reference(7)
Warrants
4.09 4 Amendment to Warrant Agreement between Original
the Company and Atlas Stock Transfer Filing*
Corporation relating to X and Y
Warrants
4.10 4 Form of Warrant Agreement between the Original
Company and Atlas Stock Transfer Filing*
Corporation relating to L Warrants
4.11 4 Warrant relating to $1.50 Warrants Original
Filing*
4.12 4 Form of Warrant Agreement between the Incorporated
Company and Atlas Stock Transfer by
Corporation relating to M Warrants Reference(8)
4.13 4 Form of Warrant Original
Filing*,
Post-Effective
Amendment No.
2
Item 5. Opinion Regarding Legality
5.01 5 Opinion and Consent of Kruse, Landa & Original
Maycock, L.L.C., counsel to the Company Filing*
Item 10. Material Contracts
10.01 10 Option Agreement between N. Thomas Incorporated
Steele and Foreland Corporation, dated by
June 24, 1985** Reference(9)
10.02 10 Option Agreement between Kenneth L. Incorporated
Ransom and Foreland Corporation, dated by
June 24, 1985** Reference(9)
10.03 10 Option Agreement between Grant Steele Incorporated
and Foreland Corporation, dated June by
24, 1985** Reference(9)
10.04 10 Form of Options to directors dated Incorporated
April 30, 1991 with respect to options by
previously granted 1986** Reference(1)
10.05 10 Agreement Regarding Oil and Gas Incorporated
Investments, dated May 15, 1991, by
between the Company and Santa Fe Energy Reference(4)
Resources, Inc.
10.06 10 Agreement Regarding Oil and Gas Incorporated
Investments, dated May 15,1991, between by
the Company and Santa Fe Operating Reference(4)
Partners, Ltd.
10.07 10 Exploration Agreement, dated December Incorporated
1, 1992, entered into by and between by
Santa Fe Energy Resources, Inc., Santa Reference(2)
Fe Energy Operating Partners, L.P., and
the Company
10.08 10 Form of Placement Agent Warrant Incorporated
Agreement, dated February 4, 1993, by
between the Company and George E. Reference(7)
Dullnig & Co.
10.09 10 Form of Executive Employment Agreement Incorporated
between the Company and executive by
officers, with form of letter and Reference(7)
related schedule**
10.10 10 Form of Stock Appreciation Rights Incorporated
Agreement between the Company and by Reference
officers, with related schedule** (7)
10.11 10 Form of Nonqualified Stock Option Incorporated
between the Company and unrelated third by
parties, with related schedule Reference(7)
10.12 10 Operating Agreement between the Company Incorporated
and Enserch Exploration, Inc., and by
Berry Petroleum Company dated June 17, Reference(7)
1993 (as revised June 22, 1993)
10.13 10 Crude Oil Purchase Agreement between Incorporated
the Company and Crysen Refining, Inc., by
dated September 1, 1993 (Nye County, Reference(6)
Nevada)
10.14 10 Crude Oil Purchase Agreement between Incorporated
the Company and Crysen Refining, Inc., by
dated September 1, 1993 (Eureka County, Reference(6)
Nevada)
10.15 10 Loan Agreement by and among Foreland Incorporated
Corporation together with its two by
subsidiaries Krutex Energy Corporation Reference(6)
and Eagle Springs Production Limited
Liability Company and CapitalPro
International, Inc., dated April 30,
1994
10.16 10 Letters from Executive Officers re: Incorporated
Salary deferrals ** by
Reference(8)
10.17 10 Conditional Letter of Acceptance dated Incorporated
June 22, 1994, and related Farmout by
Letter Agreement between Yates Reference(6)
Petroleum Corporation and Trail
Mountain, Inc.
10.18 10 Lease Agreement dated June 7, 1993, by Incorporated
and between Ulster Joint Venture and by
the Company regarding Union Terrace Reference(6)
Office, as amended
10.19 10 Agreement dated August 9, 1994, between Incorporated
Plains Petroleum Operating Company and by
the Company Reference(6)
10.20 10 Letter Agreement dated September 29, Original
1994, between the Company, Kanowa Filing*
Petroleum, Inc., and D&R Investments
relating to interest in Eagle Springs
lease.
10.21 10 Letter Agreement dated October 1, 1994, Original
between Krutex Energy Corporation and Filing*
Caldera & Clements Minerals regarding
Lulling Farmout Agreement.
10.22 10 Letter Agreement dated September 28, Original
1994, between the Company and Mobil Filing*
Exploration & Producing U.S., Inc.
regarding the Rustler Prospect Farmout
Agreement.
10.23 10 Form of Options to employees, with Original
related schedule Filing*
10.24 10 Form of Promissory Notes relating to Original
certain options exercised by officers, Filing*
with related schedule
10.25 10 Form of Option granted pursuant to Original
reload provisions of previously granted Filing*
options with related schedule
10.26 10 Letter dated January 25, 1995 from Incorporated
Plains Petroleum Operating Company by
regarding Plains' election under the Reference(8)
Agreement dated August 9, 1994.
10.27 10 Form of Letter Agreement dated March 8, Incorporated
1995 between the Company and Parsely & by
Parsley Development, L.P. regarding Reference(8)
Exploration Agreement.
10.28 10 Form of Letter Agreement dated March Incorporated
24, 1995, between the Company and Mobil by
Exploration & Producing U.S., Inc., Reference(8)
regarding the Rustler Prospect Farmout
Agreement.
10.29 10 Form of Registration Agreement relating Incorporated
to Units consisting of 1995 Series by
Preferred Stock and M Warrants. Reference(8)
10.30 10 Crysen Refining, Inc., document Incorporated
respecting extension of Crude Oil by
Purchase Agreement Reference(8)
Item 13 Annual Report to Security Holders, Form
10-Q or Quarterly Report to Security
Holders
13.01 13 Annual report on Form 10-K for the This Filing*
fiscal year ended December 31, 1995 Post-Effective
Amendment No.
4
Item 21. Subsidiaries of the Registrant
21.01 21 Schedule of Subsidiaries Incorporated
by
Reference(5)
Item 23. Consents of Experts and Named Counsel
23.01 23 Consent of Hein + Associates, current This filing*
Company auditors Post-Effective
Amendment No.
4
23.02 23 Consent of Kruse, Landa & Maycock, (See Item 5)
L.L.C., counsel to the Company Original
Filing*
23.03 23 Consent of Eddie A. Ayres, Professional Original
Engineer of Charles Ehnot, Petroleum Filing*
Engineer
23.04 23 Consent of Malkewicz Hueni Associates, This filing*
Inc., Petroleum Engineers Post-Effective
Amendment No.
4
Item 24. Power of Attorney
24.01 24 Power of Attorney See signature
page to
Original
Filing*
(1)Incorporated by reference from the Company's registration statement on form
S-2 filed with the Commission, SEC file number 33-42828.
(2)Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1992.
(3)Incorporated by reference from the Company's quarterly report on form 10-Q
for the period ending March 31, 1993.
(4)Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1991.
(5)Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1993.
(6)Incorporated by reference from the Company's registration statement on form
S-1 filed with the Commission, SEC file number 33-81538.
(7)Incorporated by reference from the Company's registration statement on form
S-2 filed with the Commission, SEC file no. 33-64756.
(8)Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1994.
(9)Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1985.
(10) Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1995.
* Filed as an exhibit to this registration statement on Form S-2, SEC file no.
33-86076. Unless otherwise indicated, the exhibit was filed with the
original filing.
** Identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit.
ITEM 17. UNDERTAKINGS
Post-Effective Amendments (Regulation S-K, Item 512(a))
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(b) To reflect in the Prospectus any factors or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Request for Acceleration of Effective Date (Regulation S-K, Item 512(h))
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense
of any action, suit, or proceeding) is asserted by such director, officer,
or controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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
26th day of April, 1996.
FORELAND CORPORATION
(Registrant)
By: /s/
-------------------------
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 26th day of April, 1996.
/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/
- -------------------- |
Bruce C. Decker, Director | N. Thomas Steele,
Attorney-In-Fact |
|
/s/ Dennis J. Gustafson |
- ------------------------------ |
|
Dennis J. Gustafson, Director _
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the registration statement of
Foreland Corporation on Form S-2 (File No. 33-64756) of our report (which
includes an explanatory paragraph about the ability of the Company to continue
as a going concern) dated April 12, 1996, on our audits of the consolidated
financial statements of Foreland Corporation, as of December 31, 1994 and 1995,
and for each of the three years in the period ended December 31, 1995, which
report is included in the Company's Annual Report on Form 10-K.
/S/
HEIN + ASSOCIATES, LLP
Denver, Colorado
April 26, 1996
<Letterhead>
Malkewicz Hueni Associates, Inc.
April 26, 1996
Foreland Corporation
12596 West Bayaud, Suite 300
Lakewood, CO 80228-2019
Dear Sir:
The undersigned petroleum engineer hereby consents to incorporation by reference
in the registration statement of Foreland Corporation on Form S-2 (File No. 33-
64756) of the reserve report respecting Foreland's properties, as such report is
referred to in Foreland Corporation's annual report on form 10-K for its fiscal
year ended December 31, 1995.
Sincerely,
/s/ Steph E. Malkewicz
Stephen E. Malkewicz
President
14142 Denver West Parkway, Suite 190
Golden, Colorado 80401 U.S.A
(303) 277-0270
Fax: (303) 277-0267
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
------------------- ----------------
Commission File Number0-14096
-----------------------
Foreland Corporation
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0422812
- --------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12596 West Bayaud, Suite 300
Lakewood, Colorado 80228-2019
- --------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 988-3122
---------------
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
None None
------------------------- -------------------------
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $0.001
Class L Common Stock Purchase Warrants
- -----------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o
The aggregate market value of the registrant's voting stock held by
nonaffiliates computed at the average closing bid and asked prices in the over-
the-counter market as quoted on the National Association of Securities Dealers
National Quotation system ("NASDAQ") on April 15, 1996, was approximately
$20,768,876.
As of April 15, 1996, the Company had outstanding 14,489,401 shares of its
common stock, par value $0.001.
Documents Incorporated by Reference. List hereunder the following
documents if incorporated by reference and the part of the form 10-K (e.g., part
I, part II, etc.) into which the document is incorporated: (1) any annual
report to security holders; (2) any proxy or information statement; and (3)
any prospectus filed pursuant to rule 424(b) or (c) under the Securities Act of
1933: None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
<PAGE>
TABLE OF CONTENTS
Item Number and Caption Page
- -----------------------
PART I..........................................................6
ITEM 1. BUSINESS .............................................6
ITEM 2. PROPERTIES ..........................................36
ITEM 3. LEGAL PROCEEDINGS ...................................57
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .57
PART II........................................................58
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS ..............................58
ITEM 6. SELECTED FINANCIAL DATA .............................61
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION ...........................68
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .........88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ..........................88
PART III.......................................................89
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT .....90
ITEM 11. EXECUTIVE COMPENSATION .............................96
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ....................107
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ....114
PART IV.......................................................118
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K .........................................118
<PAGE>
PART I
ITEM 1. BUSINESS
General
Foreland Corporation (the "Company") was organized in June 1985 to advance
an exploration project in the Great Basin and Range geologic province in Nevada
(the "Great Basin") that had been initiated by Gulf Oil Corporation ("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 and 1994, the Company acquired nine
shut-in wells in the Eagle Springs Field in Nevada. The Company then returned
eight of these acquired wells to production and drilled a new water injection
well. In August 1994, the Company entered into an agreement with Plains
Petroleum Operating Company, which was acquired in August 1995 by Barrett
Resources Corporation (together, "Barrett"), to fund further activities in the
Eagle Springs Field. In September 1994, the Company and Barrett acquired an
additional Eagle Springs lease with three previously producing wells, which have
since been reworked and returned to production, and a shut-in water injection
well. Pursuant to its agreement with the Company, Barrett provided $1,920,000
of $2,400,000 in well costs and thereafter, in January 1995, elected to continue
to participate in the Company's Eagle Springs project, thereby earning a 40%
working interest in the Company's Eagle Springs producing properties, subject to
the right to make individual elections respecting participating in specific
wells as they are proposed. As of March 31, 1996, the Company and Barrett have
drilled and placed into production a total of eight new wells in the Eagle
Springs Field, all of which are now in regular continuous production. The
Company and Barrett plan to drill additional wells to test horizons productive
in existing wells in a further effort to increase production.
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
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 USA, Inc. ("Exxon"), Texaco, Inc., Gulf, Chevron USA,
Inc. ("Chevron"), Mobil Exploration and Producing USA, Inc. ("Mobil"), and Amoco
Corp. ("Amoco"), acquired substantial lease holdings and initiated exploration
programs in eastern and central Nevada during the early years of the decade.
<PAGE>
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 voluntary retirement of
a number of Gulf employees. One such 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.
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 70 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 Exploration, Inc. ("Enserch"), Berry Petroleum
Company ("Berry"), Parker and Parsley Petroleum Company (successor-in-interest
to Santa Fe Energy Resources, Inc.) ("P&P"), and Barrett. This team employs
the following strategies in guiding the Company's Nevada exploration:
. Take full advantage of the most advanced generally 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 diversify the risk and to obtain additional scientific data and
expertise, land, and funding.
. To increase revenues by drilling in the Eagle Springs Field to develop
proven reserves and 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
1,400 line miles of 2-D seismic data, much of it reprocessed with new analytical
computer programs, newly acquired high resolution 3-D seismic surveys, and
gravity data gathered by the Company as well as by Exxon, P&P, Mobil, Chevron,
Enserch, and Berry. 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 leaseholdings.
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's geophysical and geological
evaluation is ongoing to locate possible additional drilling locations to
develop the undeveloped reserves and to test the horizons that are productive in
the existing wells. The Company has surface facilities capable of handling
additional production. The Company also intends to continue to drill
exploration wells in the area of existing production in the Pine and Railroad
Valleys 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
continually identify new prospect concepts and areas for possible future
exploration while advancing existing prospects to the drilling stage.
Through 1996, the Company will focus its activities on drilling in the
Eagle Springs Field to develop proved undeveloped reserves and to evaluate the
horizons that are productive in existing wells and in several additional
exploratory prospects in the Pine, Railroad, and Huntington Valleys and Toano
Draw of Nevada. In addition, the Company will continue to review the
exploration potential of certain acreage under its agreement with P&P, as
discussed below, and continue its acquisition of 3-D seismic data and reanalysis
of existing 2-D seismic data. 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
Effective March 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 (collectively, "Enserch/Berry"), to
undertake a three-year, six-well joint exploration program on approximately
110,000 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 net 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 91,000 gross leased acres
held during 1995. Through 1994, the parties drilled three test wells, one each
in the Pine, Little Smoky, and Antelope Valleys, all three of which were dry
holes that were plugged and abandoned. During 1995, the parties drilled the Hot
Creek Wash test in Antelope Valley, and the Eldorado #15-1 test in Little Smoky
Valley. Both tests were plugged and abandoned. The remaining well under the
arrangement with Enserch/Berry, the Pinon prospect in Pine Valley, is planned to
be drilled during 1996, subject to obtaining required financing. (See
"Exploration Status.")
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 time the acreage in Diamond Valley contributed by Foreland to the joint
arrangement is returned to Foreland. The balance of the acreage and the
designated acreage surrounding wells that have then been drilled under the
joint arrangement remain subject to the operating agreement. 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.
Rustler Prospect
On September 28, 1994, the Company entered into an agreement with Mobil
under which the Company had the right to commence one test well on or before
September 1, 1995, on the Rustler Prospect located in White Pine County, Nevada.
The Company elected not to commence such well and has no further rights or
obligations under the agreement.
P&P Marketing and Exploration Agreement
In December 1992, the Company entered into a three year exploration
agreement, subsequently extended to December 1, 1996, with P&P's predecessor-in-
interest, appointing the Company the exclusive marketing representative for
P&P's fee mineral interest in northern Nevada. The Company delineates
exploration areas, defines prospects, and secures drilling partners utilizing
the Company's and P&P's combined geological and geophysical data base. The
Company has generated five drillable prospects affecting the P&P lands in the
North Humboldt and Dixie Flats prospects in Huntington Valley and the Deadman
Creek and Medicine Creek prospects in Toano Draw and the Pine Creek prospect in
Pine Valley. If drilling is undertaken, the Company and P&P 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
P&P's proprietary geological and geophysical data respecting the P&P 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, P&P is precluded from granting third parties
exploration rights to such exploration area for one year. P&P has certain
rights of access to the data developed by the Company on the P&P property.
On any drillings of P&P lands arranged by the Company, P&P 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 P&P have 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 the remaining 434,000 acres subject to
the P&P agreement by December 1996, when the agreement expires, subject to any
specific acreage subject to leases, farmouts, or other arrangements reached
under the agreement with the Company. The Company will review the P&P acreage
with a view towards identifying the most promising prospects and reaching
drilling arrangements by December 1996. Originally, the agreement required the
Company to release the acreage by December 1995, but P&P and the Company agreed
to extend the expiration date to permit further evaluation of the properties by
the Company.
As a result of the Company's review of the P&P acreage, the Company
identified an exploration target in the Deadman Creek area of Toana Draw based
on the Company's review of available data regarding a test drilled by another
operator in the mid 1980s that encountered favorable oil shows but was not
completed for production. The Company has reentered this hole for testing and,
if warranted, will attempt recompletion of the well using modern completion
technologies. As a result of this reentry, the Company will earn a 100% working
interest in 5,013 gross acres (4,261 net acres) under the P&P agreement, subject
to P&P's 15% working interest in each well after the Company has recouped costs
incurred.
North Humboldt Prospect
Under the agreement with the Company discussed below, after the first three
new Eagle Springs wells were placed into production in January 1995, Barrett
exercised its right to earn an interest in the Company's acreage in an area of
mutual interest in the North Humboldt prospect included in the P&P acreage. The
Company and Barrett are undertaking a joint technical evaluation of the seismic
data to select a drillsite. Upon the completion of any geophysical studies that
the parties deem necessary and review of the data obtained, the parties will
select a drillsite and proceed to drill, with Barrett 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.
Hugoton/Maxwell Agreement
On January 22, 1996, the Company entered into a revised agreement with
Hugoton Energy Corporation and Maxwell Petroleum, Inc. ("Hugoton/Maxwell"),
respecting exploration of the Pine Creek prospect in Pine Valley, Nevada.
Under this agreement, the Company and Hugoton/Maxwell each agreed to assign to
the other certain acreage to consolidate the Company's position in the prospect
area; Hugoton/Maxwell agreed to pay for a one-year extension of the leasehold
assigned by it; the Company agreed to initiate a well on the federal acreage
assigned, in order to obtain a two-year lease extension; and Hugoton/Maxwell
agreed to complete and pay for a 3-D seismic study in the area or pay the
Company $75,000 as liquidated damages. If the Company does not initiate a test
and obtain a two-year lease extension, Hugoton/Maxwell is not required to
complete the seismic study or pay damages. The total estimated dry hole cost
for the Pine Creek test is $664,000, which the Company would seek to share on a
50-50 basis with other drilling participants if a drilling group can be formed.
If a drilling group cannot be formed on terms acceptable to the Company, it may
not drill the test.
<PAGE>
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 scientific information 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, which included a portion of the Eagle Springs Field,
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 asserted an ownership interest or had advanced
funds or services to the field. In September 1994, the Company, with Barrett,
acquired Kanowa's interest in a 240-acre 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.
In the year following acquisition of the Eagle Springs properties in July
1993, the Company completed substantial work and returned eight of the acquired
wells in the Eagle Springs Field to production and drilled a water injection
well. Under the agreement with Barrett discussed below, during 1994 and early
1995, the Company and Barrett drilled and placed into production three wells in
the Eagle Springs Field. In January 1995, after these three wells were placed
into production, Barrett elected to continue to participate in the Eagle Springs
Field and in mid-1995, the Company and Barrett commenced the development
drilling program in Eagle Springs based on the Company's own 3-D seismic study
to develop additional production and evaluate at additional locations horizons
that are productive in existing wells. The Company and Barrett have drilled and
placed into production five additional wells of this program, for a total of
eight new wells drilled by the Company and Barrett. According to the Company's
year-end independent reserve report completed by Malkewicz Hueni Associates,
Inc., Golden, Colorado, there are eight proved undeveloped drilling locations
within the estimated perimeter of the Eagle Springs Field. A 3-D seismic survey
has been completed on the field, and the 3-D seismic information continues to be
evaluated and integrated with additional available drilling results as an
ongoing guide for drilling. Initial evaluation of the 3-D seismic information
provided the basis of the Company's decision to purchase Kanowa's interest in
the 240-acre lease in the Eagle Springs field in September 1994. It is
anticipated that the eight proved undeveloped locations identified in the
reserve report will be scheduled to be drilled in 1996 and 1997, subject to
available financing. As these locations are drilled, additional locations will
be identified and evaluated for drilling in the Company's Eagle Springs program
to the extent warranted by results as drilling progresses and the availability
of required funding, and subject to unexpected delays, downtime, and similar
unforeseen circumstances.
<PAGE>
When reworking the nine 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 and 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 acres to 10 acres, which is the spacing approved by
regulatory authorities, 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 1997, the period during which the Eagle
Springs Field could be developed. In addition, the Company has initiated a
larger ongoing reservoir study of the Eagle Springs Field oriented toward
development of a secondary or tertiary improved oil recovery project.
Further activities in the Eagle Springs Field are currently being conducted
jointly with Barrett as discussed below.
Barrett Agreement
On August 9, 1994, the Company entered into an agreement with Plains
Petroleum Operating Company, which was acquired in August 1995 by Barrett
Resources Corporation (together, "Barrett"), under which Barrett provided
$1,920,000 of $2,400,000 in well costs to earn a 40% interest in the Company's
Eagle Springs producing properties and obtained the right to participate in
other specified Company exploration projects under agreed terms, including the
North Humboldt prospect, as discussed above.
Under the agreement with Barrett, in September 1994, the Company and
Barrett acquired for $225,000 in Company stock and cash an additional Eagle
Springs lease on approximately 240 gross acres with three previously producing
wells, then shut-in, and a shut-in water injection well. Of these wells, one
was returned to production in 1994 and two were reworked and returned to
production in July 1995. Two of the first new Eagle Springs wells drilled with
Barrett are located on this acquired acreage.
The Company and Barrett drilled three new producing wells in the Eagle
Springs Field in late 1994 and early 1995. In January 1995, after the first
three new Eagle Springs wells were placed into production, Barrett elected to
continue to participate in Eagle Springs, thereby earning a 40% working interest
in the Company's Eagle Springs project, subject to the right to make individual
elections respecting participating in future wells proposed by the Company. In
mid-1995, the Company and Barrett commenced a multi-well drilling program on the
proved nonproducing and proved undeveloped acreage in the field, to test at
additional locations horizons that are productive in existing wells, and to
increase proved reserves. The Company and Barrett are proceeding to prioritize
the proved undeveloped locations as identified in the reserve report and
anticipate those eight locations as additional wells to be drilled during 1996
and 1997. Barrett or Foreland may elect, on a well-by-well basis, to
participate in the wells planned for 1996 and 1997 but has no obligation to
participate in any well.
Barrett also has elected to earn an interest in the Company's acreage in an
area of mutual interest in the North Humboldt prospect, developed by the Company
on P&P mineral interests under the Company's agreement with P&P. (See "Joint
Exploration Arrangements" above.) Barrett has declined further participation in
the Dixie Flats prospect in Huntington Valley. In January 1995, Barrett elected
not to participate in the Pine Valley 3-D survey, indicating that the full study
was too large for Barrett's revised exploration budget.
Activities under the joint exploration arrangement with Barrett 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 Barrett the right to participate in any other
exploration prospects that the Company elects to offer to third parties.
<PAGE>
North Willow Creek and Tomera Ranch Discoveries
North Willow Creek
The initial discovery well in this field, the North Willow Creek SPLC no.
1-27 well, drilled in 1987, discovered an oil bearing structure at a depth of
from 5,818 to 6,358 feet. Two additional wells, the North Willow Creek no. 6-27
and no. 5-27 have been drilled, extending the productive area of the field. The
Company continues to experience production difficulties and management has
concluded that the wells are not producing to the potential indicated by initial
tests and engineering and geologic evaluations. The Company continues to
receive limited production from two wells in this field.
Tomera Ranch
In August 1987, the Tomera Ranch discovery well, the SPLC no. 1-5, drilled
by another operator under a joint exploration arrangement with the Company, was
completed for production in the Indian Wells formation at between 1,864 and
1,950 feet. This well 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. In December 1993, the Company acquired the working interest of the
previous operator in the Tomera Ranch field, and since then has continued to
evaluate the productive potential of the area.
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.
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. The Company's petroleum
engineer is evaluating the North Willow Creek and Tomera Ranch Fields and is
making recommendations for improvement of production.
Exploration Status
Pine Valley
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. In 1993, after evaluating the results of
the West Hay Ranch no. 12-1, the Company drilled the Hay Ranch no. 1-17. 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 the future. 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. In December 1993, the Company 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.
<PAGE>
The Company conducts exploration efforts in this area with Enserch/Berry
pursuant to the operating agreement entered into by the parties. With funding
provided jointly by the Company and Enserch/Berry, the Company acquired
additional seismic data and defined two drilling prospects to be drilled in Pine
Valley. In December 1994, the Trout Creek No. 26-1 exploratory well, the first
well to be drilled in Pine Valley by the parties, was plugged and abandoned.
The Pinon prospect in Pine Valley, the final well to be drilled under the
Company's agreement with Enserch/Berry, is planned to be drilled during 1996,
subject to obtaining required financing.
The Company and Hugoton/Maxwell are currently pursuing activities in the
Pine Valley area pursuant to the revised agreement dated January 22, 1996,
between the parties. Both parties contributed acreage under the agreement to
consolidate the Company's position in the Pine Creek prospect. Hugoton/Maxwell
obtained a one-year extension of the leasehold assigned by it and has agreed to
complete and pay for a 3-D seismic study in the area or pay the Company $75,000
as liquidated damages, provided that the Company initiates a test well and
obtains a two-year lease extension. The Company has had the Pine Creek unit
designated by the Bureau of Land Management and plans to drill this prospect in
the latter part of the second quarter, subject to forming a drilling group on
terms acceptable to the Company.
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 drilled an additional test well in each of these
valleys during 1995, the Hot Creek Wash no. 15-1 in Antelope Valley and the
Eldorado #15-1 in Little Smoky Valley. Both were plugged and abandoned.
Newark Valley
The Company is utilizing the extensive seismic information available to it
through its agreement with 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. On
September 28, 1994, the Company entered into an agreement with Mobil under which
it could drill one test well on or before September 1, 1995, on the Rustler
Prospect located in White Pine County, Nevada, to earn an interest in such
prospect area. The Company elected not to commence such well and has no further
rights or obligations under the agreement.
Deadman Creek
The Company has completed lease acquisition over its Deadman Creek prospect
in the Toano Draw area of Elko County with the purchase of leases on
approximately 10,000 acres, which supplement the approximately 12,300 acres
previously acquired. This prospect was generated by the Company during 1994 and
1993. In November 1995, the Company reentered an existing hole drilled by a
previous operator in the mid-1980s for testing to determine whether recompletion
is warranted using modern completion technologies. The Company has opened
additional zones and swabbing operations have recovered oil and drilling and
testing fluids. Representative samples of the oil and mud recovered from the
swabbing are being analyzed to determine the appropriate fluids to use for
breaking down the perforations. This test is on P&P acreage covered by P&P's
agreement with the Company.
<PAGE>
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 geologic and
engineering analyses indicate 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.
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 predicted accurately. Such factors
include the extent of domestic production and imports of oil; the competitive
position of oil as a source of energy as compared to gas, coal, nuclear 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.
<PAGE>
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 at a cost of $110,604. 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 new remediation issues will not arise 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.
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. Management believes that the Company's current insurance coverage
is adequate; however, 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.
<PAGE>
Employees
The Company has 13 employees, including five executive officers (all of
whom are also directors), four technical employees in addition to the executive
officers, two field operations employees, and two administrative employees.
(See "ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.")
ITEM 2. PROPERTIES
The Company's principal oil and gas properties are located in Nevada.
In the oil and gas industry and as used herein, the word "gross" well or
acre is a well or acre in which a working interest is owned; the number of gross
wells is the total number of wells in which a working interest is owned. A
"net" well or acre is deemed to exist when the sum of fractional ownership
working interests in gross wells or acres equals one. The number of net wells
or acres is the sum of the fractional working interests owned in gross wells or
acres.
Proved Reserves
The following table sets forth the estimated oil reserves, net to the
Company's interest, of oil and gas properties as of December 31. 1995, giving
effect to Barrett' election on January 25, 1995, to continue to participate in
the Eagle Springs Field and to receive a 40% working interest in the field
effective August 1, 1994. The reserve information is based on the independent
appraisal prepared by Malkewicz Hueni Associates, Inc., Golden, Colorado, and
was calculated in accordance with the rules and regulations of the Securities
and Exchange Commission. (See "ITEM 1. BUSINESS.")
Estimated
Future Net
Revenues
Estimated Discounted
Reserve Category Oil (bbls) at 10% (1)
- ------------------------- --------------- ----------------
Proved Developed
Producing
Eagle Springs 1,111,000 $3,918,600
North Willow Creek 17,100 50,200
Proved Developed
Nonproducing
Eagle Springs 47,400 123,200
Proved Undeveloped
Eagle Springs 830,900 2,106,700
Total Proved 2,006,400 $6,198,700
=============== ==============
(1)Neither prices nor costs have been escalated. (See "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.") The discounted figures have been
reduced by the Company's share of estimated development costs in the amount
of $2,754,000.
<PAGE>
Wells and Acreage
Shown below is a tabulation of the productive wells owned by the Company in
Nevada as of December 31, 1995, which gives effect to Barrett's 40% working
interest in the Eagle Springs field.
Productive Oil Wells
- -----------------------
Gross Net
- ---------- ----------
21.0 14.2
Set forth below is information respecting the developed and undeveloped
acreage owned by the Company in Nevada as of December 31, 1995, which gives
effect to Barrett's 40% working interest in the Eagle Springs Field.
Developed Acreage Undeveloped
Acreage
Gross Net Gross Net
4,120 2,728 209,480 154,024
The Company's leases in Eagle Springs (3,040 gross and 1,648 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 $125,000. In addition
to the above acreage, the Company has certain marketing and exploration rights
to approximately 434,000 gross acres of P&P mineral interest in northern Nevada
until December 1996.
Drilling Activities
Set forth below is a tabulation of wells completed in the period indicated
in which the Company has participated and the results thereof for each of the
periods indicated.
Year Ended December 31,
---------------------------------
1993 1994 1995
--------- ---------- ----------
Gro Net Gro Net Gro Net
ss ss ss
Exploratory:
Dry................ 6 3.5 3 1.05 2.0 0.84
Oil................ -- -- -- -- -- --
Gas................ -- -- -- -- -- --
---- ----- ----- ----- ---- ------
Totals......... 6 3.5 3 1.05 2.0 0.84
Development:
Dry................ -- -- -- -- -- --
Oil................ 1 1 3 1.8 5.0 3.0
Gas................ -- -- -- -- -- --
---- ----- ----- ----- ---- ------
Totals......... 1 1 3 1.8 5.0 3.0
==== ===== ===== ===== ==== ======
Production and Sale of Oil
The following table summarizes certain information relating to the
Company's net oil produced and sold from the Company's Nevada properties, after
royalties, during the periods indicated.
<PAGE>
Year Ended December 31,
----------------------------
1993(1) 1994(2) 1995(2)
Average net daily production of 16 121 236
oil (Bbls)
Average sales price of oil ($ $11.45 $10.80 $11.62
per Bbl)(3)
Average production cost ($ per $ 7.95 $ 8.09 $4.06
Bbl)(3)
(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.
(3)Includes lifting costs (electricity, fuel, water, disposal, repairs,
maintenance, pumper, and similar items), and production taxes. The amount
excludes costs related to completion of remediation of a contaminated
drilling pit at a former water injection drillsite.
Production from Eagle Springs started in January 1994, and currently
accounts for about 92% of the Company's oil production. This consists of oil
produced and sold net to the Company's interest from the eleven wells the
Company acquired, reworked, and returned to production commencing in early
January 1994 plus the eight new wells subsequently drilled and placed into
production, net of production royalties. However, certain of the wells have
been shut-in from time to time, sometimes for several months. Other wells have
been shut-in for shorter periods during particular months because of mechanical
problems. Currently, one well is temporarily shut-in and not in production. The
Company intends to undertake remedial work when its schedule permits, when
appropriate rig and equipment are available in the area, and when funds are
available.
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 1996, 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 $3.05 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 month of January 1996, the Company
received a net price of $12.36 per barrel, after deducting transportation
charges. The sale of oil is subject to price adjustments, production
curtailments, and similar provisions common in oil purchase contracts.
Production costs relating to Nevada production for 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 and 1995 is
attributable to returning the Eagle Springs wells to production and drilling
additional wells during such periods. Production costs in 1994 were
inordinately high per barrel of oil 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. Production costs in 1995 decreased
dramatically due to higher production, improved production facilities, and
utilization of more cost-efficient energy sources used in operations 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 has been changing to more cost effective energy sources
for continuing production in a further effort to control costs. This consists
principally of a large capacity boiler that the Company intends to eventually
fuel by natural gas from the wells, which requires no propane fuel and, because
its large capacity heats the oil to higher temperatures, will reduce costs for
well treatment chemicals and increases production efficiencies. Because of the
foregoing, the Company expects that production costs per barrel will continue to
decrease as production increases sufficiently to obtain economics of scale and
dilute the impact of 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.
The Company has only minor gas production which is used in operations to
reduce energy costs.
<PAGE>
Texas Interests
The Company's wholly owned subsidiary, Krutex Energy Corporation
("Krutex"), previously held 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 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. 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, the Operator waived a
payment of $12,500 by Krutex respecting the previous acquisition of certain
third-party interests affecting the leases, and the Company waived the last two
payments on the $150,000 note. Pursuant to the agreement, the Operator
purchased Krutex's remaining 25% working interest for $25,000 in January 1995,
so Krutex no longer has any interest in such Texas properties. The foregoing
Texas properties are not included in the Company's principal oil and gas
properties described in the tables above.
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter of 1995.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and is
quoted on Nasdaq under the symbol "FORL." The following table sets forth the
high and low closing bid quotations for the Company's Common Stock 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).
Common Stock
High Low
1994
First Quarter........... $3.50 $2.25
Second Quarter.......... $2.68 $2.06
Third Quarter........... $2.625 $2.25
Fourth Quarter.......... $3.188 $1.938
1995
First Quarter........... $2.125 $1.5625
Second Quarter.......... 2.50 1.375
Third Quarter .......... 2.4375 1.75
Fourth Quarter.......... 1.31 2.13
On April 11, 1996, the closing bid price of the Company's Common Stock on
Nasdaq was approximately $1.25. The Company has approximately 2,000 Common
Stock shareholders of record.
<PAGE>
ITEM 6. 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, 1995, 1994
and 1993, and for the years 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, 1992, and 1991, and for both of the years then ended, have been
derived from the Consolidated Financial Statements of the Company for such
periods, which were audited by another auditor. (See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.")
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues $470,580 $174,657 $98,244 $542,991 $1,115,876
Net Income (Loss) (1,978,958) (1,676,098) (3,578,254) (4,453,718) (2,275,565)
Net Income (Loss) Per
Share (0.29) (0.19) (0.34) (0.34) (0.16)
Weighted Average Number of
Common Shares Outstanding 6,901,000 8,649,000 10,405,000 12,989,000 14,271,000
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1991 1992 1993 1994 1995
-------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital (Deficit)
$1,189,103 $36,557 $677,980 $47,629 $(2,004,407)
Total Assets 4,052,247 2,800,882 6,596,443 5,197,414 5,601,098
Long-Term Debt 400,000 23,091
Current Portion of Long-
Term Debt 404,237
Stockholders' Equity 3,165,250 2,118,405 5,521,402 3,708,472 3,012,872
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Overview
Since its organization in June 1985, the Company has been engaged
principally in oil exploration in the Great Basin and Range of Nevada, 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, 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.
Until 1994, the Company 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, including properties held in Texas from
which the Company received no material operating income after April 1993. In
September 1994 the Texas properties were sold to an unrelated third party
operator. In 1993 and 1994, the Company acquired twelve previously producing
wells in Eagle Springs, including three acquired with Barrett, and has since
reworked and returned to production eleven of such wells, drilled a new water
injection well in the Eagle Springs Field, and has undertaken a multi-well
drilling program with Barrett, as discussed below, in order to supplement the
Company's other limited production from its Tomera Ranch and North Willow Creek
oil discoveries.
In August 1994, the Company entered into an agreement with Barrett under
which Barrett provided $1,920,000 of $2,400,000 in well costs to earn a 40%
interest in the Company's Eagle Springs producing properties and obtained the
right to participate in one specified Company exploration project on agreed
terms. Pursuant to such agreement, the Company and Barrett acquired an
additional Eagle Springs lease on approximately 240 acres with three previously
producing wells, which have since been reworked, and a shut-in water injection
well and have drilled a total of eight new wells in Eagle Springs, all of which
are now in regular continuous production. The Company plans to continue
additional drilling in this field to place into production undeveloped reserves
and to drill in additional locations to test horizons that are productive in
existing wells.
To date, the Company has funded its exploration program principally from
the sale of its equity 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.
<PAGE>
The Company has completed substantial work at Eagle Springs since its
acquisition in July 1993, reworking eleven wells, including the three wells
acquired and reworked with Barrett, to return them to production (subject to
interruptions from time to time until further well treatment and other surface
facilities could be completed), drilling a water injection well, and drilling
and placing into production eight additional Eagle Springs wells with Barrett.
Such activities include substantially renovating and upgrading surface
facilities such as tank batteries, piping, separators, and other equipment so
that field production facilities currently have excess capacity available to
service new wells. Production from the Eagle Springs Field is sold under the
Company's existing sales agreement and trucking arrangement to a refinery in
Salt Lake City, Utah.
Of the new wells drilled on the Eagle Springs Field, the Company and
Barrett drilled three new producing wells in the Eagle Springs Field in late
1994 and early 1995. In January 1995, after the first three new Eagle Springs
wells were placed into production, Barrett elected to continue to participate in
Eagle Springs, thereby earning a 40% working interest in the Company's Eagle
Springs project, subject to the right to make individual elections respecting
participating in future wells proposed by the Company. In mid-1995, the Company
and Barrett commenced a multi-well drilling program on the proved nonproducing
and proved undeveloped acreage in the field, to test at additional locations
horizons that are productive in existing wells, and to increase proved reserves.
The Company and Barrett are proceeding to prioritize the proved undeveloped
locations as identified in the reserve report and anticipate those eight
locations as additional wells to be drilled during 1996 and 1997. Barrett or
Foreland may elect, on a well-by-well basis, to participate in the wells planned
for 1996 and 1997 but has no obligation to participate in any well.
Based on its current drilling experience, the Company estimates that the
Eagle Springs drilling will cost approximately $325,000 per gross well for a dry
hole or $560,000 for a completed gross well, including related geophysical and
geological evaluations, for estimated costs attributable to the Company's 60%
share of the Eagle Springs drilling of from approximately $195,000 to $336,000
per well for a dry hole and a producing well, respectively. Therefore, the
Company's share of the cost of the eight wells planned for 1996 and 1997 is
estimated at approximately from $1,560,000, if all wells were dry holes, to
$2,688,000 if all wells were completed for production.
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. Based on estimates of the production rates and
operating conditions during the first quarter of 1996, management believes that
the Company currently requires cash from external sources of approximately
$70,000 to $90,000 per quarter for ongoing fixed and recurring operating costs
(which include general and administrative expenses, exploration consisting of an
allocation of employee salaries and other overhead to the exploration function,
and interest on outstanding debt), and approximately $32,000 to meet annual
lease rental and other cost on its properties, which exceeds the Company's net
revenue from oil production. Based on current production, after giving effect
to reworking several existing Eagles Springs wells, to be accomplished during
the second quarter of 1996, the Company estimates its second quarter oil revenue
to be approximately $430,000, based on current oil prices, with average daily
production net to the Company's interest of approximately 375 barrels of oil,
giving effect to the fact that at any time some wells many not be in production.
Related production costs are estimated at approximately $120,000, yielding
estimated net production revenue of approximately $310,000 for the second
quarter of 1996. (See "ITEM 2. PROPERTIES: Production and Sale of Oil.)
Therefore, the Company estimates that it will be able to meet fixed and
recurring operating costs for the second quarter of 1996 and thereafter.
However, there can be no assurance that the reworking of the Eagle Springs wells
will result in increased production, that production levels will not decline, or
that current prices for oil will not decline. Any improved operating margins
resulting from increased production and reduced operating expenses as weather
improves or price increases would benefit the Company. There can be no
assurance that Eagle Springs development will result in material additional
production or that the Company will be able to obtain funds from other sources,
in which case the Company would be required to implement cost-cutting measures
and curtail drilling and most other exploration activity in order to continue.
<PAGE>
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 and existing and anticipated revenues from the
development of Eagle Springs. During 1995, the Company drilled the fourth and
fifth exploratory tests under its agreement with Enserch/Berry, both plugged and
abandoned, incurring approximately $225,800 in drilling costs for the Hot Creek
Wash test in Antelope Valley and approximately $153,200 in drilling costs for
the Eldorado Federal # 15-1 exploratory well drilled in Little Smoky Valley.
The Company anticipates that it will continue its exploration program with
up to six additional exploration tests during 1996, depending on the
availability of required funds. The test in the Pinon Prospect in Pine Valley,
with estimated total dry hole costs of $300,000, is planned for 1996, subject to
available funding. The Company would be required to bear 50% of such costs.
This would be the sixth well of the six well exploration program with
Enserch/Berry. The Company and Barrett may also drill one test at North
Humboldt at an estimated dry hole cost of approximately $400,000 for a net cost
to the Company of $133,000 under their joint exploration agreement. The Company
has reentered an existing hole drilled by another operator in the Deadman Creek
area of Toano Draw on lands covered by an exploration agreement with P&P. The
hole was originally drilled in the mid 1980s and encountered favorable oil shows
but was not completed for production. The Company is evaluating the hole to
determine if it could be economically completed using modern completion
techniques. If joint exploration arrangements can be reached with other
industry participants and the Company's share of required funds is available,
the Company may also attempt to drill a Dixie Flats test in Huntington Valley at
an estimated dry hole cost of $400,000. In addition, the Company will be
drilling the Pine Creek prospect in Pine Valley at a net estimated cost to the
Company of $332,000 and the Ghost Ranch prospect in Railroad Valley at a net
estimated cost to the Company of $261,000.
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 process
seismic data available to the Company, completing 3-D seismic studies of
specific drilling prospects, and integrating seismic, gravity, and drilling
data. In addition the Company may undertake joint geophysical data acquisition
with others under arrangements in which each participant bears a share of the
cost 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. Typically, new prospects that are generated are not
drilled for several months or until the next drilling season or later.
The Company initiated its 1995 exploration program with the net proceeds of
$1,376,718 received from the private placement of units consisting of preferred
stock and common stock purchase warrants completed in September 1995 (and
$329,250 received from the exercise of C Warrants in October 1995). In order to
pay other liabilities incurred in connection with drilling, during February and
March 1996, the Company sold 500 shares of preferred stock for net proceeds of
$472,500. The Company is currently seeking and is dependent on the receipt of
funds from the sale of debt or equity financing to fund its portion of the cost
of the Eagle Springs drilling program and further exploration drilling, but
there can be no assurance that the Company will be successful in obtaining such
additional financing.
<PAGE>
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 interest of 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 and greater economic return to its shareholders.
Liquidity and Capital Resources
Previous Periods
Historically the Company has obtained cash required for its other
requirements from the sale of its equity securities. The Company's operations
provided cash of $190,600 in 1995 when the Company reported a net loss of
$2,275,600, which included $725,600 in expenses due to abandonments and
impairments, and $852,600 for depreciation, depletion, and amortization. As of
December 31, 1995, the Company's accumulated deficit was $19,212,300.
Operations used $2,501,600 of cash in 1994, which included $1,847,200 in
expenses due to abandonments and impairments, $434,500 for the loss on the sale
of the Company's Texas oil and gas properties, and $329,500 for depreciation,
depletion, and amortization.
During 1995 investing activities used net cash of $1,814,300, principally
due to $1,883,500 in additions to oil and gas properties. In 1994 investing
activities used net cash of $1,182,500, principally due to additions to oil and
gas properties resulting from the acquisition of additional lease rights from
Kanowa in the Eagle Springs Field and additional Eagle Springs drilling,
including the completion of a water injection well.
As noted above, cash required for both operating and investing activities
was provided from financing activities during each of the past two fiscal years.
In 1995, financing activities provided $1,560,400, provided by $1,561,400 from
the issuance of equity securities. In 1994, financing activities provided
$2,819,400, consisting primarily of a net of $2,537,600 from the issuance of
equity securities and $400,000 in proceeds from new borrowing.
In addition to the above, the Company's oil and gas exploration and
production activities were also advanced by approximately $2,233,000 and
$2,345,000 provided during 1994 and 1995, respectively, by others under industry
sharing arrangements related to specific drilling or other exploration.
Current Position/Future Requirements
The Company is dependent on the receipt of additional funds to repay
certain drilling expenditures incurred during the fourth quarter of 1995 and to
date during 1996 as well as to meet ongoing general and administrative expenses
and other operating costs.
The Company requires cash for certain fixed and recurring operating costs
in order for the Company to continue, as distinguished from drilling and related
costs to advance its ongoing exploration program in Nevada that are either
expensed as dry hole and abandonment costs in the case of an unsuccessful test
or added to oil and gas properties if a producing well results. For example,
during the fourth fiscal quarter ended December 31, 1995, the Company required
cash for production operations ($105,800), exploration, consisting of an
allocation of employee salaries and other overhead to the exploration function
($133,500), general and administrative ($139,100), and interest on outstanding
debt requiring cash payment ($12,000), for an aggregate of approximately
$390,400. (Most interest revenue and most interest expense relate to
indebtedness to and from former and present officers and directors that do not
require current cash expenditures.) During the fourth quarter, the Company
received revenue of $298,400 from oil sales at an average of approximately 285
barrels per day, resulting in a cash shortfall for the quarter of $92,000.
<PAGE>
Average daily net fourth quarter production increased to approximately 285
barrels per day, which is lower than anticipated. Due to delays in the Eagle
Springs drilling and completion program, only three new Eagle Springs wells were
placed in production during the fourth quarter. Such wells were not placed into
production until the latter part of the fourth quarter. One additional well was
placed in production in January 1996. Management believes that the Company's
cash requirements, excluding drilling and related costs to advance the Company's
ongoing development and exploration program in Nevada, will be met when certain
Eagle Springs wells are recompleted in the second quarter of 1996, but there can
be no assurance that production will increase in sufficient quantities or that
oil prices will not fluctuate significantly.
To the extent that net production to the Company does not increase to a
level sufficient to cover shortages of cash required for operations, the Company
will be dependent on the sale of additional debt or equity securities, the
exercise of outstanding options or warrants, or financing from other sources.
There can be no assurance that Eagle Springs development will sustain sufficient
additional production for the Company to be able to meet its requirements for
recurring operating expenses or that the Company will be able to obtain funds
from other sources, in which case the Company would be required to implement
cost-cutting measures and curtail drilling and most other exploration activity
in order to continue.
Between March and September 1995, the Company sold 507,667 units consisting
of preferred stock and common stock purchase warrants at $3.00 for net proceeds
of $1,376,719. During September 1995, the Company amended the exercise price of
the C Warrants from $3.00 per share to $1.50 per share, and extended the
expiration date from September 30, 1995 to October 10, 1995. The Company
received, in October 1995, $329,250 in cash and notes receivable for the
exercise of 219,500 C Warrants. In order to pay other liabilities incurred in
connection with drilling, during February and March 1996, the Company sold 500
shares of preferred stock for net proceeds of $472,500 and is investigating the
possibility of selling additional equity securities. The Company is current
seeking and is dependent on the receipt of funds from the sale of debt or equity
financing to fund its portion of the cost of the Eagle Springs drilling program
and further exploration drilling, but there can be no assurance that the Company
will be successful in obtaining such additional financing. There can be no
assurance that the Company will be successful with any of its current financing
activities
On April 30, 1994, the Company borrowed $400,000 from an unrelated third
party, collateralized by oil and gas production and other 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. The loan bears interest at 8.4% per annum, payable quarterly, and was
originally due on April 30, 1995. In connection with this 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. In May 1995, the Company negotiated the
extension of the due date of this loan to April 30, 1996. In connection with
extending the loan payment date to April 30, 1996, the Company reduced the
exercise price of the options previously granted to $1.50 and granted a new
option to purchase 200,000 shares at $2.00 through the earlier of April 30,
1997, or 60 days subsequent to the repayment of the loan. The Company is
currently investigating financing alternatives to repay the loan
The auditors' report on the financial statements of the Company as of
December 31, 1995, contains a modification regarding 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 December 31, 1995, the
Company had negative working capital of approximately $2,004,400 and had ongoing
cash requirements for fixed and recurring operating expenses requiring cash
expenditures, but excluding drilling and related expenditures, of approximately
$92,000 greater than production revenue for the fourth quarter of 1995.
<PAGE>
The Company will continue to seek cash proceeds from the exercise of
outstanding options and warrants and from the sale of additional common stock,
preferred stock, warrants, debt or other securities. In addition, the Company
is exploring other sources of financing for ongoing costs as well as expanded
activities and the possible purchase of additional production to increase the
Company's production to increase the Company's financial security and stability
as it continues its exploration. The purchase of producing properties would
require substantial amounts of additional debt and equity financing. There can
be no assurance that the Company can negotiate the acquisition of any properties
or obtain any financing that may be required for such purchase. As in the past,
the Company will rely largely on the sale of additional securities to meet its
capital requirements.
Results of Operations
1994 and 1995
For the year ended December 31, 1995, oil sales increased $540,400 to
$1,071,400 when compared to the fiscal year ended December 31, 1994, with sales
from the Eagle Springs Field increasing $519,700 to $937,900 during such period.
The revenues from the Company's other interests increased $20,700. Operating
overhead revenue and well service revenue aggregately increased a net of $16,800
when compared to 1994, consisting of an increase of $33,000 in operating
overhead revenue in 1995 due to the increased number of Eagle Springs wells
drilled and placed into production during 1995 and a decrease of $16,100 in well
service income during 1995 as compared to 1994 as a result of reduced fees
earned for water disposal services. The increase of other income of $18,400 in
1995 as compared to 1994 was primarily a result of increases in value of new and
used well equipment inventories used in the Company's drilling program.
Interest income increased $63,000 in 1995 to $140,700, $76,600 of such increase
attributable to interest earned on stock subscriptions receivable, while
interest earned from excess cash investments decreased $14,900 in 1995 when
compared to 1994.
The Company's oil and gas production expenses for 1995 decreased $33,300 to
$424,400 when compared to 1994, attributable principally to reduction in
operating expenses of the Eagle Springs Field of $34,700 in 1995 when compared
to such expenses in 1994. These reductions were a result of increased
efficiency and excess field operations capacity. During 1995, oil and gas
exploration costs decreased $287,500. Components of oil and gas exploration
costs in 1994 were Eagle Springs 3-D seismic program expenses of $207,500 and
gravity and other surveys costing $16,000 for Dixie Flats, $16,300 for the North
Humboldt prospect, and $57,600 for Toano Draw. The Company did not incur any
similar expenses during 1995. Dry hole, abandonment, and impairment costs
aggregately decreased $1,132,200 when compared to such expenses during 1994.
Individually, dry hole expense decreased $70,500 when compared to 1994. Dry
hole costs for 1995 were primarily from the Eldorado Federal #15-1 of $153,200,
the Hot Creek Wash #15-1 of $225,800, and costs for the Trout Creek #26-1 well
of $17,300. Impairment and abandonment of leases decreased $1,211,700 when
compared to 1994. Major cost components during 1995 were abandonment of expired
undeveloped leasehold costs of $23,000, impairment of undeveloped leases of
$250,000 and impairment of well equipment inventory of $47,500, while the North
Willow Creek nos. 1-27 and 5-27 and the Tomera Ranch wells were impaired in 1994
at $1,382,200. General and administrative expenses decreased $227,300 in 1995
to $775,300. Much of the reduction in general and administrative expenses were
principally due to one time charges in 1994 that were not repeated in 1995 of
$114,500 for relocation cost; and $129,200 as a reduction in securities offering
costs that were required to be expensed because of delays in consummating the
Company's financing, although in 1995 the Company did incur an increase of
$70,000 in expenses related to financial public relations, information
dissemination within the investment community (which management expects to
decline) and a decrease in certain salaries and benefits of $27,900 when
compared to 1994. Depreciation, depletion and amortization expenses increased
$533,100 when compared to 1994. Such expenses attributable to the Eagle Springs
Field increased $426,900, primarily due to new wells being brought into
production with high initial production rates, while such expenses attributable
to the Company's remaining properties increased $106,200 in 1995 when compared
to 1994. Interest expense increased $39,600 in 1995 to $125,300, primarily due
to a full year of interest and amortization of loan fees associated with the
Company's $400,000 note payable, as opposed to nine months of interest and
amortization of the same loan fees during 1994.
<PAGE>
1993 and 1994
For the year ended December 31, 1994, oil sales increased $401,200 to
$477,000 as compared to 1993, with the Eagle Springs Field contributing
approximately $418,200 of 1994 revenues as production from the Company's other
fields declined. Well service revenue decreased $4,000 due primarily to reduced
water disposal fees. Other income was approximately $35,600 higher in 1994 as
compared to 1993 as a result of increased drilling and lease overhead fees
charged to participants in Company drilling programs and lease operations.
The Company's oil and gas production expenses for 1994 increased $387,800
to $457,800 when compared to 1993, attributable principally to $346,500 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 $110,600.
During 1994, oil and gas exploration costs increased $46,200, reflecting the
Company's continuing active exploration program. Major components of 1994
exploration costs were an Eagle Spring 3-D seismic program expense of $207,500
and gravity and other seismic surveys of $16,000 for Dixie Flats, $16,300 for
North Humboldt, and $57,600 for Toano Draw areas in Nevada contributed to the
increase in exploration costs for 1994. Dry hole and abandonment cost increased
by $468,200 due to the Company's exploration activities as well as specific
abandonment expenses relating to wells initially drilled in previous years. Dry
hole, abandonment, and impairment costs included charges to expense of $75,600
for the Indian Springs no. 22-A test that was plugged and abandoned, $31,800 for
the Cedar Creek no. 2-1 dry hole, $87,900 for the Willow Springs no. 34-31 dry
hole, and $268,800 for the Trout Creek no. 26-1 dry hole. Impairment expense
increased due to the charge to expense of $703,900 for the North Willow Creek
no. 1-27 test drilled in August 1993 that management concluded could not be
placed into production. Additionally, during the fourth quarter of 1994 when it
was determined that no reserves could be attributed to the North Willow Creek
no. 1-27 or the Tomera Ranch wells, their undepleted capitalized costs of
$564,400 and $103,900, respectively, were charged to impairment expense. General
and administrative expenses for 1994 increased approximately $337,900 as
compared to 1993. The major contributors to this increase were $222,600
associated with expenses written off for a canceled securities offering and the
$84,200 cost on the guarantee of the selling price of N. Thomas Steele's
residence. The Company recognized a $434,500 loss during 1994 related to the
disposal of its remaining interest in certain Texas producing properties. 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
$154,000 of depletion expense in 1994, while depletion attributable to the North
Willow Creek and the Tomera Ranch wells decreased $41,500 and $188,600,
respectively, as compared to 1993. Interest expense declined $27,900, primarily
due to the conversion of promissory notes to stock in September 1993 as compared
to interest expense on the long term debt incurred in 1994.
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 completes 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 "ITEM 1. BUSINESS: Oil Properties.")
<PAGE>
Operating Costs
Operating costs relating to Nevada production from time to time include
costs associated with various production testing measures on the Tomera Ranch
and North Willow Creek wells and fixed costs allocable to a number of wells,
including the Eagle Springs wells that were returned to production during 1994
and the new producing wells jointly drilled with Barrett. Production costs
relating to the Eagle Springs Field have historically been higher than the
normal industry standard per barrel of oil presently being produced due to
start-up costs associated with the upgrading and expanding the production
facility to facilitate additional production, and repairs to equipment that had
been shut down without maintenance for over a year. During the first three
months of 1995, 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 operate the pumping units. In early 1995, the Company
completed field upgrades including a boiler system to heat the oil, a trace
water disposal system to return produced water to the field water injection well
as opposed to trucking the water to the disposal well.
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. 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 economies 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 other factors.
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 material price declines 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.
Accounting Policy Changes
The Company's accounting policy is to compute depreciation and depletion
expense for its proved oil and gas properties on a well-by-well basis, and to
assess impairment on a Company-wide basis by comparing aggregate net capitalized
costs related to proved properties to the aggregate undiscounted future cash
flows related to such properties. At December 31, 1995, the Company recorded
impairment to leases of undeveloped drilling properties of $250,000 and to well
equipment inventory of $47,450. No impairment was necessary for net aggregate
capitalized costs of proved properties.
In March 1995, the Financial Accounting Standards Board issued a new
Statement titled "Accounting for Impairment of Long-Lived Assets." This new
standard is effective for years beginning after December 15, 1995, and would
change the Company's method of determining impairment of proved oil and gas
properties. Although the Company has not performed a detailed analysis of the
impact of the new standard on the Company's financial statements, management
estimates the application of the new standard would have increased the provision
for impairment of oil and gas properties by approximately $450,000, as of
December 31, 1995. The Company will adopt the new standard in the first quarter
of fiscal 1996.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (SFAS 123). The new
statement is effective for fiscal years beginning after December 15, 1995.
SFAS 123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on fair value. Companies that do not adopt the fair value
accounting rules must disclose the impact of adopting the new method in the
notes to the financial statements. Transactions in equity instruments with non-
employees for goods or services must be accounted for on the fair value method.
For transactions with employees, the Company currently does not intend to adopt
the fair value accounting under SFAS 123, and will be subject only to the
related disclosure requirements.
The Company does not anticipate that any other currently adopted changes in
accounting policies will have a material positive or negative effect on the
Company.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The table of contents of the financial statements and supplementary data
included in this report is contained in "ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company and its auditors have not disagreed on any items of accounting
treatment or financial disclosure.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
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 71 Chairman and Director
N. Thomas Steele 51 President and Director
Kenneth L. Ransom 38 Vice-President, Exploration and
Director
Bruce C. Decker 44 Vice-President and Director
Dennis J. Gustafson 48 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. The Company has entered into employment
agreements with N. Thomas Steele, Kenneth L. Ransom, Bruce C. Decker, and Dennis
J. Gustafson. See "Employment Agreements" below.
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.
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.
<PAGE>
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. Schaftenaar
is responsible for the acquisition and analysis of proprietary two- and
three-dimension seismic programs of the Company.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of forms 3, 4, and 5 and amendments thereto,
furnished to the Company during or respecting its last fiscal year, no director,
officer, beneficial owner of more than 10% of any class of equity securities of
the Company or any other person known to be subject to Section 16 of the
Exchange Act failed to file on a timely basis reports required by Section 16(a)
of the Exchange Act for the last fiscal year, except that N. Thomas Steele and
Grant Steele each failed to timely report a gift of shares of Common Stock
during December 1995, and all directors failed to timely report the delivery of
shares of stock held by them to the Company as payment for the September 1995
installment of their notes as discussed in "Item 13. Certain Relationships and
Related Transactions."
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the annual and long term compensation earned
by, awarded to, or paid to the 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
$100,000 for all services rendered in all capacities to the Company and its
subsidiaries. The Company provides to all of its full time employees, including
executive officers and directors, health insurance and miscellaneous other
benefits.
<TABLE>
<CAPTION>
Annual Long-Term
Compens- Compensation
--------
Awards
------------------
ation
--------
(a) (b) (c) (g) (i)
Securities All Other
Underlying Compen-
Name and Principal Year Salary Options/ SARs sation
Position Ended Dec. 3($) (#) ($)
- --------------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
N. Thomas Steele
President (CEO) 1995 $80,400 --/-- $ --
1994 $99,046 200,000/-- $ 84,200(1)
1993 $74,700 72,000/45,000(2) $27,313 (2)
</TABLE>
(1)During 1994, the Company incurred a loss of $84,200 on its guarantee of a
minimum sales price of $375,000 on Mr. Steele's former residence in
connection with his move to Denver, Colorado, to become president and chief
executive officer of the Company. (See "ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS: Relocation Agreement.")
(2)Consists of options to purchase 72,000 shares at $1.50 through May 1998 and
stock appreciation rights with respect to appreciation on 45,000 shares of
the Company's Common Stock above $4.56, the trading price of the Company's
Common Stock on the date of grant on May 19, 1993. Such stock appreciation
rights vest as to 15,000 shares on May 19, 1993, as to an additional 15,000
shares on May 19, 1994, and as to the remaining 15,000 shares on May 19,
1995. The terms of these stock appreciation rights were not determined in
arm's length negotiations.
Option/SAR Grants in Last Fiscal Year
The chief executive officer was not granted any options or stock
appreciation rights during the fiscal year ended December 31, 1995.
<PAGE>
Aggregate Option/SAR Exercises in Last Fiscal Year and Year End Option/SAR
Values
The following table sets forth information respecting the exercise of
options and SARs during the fiscal year ended December 31, 1995, by the named
executive officer of the Company and the fiscal year end values of unexercised
options and SARs.
<TABLE>
<CAPTION>
(a) (d) (e)
Value of
Number of Unexercised
Securities In-the-Money
Underlying Options/SARs
Unexercised at
Options/SARs at FY FY End ($)
End (#)
Exercisable/ Exercisable/
Unexercisable Unexercisable
-------------------------- -------------
<S> <C> <C>
N. Thomas Steele 467,000/--(1) $20,208/--(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 on May 19, 1993. Such stock
appreciation rights vested as to 15,000 shares on May 19, 1993, as to an
additional 15,000 shares on May 19, 1994, and as to the remaining 15,000
shares on May 19, 1995. 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 $1.5625 on
December 31, 1995.
Director Compensation
As all of the Company's directors are also employees, the Company has not
compensated and does not intend to compensate such individuals for their service
as directors of the Company.
Employment Agreements
The Company entered into employment agreements dated May 19, 1993, 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.
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.
<PAGE>
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.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 15, 1996, 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 14,489,401 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>
Number of
Name of Beneficial Owner Nature of Common Percentage of
Ownership Owned(1) Ownership(2)
Principal Shareholders
<S> <C> <C> <C>
Grant Steele Common Stock 435,075(3) 3.0%
Options 300,000(4) 2.1%
-------------
Total 735,075 5.0%
N. Thomas Steele Common Stock 290,991(5) 2.0
Options 422,000(6) 2.8%
-------------
Total 712,991 4.8%
Kenneth L. Ransom Common Stock 375,613 2.6%
Options 300,000(7) 2.0%
-------------
Total 675,613 4.6%
Directors and Executive
Officers
Grant Steele - - - - - See Above - - - - -
N. Thomas Steele - - - - - See Above - - - - -
Kenneth L. Ransom - - - - - See Above - - - - -
Bruce C. Decker Common Stock 75,668 0.5%
Options 75,000(8) 0.5%
-------------
Total 150,668 1.0%
Dennis J. Gustafson Common Stock 19,973(9) 0.1%
Options 25,000(11) 0.2%
--------------
Total 44,973 0.3%
All Executive Officers and
Directors as a Group (5
persons) Common Stock 1,197,320 8.3%
Options 1,122,000 7.2%
-------------
Total 2,319,320 14.9%
<PAGE>
<FN>
</TABLE>
(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.
(3)Represents 100,000 shares owned by Dr. Steele's wife's estate and 80,000
shares held by his Individual Retirement Account, over which Dr. Steele
exercises sole investment, voting, and dispositive power.
(4)Consists of 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 7,000 shares of Common Stock and 6,250 shares of Common Stock
issuable on conversion of outstanding preferred stock, such shares of common
and preferred stock held by Mr. Steele's wife.
(6)Consists of 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.
(7)Consists of 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.
(8)Consists of 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.
(9)Consists of shares owned by the individual retirement account of Mr.
Gustafson, over which he exercises sole investment, voting and dispositive
power.
(10)Consists of 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.
ITEM 13. 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. As of December 31,
1995, the Company owed $392,462 in deferred salaries (including $10,527 due N.
Thomas Steele), which the officers and directors have agreed not to seek to
collect until at least after January 1, 1996 unless such payment would not
jeopardize the ability of the Company to continue, or the net amount received by
such officers and directors is used to retire existing debt owed to the Company
or to purchase stock from the Company on exercise of options so that the Company
will have such amounts available for its ongoing cash requirements. 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>
Officer, Director, and Employee Options
On September 16, 1994, outstanding options were exercised to purchase an
aggregate of 650,000 shares of 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. On September 16, 1995, these individuals
delivered to the Company shares of Common Stock , valued at $2.25 per share, the
approximate price of the Company's common stock as quoted on Nasdaq as of such
date, as payment of accrued interest and principal due on notes delivered by
them to the Company as payment for the September 1995 installment of their notes
as follows: N. Thomas Steele, 50,807 shares for $114,316; Grant Steele, 50,807
shares for $114,316; Kenneth L. Ransom, 50,807 shares for $114,316; Dennis
Gustafson, 9,527 shares for $21,436; and Bruce C. Decker, 9,527 shares for
$21,436. These transaction were not the result of arm's length negotiations.
Certain Loans
In previous years, the Company loaned to Bruce C. Decker, an officer and
director of the Company, and Robert Richins, a former officer and director, an
aggregate of $160,005, secured by a pledge of the obligation of the Company to
such persons for accrued but unpaid back salaries. Proceeds from these loans
were used principally to purchase equity securities of the Company. As of
December 31, 1995, the aggregate amount of principal and interest due the
Company from such individuals was $247,470, and the aggregate amount of accrued
but unpaid salaries, including interest, due by the Company to such persons was
$258,638. The Company has not sought, nor will it seek, payment of the notes
until back salaries owed these individuals are paid.
Relocation Agreement
In May 1993, in connection with the relocation of N. Thomas Steele from
Utah to Colorado in order to become president of the Company, the Company
agreed, among other items, to guarantee the sales price of Mr. Steele's Utah
home. In the third quarter of 1994, the Company sold the home and recognized a
loss of approximately $84,200.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a)(1) Financial Statements. The following statements are included in
--------------------
this report:
<TABLE>
<CAPTION>
Title of Document Page
<S>
<C>
Table of Contents F-1
Report of Hein + Associates, LLP, Certified Public
Accountant F-2
Consolidated Balance Sheets - As of at December 31,
1994 and 1995 F-3
Consolidated Statements of Operations - For the
Years Ended December 31, 1993, 1994, and 1995 F-5
Consolidated Statement of Stockholders' Equity - For
the Years Ended December 31, 1993, 1994, and 1995 F-6
Consolidated Statements of Cash Flows - For the
Years Ended December 31, 1993, 1994, and 1995 F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
(a)(2) Financial Statement Schedules. Schedules are omitted because of
-----------------------------
the absence of conditions under which they are required or because the
information is shown in the financial statements.
<PAGE>
(a)(3) Exhibits. The following exhibits are included as part of this
--------
report
<TABLE>
<CAPTION>
SEC
Refer-
Exhibit ence
No. No. Title of Document Location
- ---------- --------- ----------------------------------------- -------------
<S> <C> <C> <C>
Item 3. Articles of Incorporation and Bylaws
- --------------------------------------------------------------
3.01 3 Articles of Incorporation Incorporated
by
Reference(4)
3.02 3 Bylaws Incorporated
by
Reference(4)
Item 4. Instruments Defining the Rights of
- ----------------------
Security Holders, Including Indentures
----------------------------------------
4.01 4 Specimen Common Stock Certificate Incorporated
by
Reference(1)
4.02 4 Designation of Rights, Privileges, and Incorporated
Preferences of 1991 Series Preferred by
Stock Reference(1)
4.03 4 Designation of Rights, Privileges and Incorporated
Preferences of 1994 Series Convertible by
Preferred Stock Reference(8)
4.04 4 Designation of Rights, Privileges and Incorporated
Preferences of 1995 Series Convertible by
Preferred Stock Reference(13)
4.05 4 Designation of Rights, Privileges and This Filing*
Preferences of 1996 Series 6%
Convertible Preferred Stock
4.06 4 Form of Underwriter's Warrant to Incorporated
Purchase Units by
Reference(10)
4.07 4 Warrant Agreement between the Company Incorporated
and Atlas Stock Transfer Corporation by
relating to X and Y Warrants Reference(3)
4.08 4 Amendment to Warrant Agreement between Incorporated
the Company and Atlas Stock Transfer by
Corporation relating to X and Y Reference(9)
Warrants
4.09 4 Amendment to Warrant Agreement between Incorporated
the Company and Atlas Stock Transfer by
Corporation relating to X and Y Reference(10)
Warrants
4.10 4 Form of Warrant Agreement between the Incorporated
Company and Atlas Stock Transfer by
Corporation relating to L Warrants Reference(10)
4.11 4 Warrant relating to $2.00 Warrants Incorporated
by
Reference(10)
4.12 4 Form of Warrant Agreement between the Incorporated
Company and Atlas Stock Transfer by
Corporation relating to M Warrants Reference(13)
Item 10. Material Contracts
10.01 10 Option Agreement between N. Thomas Incorporated
Steele and Foreland Corporation, dated by
June 24, 1985** Reference(12)
10.02 10 Option Agreement between Kenneth L. Incorporated
Ransom and Foreland Corporation, dated by
June 24, 1985** Reference(12)
10.03 10 Option Agreement between Grant Steele Incorporated
and Foreland Corporation, dated June by
24, 1985** Reference(12)
10.04 10 Form of Options to directors dated Incorporated
April 30, 1991 with respect to options by
previously granted 1986** Reference(1)
10.05 10 Agreement Regarding Oil and Gas Incorporated
Investments, dated May 15, 1991, by
between the Company and Santa Fe Energy Reference(6)
Resources, Inc.
10.06 10 Agreement Regarding Oil and Gas Incorporated
Investments, dated May 15,1991, between by
the Company and Santa Fe Operating Reference(6)
Partners, Ltd.
10.07 10 Exploration Agreement, dated December Incorporated
1, 1992, entered into by and between by
Santa Fe Energy Resources, Inc., Santa Reference(2)
Fe Energy Operating Partners, L.P., and
the Company
10.08 10 Form of Placement Agent Warrant Incorporated
Agreement, dated February 4, 1993, by
between the Company and George E. Reference(9)
Dullnig & Co.
10.09 10 Form of Executive Employment Agreement Incorporated
between the Company and executive by
officers, with form of letter and Reference(9)
related schedule**
10.10 10 Form of Stock Appreciation Rights Incorporated
Agreement between the Company and by Reference
officers, with related schedule** (9)
10.11 10 Form of Nonqualified Stock Option Incorporated
between the Company and unrelated third by
parties, with related schedule Reference(9)
10.12 10 Operating Agreement between the Company Incorporated
and Enserch Exploration, Inc., and by
Berry Petroleum Company dated June 17, Reference(9)
1993 (as revised June 22, 1993)
10.13 10 Crude Oil Purchase Agreement between Incorporated
the Company and Crysen Refining, Inc., by
dated September 1, 1993 (Nye County, Reference(8)
Nevada)
10.14 10 Crude Oil Purchase Agreement between Incorporated
the Company and Crysen Refining, Inc., by
dated September 1, 1993 (Eureka County, Reference(8)
Nevada)
10.15 10 Loan Agreement by and among Foreland Incorporated
Corporation together with its two by
subsidiaries Krutex Energy Corporation Reference(8)
and Eagle Springs Production Limited
Liability Company and CapitalPro
International, Inc., dated April 30,
1994
10.16 10 Letters from Executive Officers re: Incorporated
Salary deferrals** by Reference
(13)
10.17 10 Conditional Letter of Acceptance dated Incorporated
June 22, 1994, and related Farmout by
Letter Agreement between Yates Reference(8)
Petroleum Corporation and Trail
Mountain, Inc.
10.18 10 Lease Agreement dated June 7, 1993, by Incorporated
and between Ulster Joint Venture and by
the Company regarding Union Terrace Reference(8)
Office, as amended
10.19 10 Agreement dated August 9, 1994, between Incorporated
Plains Petroleum Operating Company and by
the Company Reference(8)
10.20 10 Letter Agreement dated September 29, Incorporated
1994, between the Company, Kanowa by Reference
Petroleum, Inc., and D&R Investments (10)
relating to interest in Eagle Springs
lease.
10.21 10 Letter Agreement dated October 1, 1994, Incorporated
between Krutex Energy Corporation and by Reference
Caldera & Clements Minerals regarding (10)
Lulling Farmout Agreement.
10.22 10 Letter Agreement dated September 28, Incorporated
1994, between the Company and Mobil by Reference
Exploration & Producing U.S., Inc. (10)
regarding the Rustler Prospect Farmout
Agreement.
10.23 10 Form of Options to employees, with Incorporated
related schedule by Reference
(10)
10.24 10 Form of Promissory Notes relating to Incorporated
certain options exercised by officers, by Reference
with related schedule (10)
10.25 10 Form of Option granted pursuant to Incorporated
reload provisions of previously granted by Reference
options with related schedule (10)
10.26 10 Letter dated January 25, 1995 from Incorporated
Plains Petroleum Operating Company by Reference
regarding Plains' election under the (13)
Agreement dated August 9, 1994.
10.27 10 Form of Letter Agreement dated March 8, Incorporated
1995 between the Company and Parsley & by Reference
Parsley Development, L.P. regarding (13)
Exploration Agreement.
10.28 10 Form of Letter Agreement dated March Incorporated
24, 1995 between the Company and Mobil by Reference
Exploration & Producing U.S., Inc., (13)
regarding the Rustler Prospect Farmout
Agreement
10.29 10 Form of Registration Agreement relating Incorporated
to Units consisting of 1995 Series by Reference
Preferred Stock and M Warrants (13)
10.30 10 Crysen Refining, Inc., document Incorporated
respecting extension of Crude Oil by Reference
Purchase Agreement (13)
Item 21. Subsidiaries of the Registrant
21.01 21 Schedule of Subsidiaries Incorporated
by
Reference(7)
</TABLE>
<PAGE>
(1)Incorporated by reference from the Company's registration statement on form
S-2, SEC file number 33-42828.
(2)Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1992.
(3)Incorporated by reference from the Company's quarterly report on form 10-Q
for the period ending March 31, 1993.
(4)Incorporated by reference from the Company's registration statement on form
S-1, SEC file number 33-19014.
(5)Incorporated by reference from the Company's registration statement on form
S-2, SEC file number 33-34970.
(6)Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1991.
(7)Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1993.
(8)Incorporated by reference from the Company's registration statement on form
S-1, SEC file number 33-81538.
(9)Incorporated by reference from the Company's registration statement on form
S-2, SEC file number 33-64756.
(10) Incorporated by reference from the Company's registration statement on form
S-2, , SEC file number 33-86076.
(11) Incorporated by reference from the Company's quarterly report on form 10-Q
for the period ending March 31, 1993.
(12) Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1985.
(13) Incorporated by reference from the Company's annual report on form 10-K for
the fiscal year ended December 31, 1994.
* Filed as an exhibit to this annual report on form 10-K.
** Identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit.
(b) Reports on Form 8-K.
During the last quarter of the fiscal year ended December 31, 1995, the
Company did not file any reports on form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FORELAND CORPORATION
Dated: April 15, 1996 By /s/ N. Thomas Steele
---------------------------
N. Thomas Steele, President
Pursuant to the requirements of the Securities Exchange of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Dated: April 15, 1996 By /s/ N. Thomas Steele
---------------------------
N. Thomas Steele, President and Director
(Principal Executive Officer and
Principal Financial Officer)
Dated: April 15, 1996 By /s/Grant Steele
---------------------------
Grant Steele, Chairman and Director
Dated: April , 1996 By
----- ----------------------------
Kenneth L. Ransom, Vice President-
Exploration and Director
Dated: April , 1996 By
----- ----------------------------
Bruce C. Decker, Vice-President and
Director
Dated: April 15, 1996 By /s/ Dennis J. Gustafson
----------------------------
Dennis J. Gustafson, Vice President-
Land and Director
Dated: April 15, 1996 By /s/Don W. Treece
----------------------------
Don W. Treece, Controller (Principal
Accounting Officer)
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report.....................................F-2
Consolidated Balance Sheets - As of December 31, 1994 and 1995...F-3
Consolidated Statements of Operations - For the Years
Ended December 31, 1993, 1994, and 1995.....................F-5
Consolidated Statements of Stockholders' Equity - For the Years
Ended December 31, 1993, 1994, and 1995.....................F-6
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1993, 1994, and 1995...........................F-8
Notes to Consolidated Financial Statements......................F-10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Foreland Corporation
Lakewood, Colorado
We have audited the accompanying consolidated balance sheets of Foreland
Corporation and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foreland Corporation
and subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, 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 real-
ization 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 adjustments that might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
April 12, 1996
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
1994 1995
--------- ---------
ASSETS
------
CURRENT ASSETS:
Cash and equivalents $ 93,715 $ 30,490
Accounts receivable, net of allowance of
$9,000 in 1994 864,778 438,058
Inventory 168,699 81,382
Advances to officer and director 7,907 7,212
Prepaid expenses and other 1,472 2,586
---------- ----------
Total current assets 1,136,571 559,728
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, under the successful
efforts method 5,133,538 6,874,635
Furniture, equipment, and vehicles 263,603 299,161
---------- ----------
5,397,141 7,173,796
Less accumulated depreciation, depletion and
amortization (1,500,648) (2,363,211)
---------- ----------
3,896,493 4,810,585
OTHER ASSETS 164,350 230,785
---------- ----------
TOTAL ASSETS $5,197,414 $5,601,098
========== ==========
See accompanying notes to these consolidated financial statements.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ - $ 404,237
Accounts payable and accrued expenses 649,242 1,642,537
Officers' salaries payable 354,962 392,462
Oil and gas sales payable 84,738 125,899
---------- ----------
Total current liabilities 1,088,942 2,565,135
LONG-TERM DEBT, less current maturities 400,000 23,091
COMMITMENTS (Notes 2, 4 and 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000
shares authorized:
1991 Convertible Preferred Stock,
40,000 shares issued and outstanding,
liquidation preference of $50,000 40 40
1994 Convertible Redeemable Preferred
Stock, 1,242,210 and 433,686 shares
issued and outstanding, respectively,
liquidation preference of $2,484,420 and
$867,372, respectively 1,242 434
1995 Convertible Redeemable Preferred
Stock, 1,015,334 shares issued and
outstanding, liquidation preference
of $1,523,001 - 1,015
Common stock, $.001 par value, 50,000,000
shares authorized; 13,587,852 and
14,489,401 shares issued and outstanding,
respectively 13,588 14,489
Additional paid-in capital 21,887,629 23,301,858
Less note and stock subscriptions receivable (1,257,250) (1,092,622)
Accumulated deficit (16,936,777)(19,212,342)
----------- ----------
Total stockholders' equity 3,708,472 3,012,872
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,197,414 $5,601,098
========== ==========
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
----------- ----------- ----------
REVENUE:
Oil sales $ 75,748 $ 476,964 $1,017,401
Operator and well service revenue 21,589 54,880 71,722
Other income, net 907 11,147 26,753
---------- ---------- ----------
Total revenue 98,244 542,991 1,115,876
EXPENSES:
Oil and gas production 69,970 457,782 424,445
Oil and gas exploration 860,214 906,371 618,895
Dry hole, abandonment, and 1,389,728 1,857,878 725,648
impairment costs
General and administrative 655,985 1,002,662 775,300
Compensation - below market
options 320,000 - -
Depreciation, depletion, and
amortization 356,676 329,502 862,563
---------- ---------- ----------
Total expenses 3,652,573 4,554,195 3,406,851
---------- ---------- ----------
OPERATING LOSS (3,554,329) (4,011,204) (2,290,975)
OTHER INCOME (EXPENSE):
Interest income 89,636 77,693 140,688
Interest expense (113,561) (85,686) (125,278)
Loss on sale of oil and gas
properties - (434,521) -
---------- ---------- ----------
NET LOSS ($3,578,254) ($4,453,718) ($2,275,565)
========== ========== ===========
NET LOSS PER COMMON SHARE $ (.34) $ (.34) $ (.16)
============ ========= ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10,405,000 12,989,000 14,271,000
========== ========== ==========
See accompanying notes to these consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
PREFERRED STOCK COMMON STOCK
--------------- -------------
SHARES AMOUNT SHARES AMOUNT
---------- ------- -------- --------
<S> <C> <C> <C. <C>
BALANCES, January 1, 1993 524,600 $ 525 9,220,709 $ 9,220
Stock issued for compensation - - 5,000 5
Preferred stock exchanged for common (450,000) (450) 450,000 450
Redemption of shares - - (93) -
Preferred stock offering 700,000 700 - -
Conversion of promissory notes
to common stock - - 162,500 163
Conversion of preferred stock to
common (696,000) (696) 1,392,000 1,392
Exercise of preferred warrants - - 217,000 217
Exercise of Class A warrants - - 1,241,990 1,242
Exercise of X warrants - - 3,000 3
Waived executive compensation - - - -
Accrued interest - - - -
Options issued below market - - - -
Net loss - - - -
--------- ------- -------- --------
BALANCES, December 31, 1993 78,600 79 12,692,106 12,692
Preferred stock offering 1,316,210 1,316 - -
Preferred stock offering cost - - - -
Preferred stock exchanged for common (112,600) (113) 116,600 117
Stock issued for promissory notes - - 701,900 702
Exercise of stock options - - 95,600 95
Options and warrants issued below
market - - - -
Collection of principal on notes - - - -
Purchase and retirement of shares
from directors - - (72,354) (72)
Purchase of property for stock - - 54,000 54
Registration costs of warrants and
stock - - - -
Services rendered for payment of
stock subscriptions receivable - - - -
Accrued interest on notes - - - -
Net loss - - - -
--------- ------- -------- --------
BALANCES, December 31, 1994 1,282,210 1,282 13,587,852 13,588
BALANCES, December 31, 1994 1,282,210 1,282 13,587,852 13,588
Preferred stock offering 1,015,334 1,015 - -
Offering costs - - - -
Preferred stock exchanged for common (808,524) (808) 808,524 808
Warrants issued below market - - - -
Exercise of C warrants for cash - - 127,833 127
Note receivable for exercise of
C warrants - - 91,667 92
Collection of principal on notes - - - -
Services rendered for common stock 45,000 45
Accrued interest on notes - - - -
Common stock returned by officers in
payment of subscriptions
receivable and accrued interest (171,475) (171)
Net loss - - - -
--------- ------- -------- --------
BALANCES, December 31, 1995 1,489,020 $ 1,489 14,489,401 $ 14,489
========= ======= ========== ========
<CAPTION>
NOTES FOR
ADDITIONAL STOCK TOTAL
PAID-IN ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
CAPITAL DEFICIT RECEIVABLE EQUITY
---------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1993 $11,231,511 $(8,904,805) $ (218,046) $ 2,118,405
Stock issued for compensation 10,933 - - 10,938
Preferred stock exchanged for
common - - - -
Redemption of shares (250) - - (250)
Preferred stock offering 3,125,842 - - 3,126,542
Conversion of promissory notes
to common stock 324,837 - - 325,000
Conversion of preferred stock to
common (696) - - -
Exercise of preferred warrants 379,533 - - 379,750
Exercise of Class A warrants 2,793,236 - - 2,794,478
Exercise of X warrants 9,747 - - 9,750
Waived executive compensation 37,500 - - 37,500
Accrued interest - - (22,457) (22,457)
Options issued below market 320,000 - - 320,000
Net loss - (3,578,254) - (3,578,254)
---------- ---------- ------------- ------------
BALANCES, December 31, 1993 18,232,193 (12,483,059) (240,503) 5,521,402
Preferred stock offering 2,631,104 - - 2,632,420
Preferred stock offering cost (291,050) - - (291,050)
Preferred stock exchanged for
common (4) - - -
Stock issued for promissory
notes 1,115,598 - (1,116,300) -
Exercise of stock options 196,105 - - 196,200
Options and warrants issued
below market 90,625 - - 90,625
Collection of principal on notes - - 103,800 103,800
Purchase and retirement of
shares from directors (153,680) - - (153,752)
Purchase of property for stock 134,946 - - 135,000
Registration costs of warrants
and stock (68,208) - - (68,208)
Services rendered for payment of
stock subscriptions
receivable - - 41,195 41,195
Accrued interest on notes - - (45,442) (45,442)
Net loss - (4,453,718) - (4,453,718)
---------- ---------- ------------- -------------
BALANCES, December 31, 1994 21,887,629 (16,936,777) (1,257,250) 3,708,472
<PAGE>
BALANCES, December 31, 1994 21,887,629 (16,936,777) (1,257,250) 3,708,472
Preferred stock offering 1,521,985 - - 1,523,000
Offering costs (146,282) - - (146,282)
Preferred stock exchanged for - -
common - -
Warrants issued below market 13,000 - - 13,000
Exercise of C warrants for cash 191,622 - - 191,749
Note receivable for exercise of
C warrants 137,408 - (137,500) -
Collection of principal on notes - - 34,900 34,900
Services rendered for common
stock 82,143 - - 82,188
Accrued interest on notes - - (118,590) (118,590)
Common stock returned by
officers in payment of
subscriptions receivable
and accrued interest (385,647) - 385,818 -
Net loss - (2,275,565) - (2,275,565)
---------- ---------- ------------- -------------
BALANCES, December 31, 1995 $23,301,858 $(19,212,342)$ (1,092,622) $ 3,012,872
=========== ============ ============= =============
See accompanying notes to these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
------------
1993 1994 1995
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,578,254) $(4,453,718) $(2,275,565)
Adjustments to reconcile net loss to
net cash from operating
activities:
Depreciation, depletion and
amortization 356,676 329,502 862,563
Bad debt allowance - 8,797 (8,797)
Waived executive compensation 37,500 - -
Abandonments and impairments - 1,847,176 725,648
Issuance of stock for services 10,938 - 82,188
Accrued note receivable interest (22,457) (45,442) (118,590)
Amortization of loan origination fee - 29,167 46,750
Below market stock options 320,000 - -
Loss on sale of oil and gas
properties - 434,521 -
Services rendered for payment of note 41,195 -
Other - (5,878) -
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable (220,882) (615,904) 435,517
Advances to officer (175,693) 171,923 695
Inventory (55,864) (72,223) (10,178)
Prepaid expenses and other 63,551 14,059 (4,218)
Increase (decrease) in:
Accounts payable and accrued
expenses 722,646 (218,183) 417,095
Officers' salaries payable (5,082) 33,375 37,500
------------ ----------- -----------
Net cash provided by (used in)
operating activities
(2,546,921) (2,501,633) 190,608
------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (186,707) - -
Proceeds from sale of marketable securities 189,911 186,707 -
Proceeds from sale of oil and gas
properties - 50,000 41,607
Additions to oil and gas properties (3,009,154) (1,423,605) (1,883,496)
Purchase of other property and equipment (80,375) (67,859) (7,264)
Proceeds from note receivable 66,666 72,222 34,900
------------ ----------- -----------
Net cash used in investing
activities (3,019,659) (1,182,535) (1,814,253)
------------ ----------- -----------
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 3,126,542 2,341,370 1,523,000
Proceeds from exercise of warrants and
options 3,183,978 196,200 191,749
Purchase and retirement of shares from - (153,752) -
directors
Payment of offering and registration costs - (68,208) (153,363)
Payment of long-term debt and promissory - - (966)
notes
Collection of principal on notes - 103,800 -
Proceeds from long-term debt - 400,000 -
Other (24,639) - -
------------ ---------- -----------
Net cash provided by financing
activities 6,285,881 2,819,410 1,560,420
------------ ---------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 719,301 (864,758) (63,225)
CASH AND EQUIVALENTS, beginning of year 239,172 958,473 93,715
------------ ---------- -----------
CASH AND EQUIVALENTS, end of year $ 958,473 $ 93,715 $ 30,490
============ ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid for interest $ - $ 50,316 $ 41,327
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable and accrued interest
converted to common stock $ 325,000 $ - $ -
============ ========== ===========
Exercise of stock options and warrants
in exchange for notes receivable $ - $1,116,300 $ 137,500
============ ========== ===========
Below market warrants issued as loan
origination fee $ - $ 87,500 $ 13,000
============ ========== ===========
Issuance of 54,000 common shares for
acquisition of oil and gas properties $ - $ 135,000 $ -
============ ========== ===========
Note receivable obtained for sale of oil
and gas properties $ - $ 25,000 $ -
============ ========== ===========
Debt incurred for purchase of equipment $ - $ - $ 28,294
============ ========== ===========
Return of 171,475 shares of common stock
by officers for subscription receivable $ - $ - $ 385,818
============ ========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Nature of Operations - Foreland Corporation (Foreland) was incorporated in
Nevada in 1985 to engage in oil exploration, development, and production.
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.
Cash Equivalents - For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
Oil and Gas Properties - The Company follows 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. Management estimates that the salvage value of lease and well
equipment will approximately offset the future liability for plugging and
abandonment of the related wells.
The Company determines impairment of proved oil and gas properties by
comparing the net carrying value of all of the Company's proved properties to
the undiscounted future net revenues for such properties. Impairment is
recognized to the extent that the carrying value exceeds the undiscounted future
net revenues. Also see Note 11.
Unproved oil and gas properties are periodically assessed for impairment of
value, and a loss is recognized at the time of impairment by providing an
impairment allowance. Capitalized costs of producing oil and gas properties are
depreciated and depleted by the unit-of-production method. 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
longer than one year from completion of drilling.
Upon the sale of an entire interest in an unproved property for cash, 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.
Other Property and Equipment - Furniture, equipment, and vehicles are stated
at cost. Depreciation 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.
<PAGE>
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. The actual results could differ from
those estimates.
The Company's financial statements are based on a number of significant
estimates including the allowance for doubtful accounts, realizability of notes
and common stock subscriptions receivable, impairment of unproved oil and gas
properties, and oil reserve quantities which are the basis for the calculation
of depreciation, depletion, and impairment of proved oil and gas properties.
The Company's reserve estimates were determined by an independent petroleum
engineering firm. However, management emphasizes that reserve estimates are
inherently imprecise and that estimates of more recent discoveries are more
imprecise than those for properties with long production histories. At
December 31, 1995, approximately 44% of the Company's oil reserves are
attributable to non-producing properties. Accordingly, the Company's estimates
are expected to change as future information becomes available.
At least annually, the Company is required to evaluate the possible
impairment of the carrying value of its proved oil and gas properties. This
involves a comparison to the estimated future undiscounted cash flows, which is
the primary basis for determining the related fair values for such properties.
In addition to the uncertainties inherent in the reserve estimation process,
this amount is affected by historical and projected prices for oil which has
typically been volatile. It is reasonably possible that the Company's oil
reserve estimates will materially change in the forthcoming year.
Additionally, at December 31, 1995, the Company has net capitalized costs of
approximately $114,000 related to a well in progress. If this well is
ultimately unsuccessful, these costs will be charged to operations.
Inventory - Inventory consists primarily of oil and gas production equipment
and crude oil. Inventory is carried at the lower of cost or market, cost being
determined generally under the average cost method of accounting, or where
possible, by specific identification. The Company has classified $50,000 of
used oil field equipment inventory as long-term (included with other assets),
because based on current inventory usage and the type of equipment, it is not
expected to be sold or placed in service within the next year.
Income Taxes - The Company accounts for income taxes on the liability method,
whereby deferred tax assets and liabilities are recognized 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
statement and tax bases of assets and liabilities using enacted tax rates.
Revenue Recognition - The Company recognizes oil sales upon delivery to the
purchaser. Revenues from operator and well service fees are recognized as the
services are performed.
Net Loss Per Share - The net loss per share calculation is based on the
weighted average number of shares outstanding during each year. Convertible
preferred stock, options, and warrants outstanding have been excluded from the
calculation since the effect would be antidilutive.
<PAGE>
Financial Instruments - Statement of Financial Accounting Standards No. 107
requires all entities to disclose the fair value of certain financial
instruments in their financial statements. Accordingly, at December 31, 1995,
management's best estimate is that the carrying amount of all financial
instruments approximates fair value due to the short maturity of these
instruments.
Reclassifications - Certain reclassifications have been made to the 1993 and
1994 financial statements to conform to the presentation in 1995. The
reclassifications had no effect on the 1993 or 1994 net loss.
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
incurred cumulative losses of $19,212,342 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 set forth below.
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, drilling prospects or exploration rights on specific prospects,
the sale of geological and geophysical data gathered in Nevada by the Company
since 1985, or through other means. The Company intends to fund its exploration
drilling program by spreading the risk inherent in this type of drilling by
entering into drilling partnerships with others. The Company is continuing
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.
The Company believes these efforts along with increased revenues from oil and
gas production will enable it to continue its operations in the forthcoming
year.
3. RELATED PARTY TRANSACTIONS:
--------------------------
The Company owed $354,962 and $392,462 in salaries and interest to its
officers and directors at December 31, 1994 and 1995, 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. A
portion of the proceeds from these loans was used to purchase $100,000 in
preferred stock and warrants. The notes were originally due in June 1992, but
the Company has agreed not to seek payment of $247,470 (including additional
advances and accrued interest) of the notes until back salaries owed these
individuals (totaling $258,638 at December 31, 1995) are paid. At December 31,
<PAGE>
1995, $247,470, including accrued interest, was due under the notes (which are
included as a reduction of stockholders' equity in the accompanying financial
statements).
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. Additional relocation costs of
approximately $29,000 were paid in 1994.
See Note 4 for other related party transactions.
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 consisted 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 were exercisable through October 30, 1994. Upon expiration of the B
warrants, the Company issued 1,242,000 L warrants to replace the B warrants.
The L warrants are exercisable to purchase common stock at $8.00 per share
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.
In conjunction with the 1991 Offering, the Company issued to the underwriter
for $100, 400 underwriter unit warrants consisting of an aggregate of 108,000
Class A warrants, 108,000 Class B warrants, and 108,000 shares of common stock.
<PAGE>
The underwriter's unit warrants were exercisable at $550 per each unit. In
1995, pursuant to their terms, the underwriter's unit warrants were adjusted so
that they are now exercisable at $552 per unit and the 400 units purchasable on
exercise now consist of an aggregate of 138,000 shares of common stock, 138,000
Class A Warrants and 138,000 Class B Warrants. The underwriter's unit warrants
are exercisable through October 30, 1996. The A and B Warrants issuable on the
exercise of the underwriter's unit warrants are not redeemable and are
exercisable through October 30, 1995, 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.
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 Private Placement - During 1991, the Company sold 914,600 shares of
convertible 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. At
the election of the holder, each share of 1991 preferred stock may be converted
into one share of common stock.
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 1992 and 217,000 shares of common stock at
$1.75 per share for a total of $379,750 during 1993.
During 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.
The holders of the 1991 convertible preferred stock elected to convert
450,000 and 34,600 shares into common stock in 1993 and 1994, respectively. No
holders of the 1991 convertible preferred stock elected to convert their shares
to common in 1995.
1993 Private Placement - During May 1993, the Company completed a private
placement 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. Subsequent to such
offering, each share of 1993 preferred stock was convertd into two shares of the
Company's common stock. Each X warrant entitled the holder to purchase, at any
time through December 1, 1994 at an exercise price of $3.25 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. Through December 1,
1994, holders of an aggregate of 3,000 X Warrants exercised such warrants and
the Company isued 3,000 shares of common stock and 3,000 Y Warrants. The
697,000 X Warrants not exercised by December 1, 1994, were exercisable at $4.00
per share thereafter. The outstanding X and Y Warrants originally expired on
December 15, 1995, but the Company extended the exercise period to March 14,
1996. During such period, no holders elected to exercise the outstanding X or Y
Warrants.
<PAGE>
The Company issued to the placement agent in this offering warrants to
purchase 70,000 units, each unit consisting of one share of 1993 convertible
preferred stock and one X warrant, such securities containing the same terms and
conditions as those issued to investors.
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 preferred stock and warrants were sold as units at
$4.00 per unit, such units consisting of two shares of preferred stock and one C
Warrant. The Company issued to the placement agent in this offering warrants to
purchase 65,811 units which are exercisable before July 8, 1999, at an exercise
price of $4.40 per unit.
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. Holders of
the 1994 Preferred Stock elected to convert 74,000 and 808,524 shares into
common shares in 1994 and 1995, respectively. 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 originally entitled 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 During September 1995, the Company amended the exercise
price of the Class C warrants from $3.00 per share to $1.50 per share, and
extended the expiration date from September 30, 1995 to October 10, 1995. In
October 1995, the Company received $191,749 in cash and a $137,500 note
receivable for the exercise of 219,500 C warrants. The note receivable was
recorded as a reduction in stockholders' equity.
1995 Private Placement - Between March and September 1995, the Company
completed the sale of 507,667 non-transferable units (the "Units") for $3.00 per
unit. Each Unit consists of two shares of preferred stock designated as the
1995 Series Preferred Stock and one M warrant. At the election of the holder,
each share of 1995 Preferred Stock may be converted into one share of common
stock. The 1995 preferred stock has a liquidation preference of $1.50 per
share. Each M warrant entitles the holder to purchase, at any time through
December 31, 1998, for $4.00 one share of Common Stock. M Warrants not
exercised by December 31, 1998 will expire. The M Warrants may be redeemed by
the Company on at least 30 days' notice at a redemption price of $.10 per
M Warrant if the average closing price for the Company's Common Stock is at
least $6.00 per share for 20 consecutive trading days prior to the redemption
notice, subject to certain other conditions. The Company has agreed to file a
registration statement under the Securities Act of 1933 covering the resale of
the Conversion Shares issuable on conversion of the 1995 Preferred Stock and the
Warrant Shares issuable on the exercise of the M Warrants.
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 upon 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 options were again extended through 1996 and
the officers and directors waived their rights to 100,000 options. In 1991,
options for 67,781 shares were exercised at $1.50 per share, and new options
were granted for 67,781 shares at $1.31 per share through December 1996.
<PAGE>
During 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.
During 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.
The first payment for the above referenced notes became due in September
1995. Grant Steele, N. Thomas Steele, and Kenneth Ramson each returned
50,807 shares of Common Stock in satisfaction of the first installment of
principal and interest on their $300,000 notes, while Bruce Decker and Dennis
Gustafson each returned 9,527 shares in satisfaction of the first installment of
principal and interest on their $56,250 notes.
During 1994, the Company granted five-year options which allow several
employees to purchase an aggregate of 105,000 shares of common stock at $3.00
per share. Options for 10,000 shares were immediately exercisable upon grant,
31,000 vested and became exercisable one year after grant, 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.
In 1994, the Company granted options to a non-affiliated person to purchase
30,000 shares of common stock at an exercise price of $3.00 per share through
October 6, 1999.
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 entitle the officers to receive cash, stock or a combination of
<PAGE>
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 are exercised exceeds $4.56 per
share. The SARS expire in May 1998.
In 1994, the Company granted 45,000 SARS to an executive officer and
director. The SARS entitle 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 the SARS are exercised exceeds $2.50 per
share. The SARS expire in June 1999.
Summary - The following summarizes the options and warrants currently
-------
outstanding:
EXPIRATION DATE COMMON SHARES
------------------ -----------------
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- 354,000
May 1998
Exercise price of $1.31 December 1996 68,000
Exercise price of $2.125 September 1999 650,000
Others:
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 135,000
---------
Total options 1,307,000
---------
Warrants (price per share):
--------------------------
Exercise price of $4.00 March 1996 3,000
(Y warrants)
Exercise price of $6.00-8.00 December 1996 1,242,000
(L warrants)
Exercise price of $4.00 March 1996 697,000
(X warrants)
Exercise price of $1.60 October 1996 138,000
(Placement Agent)
Exercise price of $1.25 February 1996 1,000
(Underwriter)
Exercise price of $1.50 April 1996 200,000
(CapitalPro)
Exercise price of $2.00 April 1997 200,000
(CapitalPro)
Exercise price of $4.00 December 1998 507,667
(M Warrants)
Exercise price of $1.50 June 2000 100,000
(Investment Banker)
---------
Total warrants 3,088,667
---------
Total options and warrants
issued and outstanding 4,395,667
=========
The above table does not include 346,000 warrants to purchase common stock
purchase warrants, underlying units currently outstanding, or any options
issuable upon the exercise of existing options.
<PAGE>
The Company has also issued 271,622 warrants to purchase preferred stock of
prices ranging from $2.20 to $2.75.
5. INCOME TAXES:
------------
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1994 and 1995:
1994 1995
---------- ----------
Long-term deferred tax assets
(liabilities):
Net operating loss carryforward $6,700,000 $7,300,000
Property and equipment basis (1,000,000) (1,300,000)
differences
Below-market stock options 100,000 100,000
--------- ---------
Net deferred tax assets 5,800,000 6,100,000
Less valuation allowance (5,800,000) (6,100,000)
---------- ----------
Net deferred tax assets $ - $ -
======= =========
The Company has a net operating loss carryforward of approximately
$19,700,000 for income tax purposes. A portion of these net operating loss
carryforwards may be subject to reduction or limitation of use as a result of
change in ownership or certain consolidated return filing regulations.
The loss carryforwards for income tax purposes expire as follows:
YEAR OF
EXPIRATION
- -----------
1999 $ 300,000
2000 100,000
2001 700,000
2002 1,600,000
2003 1,400,000
2004 1,000,000
2005 1,300,000
2006 1,900,000
2007 1,700,000
2008 4,300,000
2009 3,800,000
2010 1,600,000
----------
$19,700,000
===========
<PAGE>
6. SIGNIFICANT CONCENTRATIONS:
--------------------------
Substantially all of the Company's accounts receivable result from crude oil
sales and joint interest billings to companies in the oil and gas industry.
This concentration of customers and joint interest owners may impact the
Company's overall credit risk, either positively or negatively, since these
entities may be similarly affected by changes in economic or other conditions.
In determining whether or not to require collateral from a customer or joint
interest owner, the Company generally analyzes the entity's net worth, cash
flows, earnings, and/or credit ratings. Receivables are generally not
collateralized; however, receivables from joint interest owners are subject to
collection under operating agreements which generally provide lien rights.
Historical credit losses incurred on trade receivables by the Company have been
insignificant.
The Company's oil and gas properties are located in north-central Nevada
where the net price realized for the Company's oil production is typically
discounted due to gravity adjustments and transportation costs. Accordingly, in
comparison to the net price received by oil producers in many other areas of the
United States, the Company often realizes a lower net sales price.
Additionally, the Company is vulnerable to a curtailment in drilling activity in
order to realize the value of oil field inventories and related operating
assets. Due to the remote location, the Company may be vulnerable to delays and
shortages of equipment due to a relatively limited number of suppliers for
certain goods and services.
At December 31, 1995, the Company had a receivable from a single
oil purchaser for $225,000, which was collected in January 1996. This purchaser
accounts for all of the Company's oil sales. Additionally, at December 31, 1994
and 1995, the Company had joint interest billings from a single customer of
approximately $475,000 and $175,000, respectively.
7. LONG-TERM DEBT:
--------------
Long-term debt at December 31, 1994 and 1995, consists of the following:
1994 1995
======= ------
Note payable to unrelated party. $400,000 $400,000
Other installment notes. Interest at 13.4%,
monthly principal and interest payments of
approximately $639 through October 1999 when
the remaining balance is due. The notes are
collateralized by vehicles. - 27,328
-------- --------
Total long-term debt 400,000 427,328
Less current maturities - (404,237)
-------- --------
Total long-term debt, less current $400,000 $ 23,091
maturities -------- --------
<PAGE>
On April 30, 1994, the Company borrowed $400,000 from an unrelated party to
provide interim financing to proceed with 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 warrants 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 loan originally provided for interest at 8.4% per annum, payable quarterly,
and was due on April 30, 1995.
In May 1995, the Company negotiated the extension of the due date of this
loan to April 30, 1996, and in connection with such extension, the interest rate
was increased to 10%, the Company reduced the exercise price of the warrants
previously granted to $1.50 per share, and the Company granted new warrants to
purchase 200,000 shares of Common Stock at $2.00 per share through the earlier
of April 30, 1997, or 60 days subsequent to the repayment of the loan.
Borrowings are collateralized by substantially all of the Company's
property, equipment, receivables and inventory. The credit agreement contains
certain covenants, including those that prohibit the Company from selling
substantially all of its assets and incurring additional collateralized
indebtedness in excess of $50,000. From time to time, certain vendors of the
Company file mechanics liens against the Company's oil and gas properties in
order to secure their claims. These liens are typically cleared in a relatively
short period of time and management believes they are insignificant to the
Company's financing activities.
The aggregate maturities of long-term debt are as follows:
Year Ending
December 31,
- ------------
1996 $404,237
1997 4,844
1998 5,538
1999 12,709
-------
$427,328
========
8. COMMITMENTS:
-----------
The Company currently rents administrative office space and equipment under
noncancelable leases. Total rental expenses incurred under operating leases
amounted to $55,205, $64,717, and $67,382 for the years ended December 31, 1993,
1994, and 1995, respectively.
The total minimum rental commitment as of December 31, 1995 is as follows:
1996 $ 57,061
1997 52,200
1998 29,393
--------
$138,654
========
<PAGE>
In 1995, the Company entered into a financial consulting agreement with
Vantage Resource Group LLP ("Vantage") whereby the Company agreed to pay Vantage
3% of the gross proceeds from any debt or equity financing from any person
directly or indirectly introduced to the Company by Vantage. The Company also
agreed to pay Vantage 1% of the proceeds from any financing obtained from any
other source. The Company agreed to pay these amounts during the term of the
consulting agreement, which expires in June 1996, and for 12 months thereafter.
The Company has issued 100,000 warrants exercisable at the lower of $1.50 or
the average of the closing price of the common stock for the 20 business days
preceding the exercise date. The warrants expire in June 2000. The Company has
agreed to issue an additional 100,000 warrants in the event Vantage is
successful in obtaining financing in excess of $1,000,000.
9. OIL AND GAS PROPERTY CONVEYANCES:
--------------------------------
During 1994, the Company entered into an agreement with Barrett Resources
Corporation ("Barrett") whereby Barrett agreed to pay 80% of the first
$2,400,000, or as much as $1,920,000, of the costs to drill and, if practical,
complete three oil wells in the Company's Eagle Springs field. In January 1995,
Barrett elected to retroactively assign ownership of the Eagle Springs
properties and leaseholds to the August 1, 1994 effective date of the agreement.
The accompanying financial statements give effect to Barrett's election as of
August 1, 1994, with no gain or loss recognized since this transaction
represented a pooling of capital. After the initial $2,400,000 of expenditures,
additional development costs are being shared 60% by the Company and 40% by
Barrett.
In 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 option was exercised in 1995 and the
Company recognized a loss of $434,521 in 1994.
10. SUBSEQUENT EVENTS:
-----------------
In March 1996, the Company issued 500 shares of 6% convertible preferred
stock for net proceeds of $472,500. From May 1996 through March 1998, at the
election of the holder, each share may be converted into that number of shares
of the common stock determined by dividing $1,000 plus all accrued but unpaid
dividends on such a share by the lesser of (i) $1.50 or (ii) 75% of the average
closing bid price of the common stock as reported by NASDAQ for the trading date
immediately preceding the date of conversion.
Under certain conditions, this stock may be redeemed after April 1, 1997 at
a price of 133% of the original issue price. The Company has agreed to register
the resale of the common stock issuable on conversion in certain circumstances.
<PAGE>
11. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (UNAUDITED):
----------------------------------------------------------
In March 1995, the Financial Accounting Standards Board issued a new
Statement titled "Accounting for Impairment of Long-Lived Assets." This new
standard is effective for years beginning after December 15, 1995 and will
change the Company's method of determining impairment of proved oil and gas
properties. Management estimates that the application of the new standard would
have increased the provision for impairment of oil and gas properties by
approximately $450,000 as of December 31, 1995. The Company plans to adopt the
new standard in the first quarter of 1996.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (SFAS 123). The new
statement is effective for fiscal years beginning after December 15, 1995.
SFAS 123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on fair value. Companies that do not adopt the fair value
accounting rules must disclose the impact of adopting the new method in the
notes to the financial statements. Transactions in equity instruments with non-
employees for goods or services must be accounted for on the fair value method.
For transactions with employees, the Company currently does not intend to adopt
the fair value accounting under SFAS 123, and will be subject only to the
related disclosure requirements.
12. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES:
--------------------------------------------------
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,
--------------------
1994 1995
---------- -----------
Proved oil and gas producing properties $4,145,656 $6,292,331
Wells in progress 137,285 113,986
Unproved properties, net of allowance for
impairment of $250,000 in 1995 850,597 468,318
--------- ---------
5,133,538 6,874,635
Accumulated depreciation, depletion and (1,361,802) (2,183,423)
---------- ----------
amortization $3,771,736 $4,691,212
========== ==========
<PAGE>
Costs incurred in oil and gas producing activities, whether capitalized or
expensed, during the three years ended December 31, 1993, 1994, and 1995 are as
follows:
1993 1994 1995
---------- ---------- ----------
Acquisition costs $ 843,871 $ 347,393 $ 46,597
========= ========== =========
Exploration costs $2,249,942 $1,829,943 $1,024,008
========== ========== ==========
Development costs $2,166,883 $1,232,606 $2,414,265
========== ========== ==========
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) - 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. 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.
At December 31, 1995, over 40% of the Company's reserves are attributable to
undeveloped properties which are scheduled to be drilled over the next two years
at an estimated cost of approximately $2,750,000. As of December 31, 1995, the
Company has minimal working capital and, therefore, may be unable to develop its
reserves unless additional capital is raised, financing is obtained and/or the
property interests are sold. If the property interests are farmed out to fund
development, the Company's revenue interest will decrease.
Reserve estimates for recently drilled wells and undeveloped properties are
subject to substantial upward or downward revisions after drilling is completed
and a production history obtained. 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 for 1993 and 1995, and by a petroleum
engineer who was employed by the Company for 1994.
<PAGE>
Set forth below is the unaudited summary of the changes in the net quantities
of the Company's proved oil reserves (in barrels) as of December 31, 1993, 1994,
and 1995:
1993 1994 1995
--------- --------- --------
Proved reserves, beginning of 506,000 1,144,000 1,848,000
year
Production (29,000) (38,000) (88,000)
Purchase of reserves in place 627,000 308,000 -
Discoveries, extensions and
other additions - 994,000 724,000
Sale of reserves in place - (737,000) -
Revisions of previous 40,000 177,000 (478,000)
estimates --------- --------- --------
Proved reserves, end of year 1,144,000 1,848,000 2,006,000
========= ========= =========
Proved developed reserves, end of 754,000 992,000 1,175,000
--------- --------- ---------
year
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
--------------------------------------------------------------------
Statement of Financial Accounting Standards No. 69 prescribes guidelines for
computing a standardized measure of future net cash flows and changes therein
relating to estimated proved reserves. The Company has followed these
guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimated future income taxes are computed using
current statutory income tax rates including consideration for estimated future
statutory depletion and tax credits. The resulting future net cash flows are
reduced to present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed
by the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations for actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.
DECEMBER 31,
-------------------------------
1993 1994 1995
---------- ----------- -----------
Future cash inflows $12,445,000 $21,178,000 $25,926,000
Future production costs (4,749,000) (7,439,000) (11,092,000)
Future development costs (2,808,000) (2,352,000) (2,754,000)
Future income tax expense - - -
---------- ---------- ---------
Future net cash flows 4,888,000 11,387,000 12,080,000
10% annual discount for
estimated timing of cash flows (2,692,000) (6,276,000) (5,880,000)
---------- ---------- ----------
Standardized measure of
discounted future $2,196,000 $5,111,000 $6,200,000
of cash flows ---------- ---------- ----------
<PAGE>
The following are the principal sources of change in the standardized measure
of discounted future net cash flows for the years ended December 31, 1993, 1994,
and 1995:
1993 1994 1995
---------- ----------- --------
Standardized measure, beginning $1,215,000 $2,196,000 $5,111,000
of year
Sales of oil and gas, net of (6,000) (19,000) (593,000)
production costs
Extensions, discoveries and - 4,165,000 4,122,000
other, net
Purchase of reserves in place 3,136,000 1,364,000 -
Sale of reserves in place - (1,118,000) -
Net change due to revisions in 120,000 142,000 (2,565,000)
quantity estimates
Net change due to changes in (3,161,000) 346,000 (2,000)
prices and production costs
Net change in future development 472,000 (2,234,000) (384,000)
costs
Net change in income taxes 298,000 - -
Accretion of discount 122,000 269,000 511,000
--------- --------- --------
Standardized measure, end of $2,196,000 $5,111,000 $6,200,000
year ---------- ---------- ----------
