UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
FORELAND CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 87-0422812
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12596 W. BAYAUD AVENUE
SUITE 300, LAKEWOOD, COLORADO 80228
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(Address of principal executive offices) (Zip Code)
(303) 988-3122
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(Registrant's Telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal
year, if changed since last report)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date: As of August 12, 1998, the
Company had outstanding 8,548,922 shares of its common stock, par value $0.001
per share.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by Foreland Corporation (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. However, in the opinion of management, all adjustments
(which include only normal recurring accruals) necessary to present fairly the
financial position and results of operations for the periods presented have been
made. These consolidated condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the period ended December 31, 1997
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 1998 Dec. 31, 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................... $1,317,994 40,631
Accounts receivable - trade................. 147,072 245,041
Inventory................................... 140,863 61,108
Prepaid expenses and other.................. 4,754 11,998
---------- ----------
Total current assets.................. 1,610,683 358,778
Property and equipment, at cost:
Oil and gas properties, under the
successful efforts method................ 13,084,013 11,878,336
Other property and equipment................ 367,388 362,171
---------- ----------
13,451,401 12,240,507
Less accumulated depreciation, depletion,
and amortization......................... (5,719,912) (5,346,333)
---------- ----------
Total property and equipment ..... 7,731,489 6,894,174
Other assets:
Option to acquire Petro
Source Refining Corporation................ 571,572 520,000
Deposits and other.......................... 761,346 180,220
----------- ----------
Total assets................................... $10,675,090 $7,953,172
=========== ==========
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 1998 Dec. 31, 1997
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....... $ 576,177 $ 424,769
Officers' salaries payable.................. 408,889 364,276
Oil and gas sales payable................... 26,950 39,587
Current portion of long-term debt........... 1,076,240 25,301
---------- ----------
Total current liabilities............. 2,088,256 853,933
Long-term debt................................. 3,420,222 642,951
Stockholders' Equity:
Preferred Stock, $0.001 par value, 5,000,000
shares authorized.
1991 Convertible Preferred Stock,
40,000 and 40,000 shares issued and
outstanding, respectively, liquidation
preference $1.25 per share........... 40 40
1994 Convertible Preferred Stock,
153,140 and 165,140shares issued and
outstanding, respectively, liquidation
preference $2.00 per share........... 153 165
1995 Convertible Preferred Stock,
361,103 and 556,667shares issued and
outstanding, respectively, liquidation
preference $1.50 per share........... 361 557
Common Stock, $0.001 par value, 50,000,000 shares
authorized; 8,548,922 and 8,467,703 shares
issued and outstanding, respectively..... 8,549 8,468
Additional paid-in capital.................. 33,698,965 32,486,345
Less note and stock subscriptions
receivable............................... (324,670) (311,758)
Accumulated deficit......................... (28,216,786) (25,727,529)
----------- -----------
Total stockholders' equity............ 5,166,612 6,456,288
----------- -----------
Total liabilities and stockholders' equity..... $10,675,090 $ 7,953,172
=========== ===========
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1998 1997 1998 1997
-------- --------- -------- -----------
REVENUES:
Oil and gas sales....... $ 317,554 $605,920 $730,306 $1,296,798
Operator and well
service income......... 0 19,622 0 26,906
Other income, net....... 1,045 1,169 1,104 3,255
--------- -------- ---------- ----------
Total revenues.... 318,599 626,711 731,410 1,326,959
EXPENSES:
Oil and gas production.. 444,433 277,778 891,624 498,835
Oil and gas exploration. 218,222 197,970 476,267 417,583
Well service costs...... 2,161 511 2,465 911
Dry hole and abandonment
costs.................. 417,892 3,262 490,465 9,358
General and
administrative......... 162,855 191,316 369,894 409,430
Shareholder-investor
services............... 30,361 46,513 70,979 129,647
Compensation - below market
options............ 6,180 16,473 12,344 32,948
Depreciation, depletion, and
amortization......... 222,502 201,653 379,280 361,228
--------- -------- ---------- ----------
Total expenses.... 1,504,606 935,476 2,693,318 1,859,940
--------- -------- ---------- ----------
OPERATING LOSS.............$(1,186,007) $(308,765) $(1,961,908) $ (532,981)
OTHER INCOME (EXPENSE)
Gain (Loss) on sale
of asset............... 0 (7,474) 3,460 (7,474)
Interest income......... 35,064 38,100 81,988 72,626
Interest expense........ (358,537) (33,853) (650,521) (60,860)
--------- -------- ---------- ----------
NET LOSS .................$(1,509,480) $(311,992) $2,526,981 $ (528,689)
--------- -------- ---------- ----------
Preferred stock dividends:
Declared................ 0 (26,855) 0 (26,855)
Accrued ................ 0 (27,773) 0 (78,921)
Imputed ................ 0 (68,658) 0 (198,788)
--------- -------- ---------- ----------
Total preferred stock
dividend............... 0 (123,246) 0 (304,564)
--------- -------- ---------- ----------
Net loss applicable to common
shareholders............$(1,509,480) $(435,238) $(2,526,981) $(833,253)
========== ======== ========== ==========
NET LOSS PER COMMON
SHARE...................$ (0.18) $ (0.06) $ (0.30) $ (0.11)
========== ======== ========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 8,538,600 7,342,500 8,508,800 7,296,100
========== ========= =========== ==========
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
--------------------------
1998 1997
---------- ----------
Cash flow from operating activities:
Net loss....................................... $(2,526,981) $ (528,689)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion, and amortization...... 379,279 361,228
Dry hole, abandonment and impairment costs..... 490,465 9,358
Issuance of stock for services................. 18,150 7,031
Accrued note receivable interest income........ (12,912) (38,978)
Amortization of loan origination fee........... 326,063 --
Compensation - Below market options............ 12,344 32,948
Loss on sale of other properties............... (3,460) 7,474
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable...................... 97,647 412,169
Inventory................................ (79,755) 5,741
Prepaids and other....................... (395,584) 7,626
Increase (decrease) in:
Accounts payable......................... 138,770 (327,989)
Salaries payable......................... 44,614 7,752
---------- ---------
Net cash used in operating activities. (1,511,360) (44,329)
Cash flows from investing activities:
Additions to oil and gas properties............ (2,512,329) (1,040,991)
Purchase of other property..................... (7,546) (65,655)
Proceeds from the sale of other property....... 4,000 2,050
---------- ---------
Net cash (used in) provided by
investing activities................. (2,515,875) (1,104,596)
Cash flows from financing activities:
Proceeds from exercise of warrants and options. 32,000 --
Proceeds from borrowing long-term debt......... 5,925,270 --
Payment of long-term debt...................... (652,681) (252,672)
---------- ---------
Net cash provided by..................
financing activities.................... 5,304,598 (252,672)
---------- ---------
Increase (decrease) in cash and cash equivalents.. 1,277,363 (1,401,597)
Cash and cash equivalents, beginning of year...... 40,631 2,325,079
---------- ---------
Cash and cash equivalents, end of period.......... $1,317,994 $ 923,482
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest......................... $ 306,804 $ 45,314
========== ==========
Non-cash investing and financing activities.... $ 12,912 $ 36,529
========== ==========
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OIL AND GAS PROPERTIES:
With the Company's continuous leasing program since 1986, it has
established what management believes is one of the best property positions in
Nevada. The Company's leasing program is coordinated with prospect generation
and explorations 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
leasehold costs. The Company currently has approximately 145,400 gross acres
under lease. During the first six months of 1998 the Company purchased a
working and royalty interest in the Kate Springs 12-2 well from unaffiliated
third parties. This well is located approximately one half mile south of the
Company's Ghost Ranch field.
2. ISSUANCE OF SECURITIES, COMMON STOCK OPTIONS, AND PURCHASE WARRANTS.
During the first six months of 1998 the Company issued 4,031 shares of
Common Stock for services. The Company issued 2,531 shares for research
consulting services associated with Forelands enhanced oil recovery project at
Eagle Springs, and 1,500 shares for services of investor information
dissemination.
In the first six months of 1998, two employees paid $32,000 to exercise
their employee options for 8,000 shares of Foreland Common Stock.
During the six month period ended June 30, 1998, the holders of 207,564
shares of the Company's 1994 and 1995 Preferred Stocks converted such preferred
shares into 69,188 shares of Common Stock.
3. LONG-TERM DEBT:
In January 1998, the Company completed a $16.9 million debt financing with
Energy Income Fund for use in the enhanced oil recovery program and development
drilling in the Eagle Springs field, 3D seismic acquisition, the drilling of 3D
defined exploration targets, the acquisition of producing properties, and to
retire existing bank debt. In January 1998, the Company borrowed $3,585,000 of
its new available debt financing to fund the implementation of a high pressure
air injection program, including compressors and buildings in the Company's
Eagle Springs field, a 3D seismic program on the Company's Pine Creek property,
the retirement of existing bank debt and the payment of closing costs. An
additional $1,846,000 was placed into an escrow account at closing. Funds have
been withdrawn from the escrow account to fund the drilling of two Eagle
Springs wells and the Sand Dune well. The escrow account had a balance of
$961,200 as of June 30, 1998.
Pursuant to the terms of the financing arrangement, the Company is required
to make payments of interest only through November 1998, after which payments of
principal and interest are required to amortize the indebtedness generally over
a 48-month period; provided, however, that the final payment of all accrued but
unpaid interest and the remaining principal balance is due on January 1, 2002.
The Company also agreed to transfer to Energy Income Fund a 3% overriding
royalty in the Company's interest in the Company's proved oil and gas properties
and a 1% overriding royalty interest in certain unproved properties.
Amounts due under the financing arrangement are collateralized by oil and
gas properties and the Company is required to maintain certain financial ratios
and comply with other terms and conditions while any balance of indebtedness
remains outstanding. In connection with the establishment of the financing
arrangement, the Company issued to Energy Income Fund five-year warrants to
purchase 750,000 shares of common stock at $6.00 per share and 250,000 shares at
$10.00 per share and granted Energy Income Fund the right to designate a
representative for appointment to the board of directors of the Company. (See
Note 6. "Subsequent Events.")
4. RELATED PARTY TRANSACTIONS:
The Company owed $378,479 in salaries and interest to two current officers
and directors, and a former officer and director, at June 30, 1998. The Company
also had outstanding loans to one current officer and director and two former
officers and directors in the amount of $302,832 as of such date.
In September 1997, the Company entered into new employment agreements with
its executive officers in order to provide to a prospective lender assurances
that key management personnel would have a strong incentive to remain in their
positions during the term of the loan. Under such agreements, N. Thomas Steele
and Bruce C. Decker are employed at salaries of $125,000 and $119,000,
respectively. The agreement with Grant Steele provides a monthly salary of
$6,000, $1,500 of which will be paid in cash and $4,500 of which will accrue and
will be paid only toward the payment of the purchase price on the exercise of
options held by him. The agreements with N. Thomas Steele and Bruce C. Decker
provide for a $48,000 increase in each such executive officer's annual salary at
such time as the Company achieves sustained net oil production of at least 1,000
barrels per day for any calendar month. In addition, each agreement provides
for annual salary increases on each anniversary by the percentage increase, if
any, in the Consumer Price Index for the prior year, or as otherwise determined
by the board of directors. The Company granted to each of such executive
officers 10-year options to purchase 200,000 shares of Common Stock (50,000
shares in the case of Grant Steele) at an exercise price of $2.50 per share and
10-year options to purchase 100,000 shares each at $4.00 per share. All of such
options were immediately vested to purchase 25% of the covered shares and vest
in equal increments on each of the next succeeding three anniversary dates of
the agreement. Each such employment agreement is for a 36-month term and is
automatically renewed each month for a new 36-month 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 the event of
termination of employment resulting from a change in control not approved by the
board of directors, each executive will receive payment, in cash or Common
Stock, at the executive's option, in an amount equal to the executive's base
salary for the remaining term of his respective employment agreement plus any
incentive compensation previously earned. In addition, all options held by any
such executive shall immediately become vested and exercisable and the executive
shall receive, in consideration of the cancellation of such options, payment
equal to the fair market value of the options granted under the employment
agreement times the number of unexercised options.
5. INCOME TAXES:
The Company adopted the liability method of accounting for income taxes as
prescribed by Statement of Financial Accounting Standards No. 109 (SFAS 109)
effective January 1993. Financial statements of prior years have not been
restated to apply the new method retroactively. The change in accounting method
had no effect on the net loss for 1993 or prior years.
The Company has had no taxable income under federal and state tax laws due
to operating losses since its inception; therefore, no provision for income
taxes has been made. At December 31, 1997, the Company has unused net operating
loss carry-forwards of approximately $31,500,000. This carryforward expires in
varying amounts from 1999 to 2012.
6. SUBSEQUENT EVENTS:
In July 1998, the Company entered into a joint venture exploration
agreement with Conley P. Smith Operating Company covering Cave Valley, Nevada.
With the assistance of Conley P. Smith Operating Company, the Company purchased
the 30% interest in the Cave Valley prospect leases held by Dominion Reserves,
Inc.
Also in July 1998, the Company participated in the drilling of the Flat
Top Federal 27-15 well, which was plugged and abandoned in August 1998, and
announced that its Sand Dune 88-35 well had an initial production rate of 284
barrels of oil per day. In August 1998, the Company re-entered a previously
plugged shallow well, located approximately 1/3 of a mile from the Sand Dune 88-
35 well, to drill down to and test the deeper the producing zone encountered in
the Sand Dune 88-35 well.
On August 12, 1998, the Company completed the purchase from Petro Source
Corporation, an independent crude oil processing, transportation, and trading
firm based in Houston, Texas, of the Eagle Springs Nevada refinery, which
manufactures asphalt and ancillary products from crude oil produced by the
Company and other Nevada operators, a processing facility in Tonopah, Nevada,
and trucks and related equipment used by Petrosource Transportation to gather
crude oil and distribute products. In addition to the $520,000 payable in Common
Stock to acquire the option, the Company paid $5,000,000 in cash and $2,676,322
in Common Stock and issued 100,000 additional shares of Common Stock. The terms
of the purchase were the result of arm's length negotiations. The purchase of
the refinery and transportation assets and related operations was effective for
accounting purposes as of June 1, 1998.
The Company's long-term debt financing arrangement with Energy Income Fund
was revised to draw $5,000,000 to fund the purchase of the Eagle Springs and
Tonopah asphalt refinery and transportation company and to enable the Company to
draw additional funds for refinery working capital and revised enhanced oil
recovery, development, and other corporate expenditures. The Company also
increased an outstanding warrant to purchase 250,000 shares at $10.00 per share
to 750,000 shares and reduced the exercise price to $6.00 per share. In
addition, the Company sold to Energy Income Fund for $2,000,000 a total of 2,000
shares of 1998 Series Preferred Stock convertible into an aggregate of 333,333
shares of Common Stock. As of the date of such revisions, the Common Stock
traded at approximately $3.31 per share on the Nasdaq SmallCap Market. Robert
Gershen, a manager of the general partner of Energy Income Fund, is a director
of the Company; the disinterested members of the board of directors unanimously
approved the terms of this transaction and believe them to be fair to the
Company from a financial point of view.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTION RESPECTING FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When
used in the document, the words "anticipate," "believe," "estimate," "expect,"
and "intend" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of the Company respecting future events and
are subject to certain risks, uncertainties, and assumptions, including the
risks and uncertainties noted. Should one or more of these risk or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
OVERVIEW
This discussion should be read in conjunction with Management's Discussion
and Analysis of Financial Conditions and Results of Operations in the Company's
annual report on Form 10-K for the year ended December 31, 1997.
The Company was organized in June 1985 to advance an exploration project
in the Great Basin and Range geologic province in Nevada that had been initiated
by Gulf Oil Corporation. To date, the Company has funded its exploration
program principally from debt and 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during the first six months of 1998 used cash of
$1,511,400 when the Company reported a net loss from operations of $2,527,000,
which resulted in part from non-cash charges against the Company's revenues,
including $379,300 in depreciation, depletion, and amortization and $326,100 in
amortization of long-term debt issuance cost. Changes in working capital
components (current assets and current liabilities) also contributed $436,100 in
cash. Operating activities used approximately $1,467,100 more cash than the
corresponding period in 1997.
During the first quarter of 1998, investing activities used net cash of
$2,515,900 due to $2,512,300 in additions to oil and gas properties. The cash
required for investing activities was provided from the issuance of long-term
debt. During the corresponding period in 1997, investing activities used net
cash of $1,104,600, consisting primarily of $1,041,000 for additions to oil and
gas properties.
Financing activities provided $5,304,600 during the first six months of
1998, consisting primarily of borrowing under the newly established $16.9
million credit arrangement and refinancing of the existing bank debt.
Additionally, the Company received $32,000 from the exercise of options during
the first six months of 1998. During the corresponding period in 1997, the
Company used $252,700 during the first and second quarter of 1997, consisting
entirely of repayment of long-term debt.
The Company has traditionally required cash for general and administrative
expenses, maintaining its properties, and for other items that are required for
operations, in addition to costs to advance its ongoing exploration and
development program in Nevada. With the purchase of the asphalt refinery and
transportation assets and operations in August 1998, the Company's requirements
to fund planned capital improvements and refining and transportation working
capital have increased. For an interim period, the Company intends to meet its
traditional needs as well as these new requirements with funds drawn under its
long-term debt financing arrangement and the sale of additional equity
securities. The Company expects that, following an interim renovation and
transition period, refinery and transportation operations and finished goods
sales will provide sufficient funds for the Company's operating requirements,
excluding exploration and development.
Although the Company is continuing with its drilling program in Nevada in
an effort to increase total production, there can be no assurance current oil
production levels or prices will not decline, which may increase the Company's
cash requirements. The Company expects that the operation of the recently
acquired asphalt refinery and transportation assets and the sale of finished
goods will improve the effective financial return to the Company from oil
produced from its Nevada properties.
As of June 30, 1998, the Company had a working capital deficit of $477,600
as compared to a surplus of $830,100 for the same period in 1997.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
For the second quarter period ending June 30, 1998, oil sales decreased
47.6% to $317,600 as compared to $605,900 in the same period in 1997,
attributable principally to decreased production of oil from the Eagle Springs
and Ghost Ranch fields. The decrease in the second quarter of 1998 was the
result of a 26.0% decrease in barrels sold and a 24.9% decrease in price as
compared to the same period in 1997. Well service and well operator income
decreased $19,600 for the second quarter of 1998, when compared to the same
period in 1997, primarily due to a decrease of $15,700 in well service revenue
due to a decrease in water disposal income, and a decrease of $3,800 in operator
income.
The Company's production expenses for the second quarter of 1998 increased
$166,700, or 60.0% to $444,400, with the Eagle Springs field and its enhanced
oil recovery project expenses contributing $173,400 and the Ghost Ranch field
contributing $20,600. Production expenses related to the Company's remaining
properties decreased $27,200, of which $26,000 of the decrease was cost
associated with the plugging of the Tomera Ranch 33-1 well in 1997. These were
one time costs that did not occur during the same period in 1998.
Oil and gas exploration expenses increased $20,300 or 10.2% to $218,200
for the second quarter of 1998 when compared to the same period in 1997. This
is primarily due to increased personnel cost of approximately $24,500. Dry
hole, abandonment, and impairment costs were $417,900, primarily due to cost
associated with the Eagle Springs 14-35 well which was plugged and the writing
off of leases that were not in primary exploration areas.
General and administrative expenses decreased $16,200 to $162,900 for the
three-month period ended June 30, 1998, when compared to the same period in
1997. The primary contributors were decreases of $9,200 in personnel cost and
$12,400 in professional fees. Shareholder and investor services decreased
$16,200 due to a decrease in financial public relations and information
dissemination within the investment community. Depreciation, depletion, and
amortization increased for the three-month period ended June 30, 1998, by
$20,800 to $222,500 primarily as a result of increased production.
Interest income decreased $3,000 to $35,100 for the second quarter 1998,
when compared to the same period in 1997. Interest received on notes receivable
decreased $12,100, while interest received on cash being invested in short-term
liquid assets increased $9,000. Interest expense increased $324,700 to
$358,500, primarily due to interest on outstanding long-term debt, of which
$166,300 was non-cash amortized issuance costs associated with the debt
financing.
Six Months Ended June 30, 1998 and 1997
For the six months ending June 30, 1998, oil sales decreased 43.7% to
$730,300 as compared to $1,296,800 in the same period in 1997, attributable to
decreased production from the Ghost Ranch field of $159,500 and Eagle Springs
field of $396,200. This decrease in the first six months of 1998 was the result
of a 21.2% decrease in barrels sold and a 29.1% decrease in price as compared to
the same six months in 1997. Well service and well operator income decreased
$26,900 for the first six months of 1998, when compared to the same period in
1997, primarily due to a decrease of $19,200 in water disposal income and a
decrease of $7,700 in operator income.
The Company's production expenses for the first six months of 1998
increased $392,800, or 78.7% to $891,600, with the Eagle Springs field and its
enhanced oil recovery project expenses contributing $374,700, and the Ghost
Ranch field expenses increasing $36,600. Production expenses related to the
Company's remaining properties decreased $18,400 when compared to the same
period in 1997, attributable to a $26,000 decrease associated with the plugging
of the Tomera Ranch 33-1 well in 1997. These were one time costs that did not
occur during the same period in 1998.
Oil and gas exploration expenses increased $58,700 or 14.1% to $476,300
for the first and second quarters of 1998 when compared to the same period in
1997. This is primarily due to increased personnel cost of approximately
$51,500, decreased lease rental cost of $34,300, and increased geological and
geophysical cost of $60,400, attributable to a one time $75,000 payment reducing
geological and geophysical cost in 1997 from Hugoton/Maxwell as a result of its
election not to complete a 3D seismic study. Dry hole, abandonment, and
impairment cost were $490,500, primarily due to cost associated with the Eagle
Springs 14-35 well which was plugged and the writing off of leases that were not
in primary exploration areas.
General and administrative expenses decreased $39,500 to $369,900 for the
six months ended June 30, 1998, when compared to the same period in 1997. The
primary contributor was a decrease in professional fees of $39,800 associated
with one time accounting and legal fees, encountered in 1997, associated with
the acquisition of Plains Petroleum's 40% interest in the Eagle Springs field
and additional financial reporting requirements of FAS 123. Shareholder and
investor services decreased $58,700 due to a decrease in financial public
relations and information dissemination within the investment community.
Depreciation, depletion, and amortization increased $18,100 for the six months
ended June 30, 1998, when compared to the same six months in 1997, primarily as
a result of increased production.
Interest income increased $9,400 to $82,000 for the first six months of
1998, when compared to the same period in 1997. Interest received on notes
receivable decreased $23,600, while interest received on cash being invested in
short-term liquid assets increased $33,000. Interest expense increased $589,600
to $650,500, primarily due to interest on outstanding long-term debt, of which
$326,100 was non-cash amortized issuance cost associated with the debt
financing.
Accounting Treatment of Certain Capitalized Costs
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 wells that
do not find proved reserves, geological and geophysical costs, and costs of
carrying and retaining unproved properties are expensed.
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 assesses the carrying cost of long-lived assets whenever
events or changes of circumstances indicate that the carrying value of long-
lived assets may not be recoverable. When an assessment for impairment of oil
and gas properties is performed, the Company is required to compare the net
carrying value of proved oil and gas properties on a lease-by-lease basis (the
lowest level at which cash flows can be determined on a consistent basis) to the
related estimates of undiscounted future net cash flows for such properties. If
the carrying value exceeds the net cash flows, then impairment is recognized to
reduce the carrying value to the estimated fair value. As a result of the
foregoing policy, 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.
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 and may, therefore, result in an impairment
allowance as discussed above.
Operating Costs
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 higher than industry standards,
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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) ITEM 701--UNREGISTERED SALES
During the quarter ended June 30, 1998, the Company sold securities without
registration under the Securities Act of 1933 (the "Securities Act") in the
following transactions:
1. Individuals converted 12,000 shares of 1994 Preferred Stock into 4,000
shares of Common Stock and 60,000 shares of 1995 Preferred Stock into 20,000
shares of Common Stock. The shares of Common Stock issued in such conversions
were issued without registration in reliance on the exemption from registration
requirements of the Securities Act provided in S 3(a)(9) thereof.
2. One individual exercised options to purchase 4,000 shares of Common
Stock.
The securities issued in the transactions described above were issued in
reliance on the exemption from the registration and prospectus delivery
requirements of the Securities Act provided in S 4(2) thereof.
Each of the persons acquiring such securities acknowledged in writing that
such person was obtaining "restricted securities" as defined in rule 144 under
the Securities Act; that such shares could not be transferred without
registration or an available exemption therefrom; that such person must bear the
economic risk of the investment for an indefinite period; and that the Company
would restrict the transfer of the securities in accordance with such
representations. Such persons also agreed that any certificates representing
such shares would be stamped with a restrictive legend covering the transfer of
such shares. The certificates representing the foregoing shares bear an
appropriate restrictive legend conspicuously on their face, and stop transfer
instructions are noted on the Company's stock transfer records.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 23, 1998, at the annual meeting of the Company's shareholders, the
shareholders approved the following matters submitted to them for consideration:
(1) Elected Grant Steele, Lee V. Van Ramshorst, Bruce C. Decker, Robert D.
Gershen, and N. Thomas Steele as directors of the Company (whose terms
expire as indicated) as follows:
Grant Steele For: 95,716 Term Expires: 1999
Lee B. Van Ramshorst For: 95,397 Term Expires: 1999
Bruce C. Decker For: 99,479 Term Expires: 2000
Robert D. Gershen For: 94,903 Term Expires: 2000
N. Thomas Steele For: 85,092 Term Expires: 2001
(2) Approved options granted to executive officers and directors of the
Company:
For 2,716,659 Against 1,024,906 Abstain 100,577
(3) Approved options granted to newly appointed directors of the Company:
For 2,739,382 Against 999,617 Abstain 103,143
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K.
During the quarter ended on June 30, 1998 the Company filed the following
reports on form 8-K.
DATE EVENT REPORTED ITEM REPORTED
-------------------- ----------------------
April 14, 1998 Item 5. Other Events
May 5, 1998 Item 5. Other Events
May 18, 1998 Item 5. Other Events
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORELAND CORPORATION
Dated: August 14, 1998 By: /s/ N. Thomas Steele
N. Thomas Steele, President
Dated: August 14, 1998 By: /s/ Don W. Treece
Don W. Treece, Controller (Chief
Financial Officer)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1998, AND STATEMENTS OF OPERATIONS FOR THE QUARTER ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,317,994
<SECURITIES> 0
<RECEIVABLES> 147,072
<ALLOWANCES> 0
<INVENTORY> 140,863
<CURRENT-ASSETS> 1,610,683
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<TOTAL-ASSETS> 10,675,090
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<BONDS> 3,420,222
<COMMON> 8,549
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<OTHER-SE> 5,157,509
<TOTAL-LIABILITY-AND-EQUITY> 10,675,090
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<TOTAL-COSTS> 891,624
<OTHER-EXPENSES> 1,799,229
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (650,521)
<INCOME-PRETAX> (1,961,908)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,961,908)
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