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 SEPTEMBER 30, 1998
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.)
143 UNION BOULEVARD
SUITE 210, LAKEWOOD, COLORADO 80228
(Address of principal executive offices) (Zip Code)
(303) 988-3122
(Registrant's Telephone number, including area code)
NOT APPLICABLE
(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 November 12, 1998, the
Company had outstanding 9,423,191 shares of its common stock, par value $0.001
per share.
<PAGE>
PART I
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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The consolidated condensed financial statements included herein have been
prepared by Foreland Corporation (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. However, in the opinion of management, all adjustments
(which include only normal recurring accruals) necessary to present fairly the
financial position and results of operations for the periods presented have been
made. These consolidated condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the period ended December 31, 1997
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPT. 30, 1998 DEC. 31, 1997
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents...................$ 1,435,060 40,631
Accounts receivable - trade................. 4,140,273 245,041
Inventory................................... 1,260,957 61,108
Stock subscriptions receivable.............. 2,000,000 0
Prepaid expenses and other.................. 328,374 11,998
------------- -------------
Total current assets.................. 9,164,664 358,778
Property and equipment, at cost:
Oil and gas properties, under
the successful efforts method............. 13,684,636 11,878,336
Refining and transportation plant,
property and equipment...................... 5,875,401 0
Other property and equipment................ 443,197 362,171
------------- -------------
20,003,234 12,240,507
Less accumulated depreciation,
amortization, depletion, and impairment.... (6,327,704) (5,346,333)
------------- -------------
Total property and equipment ..... 13,675,530 6,894,174
Other assets:
Option to acquire Petro Source
Refining Corporation...................... 0 520,000
Deposits and other.......................... 1,338,781 180,220
------------- -------------
Total assets................................... $24,178,975 $ 7,953,172
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....... $ 3,557,127 $ 424,769
Officers' salaries payable.................. 418,430 364,276
Oil and gas sales payable................... 99,855 39,587
Current portion of long-term debt........... 10,940,964 25,301
------------- -------------
Total current liabilities............. 15,016,374 853,933
Long-term debt................................. 14,169 642,951
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........................ 20 40
1994 Convertible Preferred Stock, 153,140
and 165,140 shares issued and
outstanding, respectively, liquidation
preference $2.00 per share............. 153 165
1995 Convertible Preferred Stock, 361,103
and 556,667 shares issued and
outstanding, respectively, liquidation
preference $1.50 per share............. 361 557
1998 Convertible Preferred Stock, 2,000
and 0 shares issued and outstanding,
respectively, liquidation preference
$1,000 per share....................... 20 0
Common Stock, $0.001 par value, 50,000,000
shares authorized; 8,548,922 and
8,467,703 shares issued and outstanding,
respectively........................... 9,419 8,468
Additional paid-in capital.................. 39,196,882 32,486,345
Less note and stock subscriptions
receivable............................... (331,410) (311,758)
Accumulated deficit......................... (29,727,015) (25,727,529)
------------- -------------
Total stockholders' equity............ 9,148,430 6,456,288
------------- -------------
Total liabilities and stockholders' equity.....$ 24,178,975 $ 7,953,172
============= =============
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
--------------------------- ----------------------------
1998 1997 1998 1997
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales........... $ 346,906 $ 484,558 $1,077,212 $1,781,356
Refining and transportation
sales..................... 4,204,027 0 4,204,027 0
Operator and well service
income.................... 0 21,827 0 48,733
Other income, net........... 393 730 1,497 3,985
----------- ------------ ------------ -------------
Total revenues....... 4,551,326 507,115 5,282,736 1,834,074
EXPENSES:
Oil and gas production...... 186,369 249,766 704,030 748,601
Enhanced oil recovery
project................... 151,610 0 525,573 0
Refinery/transport cost
of goods.................. 3,054,757 0 3,054,757 0
Well service cost........... 437 138 2,902 1,049
Oil and gas exploration..... 238,912 278,086 715,179 695,670
Refinery/transport
operating exp............. 557,960 0 557,960 0
Dry hole and abandonment and
impairment costs......... 672,805 2,360 1,163,270 11,718
General and administrative.. 312,668 170,151 682,562 579,581
Shareholder-investor services 33,811 32,536 104,790 162,183
Compensation - below market
options................ 6,180 9,589 18,524 42,537
Depreciation, depletion, and
amortization............. 416,113 187,369 795,393 548,597
----------- ------------ ------------ -------------
Total expenses....... 5,631,622 929,995 8,324,940 2,789,936
----------- ------------ ------------ -------------
OPERATING LOSS.................. $(1,080,296) $ (422,880) $(3,042,204) $(955,862)
OTHER INCOME (EXPENSE)
Gain (Loss) on sale of asset 11,723 0 15,183 (7,474)
Interest income............. 18,037 27,261 100,025 99,886
Interest expense............ (421,970) (54,236) (1,072,491) (115,097)
----------- ------------ ------------ -------------
NET LOSS ......................$ (1,472,506) $ (449,855) $(3,999,487) $(978,547)
----------- ------------ ------------ -------------
Preferred stock dividends:
Declared.................... 0 (137,174) 0 (164,029)
Accrued .................... 0 78,921 0 0
Imputed .................... 0 (16,823) 0 (215,611)
----------- ------------ ------------ -------------
Total preferred stock
dividend.................. 0 (75,076) 0 (379,640)
----------- ------------ ------------ -------------
Net loss applicable to common
shareholders................ $(1,472,506) $ (524,932) $(3,999,487) $(1,358,187)
=========== ============ ============ =============
NET LOSS PER COMMON
SHARE....................... $ (0.16) $ (0.07) $ (0.46) $ (0.18)
=========== ============ ============ =============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING................ 9,019,000 7,648,500 8,680,700 7,414,900
=========== ============ ============ =============
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPT. 30,
---------------------------
1998 1997
--------- ---------
Cash flow from operating activities:
Net loss...................................... $ (3,999,487) $(978,547)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion, and amortization...... 795,393 548,598
Dry hole, abandonment and impairment costs..... 1,163,270 11,718
Issuance of stock for services................. 18,150 7,031
Accrued note receivable interest income........ (19,652) (58,011)
Amortization of loan origination fee........... 477,603 2,937
Compensation - Below market options............ 18,524 42,537
Loss on sale of other properties............... (15,183) 7,474
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable...................... (488,608) 544,190
Inventory................................ 414,398 18,026
Prepaids and other....................... (457,018) (3,470)
Increase (decrease) in:
Accounts payable and accrued expenses.... 757,138 (308,208)
Salaries payable......................... 54,155 22,157
------------ ------------
Net cash used in operating
activities.......................... (1,281,317) (143,568)
Cash flows from investing activities:
Additions to oil and gas properties............ (3,983,013) (1,083,282)
Purchase of other property..................... (92,386) (68,019)
Proceeds from the sale of other property....... 23,250 2,050
------------ ------------
Net cash (used in) provided by investing
activities............................. (4,052,149) (1,149,251)
Cash flows from financing activities:
Proceeds from exercise of warrants and options. 32,000 --
Proceeds from borrowing long-term debt......... 7,375,279 --
Receipt of note receivable for stock........... -- 2,323
Payment of long-term debt...................... (679,384) (354,078)
------------ ------------
Net cash provided by financing
activities.......................... 6,727,895 (351,755)
------------ ------------
Increase (decrease) in cash and cash equivalents.. 1,394,429 (1,644,574)
Cash and cash equivalents, beginning of year...... 40,631 2,325,079
------------ ------------
Cash and cash equivalents, end of period.......... $ 1,435,060 $ 680,505
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest......................... $ 306,804 $ 57,086
============ ============
Non-cash investing and financing activities.... $ 12,912 $ 34,588
============ ============
Debt incurred for purchase of refinery ....... $ 5,150,000 $ --
============ ============
Issuance of commons tock for refinery assets... $ 3,522,607 $ --
============ ============
See accompanying notes to these consolidated financial statements.
<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 nine 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. PURCHASE OF REFINING AND TRANSPORTATION ASSETS:
On August 12, 1998, the Company completed the purchase from an unrelated
firm of a crude oil processing refinery in Eagle Springs Nevada, a hydrocarbon
processing facility in Tonopah, Nevada, and trucks and related equipment used to
gather crude oil and distribute products. In addition to the $520,000 in Common
Stock paid by the Company in December 1997 to acquire the option, the Company
paid $5,000,000 in cash (See Note 4) and $2,676,322 in Common Stock and issued
100,000 additional shares of Common Stock. For accounting purposes, the
purchase of the refinery and transportation assets and related operations was
effective as of June 1, 1998. The earnings from the acquired assets and
operations for the months of June and July 1998 were $378,000. For accounting
purposes these earnings were applied as a reduction in the purchase price.
3. ISSUANCE OF SECURITIES, COMMON STOCK OPTIONS, AND PURCHASE WARRANTS:
During the first nine 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 the Company's enhanced oil recovery project
at Eagle Springs, and 1,500 shares for services of investor information
dissemination.
In the first nine months of 1998, two employees paid $32,000 to exercise
their employee options for 8,000 shares of Foreland Common Stock.
During the nine month period ended September 30, 1998, the holders of
227,564 shares of the Company's 1991, 1994 and 1995 Preferred Stocks converted
such preferred shares into an aggregate of 75,855 shares of Common Stock.
4. LONG-TERM DEBT:
In January 1998, the Company completed a $16.9 million debt financing with
Energy Income Fund ("EIF") 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 workover
cost to convert two producing wells into air injection wells, and fund the cost
of rental air compression equipment during the pilot program, 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 $534,200 as of September 30, 1998.
In August, the arrangement with EIF was revised to draw $5,000,000 to fund
the purchase of the Eagle Springs and Tonopah asphalt refinery and
transportation assets and operations and to enable the Company to draw
additional funds for refinery working capital and revised enhanced oil recovery,
development, and other corporate expenditures.
Pursuant to the terms of the financing arrangement, the Company is
required to make payments of interest only to 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 (See "Note 7. Subsequent Events"). The Company also agreed to
transfer to EIF 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 EIF 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 EIF
the right to designate a representative for appointment to the board of
directors of the Company. In connection with the modification of the financing
arrangement in August, the Company increased the 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 EIF 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 at a conversion price of $6.00 per
share. 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 EIF, 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.
5. RELATED PARTY TRANSACTIONS:
The Company owed $388,020 in salaries and interest to two current officers
and directors, and a former officer and director, at September 30, 1998. The
Company also had outstanding loans to one current officer and director and two
former officers and directors in the amount of $309,203 as of such date.
6. 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.
7. SUBSEQUENT EVENTS:
CONVERSION OF PREFERRED STOCK.
In October 1998, two individuals converted 12,000 shares of 1995 Preferred
Stock into 4,000 share of Common Stock.
RECLASSIFICATION OF LONG TERM DEBT.
Pursuant to the terms of the financing arrangement, the Company was
required to make payments of interest only through November 1998, after which
payments of principal and interest required to amortize the indebtedness
generally over a 48-month period were to commence. In anticipation of
completing ongoing negotiations with EIF for restructuring the financing
agreement, the Company did not make the principal payment of $220,000 due
November 1, 1998, and was not in compliance with certain financial ratios and
other terms and conditions of the EIF loan. Accordingly, the outstanding
balance due as of September 30, 1998, under this loan arrangement has been
reclassified as a short term obligation. On October 4, 1998, EIF agreed in
principle to reschedule the principal amortization to commence April 1999,
extend certain financial covenants of the Company until such date, and waive
EIF's exercise of remedies upon default until such date. In consideration of
these loan modifications, the Company would issue shares of restricted Common
Stock and agree to adjust, in specified circumstances, the exercise price of
Common Stock purchase warrants held by EIF. The Company is also seeking to
negotiate revised financial covenants and other terms to the loan arrangement
to bring the Company into compliance with the loan terms.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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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.
See below for a discussion of the Company's ability to continue.
Capitalized terms used but not defined in this report are defined in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during the first nine months of 1998 used cash of
$1,281,300 when the Company reported a net loss from operations of $3,999,500,
which resulted in part from non-cash charges against the Company's revenues,
including $795,400 in depreciation, depletion, and amortization and $477,600 in
amortization of long-term debt issuance cost. Changes in working capital
components (current assets and current liabilities) also used $280,100 in cash.
Operating activities used approximately $1,137,700 more cash than the
corresponding period in 1997.
During the first three quarters of 1998, investing activities used net cash
of $4,052,100 due to $3,983,000 in additions to oil and gas properties, $92,400
for additions to other property, and $23,200 from the sale of property. 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 $1,149,300, consisting primarily of $1,083,300 for additions to oil
and gas properties.
Financing activities provided $6,727,895 during the first nine 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 nine months of 1998. During the corresponding period in 1997, the
Company used $351,800 during the first three quarters 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 in
order for the Company to continue, 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. The Company intends to meet its
traditional needs as well as these new requirements with funds drawn under its
debt financing arrangement, the extension of additional borrowings, 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 funds for
the Company's other requirements.
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 would adversely affect
productin revenues. The Company expects that the operation of the recently
acquired 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 a result of the reclassification as a short-term liability of
$10,941,000 due EIF under its long-term debt arrangement, the Company had a
working capital deficit of $5,851,700 as of September 30, 1998 as compared to a
surplus of $419,800 for the same period in 1997. The Company and EIF have
agreed in principle to certain measures discussed in Note 6 to the financial
statements intended to enable the Company to obtain EIF's forbearance from
exercising its default remedies under the operative agreements. The Company
expects that it will have to implement significant cost cutting measures,
restrict certain activities, and obtain additional equity financing in order to
be able to obtain EIF's continued voluntary cooperation and forbearance. There
can be no assurance that the Company will be successful in attaining any of
these objectives. If EIF, in April, were to elect to do so, it may be able
to execute on essentially all of the oil producing, exploratory, refining,
and transportation assets of the Company, which would likely make it impossible
for the Company to continue.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
For the third quarter ended September 30, 1998, revenue from oil sales
decreased 28.4% to $346,900 as compared to $484,600 in the same period in 1997,
attributable principally to decreased oil prices. The number of barrels of oil
sold by the Company in the third quarter of 1998, as compared to the third
quarter of 1997 would have decreased approximately 8,000 barrels; however, this
reduction was nullified by the Company's purchase of Plains Petroleum's interest
in the Ghost Ranch field. Operator, well service income decrease $21,800 for the
third quarter of 1998, when compared to the same period in 1997, primarily due
to a decrease of $19,500 in well service revenue due to a decrease in water
disposal income, and a decrease of $2,300 in operator income.
The Company purchased Petro Source's two refineries and the transportation
unit effective as of May 31, 1998, and closed the transaction on August 12,
1998. The refinery and transportation revenues for August and September of 1998
were $4,204,000. All revenues and expenses for June and July of 1998 were an
adjustment to the purchase price of the assets.
The Company's production expenses for the third quarter of 1998 decreased
$63,400, or 25.4%, to $186,400. Additionally Eagle Springs air injection cost
for the third quarter of 1998 was $151,600. Field production expenses for the
Ghost Ranch field decreased $22,600 and would have decreased more had it not
been for the purchase of Plains Petroleum's 40% working interest in the Ghost
Ranch field, which added $16,500 to the Company's production expenses for the
field. The Eagle Springs field and the Company's remaining properties
contributed $40,500 and $1,200, respectively, in increased production expenses
during the third quarter of 1998 when compared to the same period in 1997
Refinery and transportation cost of goods sold for the months of August and
September 1998 were $3,054,800. The cost of goods sold for June and July 1998
were an adjustment to the purchase price of the assets.
Oil and gas exploration expenses decreased $39,200, or 14.1%, to $238,900
for the third quarter of 1998 when compared to the same period in 1997. This is
primarily due to a decreased lease rental cost of $44,200. Dry hole,
abandonment, and impairment cost were $670,500, primarily due to dry hole cost
associated with the Eagle Springs well #44-35 of $34,800, Ghost Ranch well #58-
35 re-entry of $439,000, and the Flat Top Federal well #27-15 of $197,700.
Refinery and transportation operations expenses for the months of August
and September 1998 were $558,000. The operating expense for June and July 1998
were an adjustment to the purchase price of the assets.
General and administrative expenses increased $142,500 to $312,700 for the
third quarter of 1998, when compared to the same period in 1997. The primary
contributors were decreased personnel cost of $5,700 within the exploration and
production segment and $151,000 of general and administrative cost associated
with the refining and transportation segments. Shareholder and investor
services increased $1,300 due to maintaining Foreland's presence in the
financial public relations and information dissemination investment community.
Depreciation, depletion, and amortization increased for the three-month period
ended September 30, 1998, by $228,700 to $416,100. The exploration and
production segment increased $85,500 primarily as a result of lower prices which
adversely effected reserves, while the refining and transportation segment
contributed $143,200 of such increase.
Interest income decreased $9,200 to $18,000 for the third quarter of 1998,
when compared to the same period in 1997, primarily as a result of less cash
being invested in short-term liquid assets. Interest expense increased $367,700
to $422,000 primarily due to interest expense on the debt financing with EIF.
During the quarter ended September 30, 1997, the Company, in its earnings
per shares calculations of the consolidated statement of operations, declared a
preferred stock dividend of $137,200, of which $78,900 had previously been
accrued, on preferred stock shares that were converted to Common Stock, and had
an imputed preferred stock dividend of $16,800 as a result of convertibility of
its outstanding preferred stock into Common Stock at below-market prices. (See
Note 3 to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.) The dividend amounts are
for earnings per share calculations, and the imputed stock dividends are not
recorded in the Company's financial statements.
Nine Months Ended September 30, 1998 and 1997
For the nine months ended September 30, 1998, oil sales decreased 39.5% to
$1,077,200 as compared to $1,781,400 in the same period in 1997, attributable to
decreased sales from the Ghost Ranch field (approximately $226,900) and Eagle
Springs field (approximately $458,900), while sales from the Company's remaining
properties decreased approximately $18,300. Revenues associated with the
purchase Plains Petroleum's interest in the Ghost Ranch field contributed
increased revenue of $184,200. Well service and well operator income decreased
$48,700 for the first three quarters of 1998, when compared to the same period
in 1997, primarily due to an decrease of $38,600 in well service revenue due to
decreased water disposal fees, and a decrease of $10,000 in operator income. The
Company purchased Petro Source's two refinery's and the transportation unit as
of May 31, 1998, and closed the transaction on August 12, 1998.
The refinery and transportation revenues for August and September of 1998
were $4,204,000. All revenues and expenses for June and July of 1998 were an
adjustment to the purchase price of the assets, and are approximately
$4,600,000.
The Company's production expenses for the first three quarters of 1998
decreased $44,600, or 6.0%, to $704,000. Additionally Eagle Springs air
injection cost for the third quarter of 1998 was $525,600. The Eagle Springs
field production expenses were decreased by $30,400, and Ghost Ranch production
expense increased $4,800. The Ghost Ranch increase related to the purchase of
Plains Petroleum's 40% interest was approximately $60,500, and production
expenses related to the Company's remaining properties decreased $18,900 when
compared to the same period in 1997.
Refinery and transportation operations cost of goods sold for the months of
August and September 1998 were $3,054,800. The cost of goods sold for June and
July 1998 were an adjustment to the purchase price of the assets, and are
approximately $3,584,000.
Oil and gas exploration expenses increased $19,500, or 2.8%, to $715,200
for the first three quarters of 1998 when compared to the same period in 1997.
This is primarily due to increased personnel cost of approximately $8,800,
increased lease rental cost of $78,500, increased vehicle cost of $3,300, and
decreased geological and geophysical cost of $71,700 attributable to a $75,000
payment received from Hugoton/Maxwell as a result of its election not to
complete a 3D seismic study. Dry hole, abandonment, and impairment cost were
$1,163,300, primarily due to dry hole cost associated with the Deadman Creek
well #44-36 of $36,100, Eagle Springs well #44-35 of $452,700, Ghost Ranch well
#58-35 well re-entry of $439,000, and the Flat Top Federal well #27-15 of
$197,700.
Refinery and transportation operations expenses for the months of August
and September 1998 were $558,000. The operating expenses for June and July 1998
were an adjustment to the purchase price of the assets and were approximately
$652,000.
General and administrative expenses increased $103,000 to $682,600 for the
nine-month period ended September 30, 1998, when compared to the same period in
1997. The primary contributors were decreased personnel cost of $3,000,
decreased professional fees of $52,500 within the exploration and production
segment. Shareholder and investor services decreased $57,400 due to a reduction
of services in the financial public relations and information dissemination
investment community. Depreciation, depletion, and amortization increased for
the nine-month period ended September 30, 1998, by $246,800 to $795,400. The
exploration and production segment increased $103,600 primarily as a result of
lower prices which adversely effect reserves, while the refining and
transportation segment contributed $143,200 of such increase.
Refinery and transportation general and administrative expenses for the
months of August and September 1998 were $151,000. The general and
administrative expenses for June and July 1998 were an adjustment to the
purchase price of the assets and were approximately $109,000.
Interest income remained virtually unchanged for the first three quarters
1998, when compared to the same period in 1997. Interest expense increased
$957,400 to $1,072,500 primarily due to interest expense on the debt financing
with EIF.
During the nine months ended September 30, 1997, the Company, in its
earnings per shares calculations of the consolidated statement of operations,
declared and accrued a preferred stock dividend of $164,000 on preferred stock
shares that were converted to Common Stock and had an imputed stock dividend of
$215,600 as a result of convertibility of its outstanding preferred stock into
Common Stock at below-market prices. (See Note 3 to NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.) The dividend amounts are for earnings per share
calculations, and the imputed stock dividends are not recorded in the Company's
financial statements.
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 as 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 September 30, 1998, the Company sold securities
without registration under the Securities Act of 1933 (the "Securities Act") in
the following transactions:
1. Individual converted 20,000 shares of 1991 Preferred Stock into 6,667
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 Section 3(a)(9) thereof.
2. The Company issued 863,602 shares of Common Stock to Petro Source
Corporation in partial consideration of the purchase of Petro Source's refining
assets in the Railroad Valley and Tonopah, Nevada and its crude oil
transportation corporation assets.
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 Section 4(s) 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 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------------
(a) Exhibits.
The following exhibits are included as part of this report:
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- --------------------------------------------- ----------------
Plan of Acquisition, Reorganization,
Item 2 Arrangement, Liquidation, or Succession
- ---------------------------------------------------------------
2.01 2 Amendment to Option and Purchase Agreement This filing (1)
between Foreland Corporation, Petro Source
Corporation, Foreland Refining Corporation,
and Petrosource Transportation dated August
11, 1998
Item 4 Instruments Defining the Rights of Security
Holders
4.01 3 Designation of Rights, Privileges and Incorporated by
Preferences for 1998 Series Convertible Reference (2)
Preferred Stock
4.02 3 Registration Rights Agreement between Energy Incorporated by
Income Fund, L.P., and Foreland Reference (2)
Corporation, dated as of August 10, 1998
Item 10 Material Contracts
- ---------------------------------------------------------------
10.01 10 First Amendment to Financing Agreement Incorporated by
between Foreland Corporation, Eagle Springs Reference (2)
Production Limited Liability Company,
Foreland Refining Corporation, Foreland
Asset Corporation, Petrosource
Transportation, and Energy Income Fund,
L.P., dated August 10, 1998*
10.02 10 Common Stock Purchase Warrant to purchase Incorporated by
750,000 shares of common stock of Foreland Reference (2)
Corporation at $6.00 per share
10.03 10 Stock Purchase Agreement dated August 10, Incorporated by
1998, between Energy Income Fund, L.P., and Reference (2)
Foreland Corporation
10.04 10 First Allonge to Acquisition Note in the Incorporated by
original principal amount of $2,327,000, Reference (2)
dated as of August 10, 1998
10.05 10 First Allonge to Development Note in the Incorporated by
original principal amount of $13,893,000, Reference (2)
dated as of August 10, 1998
10.06 10 First Allonge to Refinancing Note in the Incorporated by
original principal amount of $680,000, Reference (2)
dated as of August 10, 1998
10.07 10 Environmental Indemnity Agreement between Incorporated by
Petro Source Corporation, Petrosource Reference (2)
Investments, Inc., Foreland Corporation,
Foreland Refining Corporation, Foreland
Asset Corporation, and Petrosource
Transportation dated August 11, 1998
10.08 10 Second Amendment to Deed of Trust, Security Incorporated by
Agreement, Assignment of Production and Reference (2)
Proceeds, Financing Statement and Fixture
Filing dated as of August 11, 1998, by and
among Foreland Corporation, Eagle Springs
Production Limited Liability Company,
First American Title Company of Nevada,
and Energy Income Fund, L.P.
10.09 10 Deed of Trust, Security Agreement, Incorporated by
Assignment of Rents, Profits and Proceeds, Reference (2)
Financing Statement, and Fixture Filing
from Foreland Corporation, Foreland
Refining Corporation, and Foreland Asset
Corporation
Item 27. Financial Data Schedule
- ---------------------------------------------------------------
27.01 27 Financial Data Schedule This Filing
(1) This is being filed to replace an exhibit originally filed as an exhibit
to The Form 8-K dated August 12, 1998, that was incorrectly filed.
(2) Incorporated by reference from the Company's interim report on Form 8-K
dated August 12, 1998 as amended on Form 8-K/A filed October 26, 1998.
(b) Reports on Form 8-K.
During the quarter ended on September 30, 1998 the Company filed the
following reports on form 8-K.
DATE EVENT REPORTED ITEM REPORTED
------------------- ----------------------
July 8, 1998 Item 5. Other Events
July 13, 1998 Item 5. Other Events
July 23, 1998 Item 5. Other Events
August 12, 1998 Item 2. Acquisition or Disposition of
Assets
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: November 19, 1998 By: /s/ N. Thomas Steele
--------------------------------------
N. Thomas Steele, President
Dated: November 19, 1998 By: /s/Don W. Treece
-------------------------------------
Don W. Treece, Controller ( Chief
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1998, AND STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,435,060
<SECURITIES> 0
<RECEIVABLES> 6,140,273
<ALLOWANCES> 0
<INVENTORY> 1,260,957
<CURRENT-ASSETS> 9,164,664
<PP&E> 20,003,234
<DEPRECIATION> 6,327,704
<TOTAL-ASSETS> 24,178,975
<CURRENT-LIABILITIES> 15,016,374
<BONDS> 0
0
554
<COMMON> 9,419
<OTHER-SE> 9,138,457
<TOTAL-LIABILITY-AND-EQUITY> 24,178,975
<SALES> 5,281,239
<TOTAL-REVENUES> 5,282,736
<CGS> 4,284,360
<TOTAL-COSTS> 8,324,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,072,491
<INCOME-PRETAX> (3,999,487)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,999,487)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,999,487)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
AMENDMENT TO
OPTION AND PURCHASE AGREEMENT
THIS AMENDMENT TO OPTION AND PURCHASE AGREEMENT (this "Amendment") is
entered into as of this 11th day of August, 1998, by and between FORELAND
CORPORATION, a Nevada corporation ("Foreland") on the one hand, and PETRO SOURCE
CORPORATION, a Utah corporation ("Petro Source Corporation"), FORELAND REFINING
CORPORATION, a Texas corporation ("Foreland Refining"), and PETROSOURCE
TRANSPORTATION, a Utah corporation ("Petrosource Transportation"), on the other
(Petro Source Corporation, Foreland Refining, and Petrosource Transportation are
collectively referred to as "PSC"), based on the following:
PREMISES
A. Foreland, Petro Source Corporation, and Petrosource Transportation are
parties to that certain Option and Purchase Agreement dated December 31, 1997
(the "Option and Purchase Agreement"). Foreland Refining is a successor,
through merger, to Petro Source Refining Corporation, a Utah corporation ("Petro
Source Refining"), which was also a party to the Option and Purchase Agreement.
B. In May 1998, Foreland exercised its option to purchase the Business
and Business Assets as defined in the Option and Purchase Agreement, and the
parties are obligated to close that transaction.
C. The parties desire to amend the Option and Purchase Agreement in order
to modify certain provisions thereof to reflect changes and modifications that
have been agreed to since the execution of the Option and Purchase Agreement,
including the restructuring of the transaction as the acquisition of certain
assets of Foreland Refining, including the stock of Petrosource Transportation,
by a newly-formed, wholly-owned subsidiary of Foreland, Foreland Asset
Corporation ("Foreland Asset"), followed by the acquisition by Foreland of
Foreland Refining, rather than the sale of assets of Petro Source Refining and
Petrosource Transportation to Foreland as originally contemplated by the Option
and Purchase Agreement.
D. The parties desire to ratify and reaffirm all of the terms and
conditions of the Option and Purchase Agreement, except those provisions
specifically modified by the terms of this Amendment.
AGREEMENT
NOW, THEREFORE, based on the foregoing premises, and in consideration of
the mutual covenants and agreements hereinafter set forth and the mutual benefit
to the parties to be derived herefrom, it is hereby agreed as follows:
1. PSC Employees. The following provision will be added to the end of
Section 2.10 of the Option and Purchase Agreement:
(c) Foreland Refining or Petrosource Transportation will hire the PSC
employees contemplated by Section 2.10(b) as of August 15, 1998. Between
the Closing Date and August 14, 1998, such employees will remain in the
employment of PSC and shall be made available to Foreland Refining or
Petrosource Transportation pursuant to a Transition Services Agreement
between the parties.
2. The Purchase. Section 3.01 of the Option and Purchase Agreement is
amended to read in its entirety as follows:
Section 3.01 The Purchase. As a result of Foreland exercising its
Option as set forth in Article II of the Option and Purchase Agreement, (i)
Foreland Refining shall sell to Foreland Asset all of the issued and
outstanding stock of Petrosource Transportation and the Business Assets set
forth in subparagraphs (a), (b), (k), and (n) below that are owned by it;
and (ii) after completion of the sale of assets contemplated by
subparagraph (i) and the distribution of the proceeds from such sale to
Petro Source Corporation, Petro Source Corporation shall sell, and Foreland
shall purchase, all of the issued and outstanding stock of Foreland
Refining. References in this Agreement to the acquisition of the Business
and Business Assets shall be read to mean the acquisition of the Business
and Business Assets through the purchase of the assets to be sold to
Foreland Asset and the subsequent purchase of the issued and outstanding
stock of Foreland Refining. The Business and Business Assets shall,
subject to the Excluded Assets identified in Section 3.02, consist of the
following:
(a) (i) all tangible personal property owned by PSC and located
at, or used in connection with, the operation of the Eagle Springs
Refinery, the Tonopah Refinery (excluding the emulsifier and the two
asphalt spreader trucks and related equipment), (ii) the roofing
asphalt equipment located at the Fredonia Terminal (provided Foreland,
at its own expense, removes such equipment from PSC's property within
24 months after the Closing Date, otherwise the ownership of such
equipment shall revert to Crown Asphalt Distribution, L.L.C.), and
(iii) the rights of PSC as lessee of all tangible personal property
leased, including the equipment, tools, vehicles, furniture and
fixtures, and supplies described in Exhibit "A" (the "Tangible
Personal Property");
(b) all of PSC's rights as lessee or holder of rights-of-way to
the real property and all buildings and improvements thereon on which
the Eagle Springs Refinery and the Tonopah Refinery are located, as
more particularly described in Exhibit "B" (the "Real Property");
(c) all inventory of PSC existing as of the Effective Time which
was purchased in furtherance of the Business, as described in Exhibit
"C" (the "Inventory");
(d) all of the notes and trade and other accounts receivable
associated with the Eagle Springs Refinery, the Tonopah Refinery, or
Petrosource Transportation existing as of the Effective Time, as
described in Exhibit "D" (the "Accounts Receivable");
(e) all cash, cash equivalents, and prepaid expenses held by
Foreland Refining or Petrosource Transportation;
(f) all of PSC's rights under (i) those crude oil and transmix
purchase contracts and agreements described in Exhibit "E" which were
entered into by PSC in the ordinary course of business and are
executory, and (ii) all contracts and agreements intended to
facilitate the sale of asphalt or other refinery products manufactured
at the Eagle Springs or Tonopah refineries (together, the "Contract
Rights");
(g) lists of current and past (within the preceding two years)
customers and lists of prospective customers (i.e., persons with whom
PSC has discussed potential sales and from whom PSC has received what
PSC believes to be serious expressions of interest) of the Business
compiled by PSC including, to the extent the same is in the possession
of PSC, the name, address, contact person, and telephone number of
each such customer or prospective customer (the "Customer Lists"), set
forth on Exhibit "F";
(h) all lists of current and past (within the preceding two
years) suppliers and all files, records, and data used in connection
with the Business;
(i) those prepaid expenses, fees, deposits, letters of credit,
or bonds with respect to the Business or Business Assets, including
those set forth on Exhibit "G," (the "Prepaid Expenses");
(j) to the extent they are assignable, all federal, state, or
local licenses, permits, or approvals granted or used in connection
with the operation of the Business or the Business Assets;
(k) all of PSC's rights under warranties covering the Tangible
Personal Property being transferred hereunder to the fullest extent
permitted by such warranties;
(l) all intellectual property of PSC necessary to the operation
of the Business, including the proprietary scheduling software used in
connection with Petrosource Transportation and the right to use any
trade secrets, confidential or proprietary information, or general
processes used by PSC in the conduct of the Business, together with
the Melt PacTM License from Petro Source Asphalt Company dated as of
May 31, 1998, all as described in Exhibit "H" (the "Intellectual
Property");
(m) the current telephone number(s) used in connection with the
Business at its locations in Eagle Springs and Tonopah, Nevada, and
telephone and other directory listings used by PSC in the operation of
the Business other than the Salt Lake City numbers;
(n) to the extent permitted by the carrier without financial
assurances or continued obligation by Petro Source Corporation, all
contracts of insurance relating to the Business or Business Assets and
all claims, casualties, or other occurrences prior to the Closing Date
and prepaid premiums or deposits related thereto, which policies are
specific to and separately maintained for the Business Assets, as
described in Exhibit "I" (the "Insurance Policies");
(o) originals or copies of all accounting, operating,
management, and other business records in documentary or electronic
form relating to the Business or Business Assets (provided, however,
PSC may maintain a record copy of any such items);
(p) the rights of PSC under all confidentiality, non-
competition, or similar agreements with present or former employees,
consultants, and others associated with PSC insofar as related to the
Business;
(q) the goodwill of PSC associated with the Business, including
the right to use the name "Petrosource Transportation" but excluding
the use of the name "Petro Source Refining"; and
(r) all other assets of PSC used to carry out the Business or
part of the Business Assets not included in any specific provision of
the foregoing subsections existing as of the Effective Time which are
not excluded in section 3.02.
3. Excluded Assets. Section 3.02 is amended by adding a new subsection
(h) to immediately follow subsection (g) thereof and to read as follows:
(h) the accounts receivable of Foreland Refining that are not
included in the amount set forth in paragraph (c) of the Closing
Statement, which accounts receivable shall be, and are hereby,
assigned to Petro Source Corporation.
4. Assumed Obligations. Section 3.03 is amended to read in its entirety
as follows:
Section 3.03 Obligations. On the Closing Date, Foreland Refining
and/or Petrosource Transportation shall be obligated on or Foreland Asset
shall and does hereby assume, as the case may be, the following obligations
and liabilities with respect to the Business and Business Assets for all
periods subsequent to the Effective Time, in accordance with their
respective terms and subject to the respective conditions thereof, such
obligations and liabilities to be held or assumed by the entity identified
by the parties at the Closing:
(a) all obligations of PSC under the leases or rights-of-way set
forth on Exhibit K-1 relating to the Tangible Personal Property or the
Real Property;
(b) all current trade accounts payable and other current
liabilities as of the Effective Time, that arose in the ordinary
course of the Business, all to be set forth in Exhibit K-2 of the
Closing Exhibits;
(c) all liabilities and obligations of PSC to be paid or
performed after the Effective Time under the contracts and other
agreements set forth on Exhibit K-3 relating to the Business and
Business Assets being conveyed hereunder;
(d) all liabilities in respect of any taxes for the period
beginning on the Effective Time; and any other accrued, but unpaid
liabilities for taxes, as of the Effective Time and set forth in the
Closing Schedule (real and personal property taxes shall be prorated
between Foreland Refining and Petro Source Corporation as of the
Effective Time); and
(e) other obligations listed on Exhibit K-4.
5. Excluded Liabilities. Section 3.04 of the Option and Purchase
Agreement is amended to read in its entirety as follows:
Section 3.04. Excluded Liabilities. Unless the liability is
reflected on the Closing Statement or Adjustment Statement (as those terms
are defined in Section 3.05A), neither Foreland, Foreland Refining,
Foreland Asset, nor Petrosource Transportation shall assume or be obligated
to pay, perform, or otherwise discharge the following:
(a) any liability or obligation of PSC direct or indirect, known
or unknown, absolute or contingent not expressly assumed pursuant to
section 3.03 or otherwise pursuant to this Agreement;
(b) any liability arising out of the employer/employee
relationship between PSC and its employees prior to the hiring of such
employees by Foreland Refining or Petrosource Transportation,
including liabilities for accrued bonuses, vacation, personal leave,
or other amounts for the benefit of employees of the Business (the
"Employee Benefits"); provided, however, Foreland Refining shall be
responsible for payments to Petro Source Corporation required by the
Transition Services Agreement;
(c) taxes for any period prior to the Effective Time (real and
personal property taxes shall be prorated between Foreland Refining
and Petro Source Corporation as of the Effective Time);
(d) the accounts payable listed on Schedule 3.04; and
(e) any liability as to which Petro Source Corporation has
indemnified Foreland, Foreland Refining, Petrosource Transportation,
and/or Foreland Asset pursuant to the Environmental Indemnification
Agreement.
At the Closing, PSC shall deliver to Foreland, Foreland Asset, Foreland
Refining, and Petrosource Transportation full and complete releases from any
Excluded Liability for which they might be liable or to which the Business or
Business Assets may be subject, including releases of all financing statements
or other security documents, related to such Excluded Liability (the
"Releases").
6. Amount of Purchase Price. Section 3.05 of the Option and Purchase
Agreement is amended to read in its entirety as follows:
Section 3.05 Amount of Purchase Price. The consideration payable by
Foreland for the purchase (the "Purchase Price") of the Business and
Business Assets shall be five million dollars ($5,000,000)(the "Base
Price"), plus:
(a) the sum of the current assets (except to the extent set
forth in Section 3.02), as of May 31, 1998, as determined in
accordance with GAAP (except that finished goods inventory will be
valued at market), held by Foreland Refining and/or Petrosource
Transportation;
(b) a negative amount equal to the sum of the current
liabilities, as of May 31, 1998, as determined in accordance with
GAAP, for which Foreland Refining, Foreland Asset, and/or Petrosource
Transportation will continue to be liable subsequent to the Closing,
excluding, however, the amount of $470,604 in intercorporate advances
from Petro Source Corporation to Petrosource Transportation (which
liability shall be paid prior to the Closing Date), and further
excluding the current portion of long term liabilities or liabilities
under operating leases that are not properly attributable to the
period prior to the Effective Date in accordance with GAAP;
(c) the sum of all capital contributions made by Petro Source
Corporation to Foreland Refining and/or Petrosource Transportation
since December 31, 1997 (other than the amount of $470,604 contributed
to Petrosource Transportation by Petro Source Corporation prior to the
Closing Date to enable Petrosource Transportation to repay the same
amount in a current account payable owing to Petro Source
Corporation);
(d) a negative amount equal to all distributions, other than
distributions of Excluded Assets or the cash proceeds of the sale by
Foreland Refining of certain of its assets to Foreland Asset as
contemplated by Section 3.01, made by Foreland Refining and/or
Petrosource Transportation since May 31, 1998;
(e) a positive amount equal to capital expenditures made by
Foreland Refining's predecessor or Petrosource Transportation between
December 31, 1997, and May 31, 1998, which added to the Business or
Business Assets;
(f) a negative amount equal to the net proceeds from the sale by
Foreland Refining's predecessor or Petrosource Transportation between
December 31, 1997, and May 31, 1998, of portions of the Business or
Business Assets;
(g) any unpaid portion of the Option Consideration; and
(h) 100,000 shares of Foreland Stock (the "Original Shares"),
the resale of which by PSC shall be covered by an effective
Registration Statement in accordance with Article IX.
7. Closing Amounts and Payments. A new Section 3.05A shall be added to
the Option and Purchase Agreement to read in its entirety as follows:
Section 3.05A Estimated Purchase Price. The calculation of the
Purchase Price as contemplated by Section 3.05 of the Agreement shall be
based on an estimate and adjusted to actual results as follows:
(a) Closing Statement. Petro Source Corporation has prepared
and delivered to Foreland a statement (the "Closing Statement")
setting forth estimates of the items specified in subsections 3.05(a)
through (f) (the "Estimated Adjustments to Base Price"). The Closing
Statement shall contain and shall have attached thereto such
supporting documentation and other data as is reasonably necessary to
provide a basis for the Estimated Adjustments to Base Price shown
therein. The Estimated Adjustments to Base Price shall be based upon
actual information available to Petro Source Corporation at the time
of preparation of the Closing Statement and upon its good faith
estimates and assumptions. Foreland and its representatives shall be
provided access to all of PSC's books, records, computer runs and
other documents containing information on which the Estimated
Adjustments to Base Price are based for the purpose of conducting a
review as Foreland may deem appropriate.
(b) Closing Purchase Price. The Purchase Price to be used for
the purposes of Closing (the "Closing Purchase Price") shall be the
Base Price, the items described in subsections 3.05(g) and (h), and
the Estimated Adjustments to Base Price computed as follows:
(i) If the Estimated Adjustments to Base Price shown in the
Closing Statement on the Closing Date is negative, then the
Purchase Price shall be reduced by the amount of such Estimated
Adjustments to Base Price, or
(ii) If the Estimated Adjustments to Base Price shown in the
Closing Statement is positive, then the Purchase Price shall be
increased by the amount of such Estimated Adjustments to Base
Price.
(c) Non-Cash Portion of Closing Purchase Price. The Closing
Purchase Price shall be paid in cash, except as follows:
(i) The unpaid portion of the Option Consideration payable
in accordance with subparagraph 3.05(g) shall be paid through
Petro Source Corporation's continuing sale of Option Shares in
accordance with the provisions of subparagraphs (d) through (f)
of section 2.02, except that Petro Source Corporation shall not
be limited as to the number of shares that can be sold at any
time or during any period as provided in subparagraph (f) of such
section, and any Option Shares or the proceeds therefrom in
excess of the balance of the Option Consideration due shall be
returned to Foreland.
(ii) The 100,000 Original Shares of Foreland Stock
identified in subparagraph 3.05(h), which shall be registered in
the name of Petro Source Corporation and held and disposed of in
accordance with the terms and conditions of subparagraph (e) of
this section 3.05A.
(iii) The net amount of the Estimated Adjustments to
Base Price shall be paid by the delivery by Foreland to Petro
Source Corporation at the Closing of 763,602 shares of Foreland
Stock (the "Closing Shares"), which shall be registered in the
name of Petro Source Corporation and held and disposed of in
accordance with the terms and conditions of subparagraph (e) of
this section 3.05A.
(d) Payments and Deliveries. Prior to 11:00 a.m. Houston time on
the Closing Date, Foreland shall (i) pay an amount equal to the Base
Price for the account of Petro Source Corporation by wire transfer of
funds to Petro Source Corporation's designated bank account, and (ii)
deliver to Petro Source Corporation one or more certificates for the
Original Shares and the Closing Shares.. Petro Source Corporation
shall deliver or cause to be delivered the Releases, as defined in
Section 6.03A, together with all conveyances, instruments, and
documents to be delivered by or on behalf of Petro Source Corporation
at Closing.
(e) Delivery and Sale of Original Shares and Closing Shares.
The Original Shares and the Closing Shares shall be issued, held, and
disposed of as follows:
(i) At the earliest practicable date, but in any event by
the earlier of the date that is (A) 10 days after the filing by
Foreland of a report containing historical and pro forma combined
financial information respecting the purchased Business and
Business Assets pursuant to section 13 of the Securities Exchange
Act of 1934, or (B) 75 days after the Closing Date, Foreland
shall file, at its sole cost, a Registration Statement on such
form as Foreland may select under the Securities Act covering the
resale of the Closing Shares and the Original Shares, by and for
the account of Petro Source Corporation, which shall be named as
a selling shareholder in the Registration Statement, all as more
particularly set forth in Article IX hereof. Foreland shall
utilize its best efforts to obtain the effectiveness of the
Registration Statement at the earliest practicable date and to
maintain its effectiveness until June 30, 1999. In the event
that all of the Closing Shares are not sold by Petro Source
Corporation under the Registration Statement on or before
December 31, 1998, Foreland shall pay interest to Petro Source
Corporation in cash equal to 5.0% per annum multiplied by the
difference between (i) the Estimated Adjustments to Base Price
less (ii) the net proceeds realized by Petro Source Corporation
from the sale of such Closing Shares. Such amounts shall be paid
by Foreland to Petro Source Corporation on the last day of each
month beginning with the last day of January 1999. The amount
described in the preceding sentence shall be paid in addition to
the interest Petro Source Corporation is entitled to receive
pursuant to the following paragraph.
(ii) Petro Source Corporation may cause to be sold, at any
time and from time-to-time and in accordance with the
Registration Statement, that number of Closing Shares that yields
proceeds, net of brokerage and other usual and customary
transaction costs, the Estimated Adjustments to Base Price, plus
simple interest on the unpaid balance from the Closing Date to
the date such net proceeds from such sale are available to the
account of Petro Source Corporation at the rate of 10% per annum
(the "Realizable Amount"), provided, however, that Petro Source
Corporation shall not sell or place an order to sell in the
Nasdaq SmallCap Market that number of Closing Shares that would
yield net proceeds of more than $400,000 in any consecutive 30
day period without Foreland's prior consent. There are no
restrictions on the sale of the Original Shares of Foreland Stock
delivered to Petro Source Corporation at Closing, other than in
accordance with the Registration Statement.
(iii) If the net proceeds from the sale of Closing
Shares are less than the Realizable Amount, Petro Source
Corporation may demand that Foreland pay such deficiency, in
which case Foreland shall, within five days after such demand, at
its option, either pay such amount in cash in immediately
available funds or deliver to Petro Source Corporation such
additional shares of Common Stock as Foreland estimates will
yield net proceeds in the amount sufficient for Petro Source
Corporation to realize in cash the Realizable Amount (the
"Additional Shares"). Should the proceeds from the Additional
Shares prove to be insufficient for Petro Source Corporation to
realize in cash the Realizable Amount, Petro Source Corporation
may demand that Foreland pay such deficiency, in which case
Foreland shall, within five days after such demand, pay Petro
Source Corporation such deficiency in cash.
(iv) If any Closing Shares or Additional Shares remain
unsold after the receipt by Petro Source Corporation of the
Realizable Amount, such shares shall be returned to Foreland for
cancellation. If Closing Shares or Additional Shares have been
sold for net proceeds in excess of the Realizable Amount, such
excess proceeds shall also be delivered to Foreland. Petro
Source Corporation agrees to provide Foreland with access to the
records concerning the sales of Closing Shares and Additional
Shares in order to permit Foreland to verify the amount realized
by Petro Source Corporation on such sales.
8. Post Closing Adjustment. A new Section 3.06A shall be added to the
Option and Purchase Agreement to read in its entirety as follows:
Section 3.06A Post Closing Adjustment.
(a) Adjustment Statement. As soon as practicable but in any event
not later than 60 days following the Closing Date (the "Post Closing Date")
Petro Source Corporation shall deliver to Foreland a statement (the
"Adjustment Statement") setting forth the actual amounts of the items
specified in subsection 3.05(a) through (f) based on the best information
available to Petro Source Corporation as of the Post Closing Date. The
Adjustment Statement shall be in such detail and shall contain or have
attached thereto such supporting documentation as Foreland shall reasonably
request. Foreland and its representatives shall be provided access to all
of Petro Source Corporation's books, records, computer runs, and other
documents containing information on which the Adjustment Statement is based
for the purpose of conducting an audit thereof or such other review as
Foreland may deem appropriate.
(b) Final Determination of Adjustments. The Adjustment Statement
shall become final and binding on Petro Source Corporation and Foreland on
the twentieth business day following the date the Adjustment Statement is
received by Foreland, unless prior to such twentieth business day Foreland
shall deliver to Petro Source Corporation notice of its disagreement with
the contents of the Adjustment Statement, together with proposed changes
thereto. If Foreland has delivered a notice of disagreement, then the
Adjustment Statement will become final and binding upon written agreement
between Foreland and Petro Source Corporation resolving all disagreements
of Foreland. If the Adjustment Statement has not become final and binding
by the thirtieth business day following its receipt by Foreland, then the
Adjustment Statement shall be submitted to binding arbitration in
accordance with the commercial rules of the American Arbitration
Association, except that only one arbitrator shall be used. The fees and
expenses of such arbitration shall be borne 50% by Petro Source Corporation
and 50% by Foreland. The determination of the Adjustment Statement by such
arbitration shall be final and binding upon Foreland and Petro Source
Corporation.
(c) Adjustment Payments. On the day the Adjustment Statement becomes
final and binding, Foreland and Petro Source Corporation shall make the
following payments:
(i) If the mathematical sum of the actual amounts of the items
specified in subsections 3.05(a) through (h) as shown in the final and
binding Adjustment Statement, is less than the mathematical sum of the
items to specified in subsections 3.05(a) through (h) in the Closing
Statement, then Petro Source Corporation shall pay Foreland an amount
equal to such deficiency.
(ii) If the mathematical sum of the actual amounts of the items
specified in subsections 3.05(a) through (h) as shown in the final and
binding Adjustment Statement, exceeds the mathematical sum of the
items to specified in subsections 3.05(a) through (h) in the Closing
Statement, then Foreland shall pay Petro Source Corporation an amount
equal to such excess.
Any payments required by this Section 3.06A shall be by wire transfer to
the account designated by the party to receive such payment.
9. Representations, Covenants, and Warranties of Petro Source
Corporation. The lead-in paragraph to Article IV of the Option and Purchase
Agreement is amended by substituting "Petro Source Corporation" for "PSC."
10. Organization. Section 4.01 of the Option and Purchase Agreement is
amended to read in its entirety as follows:
Section 4.01 Organization. Petro Source Corporation and Petrosource
Transportation are each corporations duly organized, validly existing, and
in good standing under the laws of the state of Utah. Foreland Refining
Corporation is duly organized, validly existing, and in good standing under
the laws of the state of Texas. Each of the corporations has the corporate
power and are duly authorized, qualified, franchised, and licensed or shall
have applied for licenses under all applicable laws, regulations,
ordinances, and orders of public authorities to own all of their properties
and assets and to carry on their business in all material respects as it is
now being conducted. There is no jurisdiction in which any of such
companies is not so qualified in which the character and location of the
assets owned by it or the nature of the business transacted by it requires
qualification, except where failure to do so would not have a material
adverse effect on the business or properties of such company. The
execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement in accordance with the
terms hereof will not, violate any provision of such companies' articles of
incorporation or bylaws. Each of such companies has taken all action
required by law, its articles of incorporation, its bylaws, or otherwise to
authorize the execution and delivery of this Agreement and the consummation
of the transactions herein contemplated.
11. Capitalization. A new Section 4.01A shall be added to the Option and
Purchase Agreement to read in its entirety as follows:
Section 4.01A Capitalization. The authorized capital of Foreland
Refining consists of 100,000 shares of common stock, par value $0.01, of
which 1,000 shares are issued and outstanding. All such issued and
outstanding shares are legally issued, fully paid, and nonassessable, and
not issued in violation of the pre-emptive or other right of any person.
No shares of the authorized capital of Foreland Refining are subject to any
right held by any other person or entity to require the issuance of
additional shares on the exercise or conversion of options, warrants,
convertible debentures, or any other such rights. The authorized capital
of Petrosource Transportation consists of 50,000 shares of common stock,
with no par value, of which 1,000 shares are issued and outstanding. All
such issued and outstanding shares are legally issued, fully paid, and
nonassessable and are not issued in violation of the pre-emptive or other
right of any person. Petrosource Transportation does not have any shares
subject to issuance pursuant to the exercise or conversion of options,
warrants, convertible debentures, or any other such rights held by any
other person or entity.
12. Financial Statements. A new subparagraph 4.03(a2) is added to read as
follows:
(a2) Included in Schedule 4.03 to this Agreement is also the unaudited
balance sheet of Petrosource Transportation as of March 31, 1998, and the
related unaudited income statements for the three months ended March 31,
1998, and the years ended December 31, 1997, 1996, 1995, and 1994, which
present fairly the results of operations and the financial position of
Petrosource Transportation for the periods and as of the dates indicated in
all respects which would be material to an entity consisting of Petrosource
Transportation and Foreland Refining, except, however, with respect to
matters that are customarily presented in footnotes to financial
statements. All such financial statements have been prepared in accordance
with GAAP consistently applied throughout the periods involved, except that
such financial statements have not been audited by independent outside
accountants and do not contain the footnote disclosures required by GAAP.
13. New Governmental Authorizations. A new Section 4.05A is added to the
Option and Purchase Agreement to read in its entirety as follows:
Section 4.05A New Governmental Authorizations. PSC has either
transferred to Foreland Refining, or caused Foreland Refining to apply for
and/or obtain, the licenses, franchises, permits, and other governmental
authorizations that are legally required to enable it to conduct the
Business in all material respects as it was conducted on the date of this
Agreement. No governmental agency has declined to issue any such
authorization or indicated that any such authorization may not be issued
and Petro Source Corporation is not aware of any reason that Foreland
Refining may not be able to obtain any such authorization. To the extent
not obtained prior to Closing, Petro Source Corporation represents and
warrants that Foreland Refining will, in the normal course of events, be
able to obtain all of the required authorizations material to the operation
of the Business.
14. Ownership of Stock. A new Section 4.21A is added to the Option and
Purchase Agreement to read in its entirety as follows:
Section 4.21A Ownership of Stock. Petro Source Corporation hereby
represents and warrants as follows: Petro Source Corporation is the sole
beneficial and record owner of all of the issued and outstanding equity
ownership of Foreland Refining which consists of 1,000 shares of common
stock, par value $0.01 per share (the "Foreland Refining Common Stock").
The Foreland Refining Common Stock is held solely by Petro Source
Corporation, and, upon Closing, will be free and clear of any and all
liens, encumbrances, or claims by any other person or entity. Foreland
Refining is the sole record and beneficial owner of all of the equity
interest in Petrosource Transportation, which consists of 1,000 shares of
common stock, no par value (the "Petrosource Transportation Common Stock").
The Petrosource Transportation Common Stock is held solely by Foreland
Refining and, upon Closing, will be free and clear of any and all liens,
encumbrances, or claims by any other person or entity.
15. Certain Liabilities or Contingencies. New Sections 4.21B and 4.21C are
hereby added to the Option and Purchase Agreement to read in its entirety as
follows:
Section 4.21B Undisclosed Liabilities or Contingencies. Petro Source
Corporation represents and warrants that to Petro Source Corporation's
Current Actual Knowledge, upon Closing, neither Foreland Refining nor
Petrosource Transportation have, or are liable for, any liabilities or
contingencies, whether known or unknown, other than the Assumed
Obligations, and Petro Source Corporation will indemnify and hold Foreland
Refining and Petrosource Transportation harmless from any such liabilities
or contingencies if such are discovered in the future, whether or not known
by Petro Source Corporation at the Closing Date.
Section 4.21C Certain Environmental Matters. Notwithstanding anything
to the contrary in the Option and Purchase Agreement and this Agreement
and without respect to the disclosures set forth in Schedule 4.18 or
elsewhere to the Option and Purchase Agreement, Petro Source Corporation
shall indemnify Foreland, Foreland Refining Corporation, and Petrosource
Transportation and hold them harmless from all environmental matters with
respect to the Business or Business Assets prior to the Closing Date in
accordance with the provisions of the Environmental Indemnity Agreement
executed and delivered by the parties at Closing.
16. Releases. A new Section 6.03A is hereby added to the Option and
Purchase Agreement to read in its entirety as follows:
Section 6.03A. Releases. Petro Source Corporation shall have
delivered the Releases required by Section 3.04 to Foreland, such Releases
to be in form suitable for filing and, if appropriate, recordation with the
appropriate governmental offices.
17. Closing Date Review and Deliveries. Section 6.06 of the Option and
Purchase Agreement is hereby amended to read in its entirety as follows:
Section 6.06 Closing Date Review and Deliveries. On and as of the
Closing Date, PSC shall, together with one or more representatives of
Foreland, undertake a Closing Date review of PSC's books, records, and
physical inventory. Petro Source Corporation shall provide Foreland with a
true, correct, and complete list and amount, as of the most recent
practicable date of the following items and represents that there will be
no material change in such items as of the Closing Date, except as may
occur in the ordinary course of the Business:
(a) the Inventory;
(b) the Tangible Personal Property;
(c) PSC's Accounts Receivable with respect to the Business and a
list of all shipped but unbilled shipments as of the Closing Date,
including an aging thereof;
(d) PSC's trade accounts payable, accrued current liabilities,
and the Assumed Obligations with respect to the Business;
(e) all unfilled customer orders with respect to the Business;
(f) all shipments made with respect to the Business during the
period from the date of this Agreement to the Closing Date;
(g) the Contract Rights;
(h) the Customer Lists;
(i) the Prepaid Expenses; and
(j) the federal, state, or local licenses held or applied for by
Foreland Refining or Petrosource Transportation, including a summary
of the status of all pending applications.
None of the above information shall, in Foreland's sole reasonable
judgment, be different from the information supplied by PSC in the Exhibits
and Schedules delivered to Foreland on or before January 15, 1998, to an
extent that, when all such differences are taken as a whole, result in the
value of the Business and Business Assets being materially less than the
value of such Business and Business Assets on January 15, 1998.
18. Certain Other Matters. A new Section 6.09 is hereby added to the
Option and Purchase Agreement to read in its entirety as follows:
Section 6.09 Certain Other Matters. Foreland Refining and Petro
Source Corporation have (i) entered into a transportation agreement for
product shipped from Petro Source Corporation's Fredonia, Arizona facility,
if Foreland Refining determines that it has equipment and personnel
available; and (ii) executed and delivered the Environmental
Indemnification Agreement.
19. Indemnification. Article X of the Option and Purchase Agreement is
hereby amended by substituting "Petro Source Corporation" and "Petro Source
Refining Corporation" for "PSC" in the case of each and every occurrence of
"PSC" in Article X. Subsection 10.01(b) is further amended by adding the words
"or its affiliates" immediately following the words "or obligation of the
indemnifying party."
20. Tax Election. Foreland shall timely and effectively file an election
pursuant to Internal Revenue Code Section 338(h)(10) to treat the transaction as
an asset purchase for tax purposes, and Foreland and Petro Source Corporation
shall record the transaction contemplated by this Agreement for tax purposes
consistent with such election. The parties also agree to mutually cooperate in
allocating the Purchase Price among the Business and Business Assets acquired by
Foreland and to treat the transaction consistent with such allocation for tax
purposes.
21. Payment of Cost of Survey. On or before ten days following the
Closing, Foreland shall reimburse Petro Source Corporation for the cost incurred
by Petro Source Corporation in obtaining a survey of the properties pursuant to
the Option and purchase Agreement.
22. Ratification of Option and Purchase Agreement. Except as specifically
provided by this Amendment, the parties hereby specifically ratify, confirm, and
adopt and binding and enforceable, all of the terms and conditions of the Option
and Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
FORELAND CORPORATION
By /s/ N. Thomas Steele, President
PETRO SOURCE CORPORATION
By /s/ A. Howard McCollum, President
FORELAND REFINING CORPORATION
By /s/ A. Howard McCollum, President
PETROSOURCE TRANSPORTATION
By /s/ A. Howard McCollum, President
