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, 1999
FORELAND CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 87-0422812
(State or other jurisdiction of (IRS 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 11, 1999, Foreland had outstanding 9,723,206 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 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 Foreland's annual
report on Form 10-K for the period ended December 31, 1998.
Certain reclassifications have been made to conform the 1998 financial
statements to the presentations of the 1999 financial statements. The
reclassifications had no effect on net income.
The financial statements do not reflect Foreland's agreement on November
15, 1999, to surrender voluntarily the assets securing its principal
indebtedness.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS Sept 30, 1999 Dec 31, 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 584,657 $ 1,849,782
Accounts receivable - trade (net of
reserves) 2,914,147 2,771,085
Inventory 1,750,750 1,166,361
Marketable securities - 700,000
Prepaid expenses and other 399,960 164,921
----------- ------------
Total current assets 5,649,514 6,652,149
Property and equipment, at cost:
Oil and gas properties, under the
successful efforts method 13,574,841 13,566,505
Refineries and building 6,733,879 4,845,472
Transportation and other equipment 1,304,745 1,007,571
Office furniture and equipment 398,554 419,317
Construction in progress 34,003 367,509
----------- ------------
22,046,022 20,206,374
Less accumulated depreciation,
depletion, and amortization (13,728,816) (13,115,997)
----------- ------------
Total property and equipment 8,317,206 7,090,377
Other assets:
Debt issuance costs, net of
accumulated amortization 479,237 576,190
Investment in Cowboy Asphalt Terminal 163,023 172,177
Deposits and other 364,673 151,794
----------- ------------
Total other assets 1,006,933 900,161
----------- ------------
Total assets $ 14,973,653 $ 14,642,687
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
debt, in default, net of discount
of $772,870 in 1999 and
$1,219,786 in 1998 $ 12,360,885 $ 11,168,213
Current maturities of long term debt
(refining) 48,251 -
Line of credit facility - -
Accounts payable and accrued expenses 2,882,053 2,378,274
Officers' salaries payable 428,651 434,813
Accrued expenses and other debt 1,216,331 1,223,474
----------- ------------
Total current liabilities 16,936,171 15,204,774
Long-term debt (refining), less
current maturities 600,558 -
Stockholders' Equity (Deficit):
Preferred Stock, $0001 par value,
5,000,000 shares authorized;
524,243 shares issued and outstanding
in 1998 (liquidation preference of
$2,891,757), 437,243 shares issued and
outstanding in 1999 (liquidation
preference of $2,940,843) 437 524
Common Stock, $0001 par value,
50,000,000 shares authorized;9,723,206
and 9,673,191 shares issued and
outstanding, respectively 9,723 9,673
Additional paid-in capital 39,625,574 39,366,477
Less note and stock subscriptions
receivable (336,435) (338,921)
Accumulated deficit (41,862,375) (39,599,840)
----------- ------------
Total stockholders' equity (2,563,076) (562,087)
Total liabilities and stockholders'
equity $ 14,973,653 $ 14,642,687
============= ============
</TABLE>
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
September 30, September 30,
-------------------------- -----------------------------
1999 1998 1999 1998
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Refining and transportation $8,425,018 $ 4,204,027 $ 20,300,107 $ 4,204,027
Oil and gas sales - 346,906 - 1,077,212
Other income, net 7,063 393 12,819 1,497
---------- ----------- ------------ ------------
Total revenues 8,432,081 4,551,326 20,312,926 5,282,736
EXPENSES:
Refinery and transportation
Cost of goods sold 6,160,235 3,054,757 14,558,368 3,054,757
Repairs and maintenance 234,542 - 674,624 -
Other 856,564 557,960 2,291,179 557,960
Oil production costs:
Lease production and operations - 186,806 - 706,932
Enhanced oil recovery project - 151,610 - 525,573
Oil exploration costs:
Dry hole, abandonment and
impairment costs (12,404) 672,805 (222,200) 1,163,270
Other 113,469 238,912 532,265 715,179
General and administrative
costs:
Shareholder-investor services 63,527 33,811 160,657 104,790
Stock-based compensation -
Employees - 6,180 - 18,524
Other 497,631 312,668 1,811,355 682,562
Depreciation, depletion, and
amortization 239,852 416,113 653,252 795,393
---------- ----------- ------------ ------------
Total expenses 8,153,416 5,631,622 20,459,500 8,324,940
---------- ----------- ------------ ------------
OPERATING INCOME (LOSS) $ 278,665 $(1,080,296) $ (146,574) $ (3,042,204)
OTHER INCOME (EXPENSE)
Gain (Loss) on sale of asset - 11,723 5,751 15,183
Interest income 10,193 18,037 51,526 100,025
Interest expense (745,677) (421,970) (2,173,238) (1,072,491)
---------- ----------- ------------ ------------
NET LOSS $ (456,819) $(1,472,506) $ (2,262,535) $ (3,999,487)
Preferred stock dividends:
Accrued (60,000) - (180,000) -
Imputed - - - -
---------- ----------- ------------ ------------
Net loss applicable to
common shareholders $ (516,819) $(1,472,506) $ (2,442,535) $ (3,999,487)
---------- ----------- ------------ ------------
NET LOSS PER COMMON SHARE $ (0.05) $ (0.16) $ (0.25) $ (0.46)
========== =========== ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 9,721,300 9,019,000 9,700,000 8,680,700
========== =========== ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flow from operating
activities:
Net loss $ (2,262,535) $ (3,999,487)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion, and amortization 653,252 795,393
Dry hole, abandonment and impairment costs 4,177 1,163,270
Issuance of stock for services 25,000 18,150
Issuance of stock for interest 235,781 -
Accrued note receivable interest income (20,158) (19,652)
Amortization of loan origination fee 446,926 477,603
Forgiveness of debt for services 20,923 18,524
Gain on sale of other properties (5,751) (15,183)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (158,062) (488,608)
Bad debt reserve 15,000 -
Inventory (584,389) 414,398
Prepaids and other 464,961 (457,018)
Increase (decrease) in:
Accounts payable and accrued expenses 230,865 757,138
Salaries payable 30,849 54,155
------------ ------------
Net cash used in operating activities (903,161) (1,281,317)
Cash flows from investing activities:
Capital expenditures for property and
equipment (1,872,277) (3,983,013)
Investment in Cowboy Asphalt Terminal 17,290 -
Proceeds from sale of assets 9,556 23,250
Other Assets 88,912 (92,386)
------------ ------------
Net cash (used in) provided by
investing activities (1,756,519) (4,052,149)
Cash flows from financial activities:
Proceeds from exercise of warrants and
options - 32,000
Proceeds from borrowing long-term debt 1,403,166 7,375,279
Payment of long-term debt (8,611) (679,384)
------------ ------------
Net cash provided by financing
activities 1,394,555 6,727,895
------------ ------------
Increase (decrease) in cash and cash equivalents (1,265,125) 1,394,429
Cash and cash equivalents, beginning of year 1,849,782 40,631
------------ ------------
Cash and cash equivalents, end of period $ 584,657 $ 1,435,060
============ ============
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 572,903 $ 306,804
============ ============
Non-cash investing and financing activities $ 20,158 $ 19,652
============ ============
</TABLE>
See accompanying notes to these consolidated financial
statements.
<PAGE>
1. OIL AND GAS PROPERTIES:
Foreland Corporation was incorporated under the laws of the state of Nevada
in 1985 to engage in oil exploration, development, and production. Since August
1998, Foreland has been engaged in refining and transportation operations
utilizing assets and equipment acquired from a third-party. The acquisition of
such assets was financed through a credit facility with Energy Income Fund, L.P.
("EIF"). Since the fourth quarter of 1998, Foreland has been in default on the
terms of such indebtedness. On October 15, 1999, Foreland agreed to surrender
voluntarily the assets securing its principal indebtedness, which assets
consisted substantially of all of Foreland's operating assets.
2. ISSUANCE OF SECURITIES, COMMON STOCK OPTIONS, AND PURCHASE WARRANTS:
During the first quarter of 1999, Foreland engaged an investment banker to
assist it in identifying potential sources for an investment, strategic
alliance, and/or sale or merger of some or all of Foreland's lines of business.
In connection with such engagement, Foreland issued to the investment banker
23,055 shares of Common Stock and granted the consultant warrants to purchase
30,000 shares of Common Stock at an exercise price of $1.08.
3. LONG TERM DEBT:
Foreland entered into a financing arrangement with "EIF" in January 1998,
which was amended in August 1998 and February 1999. Through September 30, 1999,
Foreland had drawn $12,575,279 under the financing arrangement and further loan
commitments are now terminated.
Foreland has not made any required principal amortization payments under
the loan, which payments were originally to commence in November 1998 and
subsequently deferred until May 1, 1999. Foreland has not complied with certain
financial covenants relating to minimum collateral-to-indebtedness ratio, cash
flow, equity requirements, current ratio, debt service ratio, and general and
administrative expense ratios and has not paid all interest due under the loan.
Foreland and EIF continued to discuss restructuring of the indebtedness
throughout much of 1999. On November 15, 1999, Foreland agreed to voluntarily
surrender the collateral pledged to secure the indebtedness. (See "Subsequent
Events" below.)
During the first quarter of 1999, Foreland entered into a line-of-credit
agreement with a bank. The line provides for borrowings up to $2,000,000, has
an interest rate of 8.75%, and has a maturity date of February 15, 2000.
Borrowings under the line-of-credit are collateralized by accounts receivable
and inventories of Foreland Refining.
4. RELATED PARTY TRANSACTIONS:
Foreland owed $428,651 in salaries and interest to two current officers and
directors, and a former officer and director, at September 30, 1999. Foreland
also had outstanding loans to one current officer and director and two former
officers and directors in the amount of $336,437 as of such date.
Effective September 2, 1997, Foreland entered into new executive employment
agreements with its executive officers in order to provide 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 the agreements, during
1998, N. Thomas Steele, and Bruce C. Decker received base salaries of $125,000,
and $119,000, respectively. Each 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 Foreland to register securities of Foreland held
by such persons at the request of the employees.
In connection with the agreements, N. Thomas Steele and Bruce C. Decker
received ten-year options to purchase 200,000 shares of Common Stock at a price
of $2.50 per share. Additionally, each executive received ten-year options to
purchase 100,000 shares of Common Stock at an exercise price of $5.00 per share.
Such options are now 75% vested and vest in equal increments on the next two
anniversary dates. 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 the executive shall immediately become
vested and exercisable and the executive shall receive payment equal to the fair
market value of the options granted under the employment agreement times the
number of unexercised options in consideration of the cancellation of such
options.
5. INCOME TAXES:
Foreland 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.
Foreland 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, 1998, Foreland had unused net operating loss
carry-forwards of approximately $43 million. This carry-forward expires in
varying amounts from 1999 to 2018. A portion of this net operating loss carry-
forward may be subject to reduction or limitation of use as a result of changes
in ownership or certain consolidated return filing regulations.
6. REPORTING BY SEGMENTS:
Through July 1998, Foreland's operations were concentrated in oil and gas
producing activities. Beginning in August 1998, Foreland also became engaged in
the refining and transportation segment.
Sales from the oil and gas producing segment to refining are based on
prices paid to unrelated parties. Foreland evaluates performance based on net
income or loss.
Presented below is a summary of results of operations for each segment for
the nine months ended September 30, 1999.
Oil & Gas Refining and Consolidation
Producing Transportation Entries Consolidated
Revenues:
External customers 1,057 $20,343,801 $ ( 31,932) $20,312,926
Inter-segment 1,124,765 - (1,124,765)
Interest Income 29,583 21,943 - 51,526
Total revenues 1,155,405 20,365,744 (1,156,697) 20,364,452
Costs & expenses:
Refinery/transport
cost of goods - 15,144,439 (586,071) 14,558,368
Repairs & maintenance - 674,624 - 674,624
Other - 2,291,179 - 2,291,179
Oil & gas production 570,626 - (570,626) -
Oil & gas exploration 532,265 - - 532,265
General & administrative 965,443 1,006,568 - 1,972,011
Dry hole costs (222,200) - - (222,200)
Depreciation, depletion,
& amortization 93,304 559,949 - 653,253
Interest & other, net 1,659,538 507,949 - 2,167,487
---------- ----------- ----------- -----------
Total expenses $3,598,976 $20,184,708 $(1,156,697) $22,626,987
========== =========== =========== ===========
Net Income(Loss) $(2,443,571) $ 181,036 $ - $(2,262,535)
=========== =========== =========== ===========
Total assets for each segment as of September 30, 1999 are as follows:
$ 2,318,597 $12,652,679 $ 2,377 $14,973,653
=========== =========== =========== ===========
7. SUBSEQUENT EVENTS:
Foreland agreed to surrender voluntarily the assets securing the principal
indebtedness with a current outstanding balance of approximately $13.5 million.
The assets to be conveyed consist of Foreland's Eagle Springs Field and other
producing properties, Foreland's refining and marketing operations, its
transportation company, and a principal exploration prospect and related
database. Foreland will retain the balance of its Nevada oil exploration
database that it has accumulated during the past approximately 15 years and
other exploration prospects. In addition, Foreland has retained for six months
the right to participate at a 50% interest in drilling ventures on the principal
exploration prospect surrendered to EIF, in agreed circumstances.
<PAGE>
- -------------------------------------------------------------------------------
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 Foreland 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 Foreland or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of Foreland 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 Foreland's
annual report on Form 10-K for the year ended December 31, 1998.
Since its organization in June 1985, Foreland has been engaged principally
in oil exploration in the Great Basin and Range of Nevada, an area that
management believes has potential for the discovery of major oil reserves. In
an effort to increase the financial return to Foreland from its crude oil
productions and expand its operations, Foreland acquired the Eagle Spring
Refinery and Tonopah Refinery assets and trucking fleet from Petro Source in
August 1998 and began crude oil refining and marketing of petroleum products.
The assets were acquired utilizing funds provided under the financing
arrangement with Energy Income Fund, L.P. ("EIF"). Foreland initiated and was
successful in implementing programs to reduce costs, acquire oil production from
other sources, increase refinery margins, and reduce overhead and general
administrative expenses. However, commencing in the fourth quarter of 1998 and
continuing throughout 1999, Foreland was unable to generate sufficient cash flow
to commence required principal payments due under the EIF loan. In addition,
Foreland has not complied with certain financial covenants relating to minimum
collateral-to-indebtedness ratio, cash flow, equity requirements, current ratio,
debt service ratio, and general administrative expense ratios, and has not paid
all interest due under the loan. Foreland's efforts to increase income and cash
flow were further hampered by the extremely low oil prices at the end of 1998
and continuing into 1999. These prices resulted in less exploration being
undertaken in Nevada, which such exploration could possibly have provided
additional sources of throughput for Foreland's refineries.
During most of 1999, Foreland and EIF continued to have discussions
respecting the restructuring of the principal indebtedness. These discussions
ultimately ceased on November 4, 1999, and on November 15, 1999, Foreland agreed
to surrender voluntarily the assets securing the principal indebtedness, which
had a current outstanding balance at such time of approximately $13.5 million.
The assets to be conveyed consist of Foreland's Eagle Springs Field and other
producing properties, Foreland's refining and marketing operations, its
transportation company, and a principal exploration prospect and related
database. Foreland will retain the balance of its Nevada oil exploration
database that it has accumulated during the past approximately 15 years and
other exploration prospects. In addition, Foreland has retained for six months
the right to participate at a 50% interest in drilling ventures on the principal
exploration prospect surrendered to EIF, in agreed circumstances.
In 1999, Foreland Refining Corporation, a subsidiary of Foreland,
established a line of credit with First Security Bank for $2,000,000 at 8.75%
which is collateralized by accounts receivable and inventory.
Foreland's Current Precarious Financial Condition
Foreland is suffering from extreme shortages of working capital, defaults
on major indebtedness and due or past due current liabilities and the need for
substantial amounts of additional investment, strategic alliances, or a sale,
merger, or reorganization involving all or portions of its business and
operations.
. Foreland has a Significant Working Capital Deficit. Although Foreland is
surrendering substantially all of its assets in satisfaction of the principal
indebtedness of EIF, there remains approximately $516,000 in trade accounts
payable, relating primarily to exploration costs incurred by the oil and gas
production segment, that are over 90 days past due. Foreland has been sued
by a number of such trade creditors in their collection efforts, and there
can be no assurance that Foreland will be able to reach any agreement with
such creditors respecting amounts owed to them. Upon surrendering its assets
used in operations, Foreland will not generate cash flows to meet its working
capital requirements.
. Foreland's Audit Report for the Year Ended December 31, 1998, Contains a
Going Concern Explanatory Paragraph. Foreland's independent auditor's report
on the December 31, 1998, financial statements, as for preceding fiscal
years, contains an explanatory paragraph which indicates there is substantial
doubt as to Foreland's ability to continue as a going concern. As of
September 30, 1999, Foreland had losses of $13.9 million for the year ended
December 31, 1998, and $2.3 million for the first nine months of 1999, and
expects its losses to continue. Foreland is delinquent in payments to trade
creditors and others. There can be no assurance that Foreland's efforts to
obtain forbearance from such trade creditors and others will enable Foreland
to continue.
. Foreland Will Need Additional Investment, Strategic Alliance or Sale/Merger.
In order for Foreland to continue, it will need to seek additional capital in
order to satisfy obligations to trade creditors (excluding EIF), meet ongoing
general administrative expenses, and continue its Nevada exploration program
on its retained prospects. Because of Foreland's substantial indebtedness to
trade creditors and its extreme shortage of working capital, Foreland may not
be able to find parties willing to engage in exploration activities with
Foreland.
. Foreland May be Required to Issue Substantial Stock. The refinery and assets
purchased in August 1998 were purchased from Petro Source Corporation. As a
result of such transaction, Foreland may be required to issue substantial
additional shares to Petro Source. Such issuance might result in change of
control of Foreland.
Liquidity and Capital Resources
The following discussion of Foreland's cash flow activities during 1998 and
1999 are not indicative of future periods, as Foreland has agreed to surrender
substantially all of its assets and producing properties which generate cash
from operations.
Foreland's operations during the first nine months of 1999 used cash of
$903,100 when Foreland reported a net loss from operations of $2,262,500. Non-
cash charges against Foreland's revenues included $653,200 in depreciation,
depletion, and amortization, $235,800 of stock issued for interest expense, and
$446,900 in amortization of debt discount and issuance costs. Changes in working
capital components (current assets and current liabilities) used $800 in cash.
Operating activities used approximately $248,500 less cash than the
corresponding period in 1998.
During the first nine months of 1999, investing activities used net cash of
$1,756,500 due to $1,872,300 in additions to refineries , transportation and oil
and gas properties. During the corresponding period in 1998, investing
activities used net cash of $4,052,100 for additions to plant and equipment and
other property.
Financing activities provided $1,394,600 during the first nine months of
1999, $644,700 debt associated with the purchase of the Cowboy Asphalt Terminal,
$200,000 borrowing from EIF and $558,500 in unpaid interest. During the
corresponding period in 1998 financing activities provided $7,375,000,
consisting primarily of borrowing and refinancing of the existing bank debt.
In January 1998, Foreland completed the debt financing arrangement with
EIF, which was subsequently amended in August 1998 and February 1999. Foreland
drew an aggregate of approximately $12.6 million under this facility to fund
certain of its cash requirements. Foreland made monthly interest payments
during the first quarter of 1999; however, during the second and third quarters
of 1999, Foreland made only partial payments of interest. Foreland has not been
able to commence required monthly principal amortization payments (originally
scheduled to begin in November 1998 and deferred to May 1999). Additionally,
Foreland has not been in compliance with certain financial covenants relating to
minimum cash flow, equity requirements, current ratio, debt service ratio, and
general administrative expense percentages. Although Foreland implemented cost
measures and restructured its resources to commence required payments and comply
with the financial covenants, it was ultimately unable to do so. As discussed
above, in November 1999, Foreland and EIF ceased negotiations respecting
restructuring of the principal indebtedness and, on November 15, 1999, Foreland
agreed to surrender voluntarily substantially all of its assets, which were
pledged to secure the principal indebtedness.
Although the assets are being surrendered to EIF in satisfaction of
Foreland's obligations under the loan arrangement, Foreland continues to owe
obligations of approximately $516,000 to trade creditors and others, which it
must meet. Foreland is currently seeking additional capital in order to satisfy
obligations to such creditors, meet ongoing general and administrative expenses,
and continue its Nevada exploration program on its retained prospects. There
can be no assurance that Foreland will be able to obtain such capital, or that
it will be able to join in agreements with drilling partners to explore any of
its prospects. If Foreland is unsuccessful in obtaining such capital, it likely
will not continue.
Results of Operations (see Note 7, Reporting by Segments)
The following is a discussion of Foreland's operations and results of
operations for the three month and nine month period ended September 30, 1999.
This information is historical and provides no basis for expected operations of
Foreland in the future, as Foreland has agreed to surrender substantially all of
its assets in satisfaction of the obligations owed to EIF. Therefore, persons
should not rely on such information in evaluating the business and operating
prospects of Foreland in the future.
Refining & Transportation Activities
Three months Ended September 30, 1999 and 1999 Budget
For the three month period ending September 30, 1999, refined product and
transportation revenues were $8,463,700, based on sales volume of 287,800
barrels. Since this business was purchased in August 1998, there is no
comparable data for the same period in 1998. Revenue for the period was 12%, or
$912,300 more than Budget. This level of revenue represents a 21%, or
$1,471,900 increase over second quarter revenue of $6,991,800 based on sales
volume of 273,300 barrels. The increase in sales volume, 14,000 barrels, is
attributable to seasonal increase in demand. While more volume was sold in the
third quarter, most of the revenue increase is a result of higher crude oil and
finished product prices.
Costs of sales for this period were $6,528,900, which represents an
increase of 29%, or $1,465,500 over the $5,063,400 experienced in the second
quarter. This is primarily due to higher crude oil prices. Compared to Budget
of $4,883,700, actual costs for the third quarter were unfavorable by 34%, or
$1,645,200. This is primarily due to the higher crude costs offset by the delay
in commencing roofing plant operations. In May 1999, a marketing agreement was
executed with Owens-Corning, an asphalt and building products company.
Operating expenses for this period were $1,091,100 which represents an
increase of 9%, or $94,600 over the $996,500 experienced in the second quarter.
This is primarily due to higher fuel costs at both refineries and roofing plant
operating expense. Actual expenses for this period were 9% or $ 104,100 less
than budgeted expenses primarily attributable to the delayed start-up of the
roofing operations.
General and administrative expenses for this period were $322,200, which
represents a decrease of 3% or $10,600 from the $332,800 experienced in the
second quarter. The primary sources of this decrease were a reduction in
contract help and professional services. Compared to Budgeted general and
administrative expense of $376,000, actual expenses for the second quarter were
favorable 14% or $53,800. Most of the variance is attributable to the delay in
commencing roofing operations.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is
a measure of cash flow generated by this business. During this period, EBITDA
was $521,7000, which represents an decrease of 13% or $77,300 from the $599,000
experienced in the second quarter. The high crude price caused deteriorating
gross margins at the Eagle Springs refinery. Compared to Budgeted EBITDA of
$1,096,500, actual results were unfavorable by 52% or $574,800. Most of the
variance is attributable to the delay in commencing roofing operations. The
balance is a result of lower gross margins.
Depreciation for this period was $198,000, which represents an increase of
5%, or $9,000 over the $189,000 experienced in the second quarter. The primary
source of this increase was the depreciation associated with the roofing
operations. Compared to Budgeted depreciation of $161,300, actual results were
unfavorable 23% or $36,700. The variance is attributable to the roofing
operations and purchase of trucks.
Interest expense for this period was $173,000, which represents an increase
of 4% or $7,000 over the $166,000 experienced in the first quarter. The primary
sources of this increase were payments to First Security Bank for borrowing on
the line of credit and interest associated with the purchase of land in the
Cowboy Asphalt Terminal. Compared to Budgeted interest of $158,000, actual
results were unfavorable 9% or $15,000. The variance is attributable to
payments to First Security Bank for borrowing on the line of credit.
Nine months Ended September 30, 1999 and 1999, Budget
For the nine month period ending September 30, 1999, refined product and
transportation revenues were $20,365,700, on sales volume of 805,600 barrels.
Since this business was purchased in August 1998, there is no comparable data
for the same period in 1998. Revenue for the period was 10%, or $1,844,400 more
than Budget revenue of $18,521,400 based on budgeted sales volume of 814,900
barrels. The 9,300 barrel decrease in volume is attributable to the delay in
commencing roofing operations. Most of the revenue increase is a result of
higher crude oil and finished product prices.
Costs of sales for this period were $15,144,400, which represents an
increase of 24%, or $2,954,800 over the $12,189,600 contained in the Budget.
This is primarily due to higher crude oil prices.
Operating expenses for the nine months were $2,965,800, which represents a
decrease of 19%, or $680,300 less than Budget cost of $3,646,100 expected for
this period. Most the favorable variance is attributable to the delay in
commencing roofing operations. Additionally, the Tonopah refinery and
Transportation operating groups experienced less cost than Budgeted.
General and administrative expenses for this period were $1,006,600, which
represents a decrease of 11%, or $121,400 under the $1,128,000 expected for this
period. Most of the variance is attributable to the delay in commencing roofing
operations.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is
a measure of cash flow generated by this business. During this period, EBITDA
was $1,248,900, which represents a decrease of 20%, or $308,800 from the
$1,557,800 expected for this period. The delay in the commencement of the
roofing operations is the majority of the variance. Better gross margins at the
refineries and better than anticipated Transportation activity in the first
quarter also contributed to this variance.
Depreciation for the nine months ended was $560,000, which represents an
increase of 16%, or $76,000 over the $484,000 expected for this period. The
primary source of this increase was the depreciation associated with the
purchase of 15 highway transport trucks and the roofing operations.
Interest expense for this period was $508,000, which represents an increase
of 8%, or $37,600 over the $470,400 expected for this period. The primary
sources of this increase were payments to First Security Bank for borrowing on
the line of credit and interest associated with the purchase of land in the
Cowboy Asphalt Terminal.
Exploration and production activities
Three Months Ended September 30, 1999 and 1998
For the third quarter ending September 30, 1999, oil sales increased 21.8%
to $511,500 as compared to $346,900 in the same period in 1998. The increase in
the third quarter of 1999 was the result of a 38.8% increase in price offset by
a 8.06% decrease in the barrels sold as compared to the same period in 1998.
Foreland's production expenses for the third quarter of 1999 decreased
$163,500, or 48.3% to $174,900. The discontinuance of the Eagle Springs fields
enhanced oil recovery project expenses accounted for $151,600 of the decrease
with the balance attributable to a reduction in field personnel cost.
Oil and gas exploration expenses increased $125,400 or 52.5% to $113,500
for the third quarter of 1999 when compared to the same period in 1998. Dry
hole, abandonment, and impairment costs were a credit of $12,400, primarily as a
result of settlements with several vendors.
General and administrative expenses increased $37,300 to $239,000 for the
three-month period ended September 30, 1999, when compared to the same period in
1998. The primary factor was an increase in shareholder and investor service
costs due to the engagement of an investment banker to assist in seeking
potential investors. Depreciation, depletion, and amortization decreased for
the three-month period ended September 30, 1999 by $263,800 as a result of a
decrease in depreciable capitalized costs.
Interest income decreased $8,200 to $9,800 for the third quarter 1999, when
compared to the same period in 1998. Interest expense increased $134,700 to
$556,700, primarily due to interest on outstanding long-term debt, of which
$33,700 was non-cash amortized issuance costs associated with the debt
financing.
Nine Months Ended September 30, 1999 and 1998
For the nine months ending September 30, 1999, oil sales increased 2.0% to
$1,124,800 as compared to $1,077,200 for the same period in 1998. This was
attributable to an increase in crude prices offset in part by a decrease in
number of barrels sold.
Foreland's production expenses for the first nine months of 1999 decreased
$661,900, or 53.7% to $570,600. The Eagle Springs fields enhanced oil recovery
project expenses was discontinued which accounted for $525,600 of the decrease.
The balance of the decrease was attributable to a reduction of field personnel
and lower workover cost.
Oil and gas exploration expenses decreased $182,900 or 25.6% to $532,300
for the nine months of 1999 when compared to the same period in 1998. This is
primarily due to decreased personnel cost, lease and vehicle costs.
General and administrative expenses increased $310,500 to $965,400 for the
nine months ended September 30, 1999, when compared to the same period in 1998.
The primary contributors were increases of $120,100 in personnel cost associated
with the severance of in the Denver office and the cost of temporary labor to
assist in the transition, $15,900 in office rental , $82,200 in professional
fees, and $44,400 in travel costs. Shareholder and investor services increased
$55,900 due to an increase in financial public relations and the retention of an
investment banker. Depreciation, depletion, and amortization decreased for the
nine months ended September 30, 1999, by $552,800 to $93,300 primarily as a
result of a decrease in depreciable capitalized cost.
Interest income decreased $70,400 to $29,600 for the first nine months of
1999, when compared to the same period in 1998. Interest expense increased
$612,100 to $1,665,300, primarily due to interest on outstanding long-term debt,
of which $255,900 was non-cash amortized issuance cost associated with the debt
financing.
Accounting Treatment of Certain Capitalized Costs
Foreland 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 and development wells that find
proven reserves, are capitalized. Costs to drill exploratory wells that do not
find proved reserves, geological and geophysical costs, and costs of carrying
and retaining unproved properties are expensed.
Foreland's accounting policy requires it to assess 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, Foreland 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. Foreland 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 Foreland's evaluation of its oil and gas reserves in connection
with the preparation of Foreland's annual financial statements, Foreland
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
Foreland's oil and gas reserves resulting in an impairment allowance as
discussed above.
The costs of exploring, drilling, producing, and transporting are higher in
the geological province targeted by management than they would be in a more
fully developed oil producing area. Access roads to drilling targets over
relatively long distances frequently have to be completed and drilling equipment
and services typically must be brought in from considerable distances.
Impact of the Year 2000 Issue
Many existing computer programs use only two digits, rather than four, to
define a year within the date field in order to conserve memory resources. Such
programs were designed and developed without considering the potential impact of
the upcoming change of the century. After December 31, 1999, any of the computer
programs used by Foreland that contain date-sensitive computer codes that are
not "year 2000 compliant," may recognize a date using "00" as the year 1900
rather than the year 2000. If not corrected, such computer applications could
fail or create erroneous results.
Foreland uses computers principally for processing and analyzing geological
and geophysical data, map-making, and administrative functions, including word-
processing, accounting, electronic mail and other applications. Its refining
operations principally do not use computer systems. Foreland has implemented an
ongoing program to ensure that its computer systems are year 2000 compliant.
Foreland has contacted its vendors, which have represented that the systems and
software used by Foreland are year 2000 compliant. Foreland will also require
future vendors to make such representation. There can be no assurance that
such programs are actually year 2000 compliant. Foreland also interacts with
the computer systems of others. There can be no assurance that such computer
systems are year 2000 compliant.
Foreland believes that it will not incur material expenditures in
connection with this issue, but there can be no assurance that Foreland has
anticipated every circumstance where Foreland's operations may be impacted.
Although Foreland believes its own internal systems will be year 2000 compliant,
no assurance can be given that the systems of vendors, telephone and utility
providers, customers, and other third parties with which Foreland has a material
relationship will be year 2000 compliant. Foreland does not believe it can
develop contingency plans to adequately deal with major external infrastructure
failures such as in communications, transportation or utilities. However, such
failures would likely not impact Foreland worse than they would any other
business.
Foreland was previously notified by the vendor of its accounting software
that the software was not year 2000 compliant and that there was a problem that
caused it to generate errors in the general ledger. The vendor has since
shipped to Foreland its software that it represents to be year 2000 compliant.
Foreland has installed the software.
PART II.--OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
- -------------------------------------------------------------------------------
In August 1998, Foreland acquired certain assets and operations from Petro
Source Corporation, including the outstanding common stock of Petrosource
Transportation, Inc. (n/k/a Foreland Transportation, Inc.) ("Transportation").
Transportation was a party to an equipment lease agreement with Semi Service,
Inc. Transportation elected to exercise a purchase option contained in the
lease to acquire the trailers covered by the lease. Semi Service, Inc., refused
to allow Transportation to exercise that purchase option. During the first
quarter of 1999, Transportation filed suit against Semi Service, Inc., in the
Third Judicial District Court of Salt Lake County, State of Utah, alleging
breach of contract and the covenant of good faith and fair dealing and seeking
equitable relief and damages in an amount to be determined at trial. Semi
Service has filed an answer and counterclaim alleging breach of contract and
seeking damages in an amount to be determined at trial. Foreland filed an
amended complaint and there has been no answer. There is no prediction of the
outcome of this litigation.
Subsequent to June 30, 1999, several trade creditors initiated action
against Foreland seeking collection of amounts due for services or material.
Foreland has no legal defense against such suits. A description of such actions
is specifically set forth below:
(a) Spidle Sales and Service, Inc. v. Foreland Corporation, Civil No.
990900393. A summary judgment will be entered against Foreland of approximately
$17,000.
(b) Vector Seismic Data Processing Services, Inc. v. Foreland Corporation,
Civil No. 99CV2012, Division 7. This case has been settled and all amounts due
from Foreland have been paid.
(c) Grant Geophysical Corp. v. Foreland Corporation, Civil No. H-99-2425.
Suit for amounts owed for completion of 3D seismic survey for the amount of
$340,000.
(d) Halliburton Energy Services, Inc. v. Foreland Corporation. Suit was
filed September 30, 1999 in Colorado for the amount of approximately $52,000.
- -------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- -------------------------------------------------------------------------------
Effective with the close of business on September 9, 1999, Foreland's
common stock was delisted from the Nasdaq SmallCap Market. Following such
delisting, the common stock has continued to be quoted and traded on the Nasdaq
Over-the-Counter Bulletin Board System under the same symbol. Foreland was
delisted because it did not meet the minimum net tangible assets/market
capitalization/net income/bid price requirements for a continued listing.
- -------------------------------------------------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- -------------------------------------------------------------------------------
Since the fourth quarter of 1998, Foreland has been in default on its
indebtedness in the principal amount of approximately $12.6 million to Energy
Income Fund, L.P. Foreland has not been able to commence required monthly
principal amortization payments (originally scheduled to begin in November 1998,
and deferred to May 1999). Additionally, Foreland has not been in compliance
with certain financial covenants and has not paid all interest due under the
loan. Throughout 1999, Foreland and EIF continued to have discussions
respecting the restructuring of such indebtedness. In November 1999, Foreland
and EIF ceased negotiations respecting such restructuring and, on November 15,
1999, Foreland agreed to surrender voluntarily substantially all of its assets
which were pledged to secure the principal indebtedness.
- -------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------------------
There were no matters submitted for the consideration of Foreland's
shareholders during the third quarter of 1999.
- -------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
- -------------------------------------------------------------------------------
None.
- -------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------
(a) Exhibits.
Item 10. Material Contracts
- -------------------------------------------------------------------------------
10.01 10 Voluntary Surrender Agreement Incorporated
by Reference(1)
Item 27. Financial Data Schedule
- -------------------------------------------------------------------------------
27.01 27 Financial Data Schedule This Filing
____
(1) Incorporated by reference from Foreland's current report on Form 8-k
dated November 16, 1999.
(b) Reports on Form 8-K.
During the quarter ended September 30, 1999, Foreland filed a report on
Form 8-K dated September 10, 1999, reporting its delisting from Nasdaq.
- -------------------------------------------------------------------------------
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
(Registrant)
Dated: November 19, 1999 By /s/
---------------------------------------
N. Thomas Steel, President
Dated: November 19, 1999 By /s/
---------------------------------------
Bruce Decker, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF JUNE 30, 1999, AND STATEMENTS OF OPERATIONS FOR THE
QUARTER ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 584,657
<SECURITIES> 0
<RECEIVABLES> 2,914,147
<ALLOWANCES> 0
<INVENTORY> 1,750,750
<CURRENT-ASSETS> 5,649,514
<PP&E> 22,046,022
<DEPRECIATION> 13,728,816
<TOTAL-ASSETS> 14,973,653
<CURRENT-LIABILITIES> 16,936,171
<BONDS> 0
<COMMON> 9,723
0
437
<OTHER-SE> (2,573,236)
<TOTAL-LIABILITY-AND-EQUITY> 14,973,653
<SALES> 20,300,107
<TOTAL-REVENUES> 20,312,926
<CGS> 14,558,368
<TOTAL-COSTS> 20,459,500
<OTHER-EXPENSES> 57,277
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,173,238
<INCOME-PRETAX> (2,442,535)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,442,535)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,442,535)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
