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 MARCH 31, 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 May 19, 1999, Foreland had outstanding 9,698,191 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.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, 1999 DEC. 31, 1998
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 331,419 $ 1,849,782
Accounts receivable - trade................. 2,458,825 2,771,085
Inventory................................... 1,538,748 1,166,361
Marketable securities....................... 700,000 700,000
Prepaid expenses and other.................. 221,803 164,921
----------- ------------
Total current assets.................. 5,250,795 6,652,149
Property and equipment, at cost:
Oil and gas properties, under
the successful efforts method.............. 13,570,767 13,566,505
Refineries and building..................... 5,349,386 4,845,472
Transportation and other equipment.......... 1,288,843 1,007,571
Office furniture and equipment.............. 421,816 419,317
Construction in progress.................... 1,221,497 367,509
----------- ------------
21,852,309 20,206,374
Less accumulated depreciation,
amortization, depletion, and impairment.... (13,329,660) (13,115,997)
----------- ------------
8,522,649 7,090,377
Other assets:
Debt issuance costs, net of
accumulated amortization of............... 627,383 576,190
Investment in Cowboy Asphalt Terminal....... 180,314 172,177
Deposits and other.......................... 151,695 151,794
----------- ------------
Total other assets........... 959,392 900,161
----------- ------------
Total assets................................... $14,732,836 $ 14,642,687
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt,
net of discount of $1,064,913 in 1999
and $1,219,786 in 1998.................... $ 11,521,592 $11,168,213
Accounts payable and accrued expenses...... 2,753,947 2,378,274
Officers' salaries payable................. 443,604 434,813
Accrued expenses and other................. 1,257,991 1,223,474
----------- ------------
Total current liabilities............ 15,977,134 15,204,774
Long-term debt, less current maturities....... 621,105 -
Stockholders' Equity (Deficit):
Preferred Stock, $0.001 par value,
5,000,000 shares authorized;524,243 shares
issued and outstanding in 1998 (liquidation
preference of $2,891,757),
524,243 shares issued and outstanding in
1999 (liquidation preference of $2,891,757) 524 524
Common Stock, $0.001 par value, 50,000,000 shares
authorized; 9,698,191 and 9,673,191 shares
issued and outstanding, respectively..... 9,698 9,673
Additional paid-in capital.................. 39,468,262 39,366,477
Less stock subscriptions receivable......... (345,485) (338,921)
Accumulated deficit......................... (40,998,403) (39,599,840)
----------- ------------
Total stockholders' equity (deficit).. (1,865,403) (562,087)
----------- ------------
Total liabilities and stockholders'
equity (Deficit)..............................$ 14,732,836 $ 14,642,687
=========== ============
See accompanying notes to these consolidated financial statements.
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------------- ------------
REVENUES:
Refining and transportation..................... $ 4,885,705 $ -
Oil and gas sales............................... - 412,752
Other income, net............................... 2,606 59
----------- ---------
Total revenues............................ 4,888,311 412,811
EXPENSES:
Refining and transportation:
Cost of goods sold........................... 3,187,243 -
Repairs and maintenance...................... 189,404 -
Other........................................ 1,033,402 -
Oil production costs:
Lease production and operations.............. - 249,158
Enhanced recovery project.................... - 198,337
Oil exploration costs:
Dry hole costs............................... - 72,573
Other........................................ 204,178 258,045
General and administrative costs:
Shareholder and investor services............ 81,321 40,618
Stock-based compensation - employees......... - 6,164
Other........................................ 666,932 207,039
Abandonment and impairment costs................ - -
Depreciation, depletion, and amortization....... 213,663 156,778
----------- ---------
Total expenses............................... 5,576,143 1,188,712
----------- ---------
NET OPERATING LOSS................................ (687,832) (775,901)
Other income (expense):
Interest income................................. 29,187 46,924
Interest expense................................ (739,918) (291,984)
Gain on sale of assets.......................... - 3,460
----------- ---------
NET LOSS........................................... $(1,398,563) $(1,017,501)
Preferred stock dividends
Accrued......................................... (96,822) -
Imputed......................................... - -
----------- ---------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS......... $(1,495,385) $(1,017,501)
=========== ===========
NET LOSS PER COMMON SHARE.......................... $ (0.15) $ (0.12)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING.............................. 9,683,800 8,520,900
=========== ===========
<PAGE>
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------------- ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss....................................... $(1,398,563) $(1,017,501)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion, and amortization...... 213,662 152,865
Dry hole, abandonment and impairment costs..... - 72,573
Issuance of stock for services................. 25,000 18,150
Issuance of stock for interest ................ 76,810 -
Accrued note receivable interest income........ (6,564) (6,381)
Amortization of debt discount and issuance costs 227,860 -
Amortization of loan origination fee........... - 159,792
Compensation - below market options............ - 6,164
Gain on the sale of assets..................... - (3,460)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable...................... 223,843 24,289
Inventory................................ (372,387) (41,921)
Prepaids and other....................... 31,535 (195,573)
Increase (decrease) in:
Accounts payable......................... 612,503 185,036
Accrued expenses......................... 49,139 25,428
Salaries payable......................... 8,790 22,029
---------- ----------
Net cash provided by
operating activities................. (308,372) (598,510)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (1,645,935) (978,179)
Investment in Cowboy Asphalt Terminal L.L.C.... (8,187) -
Purchase of other property..................... (24,021) (4,949)
---------- ----------
Net cash provided by (used in)
investing activities................. (1,678,143) (983,128)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options. - 16,000
Proceeds from sale of assets................... - 4,000
Proceeds from borrowing long-term debt......... 469,653 5,925,279
Repayment of long-term debt.................... (1,501) (651,321)
---------- ----------
Net cash provided by
financing activities................. 468,152 5,293,958
---------- ----------
Increase (decrease) in cash and
cash equivalents.............................. (1,518,363) 3,712,320
Cash and cash equivalents, beginning of period.... 1,849,782 40,631
---------- ----------
Cash and cash equivalents, end of period.......... $ 331,419 $3,752,951
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest......................... $ 495,358 $ 123,663
========== ==========
Value of warrants given as consideration
for long-term debt............................ $ - $1,150,000
========== ==========
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 Foreland's continuous leasing program since 1986, it has established
what management believes is one of the best property positions in Nevada.
Foreland's leasing program is coordinated with prospect generation and
exploration results. As areas of interest are identified, Foreland 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, Foreland may seek leases on additional areas or relinquish
leases on areas that appear less promising, thereby reducing leasehold cost.
Foreland currently has approximately 170,900 gross acres under lease.
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 Energy Income Fund L.P.
("EIF") in January 1998, which was amended in August 1998 and February 1999.
Amounts due under the financing arrangement are collateralized by substantially
all of Foreland's property and equipment, and Foreland is required to maintain
certain financial ratios and comply with other terms and conditions while any
balance of indebtedness remains outstanding. Through March 31, 1999, Foreland
had drawn $12,575,279 under the financing arrangement and further loan
commitments are now terminated.
Foreland did not commence required principal amortization payments in
November 1998 and was not in compliance 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. Ultimately, EIF agreed to reschedule the principal amortization
payments to commence May 1, 1999, and extend certain financial covenants and
waive its exercise of remedies upon default until May 15, 1999. Although
Foreland has made required monthly interest payments, Foreland did not make the
required payment of principal on May 1, 1999, and presently does not have the
ability to comply with the amended financial covenants and ratios. Accordingly,
the entire balance due EIF is included in current liabilities in Foreland's its
financial statements. Despite this presentation, management continues to
negotiate a payment plan with EIF and is hopeful that EIF will continue to make
concessions to prevent acceleration of the entire principal balance.
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.
4. RELATED PARTY TRANSACTIONS:
Foreland owed $407,830 in salaries and interest to two current officers
and directors, and a former officer and director, at March 31, 1999. Foreland
also had outstanding loans to one current officer and director and two former
officers and directors in the amount of $322,843 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. The agreements provide for a $48,000 increase in
each such executive officer's annual salary at such time as Foreland achieves
sustained net oil production of at least 1,000 barrels per day for any calendar
month. 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 50% 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 carryforward expires in
varying amounts from 1999 to 2018. A portion of this net operating loss
carryforward may be subject to reduction or limitation of use as a result of
changes in ownership or certain consolidated return filing regulations.
6. SUBSEQUENT EVENTS:
Foreland has implemented various measures to reduce overhead and operating
costs. As part of these measures, Foreland has consolidated many of its
administrative operations into its Woods Cross, Utah, location and has reduced
its Colorado workforce by more than half. Foreland is presently seeking to
sublease the unused portions of its Lakewood, Colorado, facilities to further
reduce costs.
In May 1999, Foreland completed construction and initiated operation of a
roofing asphalt facility plant near Salt Lake City, Utah.
7. 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 year ended March 31, 1999.
Oil & Gas Refining and Consolidation
Producing Transportation Entries Consolidated
---------- -------------- --------- ------------
Revenues:
External customers...... $ - $4,888,311 $ - $4,888,311
Inter-segment........... 226,638 - (226,638) -
Interest Income......... 12,374 16,813 - 29,187
--------- ---------- --------- ----------
Total revenues.... 239,012 4,905,124 (226,638) 4,917,498
Costs and expenses:
Refinery/transport
cost of goods.......... - 3,207,792 (20,435) 3,187,357
Repairs and maintenance. - 189,404 - 189,404
Other................... - 1,033,288 - 1,033,288
Oil and gas production.. 206,203 - (206,203) -
Oil and gas exploration. 204,178 - - 204,178
General and
administrative......... 369,699 351,554 - 748,253
Depreciation, depletion,
and amortization....... 40,833 172,830 - 213,663
Interest and other, net. 575,981 163,937 - 739,918
--------- ---------- ---------- ----------
Total expenses....$1,423,894 $5,118,805 $ (226,638) $6,316,061
========= ========= ========== =========
Total assets for each segment
as of March 31, 1999 are as follows:
$2,946,768 $11,903,131 $ (117,062) $14,732,835
========= =========== ========== ==========
8. DISCLOSURE ABOUT OIL AND GAS PRODUCING ACTIVITIES:
Due to the low oil prices at December 31, 1998 of approximately $5.80 per
barrel, the Company recognized substantial downward revisions in oil reserve
quantities, the standardized measure, and net capitalized costs due to
impairment on its financial statements. In addition to the adverse impact on
current operating results, low oil prices tend to dramatically reduce estimates
of future oil reserve quantities since the wells become uneconomic at an earlier
date. During the year ended December 31, 1998, Foreland recognized impairment
of its producing wells of $3,617,900 as a result of the foregoing. Since
December 31, 1998, oil prices have increased. The following pro forma
information illustrates the sensitivity of reserve quantities and the
standardized measure to changes in oil prices as prepared for the Company's
lender by an independent petroleum engineering firm:
Pro Forma
--------------------------
Quantity
Oil Price (bbls) Standardized
--------- ---------- ------------
$ 9.75 1,716,000 $2,198,000
$ 12.50 2,039,000 $4,126,000
As of April 30, 1999, oil prices were approximately $12.15 per barrel.
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
continuing to advance this exploration, Foreland's strategy is to generate
exploration prospects with the most recent generally available scientific
techniques, expand and improve Foreland's strategic land position, and establish
arrangements with other oil exploration firms active in Nevada to obtain
additional scientific data, leases, and funding. 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. Foreland has entered into
agreement to refine all of the crude oil presently produced in Nevada and is
seeking additional sources of throughput for its refineries. In May 1999,
Foreland completed construction and initiated operation of a roofing asphalt
plant near Salt Lake City, Utah. This plant will process premium quality
asphalt from Foreland's refineries in Nevada.
Foreland produces oil in Nevada from the Eagle Springs, Ghost Ranch, Kate
Springs and Sand Dune fields. Foreland purchased a 60% working interest in the
Eagle Springs field in 1993 and the remaining 40% working interest in November
1996. Foreland discovered the Ghost Ranch field in 1996 and purchased the 40%
working interests in the field held by another firm in 1997. Foreland also owns
a 21.8% working interest in a well in Kate Springs. Foreland's present oil
production from these fields comprises approximately one quarter of the
throughput currently refined by Foreland.
Through 1996, Foreland funded its exploration program principally from the
sale of common and preferred stock. In November 1996, Foreland established a
bank credit facility, now repaid. In early 1998, Foreland entered into a
financing arrangement with Energy Income Fund, L.P. ("EIF") to fund certain
activities. Through March 31, 1999, Foreland has borrowed approximately $12.6
million from EIF and further loan commitments have now been terminated. Foreland
is now in default on the EIF loan, which is classified as a short-term liability
on Foreland's financial statements as of December 31, 1998 and March 31, 1999.
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 HAD A WORKING CAPITAL DEFICIT OF $11.8 MILLION (DISREGARDING $1.1
MILLION NON-CASH ACCRUED DISCOUNT FOR DEBT ISSUANCE) AS OF MARCH 31, 1999,
AND FACES EXTREME WORKING CAPITAL REQUIREMENTS. Based on current oil
production and prices, refinery throughput, and finished goods sales and
margins, Foreland does not generate sufficient revenues to satisfy its cash
requirements for general and administrative expenses, dividends on preferred
stock, principal payments on debt, and other payments to trade creditors and
others respecting approximately $16.0 million in short-term liabilities as of
March 31, 1999, including $12.6 million resulting from reclassification of
Foreland's long-term debt arrangement with EIF. Approximately $900,000 in
in trade accounts payable relating primarily to exploration costs incurred by
the oil and gas production segment are over 120 days past due, and Foreland
expects that such trade creditors may intensify their collection efforts if
adequate partial payment or forbearance arrangements are not agreed to.
Similarly,Foreland has insufficient cash to undertake material oil and gas
exploration.
-FORELAND HAS INSUFFICIENT CASH TO PAY $12.6 MILLION IN SECURED INDEBTEDNESS.
Foreland was not able to pay the principal payment of $347,437 due May 1,
1999, on $12.6 million indebtedness due EIF, did not make earlier payments
that were subsequently deferred and has not been in compliance 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 percentages. All of Foreland's assets and
operations used in its refinery, transportation and marketing activities and
its producing properties are encumbered as security for this obligation.
Foreland has implemented cost cutting measures and is restructuring its
resources in order to be able to commence principal payments and comply with
the financial covenants, but Foreland cannot assure it will be able to do so.
EIF currently has the legal right to implement its remedies on default,
initiate foreclosure and seek to take possession of substantially all of
Foreland's assets. There can be no assurance that EIF will agree to any
further extensions or modifications or continue to forbear from exercising
its remedies.
-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 March
31, 1999, Foreland had a working capital deficit of $11.8 million
(disregarding the $1.1 million non-cash accrued discount for debt issuance)
and an accumulated deficit of $41.0 million since its inception in 1985.
Foreland had losses of $13.9 million for the year ended December 31, 1998,
and $1.4 million for the quarter ended March 31, 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 EIF, trade creditors, or others; implement cost cutting
measures; severely restrict activities; or take other measures 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 capitalize on its market
position, technical capabilities, management, assets and identified business
opportunities by either raising additional capital, creating a strategic
alliance with another company, or selling or merging some or all of its lines
of business. Foreland has engaged an investment banker to assist in these
efforts.
LIQUIDITY AND CAPITAL RESOURCES
Foreland's operations during the first three months of 1999 used cash of
$308,400 when Foreland reported a net loss from operations of $1,398,600, which
resulted in part to non-cash charges against Foreland's revenues, including
$213,700 in depreciation, depletion, and amortization and $227,900 in
amortization of debt discount and issuance costs. Changes in working capital
components (current assets and current liabilities) also contributed $653,400 in
cash. Operating activities used approximately $290,100 less cash than the
corresponding period in 1998.
During the first quarter of 1999, investing activities used net cash of
$1,678,100 due to $1,645,900 in additions to plant and equipment. During the
corresponding period in 1998, investing activities used net cash of $983,100 for
additions to plant and equipment and other property.
Financing activities provided $468,200 during the first quarter of 1999,
consisting primarily of borrowing against a line of credit under a new bank debt
agreement for the refining operations. During the corresponding period in 1998
financing activities provided $5,294,000, 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. To date,
Foreland has drawn an aggregate of $12,575,279 under this facility to fund most
of its cash requirements, including the purchase of the refinery and
transportation assets from Petro Source. Amounts due under the financing
arrangement are collateralized by oil and gas properties and Foreland is
required to maintain certain financial ratios and comply with other terms and
conditions while any balance of indebtedness remains outstanding.
Foreland has made monthly interest payments but has not commenced monthly
principal amortization payments (originally scheduled to begin in November 1998
and deferred to May 1999). Additionally, Foreland is not in compliance with
certain financial covenants relating to minimum cash flow, equity requirements,
current ratio, debt service ratio, and general administrative expense
percentages. Foreland has implemented cost cutting measures and is
restructuring its resources in order to commence the required principal payments
and comply with the financial covenants, but there is no assurance it will be
able to do so. EIF presently has the legal right to implement its remedies on
default, initiate foreclosure and seek to take possession of substantially all
of Foreland's assets. There can be no assurance that EIF will agree to any
further extensions or modifications or continue to forbear from exercising its
remedies. It may be impossible for Foreland to continue if EIF were to
foreclose on essentially all of Foreland's oil producing, refining, and
transportation assets.
Foreland requires cash for general and administrative expenses, for
maintaining its properties, and for other items that are required in order for
Foreland to continue, as distinguished from costs to advance its ongoing
exploration program in Nevada. Based on April 1999 production levels and
prices, and Foreland's current operating capital, Foreland is not able to meet
cash requirements for fixed and recurring operating costs, including principal
payments to EIF and payments to other creditors. Foreland does not have
sufficient capital to undertake further exploration activities. Foreland has
implemented certain cost-cutting measures, consolidated its administrative
operations to its Woods Cross, Utah, facility, and reduced its Colorado
workforce by over half, and is in the process of attempting to sublease a
portion of its facilities to reduce operating costs. There can be no assurance
that any such measures will be successful to reduce operating costs to allow
Foreland to continue.
As of March 31, 1999, Foreland had a working capital deficit of $11.8
million (disregarding $1.1 million treated as an accrued discount for debt
issuance), as compared to a surplus of $2.8 million for the same period in
1998. Included in such is the $12.6 million indebtedness classified as a
current liability due to Foreland's default on such indebtedness.
RESULTS OF OPERATIONS (SEE NOTE 7, REPORTING BY SEGMENTS)
Three Months Ended March 31, 1999 and 1998
For the first quarter period ending March 31, 1999, oil sales decreased
45.1% to $226,600 as compared to oil sales of $412,800 in the same period in
1998. This decrease in the first quarter of 1999 was the result of both a 19.1%
decrease in barrels sold, and a 29.1% decrease in price as compared to the same
period in 1998. Foreland purchased Petro Source's two refineries and the
transportation unit in August, 1998. The refinery and transportation revenues
for first quarter of 1999 were $4,885,700, which exceeded Foreland's projections
by $980,000 and refinery and transportation equipment rental income was $2,600.
Foreland's lease production expenses for the first quarter 1998 decreased
$43,000, or 17.2% to $206,200. Foreland shut down its enhanced recovery project
in the Eagle Springs field at the end of 1998 and lowered cost by $198,300 when
compared to the same period in 1998. Refinery and transportation cost of goods
sold, repairs and maintenance, and other costs for the first quarter of 1999
were $3,207,792, $189,404, and $1,033,288 respectively. These costs were higher
than the budgeted amount due to increased refining throughput.
Oil and gas exploration expenses decreased $53,900, or 20.9% to $204,200
for the first quarter of 1999 when compared to the same period in 1998. This is
primarily due to decreased personnel cost (staff cutting measures) of
approximately $58,000, decreased lease rental cost of $20,000, decreased vehicle
cost of $10,800, and increased geological and geophysical cost of $41,500.
General and administrative expenses increased $453,800 to $666,900 for the
three-month period ended March 31, 1999, when compared to the same period in
1998. The primary contributors are increased general and administrative cost of
the refining transportation are $351,600, increased personnel cost of $51,000,
increased professional cost of $31,800, and increased travel and entertainment
cost of $13,400. Shareholder and investor services increased $40,700 due to
increased financial public relations information dissemination within the
investment community. Depreciation, depletion, and amortization increased for
the three-month period ended March 31, 1999, by $56,900 to $213,700 when
compared to the same period in 1998. Reduced basis in Foreland's oil properties
resulted in a lower depletion calculations of $115,900 for the production
depreciation, depletion and amortization while refining and transportation
contributed $172,800 depreciation, depletion and amortization for the first
quarter of 1998.
Interest income decreased $17,700 to $29,200 for the three-month period
ended March 31, 1999, when compared to the same period in 1998, primarily as a
result of reduced cash available to be invested in short-term liquid assets.
Interest expense increased $447,900 for the three-month period ended March 31,
1999 when compared to the same period in 1998. This is primarily due to an
increase of in debt association with the $16.9 million financing completed in
January 1998.
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
proved 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 who have represented that the systems and
software used by Foreland are year 2000 compliant. Foreland will 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 has been notified by the vendor of its accounting software that
the software is not year 2000 compliant and that there exists a problem that
will generate errors in the general ledger if not corrected. Foreland has been
informed by the vendor that it expects to have this problem resolved by the end
of the second quarter of 1999.
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. There is no prediction
of the outcome of this litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 a 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. These
securities were issued without registration under the Securities Act in reliance
on the exemption from registration and prospectus delivery requirements of the
Securities Act provided in S 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Foreland is in default on its indebtedness of $12,575,279 due Energy Income
Fund, L.P. Foreland did not make the first required monthly principal payment
of $346,437 due May 1, 1999. Originally, monthly payments were due to commence
in November 1998, but these payments were subsequently deferred. Additionally,
Foreland is not in compliance with financial covenants under the loan related to
minimum collateral-to-indebtedness ratio, cash flow, equity requirements,
current ratio, debt service ratio, and general and administrative expense
ratios. EIF currently has the right to implement its remedies on default,
initiate foreclosure and seek to take possession of substantially all of
Foreland's assets.
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 first quarter of 1999.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- ---------------------------------------- -----------
Item 10 Material Contracts
- -----------------------------------
10.30 10 Operating Agreement of Cowboy Asphalt Incorporated
Terminal, LLC, between Crown Asphalt by
Company, and Foreland Asphalt Reference(1)
Corporation, dated as of January 12,
1999
10.31 10 Second Amendment to Financing Agreement Incorporated
between Foreland, Eagle Springs by
Production Limited Liability Company, Reference(1)
Foreland Refining Corporation, Foreland
Asset Corporation, Petrosource
Transportation, and Energy Income Fund,
L.P., dated as of February 4, 1999
10.32 10 First Amendment to Registration Rights Incorporated
Agreement between Energy Income Fund, by
L.P., and Foreland, dated as of February Reference(1)
4, 1999
10.33 10 First Amendment to Common Stock Purchase
Warrant dated January 6, 1998 (Warrant Incorporated
No. 1), dated as of February 4, 1999 Reference(1)
10.34 10 First Amendment to Common Stock Purchase Incorporated
Warrant dated August 10, 1998 (Warrant by
No. 2), dated as of February 4, 1999 Reference(1)
10.35 10 Common Stock Issuance Agreement between Incorporated
Energy Income Fund, L.P., and Foreland, by
dated as of February 4, 1999 Reference(1)
10.36 10 Security Agreement (relating to fixtures) Incorporated
between Foreland Asphalt Corporation and by
Energy Income Fund, L.P., dated as of Reference(1)
February 4, 1999
10.37 10 Pledge and Security Agreement (Cowboy Incorporated
Asphalt Terminal, L.LC. membership by
interests) from Foreland Asphalt Reference(1)
Corporation to Energy Income Fund, L.P.,
dated as of February 4, 1999
10.38 10 Letter/deferral/waiver/release agreement Incorporated
dated April 14, 1999, between Energy by
Income Fund, L.P. and Foreland Reference(1)
Corporation and subsidiaries.
27.01 27 Financial Data Schedule This Filing
- ----------------
(1) Incorporated by reference from Foreland's annual report on Form 10-K for
the fiscal year ended December 31, 1998.
(B) REPORTS ON FORM 8-K.
During the quarter ended March 31, 1999, Foreland filed no reports on Form
8-K.
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: May 21, 1999 By /s/ N. Thomas Steele, President
Dated: May 21, 1999 By /s/ 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 MARCH 31, 1999, AND STATEMENTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 331,419
<SECURITIES> 700,000
<RECEIVABLES> 2,458,825
<ALLOWANCES> 0
<INVENTORY> 1,538,748
<CURRENT-ASSETS> 5,250,795
<PP&E> 21,852,309
<DEPRECIATION> (13,329,660)
<TOTAL-ASSETS> 14,642,687
<CURRENT-LIABILITIES> 15,977,134
<BONDS> 0
<COMMON> 9,749
0
524
<OTHER-SE> (1,865,403)
<TOTAL-LIABILITY-AND-EQUITY> 14,732,836
<SALES> 4,885,705
<TOTAL-REVENUES> 4,917,498
<CGS> 3,187,243
<TOTAL-COSTS> 2,363,900
<OTHER-EXPENSES> 5,551,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 739,918
<INCOME-PRETAX> (1,373,563)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,373,563)
<DISCONTINUED> 0
<EXTRAORDINARY> (96,822)
<CHANGES> 0
<NET-INCOME> (1,470,385)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.14)
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