UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-14096
Foreland Corporation
(Exact name of small business issuer in its charter)
Nevada 87-0422812
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
143 Union Boulevard, Suite 210
Lakewood, Colorado 80228-2019
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code (303) 988-3122
Securities registered pursuant to section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to section 12(g) of the Exchange Act:
Common Stock, Par Value $0.001
Preferred Stock Purchase Rights
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 during the past 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 | |
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. | |
State issuer's revenues for its most recent fiscal year. $28,217,000
The aggregate market value of the registrant's voting and non-voting
common equity held by non-affiliates computed at the average closing bid and
asked prices and quoted in the Over-The-Counter Electronic Bulletin board of the
National Association of Securities Dealers ("OTC EBB") on April 13, 2000, was
approximately $2,400,000.
As of April 13, 2000, Foreland had outstanding 9,733,206 shares of its
common stock, par value $0.001.
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PREFACE
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. When used
in this report, the words "believe," "may," "will," "should," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar words and
expressions are generally intended to identify forward-looking statements.
Statements that describe Foreland's future strategic plans, goals or objectives
are also forward-looking statements.
Readers of this report are cautioned that:
o any forward-looking statements, including those regarding Foreland or
its management's intent, belief or current expectations, are not
guarantees of future performance or results or events and involve risks
and uncertainties, such as:
>> the willingness of the Company's principal creditors, including
those with judgments, to forebear from collection efforts that
would impair the Company's ability to continue;
>> the ability of the Company to obtain funds to enable it to pay
ongoing general and administrative expenses, leasehold maintenance
costs, professional fees for meeting regulatory requirements,
representing the Company in pending and possible litigation, and
documenting business and creditor agreements; and
>> the ability of the Company to retain directors and officers to
pursue the Company's business notwithstanding its precarious
financial condition.
o actual results and events may differ materially from those in the
forward-looking statements as a result of various factors, including:
>> general conditions in the oil exploration environment in Nevada;
and
>> prevailing prices for oil.
The forward-looking information is based on present circumstances and on
Foreland's predictions respecting events that have not occurred, which may not
occur or which may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors, including the
risk factors detailed in this report. The forward-looking statements included in
this report are made only as of the date of this report. The cautionary
statements made in this report are intended to be applicable to all related
forward-looking statements wherever they appear in this report. Foreland assumes
no obligation to update such forward-looking statements or to update reasons
that actual results could differ materially from those anticipated in such
forward-looking statements.
OIL AND GAS TERMS
All defined terms under Rule 4-10(a) of Regulation S-X shall have their
statutorily prescribed meanings when used in this report.
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PART I.
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ITEMS 1 AND 2. BUSINESS AND PROPERTIES
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Company Overview
Foreland Corporation recently completed the surrender of its Eagle
Springs, Nevada and other producing properties, its refining and marketing
operations, its transportation company, and a principal exploration prospect,
and related database in accordance with the terms of a Voluntary Surrender
Agreement between Foreland and its principal creditor, Energy Income fund, L.P.,
("EIF") dated November 16, 1999. Foreland cooperated in the surrender of this
collateral in satisfaction of the secured indebtedness with an outstanding
principal balance of approximately $12.6 million. Since December 31, 1998, this
loan has been classified as a current liability because Foreland had been unable
to make certain payments or meet certain financial ratios and covenants under
the loan.
Because Foreland was not able to meet its obligations on $12.6 million
indebtedness due its principal secured creditor, EIF, Foreland voluntarily
surrendered its Eagle Springs, Nevada and other producing properties, its
refining and marketing operations, its transportation company, and a principal
exploration prospect, and related database. Foreland's remaining assets consist
of other exploration prospects, the approximately 49,000 acre lease position,
and the associated geological and geophysical database accumulated by Foreland
over the preceding approximately 15 years.
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.
o Foreland Has Substantial Working Capital and Stockholders' Deficits. As of
December 31, 1999, after giving effect only to the subsequent surrender of
assets and related liabilities in foreclosure, Foreland had current assets
of $88,000 and current liabilities of $4,304,000 related to its continuing
operations, for a working capital deficit of $4,216,000. In addition, as of
such date and as so adjusted, Foreland had total assets of $372,000 and
total liabilities related to its continuing operations, of $4,304,000, for
a stockholders' deficit relating to its continuing operations of
$4,304,000. As of December 31, 1999, Foreland had an accumulated deficit of
$43.346,000.
o All Of Foreland's Obligations Are Substantially Past Due. All of Foreland's
$4,304,000 in current liabilities associated with its continuing operations
as of December 31, 1999, were substantially past due except that $2,676,000
of such amount due the seller of acquired business, plus $319,000 in
interest, constitutes a claim for relief under a lawsuit in which Foreland
has asserted defenses. See "Item 3. Legal Proceedings." Three creditors
with claims aggregating $445,000 have obtained judgments against Foreland.
In addition, in March 2000 Petro Source Corporation, from which the Company
purchased oil refining, transportation, and marketing assets in 1998, filed
a lawsuit seeking the recovery from Foreland and other defendants of $2.9
million actual damages plus punitive damages, costs, attorneys' fees, and
interest.
o Foreland Has No Revenue Or Cash. Foreland has no cash or other financial
resources and no revenue from operations or other activities, but must rely
on raising additional capital to meet its ongoing obligations for general
and administrative expenses, lease payments, payments to creditors, and
other costs.
o Foreland Has Very Limited Assets On Which To Base A Financial Recovery. As
a result of the voluntary surrender of the collateral securing its
indebtedness, Foreland's remaining assets consist of only other exploration
prospects on approximately 49,000 gross acres of non-producing leases and
the associated geological and geophysical database accumulated by Foreland
over the preceding approximately 15 years. In
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addition, Foreland has retained until May 31, 2000, the right, in agreed
circumstances, to participate at a 50% interest in drilling ventures on the
principal exploration prospect conveyed to the secured creditor.
o Foreland Has No Liquidity Or Cash With Which To Reactivate. As a result of
the voluntary surrender of the collateral securing its indebtedness,
Foreland has no present ability to generate revenues. Foreland has
insufficient cash to maintain its exploration leaseholds, pay its
personnel, satisfy claims of creditors, or undertake oil and gas
exploration.
o Foreland's Audit Report For The Year Ended December 31, 1999, Contains A
Going Concern Explanatory Paragraph. Foreland's independent auditor's
report on the December 31, 1999, 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.
o Possible Inability To Continue. As a result of all of the foregoing,
Foreland urgently needs additional capital, but because of its precarious
condition and limited assets, may be unable to attract any capital or
sufficient capital to continue.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Foreland's consolidated financial statements.
Corporate Goals
Foreland's current goal is to obtain forebearance from its remaining
creditors while it seeks additional capital to maintain its remaining
leaseholds, pay ongoing general and administrative expenses, and possibly
participate in exploration drilling on the prospects recently voluntarily
conveyed to its former principal secured creditor, if negotiated, or on
Foreland's retained properties. Foreland cannot assure that it will be able to
accomplish any or all of its goals.
Principal 1999 Activities
Foreland's 1999 activities have been overshadowed by its continuing
shortages of working capital and precarious financial condition that led to the
voluntary surrender in March and April 2000 of its principal producing and
operating assets as noted above. Notwithstanding these overriding financial
problems, during 1999, Foreland did accomplish the following activities:
o Constructed and placed into operation a roofing plant at the
Cowboy Asphalt Terminal in Woods Cross, Utah;
o Entered into a marketing agreement with Owens Corning for
product produced at the roofing plant;
o Completed the interpretation of the Hay Ranch 3-D seismic data
and defined drilling targets in that prospect; and
o Defined three additional wildcat exploration drilling
prospects in Nevada.
Nevada Exploration
Since its formation, Foreland has developed a comprehensive database of
geological and geophysical data pertaining to Nevada. The database was assembled
under the guidance of Dr. Grant Steele and consists of 50,000 square miles of
geologic mapping; 6,000 square miles of detailed gravity data; 15,000 square
miles of air photo and satellite data; 1,400 line miles of 2D seismic data; and
46 square miles of 3D seismic data. Foreland believes that Nevada is well suited
to the application of 3D data, due to the complexity of geological structures.
Conventional 2D seismic data had proven to be inadequate to properly image most
subsurface structures in the region. These structures can be extremely large
vertically, with up to 3,000 feet differences in the subsurface depth, but very
small
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in aerial extent. Foreland's strategy of developing a comprehensive database and
applying 3D technology was confirmed with Foreland's discovery of the Ghost
Ranch field in July 1996.
As of December 31, 1999, Foreland leased approximately 86,000 gross
(82,000 net) acres in Nevada. Following the voluntary surrender of its
encumbered assets, Foreland currently leases approximately 49,000 gross (48,000
net) non-producing acres in Nevada. Prior to the voluntary surrender of assets,
Foreland had developed a five-year, 3D-defined exploration and exploitation
program.
Foreland's retained leases include the following three identified
exploration targets:
o Toano Draw, Northeastern Nevada An 800 foot column has produced oil
without water from a well reentered by Foreland in Toano Draw. This
well demonstrated that producible oil is present in the area but due to
economic consideration, producing equipment had not been installed.
Foreland projects that the thickness of the source rock averages
approximately 700 feet. Foreland had proposed a 30 square mile 3D
seismic shoot to delineate the structural blocks updip, and pinpoint
drilling locations. Foreland controls a block of approximately 18,000
acres over this prospect.
o North Humboldt Prospect, Nevada The North Humboldt prospect is a large
structure covering approximately 5,000 acres on the flank of a deep
Tertiary basin. The structure has been delineated by detailed gravity
and 2D seismic. Oil has been tested from oil shale outcrops located to
the north of the prospect. Foreland controls a contiguous block of
approximately 10,000 acres over the prospect.
o Antelope Prospect, Nevada. The Antelope prospect is a large structure
covering approximately 3,000 acres located 20 miles West of Eureka,
Nevada. The structure has been delineated by detailed gravity and 2D
seismic. Oil has been tested from two wild cat wells to the East of the
prospect.
In addition to the exploration prospects on retained leasehold acreage,
the acreage voluntarily surrendered to EIF contains the Hay Ranch prospect.
Prior to the conveyance to EIF, Foreland had identified six leads in the
northern Pine Valley area using 2D seismic. Foreland had begun to process a 24.5
square mile 3D seismic shoot to properly image the structural blocks, and to
define locations for vertical wells or high angle lateral wells. Under its
agreement with EIF, Foreland has the right through May 31, 2000, to participate
with up to 50% of EIF's interest, on the same terms as agreed by any third
party, in any exploration program involving the Hay Ranch prospect. If Foreland
is unable to complete an arrangement prior to the expiration of its contractual
right with EIF, Foreland intends to continue to pursue this opportunity and
continue to seek to negotiate a drilling arrangement with EIF. Foreland is
seeking to reach accommodations with its creditors and obtain financing so that
it can participate in this opportunity.
Assets Surrendered and Results Therefrom
Note: the following discusses the assets and operations voluntarily surrendered
to EIF and so reflected in the accompanying financial statements. The following
discussion describes Foreland's activities during the preceding year and in
early 2000 until the assets were surrendered in March and April 2000.
General
Prior to the voluntary surrender of collateral securing its
indebtedness, Foreland owned and operated a refinery at Eagle Springs, Nevada,
which has the daily capacity to refine 4,500 to 6,000 barrels of crude oil
produced in Nevada by Foreland and other operators and by other operators in
nearby states. Refined products produced at Eagle Springs include asphalts,
solvents, fuels, and other specialty products. The Eagle Springs Refinery
produces high-quality asphalt flux from crude oil produced from one of the
Nevada oilfields previously owned by Foreland. Foreland also owned a refinery at
Tonopah, Nevada, which is currently used as a storage terminal for products
produced at Eagle Springs, as well as for processing pipeline transmix (the
blend of products resulting when a pipeline changes from transporting one
product to another). The transmix processed at the Tonopah refinery yields
gasoline, diesel, and other specialty products that were marketed by Foreland.
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Foreland owned an equity interest in the Cowboy Asphalt Terminal in
Salt Lake City, Utah. Cowboy Asphalt Terminal is a 180,000 barrel terminal used
for the storage and marketing of refined products. Foreland completed a 100%
owned manufacturing facility at Cowboy Asphalt Terminal for converting asphalt
flux into premium roofing asphalt.
Foreland owned a trucking fleet consisting of 24 truck tractors and 75
oil gathering and finished goods delivery tank trailers. Foreland's trucks were
used for transportation of asphalt flux from the Eagle Springs Refinery to the
Cowboy Asphalt Terminal; distribution of other refined products through the
western U.S.; backhaul of crude oil and other products to Foreland's refineries;
gathering crude oil from Nevada oilfields; and transportation of refined
products for third parties as a common carrier.
Foreland had purchased the refining and marketing assets from an
unrelated firm, Petro Source Corporation, on August 12, 1998. In March 2000,
Petro Source filed a lawsuit against Foreland and others seeking $2.9 million in
compensatory damages plus punitive damages, costs, attorney's fees, and
interest. See "Item 3.
Legal Proceedings."
Refining and Transportation
In August 1998, Foreland completed the purchase of certain Nevada
refining and transportation assets from Petro Source Corporation. These assets
include the Eagle Springs and Tonopah, Nevada, Refineries, and a fleet of trucks
to gather crude oil and distribute products. Foreland then integrated the
refining and transportation assets with its Nevada oil production and marketed a
range of refined products. Prior to the voluntary surrender of its encumbered
assets, Foreland employed about 80 people formerly employed in Petro Source's
refining and marketing operations.
Eagle Springs Refinery
The Eagle Springs Refinery is located on U.S. Highway 6, about ten
miles southwest of Currant, Nevada, and immediately adjacent to the Eagle
Springs field. Eagle Springs Refinery is approximately 200 miles from Las Vegas,
310 miles from Salt Lake City, and 550 miles from Los Angeles. Eagle Springs
Refinery was built in 1984 on open land leased from the Bureau of Land
Management. The 30-year lease for the land expires in 2014. The refinery
produces several grades of asphalts, solvents, fuels, and specialty products.
Eagle Springs Refinery has the capacity to process between 4,500 and 6,500
barrels per day of crude oil, depending on its specifications. Eagle Springs
Refinery's current throughput is approximately 1,900 barrels of feedstock per
day. Eagle Springs Refinery is a self-contained facility with steam generation
equipment, a control room, maintenance shop, laboratories, and related
facilities. Eagle Springs Refinery also has a fully equipped truck maintenance
facility that can perform major tractor/trailer overhauls for a trucking fleet.
All of the crude oil processed at Eagle Springs Refinery is obtained from Nye
County, Nevada, and is delivered by trucks into approximately 20,000 barrels of
crude oil storage capacity.
Three main types of crude oil are refined at Eagle Springs Refinery:
light crude, sour crude, and heavy crude. The asphalts produced from Foreland's
sour crude make excellent roofing asphalt. All of the projected future
production of roofing asphalt flux from the Eagle Springs Refinery was intended
to feed the Cowboy Asphalt Terminal in Salt Lake City (discussed in a later
section of this report). The three different types of crude are kept in separate
tanks and run in batches so that only one type of crude oil is processed at any
given time. Eagle Springs Refinery is operated this way because each type of
crude produces asphalt and other products with distinct properties and
qualities. Eagle Springs Refinery currently refines just over 2,025 barrels per
day of crude in total, consisting of 900 barrels of Nevada light crude, 700
barrels of sour crude (predominantly crude from the Eagle Springs and Ghost
Ranch fields), 220 barrels of Nevada heavy crude (including crude from the Kate
Spring field), plus 210 barrels of other backhauls. Eagle Springs Refinery has
approximately 65,000 barrels of storage capacity for refined products.
Foreland's main consideration in acquiring the Eagle Springs Refinery
and related assets was to capture the refinery's historical gross operating
margins. By capturing those margins, Foreland could justify expenditures for
oilfield workovers and maintenance as well as exploration during low oil price
environments.
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Tonopah, Nevada, Refinery
The Tonopah Refinery is located five miles east of Tonopah, Nevada, in
Nye County, approximately 100 miles from the Eagle Springs Refinery. Tonopah
Refinery commenced operations in 1978. The refinery site is located on property
now owned by the state of Nevada and leased by Foreland under a lease expiring
June 2004, with an option to extend the lease for an additional 25 years. As
with Eagle Springs Refinery, Tonopah Refinery is completely self-contained with
steam generation equipment, mechanical shops, a control room, office,
laboratory, and related facilities.
Refined crude oil products produced at Tonopah Refinery include
naphtha, kerosene, several grades of diesel, atmospheric gas oil, and residual
fuel. Due to the decline in Nevada crude oil production over the last few years,
Tonopah Refinery is currently used as a storage terminal for Eagle Springs
Refinery's products and as a facility for processing transmix.
Millions of barrels per day of gasoline, diesel, and jet fuel are moved
in batches through pipelines connecting refineries to terminals and distribution
centers across the country. Each refiner and marketer is responsible for
disposing of the interface, or blend, of products between batches of individual
products. The mixture found where the two individual products are blended is
called "transmix" (or, more formally, transmission mixture). Transmix supply for
the Tonopah Refinery comes from pipeline terminals in northern and central
California as well as Sparks and Las Vegas, Nevada. The total volume of transmix
from these sources is estimated to be approximately 3,800 barrels per day. The
Tonopah Refinery currently receives about 700 barrels per day of transmix that
is trucked to the refinery. Processing equipment at Tonopah Refinery consists of
two conventional atmospheric distillation towers. Tonopah Refinery has 63,000
barrels of storage capacity.
Transmix is processed at Tonopah Refinery into gasoline, diesel, and
other specialty products. These products are mostly marketed locally, although
the truck fleet owned by Foreland enabled it to backhaul finished gasoline and
diesel into the Las Vegas and Sparks/Reno markets when prices were favorable.
Foreland consistently evaluated new markets for specialty products that could be
produced at Tonopah Refinery.
Asphalt Marketing
As of December 31, 1999, Foreland owned a 33% interest in Cowboy
Asphalt Terminal, LLC ("Cowboy"), an entity that owns the Cowboy Asphalt
Terminal in Salt Lake City. The terminal is a 180,000 barrel storage facility
with several key strategic benefits:
o Heated asphalt storage capacity for roofing asphalt flux
produced at Eagle Springs Refinery;
o A variety of other product storage tanks;
o Strategic location for distribution of roofing flux to
potential purchasers; and
o Land for future expansion.
By virtue of its ownership of the Eagle Springs field, Foreland had a
dedicated supply of crude oil that makes excellent asphalt flux. Foreland
completed construction of a 100% owned asphalt flux blowing facility at Cowboy.
This facility will convert the high quality asphalt flux produced at Eagle
Springs Refinery into roofing asphalt. Foreland previously sold its asphalt flux
to a refinery in Salt Lake City owned by a third party. Foreland believed that
it could have gained market share in the asphalt roofing market and increase
gross margin per ton by selling asphalt as high quality roofing asphalt. This
was expected to enhance the value to Foreland of its Nevada crude used to
produce flux at Eagle Springs Refinery.
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Transportation
As part of its acquisition of assets from Petro Source, Foreland
acquired the stock of Petrosource Transportation (now renamed Foreland
Transportation) ("Transportation"), an entity that owns and operates a tanker
transportation fleet. Transportation was originally formed to haul crude oil
from producing fields in Nevada to the Eagle Springs and Tonopah Refineries.
Later, Petro Source began using its trucks to distribute finished products.
Rather than having the trucks return empty, Transportation began backhauling
(using otherwise empty trucks) products into Nevada.
The transportation fleet consists of approximately 24 truck tractors
(three leased, 21 owned) and 75 oil gathering and finished goods delivery tank
trailers (six leased, 69 owned). Foreland believes that it would have been able
to control its transportation costs by operating its own trucking fleet.
Transportation holds contract carrier authority from the Interstate Commerce
Commission. Contract carrier authority allows the trucks to haul products for
third parties, thereby generating revenue and acting as a profit center for
Foreland. Foreland employed a number of former key Petro Source personnel who
were responsible for running Transportation, including the fleet manager.
As discussed previously, the Eagle Springs and Tonopah Refineries have
well-equipped truck maintenance facilities. Transportation access to the Eagle
Springs and Tonopah Refineries is provided by U.S. Highway 6 and other state
highways that provide a link to the population areas of Salt Lake City, Las
Vegas, Bakersfield, Reno, and Los Angeles.
Marketing
General
During 1997, Foreland initiated a program to become an integrated
exploration, production, refining and marketing company competing in niche
markets to enable Foreland to market finished products for a higher return than
it could obtain through the sale of its crude oil. This program ultimately
resulted in acquisition of the Eagle Springs and Tonopah Refineries, as well as
the related transportation assets. Additionally, in 1998, Foreland acquired a
33% interest in Cowboy Asphalt Terminal, LLC, and completed the manufacturing
facility at the Cowboy Asphalt Terminal for converting the high quality asphalt
flux produced at the Eagle Springs Refinery into premium roofing asphalt.
Product Markets
Foreland's refined products were sold to a variety of customers,
including mines, military users, utilities, other refineries, railroads, product
brokers, paving contractors and construction companies. Markets for specific
products are discussed below:
o Naphtha. Naphtha was marketed to other refineries as a gasoline blendstock
if it could not be sold locally as mineral spirits. The closest refineries
are in Salt Lake City, with alternative markets in Los Angeles and
Bakersfield.
o No. 1 Diesel. No.1 diesel was sold to a military base near Las Vegas under
a three-year contract. An alternative market for No. 1 diesel is as a
highway diesel fuel in Nevada.
o No. 2 Diesel. There are approximately 60 mines operating in Nevada which
purchase diesel for fuel. Many of these are strip-mining operations that
consume significant quantities of off-road diesel. Foreland sold most of
its No. 2 diesel to one mine in Nevada.
o Fuel Oils. Fuel oils from the Eagle Springs Refinery went to one of two
markets, depending on whether the fuel oil is blended to achieve a low
sulfur content (less than 1 percent). Low sulfur fuel oil was sold to three
customers in Nevada. Surplus low sulfur fuel oil, and high sulfur fuel oil
that could not be blended to have less than 1 percent sulfur, were sold as
feedstock to refineries in Salt Lake City, Los Angeles or Bakersfield.
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o Paving Asphalt. The paving asphalt market in Nevada is growing, and the
Eagle Springs Refinery is able to supply product with a transportation cost
advantage. Foreland was able to market all of its current production of
paving asphalt to private contractors and the State of Nevada.
o Roofing Asphalt Flux. Historically, roofing asphalt flux produced at the
Eagle Springs Refinery was sold to one asphalt marketer in Salt Lake City.
After acquiring the refinery, Foreland continued to sell its flux to this
manufacturer for several months, pending construction of Foreland's own
flux blowing facility at Cowboy Asphalt Terminal. Flux from the Eagle
Springs Refinery was stored at Cowboy Asphalt Terminal. After the
completion of the Cowboy Asphalt Terminal, all of the production of roofing
asphalt flux from the Eagle Springs Refinery was trucked to Cowboy Asphalt
Terminal, blown to produce roofing asphalt and marketed.
Following the acquisition of the Eagle Springs and Tonopah Refineries,
Foreland did not sell any crude oil to external purchasers.
Sales to Round Mountain Gold Corporation accounted for 30% of the
refining and transportation operations revenues.
Producing Oilfields
Prior to the voluntary surrender of its encumbered assets in March and
April 2000, Foreland owned working interests in four oil fields in Nevada. They
were the Eagle Springs, Ghost Ranch, Kate Spring, and Sand Dune fields. The
Eagle Springs field, Nevada's first oilfield, was discovered by Shell Oil
Company in 1954 with the drilling of the No. 1 Eagle Springs Unit, which
initially produced 343 barrels per day. By 1967, 14 wells had been completed in
the field. This early phase of the field's development saw a peak daily
production rate in 1966 of 850 barrels of oil. Shell sold the field to other
owner-operators, and Foreland acquired the field in 1993 after it had been shut
in for much of the year due to low production. The previous operator had left
the field with some required environmental remediation which Foreland undertook
to clean up in conjunction with the Bureau of Land Management. Foreland's
successful environmental clean up efforts resulted in the Bureau of Land
Management awarding Foreland its first "Health of the Land" award in June 1996.
Foreland performed a 7.5 square mile 3D seismic shoot in March 1994 to
identify additional drilling locations at Eagle Springs. This data allowed
Foreland to commence a drilling program in the field, raising the peak
production rate to about 560 barrels per day. Eight of Foreland's nine new wells
were completed successfully. Cumulative production from the field is now
approximately 4.7 million barrels of oil.
In September 1997, Foreland initiated an enhanced oil recovery program
in Eagle Springs using high pressure air injection. The pilot program was
completed in early 1998. Although Foreland reported favorable results initially,
the project was terminated because the fractured nature of the reservoirs led to
minimal increased production and rapid breakthrough of injected air.
The 3D data from the Eagle Springs field also indicated some structural
anomalies that Foreland considered exploratory prospects within the shoot area.
Based on these structural anomalies, Foreland began drilling about one-half mile
south of the Eagle Springs field. This well was spudded in July 1996 and
discovered oil in Devonian dolomite at 4,370 feet. The Ghost Ranch 48-35 well
was the discovery well for a new field and was completed producing 393 barrels
per day. Foreland believes that the Ghost Ranch well was the first use of 3D
seismic to locate a discovery well in Nevada. Foreland completed two additional
wells in the field during 1997. The Ghost Ranch field has produced 170,000
barrels of oil since its discovery. The field currently produces about 130
barrels per day. Foreland believes that its successful development drilling
program at Eagle Springs and its subsequent discovery of the Ghost Ranch field
have validated its extensive use of 3D seismic in Nevada.
Foreland owned a 21.8% working interest in one well (Kate Spring 12-2)
in the Kate Spring field, located approximately one mile south of Eagle Springs.
The field was discovered in 1986. The well is operated by Makoil, Inc., and
currently produces 50 barrels per day.
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In July 1998, Foreland completed for production the Sand Dune no. 88-35
well on the Sand Dune field. The Sand Dune field is located approximately
one-half mile south of the Eagle Springs field and was identified by Foreland
through the use of 3D seismic. The well currently produces approximately 35
barrels per day.
All of the oil produced by Foreland prior to the voluntary surrender of
its assets was trucked to the Eagle Springs Refinery for processing.
Proved Reserves
Foreland now has no oil or gas reserves.
Prior to the voluntary surrender of its encumbered assets in March and
April 2000, Foreland produced crude oil from four producing oilfields in Nevada.
All of the crude oil produced from these fields was gathered by Foreland's
trucks and refined at its Eagle Springs Refinery.
The following table sets forth the estimated oil reserves, net to
Foreland's interest, of oil and gas properties as of December 31, 1999. In the
voluntary surrender, all of these reserves were transferred to EIF. The reserve
information was calculated in accordance with the rules and regulations of the
Securities and Exchange Commission. In accordance with such rules and
regulations, the estimates of future net revenues from Foreland's proved
reserves at December 31, 1999, were made using a sales price of $19.88 per
barrel, held constant throughout the life of the properties.
Present Value of
Estimated Future Net
Estimated Revenues,
Estimated Proved Reserves Oil Discounted at 10% (1)
--------------------------------- ---------------- -----------------------
(MBbl) (In thousands)
Proved Developed Producing
Eagle Springs field.......... 523.7 $3,261
Ghost Ranch field............ 218.2 1,382
Kate Springs field........... 38.9 174
Sand Dune field 51.4 324
---------------- -----------------------
Total................... 832.2 $5,141
================ =======================
(1) The price used in the evaluation was the year-end values at the
wellhead of $19.88 per barrel. Operating costs have not been escalated.
The operating costs, based on information provided by Foreland, are
computed by estimating expenditures to be incurred in developing and
producing the proved oil reserves, based on year-end costs and assuming
the continuation of existing economic conditions.
See "Item 8. Financial Statements and Supplementary Data."
The oil reserves assigned to the properties in the evaluation were
determined by analyzing current test data, extrapolating historical production
data, and comparing field data with the production history of similar wells in
the area. The current volatility of oil prices provides an element of
uncertainty to any estimates. If prices should vary significantly from those
projected, the resulting values would change substantially. The reserve
estimates are based on accepted engineering and evaluation principles. The
present value of estimated future net revenues, discounted at 10%, does not
necessarily represent an estimate of a fair market value for the evaluated
properties.
In 1997 and 1998, Foreland implemented a high pressure air injection
project that was expected to increase production in portions of the Eagle
Springs field. The fractured nature of the reservoirs did not result in
increased oil production, and the program was discontinued.
There are numerous uncertainties inherent in estimating quantities of
proved oil reserves. The estimates presented above are based on various
assumptions relating to rates of future production, timing and amount of
development expenditures, oil prices, and the results of planned development
work. Actual future production rates
10
<PAGE>
and volumes, revenues, taxes, operating expenses, development expenditures, and
quantities of recoverable oil reserves may vary substantially from those assumed
in the estimates. Any significant change in these assumptions, including changes
that result from variances between projected and actual results, could
materially and adversely affect future reserve estimates. In addition, such
reserves may be subject to downward or upward revision based upon production
history, results of future development, prevailing oil prices, and other
factors. All of Foreland's proved reserves were conveyed to EIF in April 2000.
The actual amount of Foreland's proved reserves as of December 31,
1999, was dependent on the prevailing price for oil, which was beyond Foreland's
control or influence. There can be no assurance that oil prices will not
continue to decline in the future. oil and gas prices have been and are likely
to continue to be volatile and subject to wide fluctuations in response to any
of the following factors: relatively minor changes in the supply of and demand
for oil and gas; market uncertainty; political conditions in international oil
producing regions; the extent of domestic production and importation of oil; the
level of consumer demand; weather conditions; the competitive position of oil as
a source of energy as compared with natural gas, coal, nuclear energy,
hydroelectric power, and other energy sources; the refining capacity of
prospective oil purchasers; the effect of federal and state regulation on the
production, transportation and sale of oil; and other factors, all of which are
beyond the control or influence of Foreland.
In an effort to limit the adverse effects of extreme declines in oil
prices, Foreland had acquired and, prior to the voluntary surrender in March and
April 2000, was operating the Eagle Springs and Tonopah refineries.
Additionally, Foreland completed construction of and began production in a
roofing asphalt manufacturing facility in an effort to integrate production,
processing, and marketing to obtain price protection, establish a new profit
center, and increase revenues.
Wells and Acreage
In the oil and gas industry and as used herein, the word "gross" well
or acre is a well or acre in which a working interest is owned; the number of
gross wells is the total number of wells in which a working interest is owned. A
"net" well or acre is deemed to exist when the sum of fractional ownership
working interests in gross wells or acres equals one. The number of net wells or
acres is the sum of the fractional working interests owned in gross wells or
acres.
Shown below is a tabulation of the productive wells owned by Foreland
in Nevada as of December 31, 1999. All of these wells were conveyed to EIF in
April 2000.
Productive Oil Wells
-----------------------------------
Gross Net
----------------- ----------------
23.0 17.79
Set forth below is information respecting the developed and undeveloped
acreage owned by Foreland in Nevada as of December 31, 1999. All but 49,000
gross (48,000 net) of the undeveloped and non-producing acreage was conveyed to
EIF in April 2000.
Developed Acreage Undeveloped Acreage
---------------------------------- -------------------------------------
Gross Net Gross Net
----------------- --------------- ------------------- ----------------
3,100 2,600 83,000 79,000
Prior to the voluntary surrender completed in April 2000, Foreland's
leases in Eagle Springs (2,960 gross and net acres), Ghost Ranch (80 gross and
net acres), Tomera Ranch (680 gross and net acres), North Willow Creek (400
gross and net acres), Sand Dune (80 gross and net acres) and Kate Springs (80
gross and 16 net acres) were held by production.
11
<PAGE>
In March and April 2000, Foreland voluntarily surrendered its
encumbered properties to its primary creditor, EIF. As a result of the voluntary
surrender, Foreland's remaining acreage position consists of leases covering
approximately 49,000 gross (48,000 net) acres of undeveloped property. Annual
rentals on the undeveloped leases retained by Foreland for 2000 are expected to
be approximately $120,000.
Production and Sale of Oil
After the voluntary surrender of its properties in April 2000, Foreland
no longer produces or sells oil.
The following table summarizes certain information relating to
Foreland's net oil produced and sold from Foreland's Nevada properties, after
royalties, during the periods indicated.
Year Ended December 31,
-----------------------------
1997 1998 1999
-------- ------- -------
Average net daily production of oil (Bbl) 492 436 449
Average sales price of oil ($ per Bbl) $12.46 $8.37 $12.67
Average production cost ($ per Bbl)(1) $5.03 $5.83 $4.48
(1) Includes lifting costs (electricity, fuel, water disposal, repairs,
maintenance, pumper, and similar items), and production taxes. Excludes
costs related to Eagle Springs air injection enhanced oil recovery project,
which has now been terminated.
Until the voluntary surrender of Foreland's producing properties in
March and April 2000, Eagle Springs accounted for about 70% of Foreland's oil
production. As part of routine field maintenance wells were shut-in from time to
time, subject to the availability of appropriate rigs and equipment in the area
and the availability of funds.
In December 1997, Foreland entered into an agreement, effective March
1, 1998, for the sale of all of its Nevada crude oil to Petro Source at the
Eagle Springs Refinery, which was subsequently acquired by Foreland in August
1998. The Eagle Springs Refinery was transferred to Foreland's primary secured
creditor in April 2000 as part of the voluntary surrender of Foreland's
encumbered assets.
The prevailing price for oil will continue to have an effect on the
level of exploration activities generally in Nevada . World oil and gas prices
and the prices and margins of finished goods have been and are likely to
continue to be volatile and subject to wide fluctuations in response to:
o the supply and demand for refined products;
o market uncertainty;
o political conditions in international oil producing regions;
o the extent of domestic production and importation of oil;
o the level of consumer demand;
o weather conditions;
o the competitive position of oil as a source of energy as
compared with natural gas, coal, nuclear energy, hydroelectric
power, and other energy sources;
o the effect of federal and state regulation on the production,
transportation and sale of oil;
o and other factors, all of which are beyond the control or
influence of Foreland.
In addition to its direct impact on the prices at which oil or gas may be sold,
adverse changes in the market or regulatory environment would likely have an
adverse effect on Foreland's ability to obtain funding from lending
institutions, industry participants, the sale of additional securities, and
other sources.
12
<PAGE>
Drilling Activities
Set forth below is a tabulation of wells drilled and completed in which
Foreland has participated and the results thereof for each of the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1997 1998 1999
------------------ ------------------- -------------------
Gross Net Gross Net Gross Net
--------- -------- --------- --------- -------- ---------
Exploratory:
<S> <C> <C> <C> <C> <C> <C>
Dry............................... -- -- 3.0 1.36 -- --
Oil............................... -- -- -- -- -- --
Gas............................... -- -- -- -- -- --
--------- -------- --------- --------- -------- ---------
Totals..................... -- -- 3.0 1.36 -- --
========= ======== ========= ========= ======== =========
<CAPTION>
Development:
<S> <C> <C> <C> <C> <C> <C>
Dry............................... -- -- 2.0 2.0 -- --
Oil............................... 2.0 1.2 1.0 1.0 -- --
Gas............................... -- -- -- -- -- --
--------- -------- --------- --------- -------- ---------
Totals..................... 2.0 1.2 3.0 3.0 -- --
========= ======== ========= ========= ======== =========
</TABLE>
Title to Properties
Substantially all of Foreland's working interests are held pursuant to
leases from third parties. Foreland performs only a minimal title investigation
before acquiring undeveloped properties, and a title opinion is typically
obtained shortly before the commencement of drilling operations. Foreland has
obtained other documentary confirmation of title on its principal producing
properties and believes that it has satisfactory title to such properties.
Foreland's properties are subject to customary royalty interests, liens for
current taxes, and other common burdens which Foreland believes do not
materially interfere with the use of such properties and whose economic effect
has been appropriately reflected in Foreland's acquisition costs of such
properties.
Government Regulation
The exploration for and production of oil in the United States are
subject to extensive regulation by both federal and state authorities. The
following discussion concerning regulation of the oil and gas industry is
necessarily brief and is not intended to constitute a complete discussion of the
various statutes, rules, regulations, and governmental orders to which
operations of Foreland may be subject.
Environmental Regulations
Operations of Foreland are subject to comprehensive federal, state, and
local laws and regulations governing the storage, use, and discharge of
materials into the environment, the remediation of environmental impacts, and
other matters relating to environmental protection, all of which may adversely
affect Foreland's operations and costs of doing business. It is probable that
state and federal environmental laws and regulations or their interpretations
will become more stringent in the future. There can be no assurance that
measures to further regulate the disposal of oil waste may not be adopted.
Environmental laws and regulations are frequently changed so Foreland is unable
to predict the ultimate cost of compliance. Foreland does not believe that it
will be required in the near future to expend material amounts due to current
environmental laws and regulations.
Present and future legislation and regulations could cause additional
expenditures, restrictions, and delays in Foreland's business, the extent of
which cannot be predicted and which may require Foreland to limit substantially,
delay or cease operations in some circumstances or subject Foreland to various
governmental controls. From time to time, regulatory agencies have proposed or
imposed price controls and limitations on production by restricting the
13
<PAGE>
rate of flow of oil and gas wells below actual production capacity in order to
conserve supplies of oil and gas. Because federal energy and taxation policies
are subject to constant revisions, no prediction can be made as to the ultimate
effect of such governmental policies and controls on Foreland.
In connection with the acquisition of the Eagle Springs property,
Foreland performed limited environmental inquiries and agreed to undertake
certain work to remediate a contaminated drilling pit at a former water
injection well site. That work was completed at a cost of $111,000 in
coordination with federal and state supervising agencies in early 1994, for
which Foreland received the Bureau of Land Management's "Health of the Land"
award. Foreland does not believe that it has any material continuing financial
obligation respecting remediation of environmental matters involving the Eagle
Springs field. However, there can be no assurance that new remediation issues
will not arise in the future due to existing undiscovered conditions or future
legislation.
As a negotiated term of the acquisition of the Eagle Springs lease,
Foreland agreed to indemnify the secured creditor from which Foreland acquired a
portion of its property interests against claims for environmental liability.
Foreland does not believe that it has any material financial obligation under
such agreement.
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and regulations
requiring permits for drilling, drilling bonds, and reports concerning drilling
and producing activities. Such regulations also cover the location of wells, the
method of drilling and casing wells, the surface use and restoration of well
locations, and the plugging and abandoning of wells, the density of well spacing
within a given area, and other matters. Nevada also has statutes and regulations
governing a number of environmental and conservation matters, including the
unitization and pooling of oil properties and establishment of maximum rates of
production from oil wells. Foreland believes it is currently in full compliance
with all material provisions of such regulations.
Federal Leases
Foreland conducts significant portions of its activities under federal
oil and gas leases. These operations must be conducted in accordance with
detailed federal regulations and orders which regulate, among other matters,
drilling and operations on these leases and calculation and disbursement of
delay rentals and royalty payments to the federal government.
Safety and Health Regulations
Foreland must also conduct its operations in accordance with various
laws and regulations concerning occupational safety and health. Currently,
Foreland does not foresee expending additional material amounts to comply with
these occupational safety and health laws and regulations. However, since such
laws and regulations are frequently changed, Foreland is unable to predict the
future effect of these laws and regulations.
Operational Hazards and Insurance
Foreland's operations are subject to the usual hazards incident to the
drilling for oil. These hazards include pipe failure, blowouts, cratering,
explosions, uncontrollable flows of oil, natural gas, or well fluids, fires,
pollution, releases of toxic gas, and other environmental hazards and risks.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage, and
suspension of operations and could result in Foreland incurring substantial
losses and liabilities to third parties.
In order to lessen the effects of these hazards, Foreland generally
maintains insurance of various types to cover its operations. As is customary in
exploration arrangements with other energy companies under which specified
drilling is to be conducted, the operator is required to purchase and pay for
insurance against risks customarily insured against in the oil and gas industry
by others conducting similar activities. Because of its shortage of funds,
Foreland may not be able to maintain general liability insurance for oil
industry activities. Even if Foreland were to maintain general coverage, no
exploration company is generally insured against all losses or liabilities that
may arise from all hazards because such insurance is unavailable at economic
rates, because of
14
<PAGE>
limitations on the insurance policy, or other factors. Insurance that Foreland
may purchase will not cover every potential risk associated with the
exploration, drilling, and production of oil. In particular, coverage is not
available for certain types of environmental hazards. The occurrence of a
significant adverse event, the risks of which are not fully covered by
insurance, could have a materially adverse effect on Foreland. Moreover, no
assurance can be given that adequate insurance will be available at reasonable
rates or that Foreland or the operators of wells in which Foreland owns an
interest will elect to maintain certain types or amounts of insurance.
Foreland's activities are subject to periodic interruptions due to
weather conditions, which may be quite severe at various times of the year.
Periods of heavy precipitation make travel to exploration or drilling locations
difficult and/or impossible, while extremely cold temperatures limit or
interrupt drilling, pumping, and/or production activities or increase operating
costs.
Employees
As of December 31, 1999, Foreland had 82 full-time employees,
distributed between the following locations:
o Executive and exploration offices, Lakewood, Colorado: 5
employees
o Foreland Refining Corporation, Woods Cross, Utah: 16 employees
o Eagle Springs Refinery, Nevada: 19 employees;
o Tonopah Refinery, Nevada: 11 employees
o Foreland Transportation, Nevada: 31 employees.
Following the voluntary surrender of its encumbered assets in March and
April 2000, Foreland has five full-time employees, four of whom are located in
the Lakewood, Colorado offices and one of whom is located in Woods Cross, Utah.
Foreland does not have funds with which to continue to pay its employees so it
is likely they will resign.
Facilities
Foreland's principal executive offices located 143 Union Boulevard,
Suite 210, Lakewood, Colorado 80228, are rented from an unrelated party under a
lease expiring September 30, 2000.
Risk Factors
In addition to the important risks noted above respecting Foreland's
extreme shortages of working capital, cash, assets, and equity in the face of
severe financial demands, the business of Foreland is subject to a number of
material business risks, including the factors set forth below.
Foreland Will Require Substantial Amounts of Capital in Order to
Accomplish its Exploration Goals in Nevada.
The total cost required to explore Foreland's exploration properties in
Nevada cannot be predicted precisely but could amount to tens of millions of
dollars. Because of the size of the total exploration possibilities and
Foreland's limited resources, Foreland expects it will have to seek funding
through borrowings, the sale of equity securities, or through sharing
arrangements with industry participants, which could substantially dilute the
interest of Foreland's shareholders. Foreland cannot assure that it can obtain
required funds on acceptable or favorable terms to continue exploration.
Foreland May be Subject to Contingent Environmental Liabilities Related
to Refinery Assets and Operations.
Foreland may be financially responsible for clean-up or other
remediation costs resulting from environmental contamination that occurred
subsequent to the date of acquisition by Foreland of the Eagle Springs
15
<PAGE>
Refinery, Tonopah Refinery, or Cowboy Asphalt Terminal but prior to the
voluntary surrender of such properties in March and April 2000. There can be no
assurance that Foreland's agreements with the prior owners of the purchased
properties will protect Foreland from contingencies related to environmental
contamination prior to the date of acquisition.
Foreland May Not be Able to Discover Additional Oil Reserves
Foreland's ability to economically locate additional oil and gas
reserves in commercial quantities is dependent upon a number of factors,
including its participation in multiple exploration projects, its technological
capabilities, and funding availability. Foreland has had limited success in
discovering oil reserves in Nevada. Additionally, there are a limited number of
firms actively exploring and developing for oil in Nevada, which decreases the
number of potential industry partners available to Foreland. It is unlikely that
this will change in the near future. There can be no assurance that Foreland
will be able to discover additional commercial quantities of oil and gas.
Foreland is Dependent on Entering into Joint Exploration Agreements
with Others
Foreland is dependent on entering into joint exploration agreements
with industry participants to obtain funds for drilling and other exploration.
Even if such arrangements are reached, typically the other participants may
terminate their participation at specified points during the exploration
program, which would likely result in additional costs and delays to Foreland.
Foreland has had Limited Commercial Drilling Success to Date
Foreland has established only limited reserves and developed limited
ongoing production as a result of its own drilling program. The Ghost Ranch
field, which was placed into production in 1996, is the first exploration by
Foreland that has resulted in significant ongoing production. The oil production
from the Eagle Springs field was acquired by Foreland in 1993 and thereafter and
did not result from Foreland's exploration activities.
Foreland's Activities are Concentrated in Higher Risk Frontier Areas
Foreland focuses its exploration and development activities in the
Great Basin area of Nevada, a largely unproved and unexplored geological
province. Foreland's exploration holdings are insignificant when compared to the
size of the potential geological area. Other than in the Eagle Springs and Ghost
Ranch fields, which were voluntarily surrendered by Foreland to its primary
creditor in April 2000, Foreland has not established material ongoing commercial
oil production. In addition, the areas targeted by Foreland, other than the
Eagle Springs and Ghost Ranch fields and the Pine Valley area, have geological,
geophysical, drilling, completion, and production problems which to date have
prevented Foreland and others with larger exploration budgets from developing or
establishing significant production or reserves. Foreland cannot assure that it
can overcome these problems or that its drilling program will be commercially
successful.
Foreland's Costs are Higher in Nevada than in More Developed Areas
Foreland's costs of exploration, drilling, production, and
transportation are higher in Nevada 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. Drilling equipment and services
typically must be brought in from considerable distances. Further, there is no
collection pipeline so that any oil that is produced must be trucked to a
refinery.
16
<PAGE>
Foreland's Activities are Subject to Operating Risks and Uninsured
Hazards
Foreland is subject to the inherent risks involved in oil and gas
exploration, production, refining, and transportation and the risks of incurring
substantial losses and liabilities to third parties from hazards such as:
o fire;
o explosion;
o flood;
o pipe failure;
o cave in and collapse;
o unusual or unexpected formations, pressures, and other
conditions;
o environmental damage;
o personal injury;
o uncontrollable flows of oil and gas; and
o other occurrences.
Foreland typically purchases and pays for insurance against risks customarily
insured against in the oil and gas industry by others conducting similar
activities. Nevertheless, Foreland may not be insured against all losses or
liabilities that may arise from all hazards because such insurance is
unavailable at economic rates, because the operator has not fulfilled its
obligation to purchase such insurance, or because of other factors. Any
uninsured loss could have a material adverse effect on Foreland. The occurrence
of significant events against which Foreland is not fully insured or of a number
of lesser events against which Foreland is fully insured but subject to
substantial deductibles could materially and adversely affect Foreland's
operations and financial condition.
Foreland's Operations can be Adversely Affected by Adverse Weather
Foreland's exploration activities are subject to periodic interruptions
due to weather conditions, which may be quite severe in Nevada at various times
of the year. Periods of heavy precipitation make travel to exploration or
drilling locations difficult and/or impossible, while extremely cold
temperatures limit or interrupt drilling, pumping, and/or production activities
or increase operating costs.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
In March and April 2000, Foreland completed the surrender of its Eagle
Springs, Nevada and other producing properties, its refining and marketing
operations, its transportation company, and a principal exploration prospect,
and related database, in accordance with the terms of a Voluntary Surrender
Agreement between Foreland and its principal creditor. The terms of the
surrender of the stock of Foreland's operating subsidiaries were approved, after
an evidentiary hearing, by the Second Judicial District Court, Davis County,
Utah, in March 2000. The terms of the surrender of the producing properties and
exploration prospect were approved, after a similar evidentiary hearing, by the
Fifth Judicial District Court, Nye County, Nevada, on April 10, 2000.
In connection with the purchase of the refineries during 1998, Foreland
agreed to acquire inventory and accounts receivable from Petro Source
Corporation for approximately $2.7 million through the registration and issuance
of shares of Foreland common stock. The shares were to be sold monthly into the
market by Petro Source Corporation until the $2.7 million plus interest was
recouped. Foreland issued approximately 865,000 shares of common stock, but did
not register the shares. The trading price for Foreland's common stock plummeted
during 1998 and 1999, rendering the sale of more shares into the market
unfeasible. In March 2000, Petro Source Corporation filed a complaint against
Foreland and other defendants seeking $2.9 million actual damages plus punitive
damages, costs, attorneys' fees, and interest. This action has been removed to
United States District Court
17
<PAGE>
for the District of Utah, Central Division. Foreland has admitted that it
incurred the $2.7 million obligation to Petro source but denied the remaining
substantive allegations of the complaint. Foreland is defending the action.
Three trade creditors have obtained judgments against Foreland for
services and materials in the aggregate amount of $445,000 provided in
connection with its Nevada exploration and drilling activities as follows:
Halliburton Energy Services, Inc., by the District Court, Jefferson County,
Colorado, in the amount of $53,000; Grant Geophysical Corp., by the United
States District Court for the Southern District of Texas, Houston Division, in
the amount of $375,000; and Spidle Sales and Service, Inc., by the Eighth
Judicial District Court, Uintah County, Utah, in the amount of $17,000.
Petrosource Transportation (n/k/a Foreland Transportation, Inc.)
("Transportation"), all the issued and outstanding common stock of which was
acquired by Foreland in August 1998 in connection with the acquisition of
certain and assets and operations from Petro Source Corporation, 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 refused to allow Transportation to exercise
that purchase option. 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. The common
stock of Transportation held by Foreland was surrendered to EIF in March 2000.
Accordingly, Foreland no longer has any participation in that proceeding.
Other than the matters set forth above, Foreland is not a party to any
material proceeding, and none has been threatened by or, to the best of
Foreland's knowledge, against Foreland.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
No matters were submitted to a vote of the shareholders during the
fourth quarter of 1999.
18
<PAGE>
PART II.
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
Price Range of Common Stock
Foreland's common stock is traded in the over-the-counter market and is
quoted on the OTC EBB under the symbol "FORL." For all of the period noted below
prior to September 10, 1999, the common stock was quoted on the Nasdaq SmallCap
Market. The following table sets forth the high and low closing bid quotations
for Foreland's common stock as quoted by Nasdaq for the periods indicated, based
on interdealer bid quotations, without markup, markdown, commissions, or
adjustments (which may not reflect actual transactions).
Common Stock
----------------------------
High Low
-------------- -------------
1998
First Quarter............... 6.0625 4.00
Second Quarter.............. 7.0625 4.50
Third Quarter .............. 5.125 2.00
Fourth Quarter.............. 2.75 0.6563
1999
First Quarter............... 1.5625 0.8125
Second Quarter.............. 0.96875 0.46875
Third Quarter .............. 0.71875 0.28125
Fourth Quarter.............. 0.5625 0.0625
On April 13, 2000, the closing bid price of Foreland's common stock in
the OTC EBB was approximately $0.25. Foreland has approximately 1,690 common
stock shareholders.
The common stock price has been volatile in the past and could
fluctuate significantly in response to the results of specific exploration
drilling tests, variations in quarterly operating results, and changes in
recommendations by securities analysts. Further, the common stock's trading
volume is relatively small, so the market may not be able to efficiently
accommodate significant trades on any given day. Consequently, sizable sales or
purchases of the common stock have in the past, and may in the future, cause
greater price volatility for its common stock than in other more actively traded
securities. With trading volume, persons may not be able to effect larger
transactions at the then current market price. In addition, Foreland may
experience significant price and volume fluctuations that are unrelated or
disproportionate to the results of its operations. These broad fluctuations may
adversely affect the market price of the common stock.
Foreland has granted to employees, officers, and directors vested
options to purchase up to approximately 1.3 million shares of Common Stock with
exercise prices ranging from $2.50 to $9.00 per share. Options to purchase a
total of 94,000 shares contain a provision that, on exercise, the holder is
granted a new option covering the number of shares for which the prior option
was exercised, with the exercise price of the new option fixed at the then fair
market value of the common stock. Foreland also has outstanding options and
warrants held by unrelated third parties to purchase over approximately
1,680,000 shares of common stock at prices ranging from $1.08 per share to $7.50
per share. In addition, Foreland has shares of outstanding preferred stock that
are convertible into common stock and has agreed to grant warrants to purchase
common stock on conversion of certain of such preferred stock. The existence of
such options, warrants, and preferred stock may prove to be a hindrance to
future financing by Foreland, and the exercise of options and warrants and
conversion of preferred stock may further dilute
19
<PAGE>
the interests of the stockholders. The possible future issuances of common stock
on the exercise of options and warrants or the conversion of preferred stock
could adversely affect the prevailing market price of Foreland's common stock.
Further, the holders of options and warrants may exercise them at a time when
Foreland would otherwise be able to obtain additional equity capital on terms
more favorable to Foreland.
Dividend Policy
Foreland has never paid cash dividends on its common stock and does not
anticipate that it will pay dividends in the foreseeable future. If Foreland
were to generate cash from operations, it would likely use any cash from
operations to expand its business operations.
Foreland has issued and outstanding an aggregate of $2,000,000 in 1998
Series Convertible Preferred Stock with a cumulative dividend of 12% per annum,
payable in cash quarterly when and as declared by the board of directors.
Unregistered Sales of Securities
During 1999, the year covered by this report, Foreland sold securities
without registration under the Securities Act of 1933 (the "Securities Act") in
the following transactions:
1. Persons converted 117,000 shares of 1995 Preferred Stock into 39,000 shares
of common stock. The shares of common stock issued in such conversions were
issued without registration in reliance on the exemption from registration
requirements of the Securities Act provided in ss. 3(a)(9) thereof.
2. Foreland issued 23,055 shares of common stock to a consultant for services
rendered to Foreland.
Except as otherwise noted, the securities issued in the transactions
described above were issued in reliance on the exemption from the registration
and prospectus delivery requirements of the Securities Act provided in ss. 4(2)
thereof.
Each purchaser was provided with business and financial information
respecting Foreland and was provided with the opportunity to obtain additional
information in order to verify the information provided or to further inform
themselves respecting Foreland.
Each of the persons acquiring such securities acknowledged in writing
that such person was obtaining "restricted securities" as defined in rule 144
under the Securities Act; that such shares could not be transferred without
registration or an available exemption therefrom; that such person must bear the
economic risk of the investment for an indefinite period; and that Foreland
would restrict the transfer of the securities in accordance with such
representations. Such persons also agreed that any certificates representing
such shares would be stamped with a restrictive legend covering the transfer of
such shares. The certificates representing the foregoing shares bear an
appropriate restrictive legend conspicuously on their face, and stop transfer
instructions are noted on Foreland's stock transfer records.
- --------------------------------------------------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- --------------------------------------------------------------------------------
Historical Overview
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
20
<PAGE>
funding. In an effort to increase the financial return to Foreland from its
crude oil productions and expand its operations, in August 1998 Foreland began
crude oil refining and marketing of petroleum products. These operations
employed the Eagle Spring Refinery and Tonopah Refinery assets and trucking
fleet purchased from Petro Source in August 1998. In March and April 2000,
Foreland voluntarily surrendered these assets, together with the Eagle Springs,
Nevada and other producing properties and a principal exploration prospect, to
Foreland's primary secured creditor.
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 arranged to borrow up
to $16.9 million from EIF to fund certain activities. Through December 31, 1999,
Foreland had borrowed $12.6 million from EIF. During 1999, the credit facility
was amended, with a net additional draw of $200,000, and further loan
commitments were terminated. In connection with the EIF financing, Foreland
granted EIF warrants to purchase an aggregate of 1,500,000 shares of common
stock at $6.00 per share, issued 250,000 shares of common stock to EIF, and sold
to EIF for $2,000,000 in cash 2,000 shares of 1998 Series Preferred Stock,
convertible into an aggregate of 333,333 shares of common stock. As discussed
below, in late 1998 Foreland became in default on the EIF loan, which was
classified as a short-term liability as of December 31, 1998. In 1998, Foreland
Refining Corporation, a subsidiary of Foreland, established a $2,000,000 line of
credit with a commercial bank which is collateralized by accounts receivable and
inventory. Subsequent to December 31, 1999, this line of credit was amended to
increase the line to $3,000,000 and was transferred as part of Foreland's
voluntary surrender of assets in March 2000.
On December 31, 1997, Foreland obtained an option to purchase certain
oil refining and transportation assets and operations from Petro Source.
Foreland paid $520,000 for the option by issuing 130,000 shares of common stock.
Foreland subsequently exercised the option and, on August 12, 1998, completed
the purchase of the refining and transportation assets by paying $5,000,000 in
cash (utilizing funds from the EIF loan), with the remaining $2,676,322 purchase
price paid by the issuance of 763,602 shares of common stock, subject to
adjustment in the number of shares and potential issuances of additional shares
so that the resale of such shares by Petro Source yields net proceeds equal to
$2,676,332 plus interest at 10% per annum. In addition, Foreland issued 100,000
shares of common stock to Petro Source at the closing of the purchase. Beginning
in 1999, Foreland was required to make monthly cash payments equal to 5% per
annum of the amount by which $2,676,333 exceeds net proceeds received by Petro
Source from the sale of the shares of common stock (not including the 130,000
shares to receive the option or 100,000 of the shares issued at closing). Petro
Source has not sold any of the 863,602 shares issued at closing and has filed a
lawsuit against Foreland and others seeking payment of the balance owing. See
"Item 3. Legal Proceedings."
The auditor's report on the financial statements of Foreland as of
December 31, 1999, contains an explanatory paragraph as to the ability of
Foreland to continue as a going concern because of its continuing losses from
operations.
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.
o Foreland Has Substantial Working Capital and Stockholders' Deficits. As of
December 31, 1999, after giving effect only to the subsequent surrender of
assets and related liabilities in foreclosure, Foreland had current assets
of $88,000 and current liabilities of $4,304,000 related to its continuing
operations, for a working capital deficit of $4,216,000. In addition, as of
such date and as so adjusted, Foreland had total assets of $372,000 and
total liabilities related to its continuing operations, of $4,304,000, for
a stockholders' deficit relating to its continuing operations of
$4,304,000. As of December 31, 1999, Foreland had an accumulated deficit of
$43.346,000.
o All Of Foreland's Obligations Are Substantially Past Due. All of Foreland's
$4,304,000 in current liabilities associated with its continuing operations
as of December 31, 1999, were substantially past due except that
21
<PAGE>
$2,676,000 of such amount due the seller of acquired business, plus
$319,000 in interest, constitutes a claim for relief under a lawsuit in
which Foreland has asserted defenses. See "Item 3. Legal Proceedings."
Three creditors with claims aggregating $445,000 have obtained judgments
against Foreland. In addition, in March 2000 Petro Source Corporation, from
which the Company purchased oil refining, transportation, and marketing
assets in 1998, filed a lawsuit seeking the recovery from Foreland and
other defendants of $2.9 million actual damages plus punitive damages,
costs, attorneys' fees, and interest.
o Foreland Has No Revenue Or Cash. Foreland has no cash or other financial
resources and no revenue from operations or other activities, but must rely
on raising additional capital to meet its ongoing obligations for general
and administrative expenses, lease payments, payments to creditors, and
other costs.
o Foreland Has Very Limited Assets On Which To Base A Financial Recovery. As
a result of the voluntary surrender of the collateral securing its
indebtedness, Foreland's remaining assets consist of only other exploration
prospects on approximately 49,000 gross acres of non-producing leases and
the associated geological and geophysical database accumulated by Foreland
over the preceding approximately 15 years. In addition, Foreland has
retained until May 31, 2000, the right, in agreed circumstances, to
participate at a 50% interest in drilling ventures on the principal
exploration prospect conveyed to the secured creditor.
o Foreland Has No Liquidity Or Cash With Which To Reactivate. As a result of
the voluntary surrender of the collateral securing its indebtedness,
Foreland has no present ability to generate revenues. Foreland has
insufficient cash to maintain its exploration leaseholds, pay its
personnel, satisfy claims of creditors, or undertake oil and gas
exploration.
o Foreland's Audit Report For The Year Ended December 31, 1999, Contains A
Going Concern Explanatory Paragraph. Foreland's independent auditor's
report on the December 31, 1999, 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.
o Possible Inability To Continue. As a result of all of the foregoing,
Foreland urgently needs additional capital, but because of its precarious
condition and limited assets, may be unable to attract any capital or
sufficient capital to continue.
Results of Operations
Note that in view of the voluntary surrender of Foreland's production,
refinery, transportation, marketing, and certain exploration assets in March and
April 2000, the following discussion should not be considered indicative of its
future results of operation
1999 and 1998
Foreland had no oil sales to external customers in 1999 as compared to
$838,000 in 1998. The $1,595,000 of oil revenue for 1999 was used in Foreland's
refining operations compared to $486,000 used internally in 1998.
22
<PAGE>
The refining and transportation revenues for 1999 were $28,217,000 on
sales of approximately 1 million barrels of refined products, compared to
$9,704,000 for the period August through December 1998 on sales of 460,200
barrels of refined products. Foreland purchased the refining and transportation
assets effective as of May 31, 1998, with a closing date of August 12, 1998. The
revenues for the period from June 1, 1998, through the closing date were
approximately $4.6 million. The sales during such period were accounted for as
adjustments to the purchase price of the assets. These operations were suspended
in 2000 as a result of the voluntary surrender of assets to EIF.
Oil and gas production costs for 1999 attributable to the assets
surrendered to EIF increased only $15,000, or 1.5%, to $959,000. Per barrel
production expense decreased $1.35 per barrel, or 23.2%, to $4.48 in 1999, as
compared to $5.83 per barrel in 1998.
Refinery and transportation operations cost of goods sold for 1999 was
$20,679,000 as compared to $6,864,000 for August through December 1998. Other
costs (including transportation costs) were $4,542,000. The increase in other
costs over the same figure for 1998 of $1,986,000, representing a 128.7%
increase, was due to a turnaround project completed at the Tonopah refinery,
costs incurred in connection with preparation for a wax production program, and
the fact that the figure for 1999 represents a full year in 1999 rather than
just a five-month period in 1998.
Oil and gas exploration costs decreased $1,609,000, or 83.4%, to
$320,000 in 1999 as compared to a year earlier as a result of Foreland's
decreased exploration and development activity. All of such amount incurred in
1999 was attributable to assets retained by Foreland after the surrender of
assets to EIF. During 1999, Foreland had no oil exploration dry hole costs as
compared to $1,706,000 in 1998.
Foreland had no abandonment and impairment expenses for 1999. The 1998
abandonment and impairment expenses were $3,651,000, due primarily to impairment
of the producing wells resulting from the assessment of the carrying cost of
long-lived assets when events or circumstances (i.e., reduced oil and gas
prices) indicated that the carrying value of the long-lived assets may not be
recoverable.
Depreciation, depletion and amortization decreased $3,448,000, or
80.9%, to $884,000, as compared to the previous year. Of such amount, $816,000
was attributable to the assets surrendered to EIF, and $68,000 was attributable
to assets retained by Foreland. The 1999 decrease was due principally to the
fact that Foreland's reserves were significantly decreased in 1998 because oil
prices at December 31, 1998, adversely affected the estimated quantity of
Foreland's reserves contributing to increased depreciation and depletion for
1998.
General and administrative expenses increased $1,203,000, or 90.9%, to
$2,526,000 for 1999, as compared to 1998. General and administrative costs
attributable to assets surrendered to EIF were $1,266,000 while general and
administrative expenses attributable to retained assets were $1,260,000. The
increase from 1998 is due primarily to the full year of operations at Foreland
Refining in 1999 as compared to only five months in 1998 and costs associated
with the Cowboy facility.
Net interest expense increased $1,042,000 to $2,773,000 primarily
because of the interest payments associated with the debt payable to EIF and
accrued interest due on the Petro Source obligation.
During 1999, Foreland accrued dividends on preferred stock in the
amount of $240,000, while in 1998, the net loss applicable to common
stockholders was increased by dividends of $37,000 on preferred stock. This
amount is for earnings per share calculations only and is not recorded in
Foreland's financial statements, until such stock dividends are declared by
Foreland.
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.
23
<PAGE>
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. The result of this accounting policy caused Foreland to recognize an
impairment charge of $3,651,000 in the fourth quarter of 1998, but none in 1999.
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. See "Items 1 and 2. Business and Properties."
Certain Costs
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.
Liquidity and Capital Resources
1999 Activities
Foreland's operations used net cash of $107,000 in 1999 when Foreland
reported a net loss of $1,967,000 from continuing operations and $1,778,000 from
the operations surrendered to EIF, for an aggregate net loss of $3,745,000. The
1999 loss included expenses which generally did not require cash for the current
period of $884,000 for depreciation, depletion and amortization, $767,000 for
amortization of debt issuance and debt discount costs associated with the debt
financing with EIF, and $319,000 of accrued interest on the Petro Source
obligation. Changes in operating assets and liabilities retained by Foreland
required cash expenditures of $2,115,000, while changes in current assets and
current liabilities surrendered to EIF, net of the effect of the acquisition,
provided cash in the amount of $3,747,000. This is compared to Foreland's
operations that used net cash of $2,160,000 in 1998 when Foreland reported a net
loss of $13,872,000. The 1998 loss included non-cash expenses of $5,356,000 for
abandonments and impairments, $4,264,000 for depreciation, depletion and
amortization, and $784,000 for amortization of debt issuance and debt discount
costs associated with the debt financing with EIF. Changes in components of
working capital had the net effect of providing cash of $1,320,000.
Investing activities required cash of $1,938,000 in 1999, including
approximately $1.8 million for additions to property and equipment. Investing
activities in 1998 required cash of $4,358,000 for additions to property and
equipment.
As noted above, cash required for both operating and investing
activities was provided from financing activities during the fiscal year ending
December 31, 1999. Financing activities for 1999 provided $196,000, primarily
from the proceeds from debt of $307,000, less payment of costs associated with
the issuance of debt in the amount of $98,000. Financing activities for 1998
provided $8,326,500, primarily from the proceeds from debt of $6,401,000 and the
sale of $2,000,000 in stock.
24
<PAGE>
Debt Financing
In January 1998, Foreland completed the debt financing arrangement with
EIF. This arrangement was amended in August 1998 and again in February 1999.
During 1998 and 1999, Foreland drew an aggregate of $12.6 million under this
facility to fund most of its cash requirements.
Pursuant to the terms of the financing arrangement, Foreland was
required to make payments of interest only through November 1998, after which
payments of principal and interest were required to amortize the indebtedness
generally over 48-months; provided, however, that the final payment of all
accrued but unpaid interest and the remaining principal balance was due on
January 1, 2002. Foreland also agreed to transfer to EIF a 3% overriding royalty
interest in Foreland's interest in its proved oil and gas properties and a 1%
overriding royalty interest in certain unproved properties.
Amounts due under the financing arrangement were collateralized by oil
and gas properties, and Foreland was required to maintain certain financial
ratios and comply with other terms and conditions while any balance of
indebtedness remained outstanding. Foreland initially issued to EIF five-year
warrants to purchase 750,000 shares of common stock at $6.00 per share and
250,000 shares at $10.00 per share. The warrants were subsequently amended to
purchase an aggregate of 1,500,000 shares at $6.00 per share. Foreland granted
EIF the right to designate a representative for appointment to the board of
directors of Foreland. EIF designated Robert Gershen as its representative, who
served as a director until, April 28, 1999, when he resigned.
Prior to November 1, 1998, when principal payments were to commence,
Foreland recognized that it had insufficient cash to make these payments and
would be unable to meet certain financial ratios and covenants under the loan.
Therefore, Foreland began seeking to renegotiate the terms of the EIF loan. On
October 4, 1998, EIF agreed in principle, subject to negotiation and execution
of definitive agreements, to defer all payments under the financing arrangement,
other than monthly interest payments, until April 1999, extend certain financial
covenants of Foreland until such date, and waive its exercise of remedies upon
default until such date. Under this informal understanding, Foreland continued
to make interest payments on this loan but did not commence principal payments
on November 1, 1998, or pay $1,300,000 due November 10, 1998, respecting certain
inventory financing. Additionally, Foreland did not meet certain financial
ratios and covenants under the loan. Accordingly, the entire balance of $12.4
million due EIF was included in current liabilities as of December 31, 1998.
In February 1999, EIF agreed to reschedule the principal amortization
to commence April 1999. In consideration of these loan modifications, Foreland
agreed that it would issue shares of restricted common stock to EIF and extend
the exercise period of and, in specified circumstances, adjust the exercise
price of the common stock purchase warrants held by EIF. Foreland drew an
additional net $200,000 under the loan arrangement, and additional loan
commitments were canceled.
Foreland was unable to pay principal payments of $338,096 due April 1,
1999, on the $12.6 million in indebtedness due EIF and was not in compliance
with certain financial covenants relating to minimum cash flow, equity
requirements, current ratio, debt service ratio, and general administrative
expense percentages. On April 15, 1999, EIF agreed to defer the first principal
payment until May 1, 1999, and waive compliance with the financial covenants
until May 15, 1999. Foreland implemented cost cutting measures and restructured
its resources in an attempt to be able to make the required payments and comply
with the financial covenants, but was unable to do so.
On November 16, 1999, Foreland entered into a Voluntary Surrender
Agreement with EIF pursuant to which Foreland agreed to surrender its Eagle
Springs, Nevada and other producing properties, its refining and marketing
operations, its transportation company, and a principal exploration prospect and
related database, all of which were pledged as security for the EIF
indebtedness. In March and April 2000, Foreland completed the surrender of such
properties to EIF in satisfaction of the secured indebtedness with an
outstanding principal balance of $12.6 million.
Current and Future Requirements
25
<PAGE>
As noted above, as of December 31, 1999, as adjusted to give effect
only to the voluntary surrender of assets to EIF in March and April 2000,
Foreland had accrued liabilities, all of which were currently or substantial
past due, of $4,304,000, with current assets of only $88,000 for a working
capital deficit of $4,216,000. Current liabilities include an aggregate of
$445,000 due on judgments obtained by creditors and $2.7 million due the seller
of an acquired business plus $319,000 in accrued interest included in a claim
for compensatory damages in a lawsuit in which Foreland has asserted certain
defenses. Therefore, Foreland would require $4,520,000 or more if it were to
satisfy all of the foregoing obligations. Foreland intends to seek to negotiate
the continued forbearance, compromise, partial forgiveness, extension or other
resolution of all or a portion of the above claims. Nevertheless, Foreland
expects that a significant amount of cash will be required to reach any
accommodation with these creditors. Foreland cannot assure that it will be
successful in its efforts to reach a satisfactory resolution of these claims or
raise the cash required to pay any amounts that may be agreed to.
In some instances, Foreland may seek to satisfy creditors' claims by
issuing securities, which would dilute the interests of existing stockholders.
Foreland's current liabilities include an aggregate of $495,000 accrued
but unpaid officers' salaries that may be paid with either securities or cash,
to the extent available. Although none of the officers to whom such amounts are
payable have demanded payment, none is precluded from doing so.
In connection with the lawsuit initiated by Petro Source against
Foreland, its former director, Robert D. Gershen, and EIF, Foreland has
submitted a claim to its insurance carrier for reimbursement of defense costs
and coverage for resulting damages, subject to the applicable deductible. The
insurance carrier has indicated preliminarily that the claim would be covered by
the policy, subject to the reservation of rights to deny coverage subsequently.
The amount sought in the lawsuit exceeds the amount of insurance coverage so
Foreland would have to pay additional amounts if the plaintiff obtained a
judgment for the amount sought. In addition, Foreland may be subject to claims
of indemnification from Mr. Gershen or other officers or directors who incur
damages as a result of their service as officers or directors of Foreland, in
accordance with its articles of incorporation and bylaws and Nevada corporate
law.
In addition to the capital required to meet its past due obligations,
Foreland needs funds for its remaining continuing operations following the
voluntary surrender of assets in March and April 2000. As a result of this
surrender and the resulting cost-cutting measures associated with the
elimination of Foreland's revenues, Foreland continuing operations require cash
principally for lease payments on retained Nevada leases, salaries for
continuing employees, professional fees for assistance in meeting regulatory
requirements and dealing with creditors and others, and other general and
administrative expenses. The aggregate amount of these items varies, but
generally approximates from $150,000 to $250,000 per quarter. Foreland requires
additional funds to meet costs for these items accruing after the April 2000
surrender, but cannot assure that it will be obtain such amount from any source.
Foreland is seeking to participate in exploration of the Hay Ranch
prospect conveyed to EIF in the voluntary surrender of assets in April 2000 as a
basis for obtaining new cash investment and reaching an arrangement with its
creditors that will enable Foreland to continue. Foreland is seeking to form a
drilling venture of one or more industry or financial participants to undertake
a multiple well drilling project on the Hay Ranch prospect under a farmout from
EIF, perhaps including drilling or other exploration on prospects on Foreland's
retained acreage. Such a drilling program may involve expenditures of
approximately $550,000 to $850,000 per well to be drilled, depending on
projected depth, plus at least $100,000 for additional geological and
geophysical work and related exploration support. Under such an arrangement,
Foreland would attempt to negotiate for its share of costs to be paid by the
other participants, retaining only a minority interest in the venture.
Alternatively, Foreland may seek to raise funds through the sale of equity or
debt securities to provide its share of drilling funds and for other corporate
purposes. Foreland does not expect that it will be able to obtain any additional
financing from any source unless and until it is able to reach agreements
acceptable to investors with its various creditors so that substantially all new
money invested will be available for Nevada exploration and not exposed to
claims of current creditors. Foreland cannot predict the amount of money that
may be required to obtain the forbearance or compromise of the claims of its
existing creditors with claims aggregating approximately $4,304,000. Foreland
has reached an informal arrangement with two of its judgment creditors for a
substantial reduction in the amount payable if paid within an agreed period.
Further, the amount to be used for Nevada exploration and related costs will
depend
26
<PAGE>
on the percentage interest that Foreland may be able to retain. There is no
assurance that Foreland will be successful in accomplishing these tasks.
Because of its financial condition and the nature and amount of its
creditors' claims, Foreland may be susceptible to an involuntary petition under
the Bankruptcy Act seeking Foreland's liquidation. In addition, if Foreland is
unable to reach satisfactory accommodations with its creditors or immediately
obtain urgently required capital, it may be forced to seek protection under
Chapter 11 of the Bankruptcy Act while it seeks to reorganize its assets and
liabilities.
Inflation
Foreland's activities have not been, and in the near-term are not
expected to be, materially affected by inflation or changing prices in general.
Foreland's oil exploration and production activities are generally affected by
prevailing sales prices for oil and the recent significant decreases in oil
prices have caused some activities to be uneconomic.
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ITEM 7. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following financial statements are included in this report
immediately following the signature page:
Title of Document Page
Index to Consolidated Financial Statements F-1
Report of Hein + Associates LLP, Certified Public Accountants F-2
Consolidated Balance Sheet - As of at December 31, 1999 F-3
Consolidated Statements of Operations - For the Years Ended
December 31, 1998, and 1999 F-5
Consolidated Statements of Stockholders' Equity - For the Years
Ended December 31, 1998, and 1999 F-6
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998, and 1999 F-7
Notes to Consolidated Financial Statements F-9
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Foreland and its auditors have not disagreed on any items of accounting
treatment or financial disclosure.
27
<PAGE>
PART III.
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------------
Directors and Executive Officers
The following table sets forth the name, age, term of directorship, and
principal business experience of each director and executive officer of Foreland
who has served in such position since Foreland's last fiscal year.
<TABLE>
<CAPTION>
Director Business Experience During Past
Name Age Since Five Years and Other Information
-------------------------- ------ ---------- ---------------------------------------------------------------------
<S> <C> <C> <C>
Grant Steele* 75 1985 Co-founder and chairman. Executive officer and chairman of the
Company since organization in 1985. Employed by Gulf Oil
Corporation from 1953 to 1983. From 1973 to 1980, Chief
Geologist--U.S. for Gulf Oil. Graduated from the University of
Utah, Salt Lake City, Utah, in 1949 with bachelor of science
degree. Earned his doctorate in geology from the University of
Washington in 1959. Certified professional geologist and an active
member of the American Association of Petroleum Geologists (awarded
a distinguished service award in 1984), the Houston Geological
Society, and the Society of Economic Paleontologists and
Mineralogists.
N. Thomas Steele* 55 1985 Co-founder and president. Officer and director of Foreland since
organization in 1985. Elected president in May 1996. Prior to
joining Foreland in 1985, president of Magnum Resources, Inc.,
Ogden, Utah, a company engaged in mineral exploration in Nevada
and Utah.
Bruce C. Decker 49 1994 Officer and director of Foreland since 1994. Officer of the Krutex
Energy Corporation from 1983 through acquisition by Foreland in
1989. Received bachelor's degree in finance and management from
the University of Utah in 1973.
</TABLE>
* Grant Steele is the uncle of N. Thomas Steele.
Robert D. Gershen resigned as a director in April 1999 and Lee B. Van
Ramshorst resigned as a director in May 1999.
Significant Employees/Consultants
Jerry Hansen. Mr. Hansen, who joined Foreland in 1986, is senior
structural geologist for Foreland with primary responsibility for generating and
developing exploration proposals and drilling prospects. He has 13 years of oil
and gas experience focused on prospect generation and evaluation in the Powder
River Basin, Gulf Coast, and primarily, in Nevada. He graduated with degrees in
geology from the University of Colorado in 1973 and the University of Arizona in
1982. As senior structural geologist, Mr. Hansen's primary responsibility is in
the generation and development of drillable prospects, from inception to actual
wellsite operations.
28
<PAGE>
Carl Schaftenaar. Mr. Schaftenaar, who joined Foreland in 1993, has
been a geophysicist and geologist in the oil industry for 13 years. He holds a
bachelor's degree in geology from Hope College, Holland, Michigan, and a master
of science degree in geophysics from Texas A&M University. Mr. Schaftenaar
worked for Chevron USA on exploration and development projects in Nevada and the
Rocky Mountain area from 1982 to 1992. As senior geophysicist, Mr. Schaftenaar
is responsible for the acquisition and analysis of proprietary two- and
three-dimension seismic programs for Foreland.
Fred Merian. Mr. Merian, who joined Foreland in 1997, is Manager of
Corporate Development for Foreland. He has 19 years of oil and gas experience
and has held engineering, managerial and executive positions with Amoco
Production Company, Tenneco Oil Company, Union Pacific Resources Corporation
(Champlin) and recently as President-COO of Vessels Oil and Gas Company. Mr.
Merian has had direct finance and operational responsibilities for integrated
oil and gas project development in most western state of the U.S. Mr. Merian's
technical knowledge coupled with finance and M&A experience has enhanced
Foreland's corporate development opportunities. Mr. Merian graduated with a
degree in Geological Engineering from the University of Missouri-Rolla in 1978.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of forms 3, 4, and 5, and amendments
thereto, furnished to Foreland during or respecting its last fiscal year, no
director, officer, beneficial owner of more than 10% of any class of equity
securities of Foreland or any other person known to be subject to Section 16 of
the Exchange Act, failed to file on a timely basis reports required by Section
16(a) of the Exchange Act for the last fiscal year.
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ITEM 10. Executive Compensation
- --------------------------------------------------------------------------------
Summary Compensation
The following table sets forth for each of the last three fiscal years the
annual and long term compensation earned by, awarded to, or paid to the chief
executive officer of Foreland and Bruce C. Decker, the only other executive
officer who received total annual salary and bonuses in excess of $100,000 for
all services rendered in all capacities to Foreland and its subsidiaries during
the last fiscal year (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long Term Compensation
------------------------- ----------
Annual Compensation Awards Payouts
------------------------------- ------------------------- ----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying Award All Other
Year Compen-sation Stock Options/ Plan Compen-
Name and Principal Ended Salary Bonus ($) Award(s) SARs Payouts sation
Position Dec. 31 ($) ($) ($) (#) ($) ($)
- ---------------------- -------- ---------- -------- ----------- ------------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
N. Thomas Steele 1999 119,300 -- 10,000 -- --/-- -- --
President (CEO) 1998 129,800 -- 24,000 -- --/-- -- --
1997 129,800 23,884 24,000 -- 300,000/-- -- --
Bruce C. Decker 1999 113,167 -- -- -- --/-- -- --
1998 119,000 -- 24,000 -- --/-- -- --
1997 119,000 10,836 24,000 -- 300,000/-- -- --
- ---------------------- -------- ---------- -------- ----------- ------------- ------------ --------- -----------
</TABLE>
Option/SAR Grants in Last Fiscal Year
There were no grants of options or stock appreciation rights during the
last completed fiscal year to any Named Executive Officer of Foreland.
29
<PAGE>
Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table sets forth information respecting the exercise of
options and SARs during the last completed fiscal year by the Named Executive
Officers of Foreland and the fiscal year end values of unexercised options and
SARs.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at FY Options/SARs at FY
Shares Acquired on End (#) End ($)
Name Exercise (#) Value Realized ($) Exercisable/ Exercisable/
Unexercisable(1) Unexercisable(2)
- ---------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
N. Thomas Steele, -- -- 399,000/75,000 --/--
President (CEO)
Bruce C. Decker -- -- 325,000/75,000 --/--
- ---------------------- -------------------- -------------------- -------------------- --------------------
</TABLE>
(1) For a complete description of the terms of options held by the Name
Executive Officers, see "Principal Shareholders" below.
(2) Based on the closing sales price on Nasdaq for the Common Stock of
$0.125 on December 31, 1999.
Employment Agreements
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 1999, 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 75% vested and will fully vest on the next anniversary
date. 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.
Directors' Compensation
The board previously approved the payment of $2,000 per month to each
of Foreland's directors who are also employees of Foreland. This payment was
waived subsequent to December 31, 1998, but one director received
30
<PAGE>
payment for five months in 1999. Foreland has a stock option plan to compensate
those directors who are not employees. Under this plan, Lee B. Van Ramshorst and
Robert D. Gershen were each granted options to purchase an aggregate of 45,000
shares of Common Stock at an exercise price of $5.00 per share. Such options are
presently vested to purchase 25,000 each. Mr. Gershen resigned from the board of
directors in April 1999. Mr. Van Ramshorst resigned from the board of directors
in May 1999.
Limitation of Liability and Indemnification
The articles of incorporation of Foreland limit or eliminate the
personal liability of directors for damages for breaches of their fiduciary
duty, unless the director has engaged in intentional misconduct, fraud, or a
knowing violation of law, or paid a dividend in violation of the Nevada Revised
Statutes.
Foreland's articles of incorporation and bylaws further provide for the
indemnification of officers and directors for certain civil liabilities,
including liabilities arising under the Securities Act, unless such person is
adjudged in any action, suit, or proceeding to be liable for his own negligence
or misconduct in the performance of his duty. In the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
- --------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The following table sets forth, as of the date hereof, the outstanding
Common Stock of Foreland owned of record or beneficially by each person who
owned of record, or was known by Foreland to own beneficially, more than 5% of
Foreland's shares of Common Stock issued and outstanding, and the name and share
holdings of each director and all of the executive officers and directors as a
group:
31
<PAGE>
<TABLE>
<CAPTION>
Number of Common Percentage of
Name of Beneficial Owner Nature of Ownership Shares Owned(1) Ownership(2)
------------------------ ------------------- --------------- ------------
Directors and Principal Stockholders
<S> <C> <C> <C>
Grant Steele Common Stock 78,832 0.8%
Options 183,333(3) 1.8
----------
Total 262,165 2.6
N. Thomas Steele Common Stock 50,888 0.5
Options 474,000(4) 4.6
----------
Total 524,888 5.1
Bruce C. Decker Common Stock 13,334 0.1
Options 400,000(5) 3.9
----------
Total 413,334 4.1
Energy Income Fund, L.P. Common Stock 250,000 2.6
Warrants 1,500,000(6) 13.4
Preferred Stock 333,333(6) 3.3
----------
Total 18.0
Petro Source Corporation Common Stock 863,602 8.9
<CAPTION>
<S> <C> <C> <C>
All Executive Officers and Directors as
a Group (four persons) Common Stock 143,054 1.5
Options 1,057,333 9.8
Warrants -- --
--------- ----
Total 1,201,387 11.1%
========= ====
</TABLE>
(1) Except as otherwise noted, shares are owned beneficially and of record,
and such record shareholder has sole voting, investment, and
dispositive power. The address of all such persons for purposes of this
table is deemed to be the address of Foreland.
(2) Calculations of total percentages of share ownership for each
individual assumes the exercise of all options held by that individual
to which the percentage relates, including options subject to vesting
provisions. Percentages calculated for totals of all executive officers
and directors as a group assume the exercise of all options held by the
indicated group.
(3) Consists of options to acquire 33,333 shares of Common Stock at an
exercise price of $4.50 per share at any time prior to December 31,
2002, options vesting incrementally to acquire an aggregate of 50,000
shares at $2.50 per share expiring incrementally through September 2,
2010, and options vesting incrementally to acquire an aggregate of
100,000 shares at $4.00 per share expiring September 2, 2007. The
options to acquire 33,333 shares at $4.50 per share contain a provision
that, on exercise, the holder is granted a new option covering the
number of shares for which the prior option was exercised, with the
exercise price of the new option fixed at the then fair market value of
the Common Stock.
(4) Consists of options to acquire 38,889 shares of Common Stock at an
exercise price of $4.50 per share at any time prior to December 31,
2002, options to acquire 11,111 shares at an exercise price of $3.93
per share at any time prior to December 31, 2002, options to acquire
24,000 shares at $4.50 per share at any time prior to May 19, 2003,
options to acquire an aggregate of 100,000 shares at an exercise price
of $5.00 per share expiring incrementally through September 1, 2006,
options vesting incrementally to acquire an aggregate of 200,000 shares
at $2.50 per share expiring incrementally through September 2, 2010,
and options vesting incrementally to acquire an aggregate of 100,000
shares at $4.00 per share expiring September 2, 2007. The options to
acquire 38,889 shares at $4.50 per share contain a provision that, on
exercise, the holder is granted a new option covering the number of
shares for which the prior option was exercised, with the exercise
price of the new option fixed at the then fair market value of the
Common Stock.
(5) Consists of options to acquire an aggregate of 100,000 shares at $5.00
per share expiring incrementally through September 1, 2006, options
vesting incrementally to acquire an aggregate of 200,000 shares at
$2.50 per share expiring incrementally through September 2, 2010, and
options vesting to acquire an aggregate of 100,000 shares at $4.00 per
share expiring September 2, 2007.
(6) Consists of warrants to purchase 1,500,000 shares at $6.00 per share
through January 6, 2003, and 2,000 shares of 1998 Series Preferred
Stock convertible into an aggregate of 333,333 shares of Common Stock.
32
<PAGE>
- --------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Unless otherwise indicated, the terms of the following transactions
between related parties were not determined as a result of arm's length
negotiations.
Salary Deferrals and Waivers; Officer and Director Notes Payable
Foreland owed $348,691 in salaries and interest to two current officers
and directors and a former officer and director at December 31, 1999. Foreland
also had outstanding loans from a current officer and director and two former
officers and directors in the amount of $316,279 as of such date.
EIF Financing
In December 1997, Foreland entered into a financing arrangement with
EIF, L.P. ("EIF"), that was amended in August 1998 and February 1999. Amounts
due under the financing arrangement were collateralized by substantially all of
the property and equipment of Foreland, and Foreland was required to maintain
certain financial ratios and comply with other terms and conditions while any
balance of indebtedness remains outstanding. In connection with the EIF
financing, Foreland granted EIF warrants to purchase an aggregate of 1,500,000
shares of common stock at $6.00 per share, issued 250,000 shares of common stock
to EIF, and sold to EIF for $2,000,000 in cash 2,000 shares of 1998 Series
Preferred Stock, convertible into an aggregate of 333,333 shares of common
stock. Foreland also agreed to transfer to EIF a 3% overriding royalty interest
in the Company's proved oil and gas properties and a 1% overriding royalty
interest in certain unproved properties. As of December 31, 1999, Foreland had
borrowed approximately $12.6 million pursuant to the financing arrangement. On
November 16, 1999, Foreland entered into a Voluntary Surrender Agreement with
EIF pursuant to which Foreland agreed to surrender its Eagle Springs, Nevada and
other producing properties, its refining and marketing operations, its
transportation company, and a principal exploration prospect and related
database, all of which were pledged as security for the EIF indebtedness. In
March and April 2000, Foreland completed the surrender of such properties to EIF
in satisfaction of the secured indebtedness with an outstanding principal
balance of $12.6 million.
As a condition to establishing the financing, Foreland agreed to permit
EIF to appoint one member to serve on its board of directors. On January 9,
1998, Robert D. Gershen was appointed a director and resigned on April 28, 1999.
Petro Source Acquisition
On December 31, 1997, Foreland obtained an option to purchase certain
oil refining and transportation assets and operations from Petro Source.
Foreland paid $520,000 for the option by issuing 130,000 shares of common stock.
Foreland subsequently exercised the option and, on August 12, 1998, completed
the purchase of the refining and transportation assets by paying $5,000,000 in
cash (utilizing funds from the EIF loan), with the remaining $2,676,322 non-cash
portion of the purchase price paid by the issuance of 763,602 shares of common
stock, subject to adjustment in the number of shares and potential issuances of
additional shares if the resale of such shares by Petro Source yields net
proceeds less than $2,676,332 plus interest at 10% per annum. In addition,
Foreland issued 100,000 shares of common stock to Petro Source at the closing of
the purchase.
33
<PAGE>
- --------------------------------------------------------------------------------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits. The following exhibits are included as part of this
report:
<TABLE>
<CAPTION>
SEC
Exhibit Reference
No. No. Title of Document Location
- ----------------- -------------- ----------------------------------------------------------- --------------------
<S> <C> <C> <C>
Item 2. Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
- ----------------------------------------------------------------------------------------------
2.01 2 Option and Purchase Agreement between Foreland, Petro Incorporated by
Source Corporation, Petrosource Refining Reference(14)
Corporation, and Petrosource Transportation
dated December 31, 1997 Amendment to Option
and Purchase Agreement between
2.02 2 Foreland, Petro Source Corporation, Foreland Refining Incorporated by
Corporation, and Petrosource Transportation Reference(16)
dated August 11, 1998
Item 3. Articles of Incorporation and Bylaws
- ----------------------------------------------------------------------------------------------
3.01 3 Articles of Incorporation Incorporated by
Reference(13)
3.02 3 Bylaws Incorporated by
Reference(2)
Item 4. Instruments Defining the Rights of Security Holders,
Including Indentures
- ----------------------------------------------------------------------------------------------
4.01 4 Specimen Common Stock Certificate Incorporated by
Reference(1)
4.02 4 Designation of Rights, Privileges, and Preferences of Incorporated by
1991 Series Preferred Stock Reference(1)
4.03 4 Designation of Rights, Privileges and Preferences of 1994 Incorporated by
Series Convertible Preferred Stock Reference(3)
4.04 4 Designation of Rights, Privileges and Preferences of 1995 Incorporated by
Series Convertible Preferred Stock Reference(7)
4.05 4 Form of Warrants to Kevin L. Spencer and Jay W. Enyart Incorporated by
Reference(8)
4.06 4 Form of Rights Agreement dated effective April 12, 1997, Incorporated by
between Foreland and Atlas Stock Transfer Corporation Reference(12)
4.07 4 Warrant of Energy Income Fund, L.P., dated January 6, Incorporated by
1998, to purchase 750,000 shares of common stock at Reference(14)
$6.00 per share
4.08 4 Warrant of Energy Income Fund, L.P., dated August 10, Incorporated by
1998, to purchase 250,000 shares of common stock at Reference(16
$10.00 per share (replaces warrant dated January 6,
1998 for 250,000 shares of common stock at $10.00 per
share)
4.09 4 Designation of Rights, Privileges and Preferences for Incorporated by
1998 Series Convertible Preferred Stock Reference(16)
34
<PAGE>
4.10 4 Registration Rights Agreement between Energy Income Fund, Incorporated by
L.P., and Foreland, dated as of August 10, 1998 Reference(16)
Item 10. Material Contracts
- ----------------------------------------------------------------------------------------------
10.01 10 Option Agreement between N. Thomas Steele and Foreland, Incorporated by
dated June 24, 1985** Reference(6)
10.02 10 Option Agreement between Grant Steele and Foreland, dated Incorporated by
June 24, 1985** Reference(6)
10.03 10 Form of Options to directors dated April 30, 1991 with Incorporated by
respect to options previously granted 1986** Reference(1)
10.04 10 Form of Nonqualified Stock Option between Foreland and Incorporated by
unrelated third parties, with related schedule Reference(4)
10.05 10 Form of Promissory Notes relating to certain options Incorporated by
exercised by officers, with related schedule Reference(5)
10.06 10 Form of Option granted pursuant to reload provisions of Incorporated by
previously granted options with related schedule Reference(5)
10.07 10 Form of Registration Agreement relating to Units Incorporated by
consisting of 1995 Series Preferred Stock and M Reference(7)
Warrants
10.08 10 Form of Revised Executive Employment Agreement between Incorporated by
Foreland and executive officers, with related schedule** Reference(9)
10.09 10 Form of Nonqualified Stock Options granted to executive Incorporated by
officers dated July 18, 1996, with related schedule** Reference(9)
10.10 10 Form of Nonqualified Stock Options granted to executive Incorporated by
officers in connection with employment agreements, with Reference(9)
related schedule**
10.11 10 Form of Nonqualified Stock Options granted to employees Incorporated by
in connection with employment agreements, with related Reference(9)
schedule
10.12 10 Purchase and Sale Agreement dated November 14, 1996, Incorporated by
between Plains Petroleum Operating Company and Eagle Reference(10)
Springs Production Limited Liability Company,
respecting the purchase of Plains' interest in the
Eagle Springs field, with related Assignment,
Conveyance, and Bill of Sale
10.13 10 Financing Agreement dated as of January 6, 1998, by and Incorporated by
among Foreland, Eagle Springs Production Limited Reference(14)
Liability Company and Energy Income Fund, L.P.
10.14 10 Refinancing Note dated as of January 6, 1998, by Foreland Incorporated by
and Eagle Springs Production Limited Liability Company Reference(14)
10.15 10 Development Note dated as of January 6, 1998, by Foreland Incorporated by
and Eagle Springs Production Limited Liability Company Reference(14)
10.16 10 Acquisition Note dated as of January 6, 1998, by Foreland Incorporated by
and Eagle Springs Production Limited Liability Company Reference(14)
35
<PAGE>
10.17 10 Deed of Trust, Security Agreement, Assignment of Incorporated by
Production and Proceeds, Financing Statement and Reference(14)
Fixture Filing dated as of January 6, 1998, by and
among Foreland, Eagle Springs Production Limited
Liability Company, First American Title Company of
Nevada, and Energy Income Fund, L.P.
10.18 10 Assignment of Overriding Royalty Interest dated effective Incorporated by
as of January 1, 1998, of a 3% net revenue Reference(14)
interest Reference(14) from Foreland and
Eagle Springs Production Limited Liability
Company to Energy Income Fund, L.P.
10.19 10 Assignment of Overriding Royalty Interest dated effective Incorporated by
as of January 1, 1998, of a 1% net revenue Reference(14)
interest Reference(14) from Foreland and
Eagle Springs Production Limited Liability
Company to Energy Income Fund, L.P.
10.20 10 Option and Purchase Agreement between Foreland Incorporated by
Corporation and Petro Source Corporation respecting the Reference(15)
purchase of Petro Source Transportation dated effective
December 31, 1997
10.21 10 Purchase and Sale Agreement dated effective December 31, Incorporated by
1998, between Foreland and Plains Petroleum Operating Reference(15)
Company
10.22 10 Purchase Contract Confirmation dated effective December Incorporated by
15, 1997, between Foreland and Petro Source Refining Reference(15)
Partners
10.23 10 First Amendment to Financing Agreement between Foreland, Incorporated by
10.23 10 Eagle Springs Production Limited Liability Company, Reference(16)
Foreland Refining Corporation, Foreland Asset
Corporation, Petrosource Transportation, and Energy
Income Fund, L.P., dated August 10, 1998
10.24 10 Stock Purchase Agreement dated August 10, 1998, between Incorporated by
Energy Income Fund, L.P., and Foreland Reference(16)
10.25 10 First Allonge to Acquisition Note in the original Incorporated by
principal amount of $2,327,000, dated as of August 10, Reference(16)
1998
10.26 10 First Allonge to Development Note in the original Incorporated by
principal amount of $13,893,000, dated as of August 10, Reference(16)
1998
10.27 10 First Allonge to Refinancing Note in the original Incorporated by
principal amount of $680,000, dated as of August 10, Reference(16)
1998
10.28 10 Environmental Indemnity Agreement between Petro Source Incorporated by
Corporation, Petrosource Investments, Inc., Foreland, Reference(16)
Foreland Refining Corporation, Foreland Asset
Corporation, and Petrosource Transportation dated
August 11, 1998
10.29 10 Second Amendment to Deed of Trust, Security Agreement, Incorporated by
Assignment of Production and Proceeds, Reference(16)
Financing Statement and Fixture Filing
dated as of August 11, 1998, by and among
Foreland, Eagle Springs Production Limited
Liability Company, First American Title
Company of Nevada, and Energy Income Fund,
L.P.
36
<PAGE>
10.30 10 Operating Agreement of Cowboy Asphalt Terminal, LLC, Incorporated by
between Crown Asphalt Company, and Foreland Reference(18)
Asphalt Corporation, dated as of January
12, 1999
10.31 10 Second Amendment to Financing Agreement between Foreland, Incorporated by
Eagle Springs Production Limited Liability Company, Reference(18)
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 Agreement between Incorporated by
Energy Income Fund, L.P., and Foreland, dated as of Reference(18)
February 4, 1999
10.33 10 First Amendment to Common Stock Purchase Warrant dated Incorporated by
January 6, 1998 (Warrant No. 1), dated as of February Reference(18)
4, 1999
10.34 10 First Amendment to Common Stock Purchase Warrant dated Incorporated by
August 10, 1998 (Warrant No. 2), dated as of February Reference(18)
4, 1999
10.35 10 Common Stock Issuance Agreement between Energy Income Incorporated by
Fund, L.P., and Foreland, dated as of February 4, 1999 Reference(18)
10.36 10 Security Agreement (relating to fixtures) between Incorporated by
Foreland Asphalt Corporation and Energy Income Fund, Reference(18)
L.P., dated as of February 4, 1999
10.37 10 Pledge and Security Agreement (Cowboy Asphalt Terminal, Incorporated by
L.LC. membership interests) from Foreland Asphalt Reference(18)
Corporation to Energy Income Fund, L.P., dated as of
February 4, 1999
10.38 10 Letter/deferral/waiver/release agreement dated April 14, Incorporated by
1999, between Energy Income Fund, L.P. and Foreland Reference(18)
Corporation and subsidiaries
10.39 10 Voluntary Surrender Agreement, dated November 16, 1999, Incorporated by
between Energy Income Fund, L.P. and Foreland Reference(19)
Corporation
Item 21. Subsidiaries
- ----------------------------------------------------------------------------------------------
21.01 21 Subsidiaries of Foreland Corporation This Filing*
Item 23. Consents of Experts and Counsel
- ----------------------------------------------------------------------------------------------
23.01 23 Consent of Hein + Associates LLP, certified public This Filing*
accountants
Item 27. Financial Data Schedule
- ----------------------------------------------------------------------------------------------
27.01 27 Financial Data Schedule This Filing*
</TABLE>
(1) Incorporated by reference from Foreland's registration statement on form
S-2, SEC file no. 33-42828.
(2) Incorporated by reference from Foreland's registration statement on form
S-1, SEC file no. 33-19014.
(3) Incorporated by reference from Foreland's registration statement on form
S-1, SEC file no. 33-81538.
(4) Incorporated by reference from Foreland's registration statement on form
S-2, SEC file no. 33-64756.
(5) Incorporated by reference from Foreland's registration statement on form
S-2, , SEC file no. 33-86076.
37
<PAGE>
(6) Incorporated by reference from Foreland's annual report on form 10-K for
the fiscal year ended December 31, 1985.
(7) Incorporated by reference from Foreland's annual report on form 10-K for
the fiscal year ended December 31, 1994.
(8) Incorporated by reference from Foreland's registration statement on form
S-3, SEC file no. 333-3779.
(9) Incorporated by reference from Foreland's quarterly report on form 10-Q for
the period ending September 30, 1996.
(10) Incorporated by reference from Foreland's interim report on form 8-K dated
November 15, 1996.
(11) Incorporated by reference from Foreland's registration statement on form
S-3, SEC file no. 333-19063.
(12) Incorporated by reference from Foreland's annual report on form 10-K for
the fiscal year ended December 31, 1996.
(13) Incorporated by reference from Foreland's registration statement on form
S-3, SEC file no. 333-37793.
(14) Incorporated by reference from Foreland's interim report on form 8-K dated
January 6, 1998.
(15) Incorporated by reference from Foreland's annual report on form 10-K for
the fiscal year ended December 31, 1997.
(16) Incorporated by reference from Foreland's interim report on form 8-K dated
August 12, 1998, as amended on Form 8-K/A filed October 26, 1998.
(17) Incorporated by reference from Foreland's quarterly report on form 10-Q for
the period ending September 30, 1998.
(18) Incorporated by reference from Foreland's annual report on form 10-K for
the fiscal year ended December 31, 1998.
(19) Incorporated by reference from Foreland's interim report on form 8-K dated
November 16, 1999.
* Filed as an exhibit to this annual report on Form 10-K.
** Identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit.
(b) Reports on Form 8-K.
During the last quarter of the fiscal year ended December 31, 1999,
Foreland filed reports on form 8-K as follows:
Date of Event Reported Item Reported
----------------------- -------------------------
November 3, 1999 Item 5. Other Events
November 16, 1999 Item 5. Other Events
38
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FORELAND CORPORATION
Dated: May 4, 2000 /s/ N. Thomas Steele
------------------------------
N. Thomas Steele, President
Pursuant to the requirements of the Securities Exchange of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Dated: May 4, 2000 /s/ N. Thomas Steele
------------------------------
N. Thomas Steele, President and
Director (Principal Executive Officer)
Dated: May 1, 2000 /s/ Grant Steele
------------------------------
Grant Steele, Director
Dated: May 1, 2000 /s/ Bruce C. Decker
------------------------------
Bruce C. Decker, Director (Principal
Financial and Accounting Officer)
39
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report..............................................F-2
Consolidated Balance Sheet - As of December 31, 1999......................F-3
Consolidated Statements of Operations - For the Years Ended
December 31, 1998 and 1999..............................................F-5
Consolidated Statements of Stockholders' Deficit - For the Years
Ended December 31, 1998 and 1999........................................F-6
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998 and 1999..............................................F-7
Notes to Consolidated Financial Statements...............................F-10
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Foreland Corporation
Lakewood, Colorado
We have audited the accompanying consolidated balance sheets of Foreland
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years ending December 31, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foreland Corporation
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for the years ending December 31, 1999 and 1998, in
conformity with generally accepted accounting principles.
As discussed in Note 5 to the financial statements, the Company agreed to
voluntarily surrender substantially all of its assets in a foreclosure to the
Company's largest creditor. This foreclosure was completed subsequent to
year-end.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. As discussed in Notes 3 and 5 to the financial statements, the Company
surrendered substantially all of its assets subsequent to year-end and certain
significant litigation has been initiated against the Company, the resolution of
which is uncertain. The Company has also suffered cumulative losses since
inception and at December 31, 1999, the Company has a significant working
capital deficit. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 9, 2000, except for Note 2 for which the date is April 19, 2000.
F-2
<PAGE>
<TABLE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<CAPTION>
CURRENT ASSETS
Continuing operations:
<S> <C>
Cash $ 1,000
Receivables 1,000
Inventory 67,000
Prepaid expenses 19,000
-----------
Total current assets from continuing operations 88,000
Assets surrendered in foreclosure:
Trade receivables, net of allowance of $30,000 2,754,000
Inventories 1,697,000
Prepaid expenses and other 254,000
-----------
Total current assets surrendered in foreclosure 4,705,000
TOTAL CURRENT ASSETS 4,793,000
LONG-TERM ASSETS:
Continuing operations:
Office equipment, net 49,000
Unproved oil and gas properties 150,000
Deposits 85,000
-----------
284,000
Assets surrendered in foreclosure:
Property and equipment, at cost:
Oil and gas properties, under the successful efforts method 13,358,000
Refineries and building 6,639,000
Transportation and other equipment 1,330,000
Office equipment 211,000
Construction in progress 13,000
-----------
21,551,000
Less accumulated depreciation, depletion and amortization (13,822,000)
-----------
7,729,000
Debt issuance costs, net of accumulated amortization of $821,000 401,000
Equity investment in Cowboy Asphalt Terminal 371,000
Deposits and other 10,000
-----------
782,000
Total long-term assets surrendered in foreclosure 8,511,000
-----------
TOTAL ASSETS $13,588,000
===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
<TABLE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(continued)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Continuing operations:
<S> <C>
Amount due to seller of acquired business $ 2,676,000
Accounts payable 627,000
Accrued liabilities 506,000
Officers' salaries 495,000
-----------
Total current liabilities of continuing operations 4,304,000
Liabilities assumed in foreclosure:
Debt, net of discount of $726,000 in 1999 11,849,000
Accrued interest 999,000
Accounts payable 2,748,000
Accrued expenses and other 295,000
-----------
Total current liabilities assumed in foreclosure 15,891,000
TOTAL CURRENT LIABILITIES 20,195,000
LONG-TERM LIABILITIES ASSUMED IN FORECLOSURE:
Other 251,000
Line-of-credit 107,000
-----------
358,000
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, and 9)
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $.001 par value, 5,000,000 shares authorized;
407,243 shares issued and outstanding in 1999 (liquidation preference
of $2,956,000) -
Common stock, $.001 par value, 50,000,000 shares authorized;
9,733,206 shares issued and outstanding 10,000
Additional paid-in capital 36,714,000
Less stock subscriptions receivable (343,000)
Accumulated deficit (43,346,000)
-----------
Total stockholders' deficit (6,965,000)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $13,588,000
===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
<TABLE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1998 1999
---------- ----------
CONTINUING OPERATIONS:
<S> <C> <C>
Revenue $ - $ -
Expenses:
Oil exploration 1,929,000 320,000
Dry hole cost 1,706,000 -
General and administrative 937,000 1,260,000
Depreciation and amortization 70,000 68,000
Interest expense - 319,000
---------- ----------
Total expenses from continuing operations 4,642,000 1,967,000
---------- ----------
LOSS FROM CONTINUING OPERATIONS (4,642,000) (1,967,000)
OPERATIONS RELATED TO FORECLOSED ASSETS AND ASSUMED LIABILITIES:
Revenue:
Refining and transportation 9,704,000 28,217,000
Oil sales 828,000 -
Other 10,000 -
---------- ----------
Total revenue related to foreclosed assets and assumed liabilities 10,542,000 28,217,000
Expenses:
Refining and transportation:
Cost of goods sold 6,864,000 20,679,000
Other 1,986,000 4,542,000
Oil production costs:
Enhanced recovery project 585,000 -
Other 388,000 221,000
General and administrative 386,000 1,266,000
Abandonment and impairment costs 3,651,000 -
Depreciation, depletion, and amortization 4,194,000 816,000
Interest expense, net 1,731,000 2,454,000
(Gain) loss on sale of property (13,000) (6,000)
Equity in loss of Cowboy Asphalt Terminal - 23,000
---------- ----------
Total expenses and losses related to foreclosed assets
and assumed liabilities 19,772,000 29,995,000
---------- ----------
LOSS FROM OPERATIONS RELATED TO FORECLOSED ASSETS
AND ASSUMED LIABILITIES (9,230,000) (1,778,000)
---------- ----------
NET LOSS (13,872,000) (3,745,000)
Preferred stock dividend (37,000) (240,000)
---------- ----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(13,909,000) $(3,985,000)
============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,870,000 9,707,000
============ ===========
BASIC AND DILUTED LOSS PER SHARE (1.57) (.41)
============ ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE>
<TABLE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<CAPTION>
Note for
Preferred Stock Common Stock Additional Stock Total
---------------- ------------------- Paid-In Accumulated Subscriptions Stockholders'
Shares Amount Shares Amount Capital Deficit Receivable Deficit
------- ------- --------- ------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1998 762,000 $ 1,000 8,468,000 $ 8,000 $32,486,000 $(25,729,000) $(312,000) $6,454,000
Exercise of options and
warrants for common stock - - 8,000 - 32,000 - - 32,000
Issuance of 1998 series
preferred stock 2,000 - - - 2,000,000 - - 2,000,000
Preferred stock exchanged for
common (240,000) - 80,000 - - - - -
Issuance of common stock for:
Service - - 4,000 - 18,000 - - 18,000
Refiner assets - - 863,000 1,000 3,022,000 - - 3,023,000
Common stock issued for debt
issuance costs - - 250,000 1,000 179,000 - - 180,000
Accrued interest on notes - - - - - - (27,000) (27,000)
Options granted to employees - - - - 9,000 - - 9,000
Warrants granted for debt
discount - - - - 1,620,000 - - 1,620,000
Net loss - - - - - (13,872,000) - (13,872,000)
------- ------- --------- ------- ----------- ------------ --------- -----------
BALANCES, December 31, 1998 524,000 1,000 9,673,000 10,000 39,366,000 (39,601,000) (339,000) (563,000)
Preferred stock exchanged
for common stock (117,000) (1,000) 39,000 - 1,000 - - -
Common shares issued for
services - - 23,000 - 25,000 - - 25,000
Accrued interest on notes - - - - - - (27,000) (27,000)
Forgiveness of shareholder notes - - (2,000) - (2,000) - 23,000 21,000
Additional consideration due
to the seller of acquired
business - - - - (2,676,000) - - (2,676,000)
Net loss - - - - - (3,745,000) - (3,745,000)
------- ------- --------- ------- ----------- ------------ --------- -----------
BALANCES, December 31, 1999 407,000 $ - 9,733,000 $10,000 $36,714,000 $(43,346,000) $(343,000) $(6,965,000)
======= ======= ========= ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE>
<TABLE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Continued operations:
<S> <C> <C>
Net loss from continued operations $(4,642,000) $(1,967,000)
Depreciation and amortization 70,000 68,000
Accrued note receivable interest (27,000) (27,000)
Loss on forgiveness of shareholders notes - 21,000
Accrued interest on Petrosource acquisition - 319,000
Changes in operating assets and liabilities 1,470,000 (2,115,000)
----------- -----------
Net cash used in continued operations (3,129,000) (3,701,000)
Operations related to foreclosed assets
Net loss from discontinued operations (9,230,000) (1,778,000)
Depreciation, depletion and amortization 4,194,000 816,000
Bad debt expense 1,000 -
Dry holes, abandonments and impairments 5,356,000
Issuance of stock and options for services 18,000 25,000
Equity in loss of Cowboy Asphalt Terminal - 23,000
Amortization of debt discount and issuance costs 784,000 767,000
Stock-based compensation - employees 9,000 -
Loss (gain) on sale of assets (13,000) (6,000)
Oil and royalty interest conveyed under severance agreement
Other
Changes in current assets and liabilities, net of
effects of acquisition (150,000) 3,747,000
----------- -----------
Net cash provided by operations related to
foreclosed assests 969,000 3,594,000
Net cash used in operating activities (2,160,000) (107,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 13,000 79,000
Net cash received in acquisition of refining and transportation businesses 163,000 -
Investment in Cowboy Asphalt Terminal, L.L.C. (172,000) (222,000)
Capital expenditures for property and equipment (4,362,000) (1,795,000)
----------- -----------
Net cash used in investing activities (4,358,000) (1,938,000)
----------- -----------
</TABLE>
See accompanying notes to these consolidated financial statements.
(continued)
F-7
<PAGE>
<TABLE>
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1998 1999
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C>
Proceeds from sale of stock 2,000,000 -
Proceeds from exercise of warrants and options 32,000 -
Payment of long-term debt and promissory notes (26,000) (13,000)
Payment of debt issuance costs (81,000) (98,000)
Proceeds from long-term debt 6,401,000 307,000
----------- -----------
Net cash provided by financing activities 8,326,000 196,000
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,808,000 (1,849,000)
CASH AND EQUIVALENTS, beginning of year 41,000 1,850,000
----------- -----------
CASH AND EQUIVALENTS, end of year $ 1,849,000 $ 1,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid for interest $ 918,000 $ 526,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of refining and transportation businesses for:
Common stock $ 3,022,606 $ -
=========== ===========
Debt $ 5,000,000 $ -
=========== ===========
Debt issuance costs incurred for:
Common stock $ 179,625 $ -
=========== ===========
Debt $ 300,000 $ -
=========== ===========
Transfer of royalty interest $ 350,000 $ -
=========== ===========
Issuance of warrants for debt discount $ 1,620,000 $ -
=========== ===========
Return of common stock by officers for subscription receivable $ - $ 21,000
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-8
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - Foreland Corporation (Foreland) was incorporated
in Nevada in 1985 to engage in oil exploration, development, and
production. Activities to date have focused primarily in north-central
Nevada. As discussed in Note 3, the Company acquired certain refineries
and transportation equipment from Petro Source Corporation in August
1998. The refineries produce diesel fuel, residual fuel oil, asphalts,
and other petroleum products.
The Company entered a voluntary surrender agreement with its largest
creditor in November 1999. After the completion of the foreclosure
pursuant to this agreement, the Company will only be engaged in oil
exploration. The accompanying financial statements are not necessarily
indicative of the future results of the Company after the foreclosure.
The results of operations related to the foreclosed assets and assumed
liabilities are also not indicative of future results from the
operation of these assets by the Company's creditor.
Principles of Consolidation - The consolidated financial statements
include the accounts of Foreland and its wholly-owned subsidiaries,
Foreland Refining Corporation, Foreland Transportation Corporation,
Foreland Asphalt Corporation, Foreland Asset Corporation, Krutex Energy
Corporation, and Eagle Springs LLC, collectively referred to as the
Company. Krutex has no assets or operations. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
Marketable Securities - Marketable securities consist of certificates
of deposit which are carried at fair value, with unrealized holding
gains and losses included in earnings.
Oil and Gas Properties - The Company follows the "successful efforts"
method of accounting for oil and gas producing activities. Costs to
acquire mineral interests in oil and gas properties, to drill and equip
exploratory wells that find proved reserves, and to drill and equip
development wells are capitalized. Costs to drill exploratory wells
that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed.
Management estimates that the salvage value of lease and well equipment
will approximately offset the future liability for plugging and
abandonment of the related wells.
Capitalized costs of producing oil and gas properties are depreciated
and depleted by the unit-of-production method. Costs of exploratory
wells in progress are capitalized and excluded from depletion until
such time as proved reserves are established or impairment is
determined, generally not longer than one year from completion of
drilling. Depreciation and depletion expense related to oil and gas
properties amounted to $3,929,000 and $51,000 for the years ended
December 31, 1998 and 1999, respectively.
Upon the sale of an entire interest in an unproved property for cash,
gain or loss on the sale is recognized, taking into consideration the
amount of any recorded impairment if the property had been assessed
F-9
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
individually. If a partial interest in an unproved property is sold,
the amount received is treated as a reduction of the cost of the
interest retained.
Other Property and Equipment - Depreciation is calculated using the
straight-line method over the following estimated useful lives:
Years
-----
Refineries and building 3-15
Transportation and other equipment 3-7
Office furniture and equipment 3-10
The cost of normal maintenance and repairs is charged to operating
expenses as incurred. Material expenditures that increase the life of
an asset are capitalized and depreciated over the estimated remaining
useful life of the asset. The cost of properties sold, or otherwise
disposed of, and the related accumulated depreciation or amortization
are removed from the accounts, and any gains or losses are reflected in
current operations. Depreciation expense related to other property and
equipment amounted to $45,000, $334,000, and $832,000 for the years
ended December 31, 1997, 1998, and 1999, respectively.
Deferred Turnaround Charges - Deferred turnaround charges consist of
major refurbishing and other upgrades which extend the life of the
refineries. These costs are included in property and equipment and are
amortized over 3 years.
Impairment of Long-Lived Assets - The Company assesses impairment
whenever events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable. When an assessment
for impairment of proved oil and gas properties is performed, the
Company is required to compare the net carrying value of proved oil and
gas properties on a field-by-field 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 net carrying value exceeds the net cash flows, then impairment is
recognized to reduce the carrying value to the estimated fair value.
Unproved oil and gas properties are periodically assessed for
impairment of value, and a loss is recognized at the time of impairment
by providing an impairment allowance.
During the year ended December 31, 1998, the Company determined that
certain oil and gas properties were impaired and accordingly, a charge
of $3,651,000 was recognized to reduce the properties to the estimated
fair value. The provision for impairment is included in accumulated
depreciation, depletion, and amortization in the accompanying balance
sheets.
Inventories - Inventories are carried at the lower of cost or market.
For refined petroleum products, cost is generally determined using the
first-in, first-out method. For other inventories, cost is determined
using the average cost method or specific identification where
possible.
F-10
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes - The Company accounts for income taxes using the
liability method, whereby deferred tax, assets and liabilities are
recognized for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Investment in Cowboy Asphalt Terminal - The Company is a 33% owner in
an asphalt terminal. The investment in the terminal accounted for under
the equity method, is recorded at cost, adjusted for the Company's
share of earnings and distributions received.
Revenue Recognition - The Company recognizes sales of refined petroleum
products and crude oil upon delivery to the purchaser. Transportation
revenues are recognized as the services are performed.
Net Loss Per Common Share - Net loss per common share is presented in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, which requires disclosure
of basic earnings per share (EPS) and diluted EPS. Basic EPS is
computed by dividing income or loss applicable to common stockholders
by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock and resulted in the issuance of common
stock. Basic and diluted EPS are the same for all periods presented
since all potential common shares were antidilutive.
Stock-Based Compensation - The Company accounts for stock-based
compensation issued to employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options granted to employees
is measured as the excess, if any, of the quoted market price of the
Company's common stock at the measurement date (generally, the date of
grant) over the amount an employee must pay to acquire the stock.
The Company accounts for options, warrants, and similar instruments
which are granted to non-employees for goods and services at fair value
on the grant date, as required by SFAS No. 123, Accounting for Stock-
Based Compensation. Fair value is generally determined under an option
pricing model using the criteria set forth in SFAS No. 123. The Company
did not adopt SFAS No. 123 to account for stock-based compensation for
employees but is subject to the pro forma disclosure requirements.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. The
actual results could differ from those estimates.
F-11
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's financial statements are based on a number of significant
estimates including the allowance for doubtful accounts, realizability
of notes for common stock subscriptions receivable, assumptions
affecting the fair value of options and warrants, impairment of
long-lived assets, and oil reserve quantities which are the basis for
the calculation of depreciation, depletion, and impairment of proved
oil and gas properties. The Company's reserve estimates were determined
by an independent petroleum engineering firm.
Reverse Stock Split - In 1996, the Company effected a three-for-one
reverse stock split. Accordingly, all share and per share amounts in
the accompanying financial statements have been retroactively restated
to give effect to the reverse stock split.
Financial Instruments - SFAS No. 107 requires all entities to disclose
the fair value of certain financial instruments in their financial
statements. As a result of the Company's impaired financial position
and subsequent debt foreclosure, the fair value of the Company's debt
and other liabilities cannot be estimated. Management estimates that
the fair value of all its remaining financial instruments approximates
carrying value.
Impact of Recently Issued Accounting Pronouncements - In June 1998,
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and for
hedging activities. The Company does not currently engage in any
activities that would be covered by SFAS No. 133.
Reclassifications - Certain reclassifications have been made to the
1998 financial statements to conform to the presentation in 1999. The
reclassifications had no effect on the 1998 net loss.
2. BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the liquidation of liabilities in the normal course of business.
The Company is experiencing severe financial difficulties, including
the following:
* 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 Substantial Working Capital and Stockholders'
Deficits - As of December 31, 1999, Foreland had current assets of
$88,000 and current liabilities of $4,304,000 related to its
continuing operations for a working capital deficit of $4,216,000.
As of December 31, 1999, Foreland had an accumulated deficit of
$43,346,000.
F-12
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
* All of Foreland's Obligations are Substantially Past Due - All of
Foreland's $4,304,000 in current liabilities associated with its
continuing operations as of December 31, 1999, were substantially
past due except that $2,676,000 of such amount due the seller of
acquired business, plus $319,000 in interest, constitures a claim
for relief under a lawsuit in which Foreland has asserted
defenses. Three creditors with claims aggregating $445,000 have
obtained judgments against Foreland. In March 2000, Petro Source
Corporation, from which the Company purchased oil refining,
transportation, and marketing assets in 1998, filed a lawsuit
seeking the recovery from Foreland and other defendants of $2.9
million actual damages plus punitive damages, costs, attorneys'
fees and interest.
* Foreland Has No Revenue or Cash - Foreland has no cash or other
financial resources and no revenue from operations or other
activities, but must rely on raising additional capital to meet
its ongoing obligations for general and administrative expenses,
lease payments, payments to creditors, and other costs.
* Foreland Has Very Limited Assets on Which to Base a Financial
Recovery - As a result of the voluntary surrender of the
collateral securing its indebtedness, Foreland's remaining assets
consist of only other exploration prospects on approximately
49,000 gross acres of non-producing leases and the associated
geological and geophysical database accumulated by Foreland over
the preceding approximately 15 years. In addition, Foreland has
retained until May 31, 2000, the right, in agreed circumstances,
to participate at a 50% interest in drilling ventures on the
principal exploration prospect conveyed to the secured creditor.
* Foreland Has No Liquidity or Cash with Which to Reactivate - As a
result of the voluntary surrender of the collateral securing its
indebtedness. Foreland has no present ability to generate
revenues. Foreland has insufficient cash to maintain its
exploration leaseholds, pay its personnel, satisfy claims of
creditors, or undertake oil and gas exploration.
* Possible Inability to Continue - As a result of all of the
foregoing, Foreland urgently needs additional capital, but because
of its precarious condition and limited assets, may be unable to
attract any capital or sufficient capital to continue.
3. PURCHASE OF REFINING AND TRANSPORTATION ASSETS:
On August 12, 1998, the Company completed the purchase from an
unrelated firm of a crude oil processing refinery in Eagle Springs,
Nevada, a hydrocarbon processing facility in Tonopah, Nevada, and
trucks and related equipment used to gather crude oil and distribute
products. The purchase price was $8,688,000, which consisted of
$520,000 in common stock issued by the Company in December 1997,
$5,000,000 in cash, the issuance of 863,602 shares of common stock with
a fair value of approximately $3,023,000, and other costs related to
the acquisition of $145,000. The acquisition was accounted for using
the purchase method of accounting for business combinations, and,
accordingly, the accompanying consolidated financial statements include
the results of operations of the acquired business since the date of
acquisition. The purchase of the refinery and transportation assets and
related operations was effective as of June 1, 1998. For financial
F-13
<PAGE>
reporting purposes, earnings between the effective date and the closing
date of $378,000 were accounted for as a reduction in the purchase
price.
The purchase agreement requires the Company to register the shares
issued for the acquired assets. If the proceeds from liquidation of
763,602 shares is less than $2,676,000 (plus interest at 10% per
annum), the agreement requires the Company to issue additional shares
or pay cash for the deficiency. Based on the trading price of the
Company's common stock at December 31, 1999, the fair value of the
shares is approximately $150,000 and a sale of these shares into the
market will likely depress the stock price further, reducing the fair
value of the shares. Subsequent to year-end, the seller initiated
litigation asserting a claim of $2.9 million, plus punitive damages,
attorneys' fees and other costs, against the Company. The Company
intends to vigorously contest this claim, most likely through its
insurance carrier. A settlement in stock would most likely result in a
change of control of the Company. The $2,676,000 plus accrued interest
has been accrued as of December 31, 1999. The Company currently does
not have the wherewithal to pay a significant cash settlement.
The following unaudited pro forma information assumes that the
acquisition had occurred on January 1, 1998:
1998
----
Revenue $ 22,839,000
============
Net loss applicable to common stockholders $(14,590,000)
============
Net loss per share - basic and diluted $ (1.55)
============
F-14
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES:
Inventories consist of the following at December 31, 1999:
1999
Crude oil and other raw materials $ 60,000
Refined oil products 1,548,000
Oil field equipment and other 156,000
----------
Total $1,764,000
==========
5. DEBT:
Debt at December 31, 1999, consists of the following:
1999
----
Note payable to Energy Income Fund
(EIF), interest at 12% $12,575,000
Less unamortized discount (726,000)
-----------
Net $11,849,000
===========
The financing arrangement with EIF was entered into in January 1998 and
was amended in August 1998 and February 1999. Amounts due under the
financing arrangement are collateralized by substantially all property
and equipment and substantially all the company's subsidiaries have
signed as borrowers. The Company is required to maintain certain
financial ratios and comply with other terms and conditions while any
balance of indebtedness remains outstanding.
In 1999, the Company entered into an agreement with EIF to voluntarily
surrender substantially all of its assets, including its proved oil and
gas properties and its refining and marketing subsidiary. Prior to
signing the agreement, the Company was not in compliance with certain
financial covenants and failed to make required principle and interest
payments throughout 1999.
Pursuant to the terms of the agreement, EIF completed or will complete
foreclosure on substantially all the Company's assets subsequent to
December 31, 1999. All of the assets and liabilities associated with
the foreclosure are presented separately in the financial statements.
In connection with the establishment of the financing arrangement, the
Company issued to EIF five-year warrants to purchase 750,000 shares of
common stock at $6.00 per share and 250,000 shares at $10.00 per share
and granted EIF the right to designate a representative for appointment
to the Board of Directors of the Company. In connection with the
modification of the financing arrangement in August, the Company
increased the outstanding warrant to purchase 250,000 shares at $10.00
per share to 750,000 shares and
F-15
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reduced the exercise price to $6.00 per share. The estimated fair value
of these warrants and the subsequent modification amounted to
$1,620,000. This amount is accounted for as a discount which is
amortized using the interest method, resulting in a balance of $726,000
at December 31, 1999. The discount will be netted against the excess of
liabilities assumed over the foreclosed assets.
In addition to the warrants, the Company also agreed to transfer to EIF
a 3% overriding royalty interest in the Company's proved oil and gas
properties and a 1% overriding royalty interest in certain unproved
properties. The estimated fair value of these royalty interests of
$350,000 was accounted for as a debt issuance cost which is being
amortized using the interest method. In December 1998, the Company
issued 250,000 shares of common stock to EIF as an inducement to enter
into negotiations to restructure the financing agreement. The fair
value of this stock of $179,625 was accounted for as a debt issuance
cost and was charged to operations in the fourth quarter of 1998.
Line-of-Credit - The Company's refining subsidiary has a line-of-credit
with a financial institution which provides for borrowings up to
$3,000,000. The line bears interest at 8.875% and matures February 28,
2001. The line requires the payment of a commitment fee of 1/2% per
annum on the unused portion and a 1% fee applied to letters-of-credit
issued under the line. Letters of credit cannot exceed $1,300,000. The
line is also subject to a borrowing base of 75% of eligible accounts
and 50% of eligible inventory. The line also contains certain financial
covenants and restrictions on dividends. The line is guaranteed by
Energy Income Fund and other subsidiaries of the Company and is
collateralized by the inventory and receivables of Foreland Refining
Corporation. The Company had outstanding $107,000 on the line at
December 31, 1999.
6. INCOME TAXES:
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1999:
1999
-------------
Long-term deferred tax assets (liabilities):
Net operating loss carryforward $ 15,700,000
Property and equipment basis differences (200,000)
Below-market stock options 200,000
-------------
Net deferred tax assets 15,700,000
Less valuation allowance (15,700,000)
-------------
Net deferred tax assets $ -
=============
The Company has a net operating loss carryforward of approximately
$42,000,000 for income tax purposes. This carryforward expires in
varying amounts from 2000 through 2019. 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.
F-16
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PREFERRED STOCK:
The Company's Board of Directors has authorized the issuance of several
series of convertible preferred stock. The following is a summary of
shares issued and outstanding under each series at December 31, 1999:
<TABLE>
<CAPTION>
Convertible to
Preferred Common Stock Liquidation
Series Shares Shares Preference
<S> <C> <C> <C>
1991 Convertible Preferred Stock 20,000 6,667 $25,000
1994 Convertible Preferred Stock 153,140 51,047 306,000
1995 Convertible Preferred Stock 232,103 77,368 348,000
1998 Convertible Preferred Stock 2,000 333,333 2,277,000
------- ------- ----------
Total 407,243 468,415 $2,956,000
======= ======= ==========
</TABLE>
None of the series of preferred stock outstanding at December 31, 1999
has a stated dividend rate, except for the 1998 convertible preferred
stock, which has a stated dividend rate of 12%. No dividends have been
declared, but such amounts are reflected as a deduction from net loss
in determining net loss applicable to common shareholders on the
statement of operations. All of the preferred stock will participate in
any common stock dividends declared.
The 1995, 1994 and 1991 convertible preferred stock is redeemable at
$3.00, $4.00 and $1.25 per share respectively at the Company's option.
EIF is the sole holder of the 1998 convertible preferred stock.
Shareholder Rights Plan - During 1997, the Company's Board of Directors
adopted a rights agreement under which preferred stock purchase rights
(Rights) were distributed, as a dividend, at a rate of one Right for
each outstanding share of the Company's common stock on the record
date. Each Right entitles the holder to purchase 1/1000th of a share of
Series A preferred stock at an exercise price of $100. The Rights may
be redeemed by the Company at a redemption price of $.01 per Right in
the event of a takeover attempt. The Rights plan is not designed to
prevent a takeover but rather to encourage a potential acquiror to
negotiate with Board of Directors. The Rights are not currently
exercisable and do not trade separately from the Company's common
stock.
F-17
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK-BASED COMPENSATION:
Employee Stock Options - The Company's Board of Directors has granted
non-qualified stock options to officers, directors, and employees of
the Company. The following is a summary of activity under these stock
option plans for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------------------- ---------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
---------- ------ ---------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 1,653,000 $ 3.89 1,640,333 $ 3.87
Granted 20,000 3.50 - -
Expired (16,667) 5.70 (36,666) 8.40
Canceled (8,000) 4.00 (20,000) 4.00
Exercised (8,000) 4.00 - -
--------- ------ --------- ------
Outstanding, end of year 1,640,333 $ 3.87 1,583,667 $ 3.76
========= ====== ========= ======
<CAPTION>
At December 31, 1999, outstanding options vest as follows:
Range of
Exercise Prices
--------------- Number Weighted Average
Vested at December 31, Low High of Shares Exercise Price
---------------------- ----- ----- --------- --------------- --------------
<S> <C> <C> <C> <C>
1999 $2.50 $5.00 1,354,667 $3.92
2000 $2.50 $5.00 227,000 $3.16
2001 $2.50 $2.50 2,000 $2.50
--------- -----
1,583,667 $3.76
========= =====
If not previously exercised, options outstanding at December 31, 1999,
will expire as follows:
<CAPTION>
Range of
Exercise Prices
--------------- Weighted Average Number
Year Ending December 31, Low High Exercise Price of Shares
------------------------ ----- ----- --------------- --------- --------------
<S> <C> <C> <C> <C>
2002 $3.93 $4.50 $4.40 126,667
2003 - 2006 $4.00 $5.00 $4.73 547,000
2007 $2.50 $4.00 $3.58 487,500
2008 - 2010 $2.50 $2.50 $2.50 422,500
----- ---------
$3.76 1,583,667
===== =========
</TABLE>
F-18
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants and Non-Qualified Stock Options - The Company has also granted
warrants and non-qualified common stock purchase options to
non-employees which are summarized as follows for the years ended
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------------------- ---------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
---------- ------ ---------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 740,025 $10.84 1,656,803 $ 6.05
Granted for debt discount and
issuance costs 1,750,000 6.57 - -
Canceled (250,000) 10.00 - -
Expired (583,222) 12.00 (10,000) 3.75
--------- ------ ---------- ------
Outstanding, end of year 1,656,803 $ 6.05 1,646,803 $ 6.06
========= ====== ========== ======
All outstanding warrants and non-qualified options granted to
non-employees were exercisable at December 31, 1999. If not previously
exercised, these instruments will expire as follows:
<CAPTION>
Range of
Exercise Prices
--------------- Weighted Average Number
Year Ending December 31, Low High Exercise Price of Shares
------------------------ ----- ----- --------------- ---------
<S> <C> <C> <C> <C>
2000 $4.50 $4.50 $4.50 8,333
2001 $4.50 $7.50 $6.87 138,470
2003 $6.00 $6.00 $6.00 1,500,000
----- ---------
$6.06 1,646,803
===== =========
</TABLE>
Reload Options - At December 31, 1999, options and warrants with a
reload feature are outstanding for a total of 94,000 shares of common
stock. Upon exercise of all or part of these options, additional
options will be granted with an exercise price equal to the market
price of the Company's common stock at the date of exercise and an
exercise period of 5 years. If an employee tenders mature shares (held
in excess of six months) for the exercise price, then no compensation
charge will be recognized.
Pro Forma Stock-Based Compensation Disclosures - The Company applies
APB Opinion 25 and related interpretations in accounting for stock
options and warrants which are granted to employees. Accordingly, the
Company recognizes compensation cost for options granted to employees
to the extent that the market price of the Company's common stock
exceeds the exercise price on the date of grant. If compensation cost
had been recognized using the fair value method prescribed by SFAS No.
123 rather than the intrinsic value
F-19
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method under APB 25, the Company's net loss applicable to common
shareholders and loss per share would have been changed to the pro
forma amounts indicated below.
Year Ended December 31,
-------------------------
1998 1999
------------- ----------
Net loss applicable to common stockholders:
As reported $(13,909,000) $(3,985,000)
Pro forma (13,937,000) (3,985,000)
Net loss per common share:
As reported $(1.57) $(.41)
Pro forma (1.57) (.41)
The weighted average fair value of options granted to employees
amounted to $1.40 for the year ended December 31, 1998. No options were
granted in 1999. The fair value of each employee option and warrant was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Year Ended December 31,
-----------------------
1998 1999
------- --------
Expected volatility 70.0% N/A
Risk-free interest rate 6.1% N/A
Expected dividends - N/A
Expected terms (in years) 3.5 N/A
9. COMMITMENTS AND CONTINGENCIES:
Operating Leases - The Company currently rents administrative office
space and equipment under noncancelable leases. Total rental expenses
incurred under operating leases amounted to approximately $88,922 and
$160,000 for the years ended December 31, 1998 and 1999, respectively.
The total minimum rental commitment under all operating leases is as
follows:
Year Ending
December 31,
2000 $78,000
2001 63,000
2002 63,000
2003 17,000
2004 13,000
Thereafter 23,000
--------
$257,000
Environmental - The Company is subject to extensive Federal, state, and
local environmental laws and regulations. These laws, which are
constantly changing, regulate the discharge of materials into the
environment and may require the Company to remove or mitigate the
environmental effects of the disposal or release of petroleum or
chemical substances at various sites. Environmental expenditures are
expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed.
Liabilities for expenditures of a non-capital nature are recorded when
environmental assessment and/or remediation is probable, and the costs
can be reasonably estimated. The seller of the refineries agreed to
indemnify the Company for certain environmental obligations.
Oil Purchase Commitment - During 1999, the Company entered into an
agreement to purchase all oil produced by a third party in the State of
Nevada, at a market responsive price, with a guaranteed floor of
between $7.50 and $12.00 per barrel. The Company does not anticipate
the quantities purchased will be in excess of its refining capacities.
Contingencies - The Company may from time to time be involved in
various claims, lawsuits, disputes with third parties, actions
involving allegations of discrimination, or breach of contract
incidental to the operations of its business. The Company is not
currently involved in any such incidental litigation which it believes
could have a materially adverse effect on its financial conditions or
results of operations. Three creditors have obtained judgments against
the Company totaling approximately $445,000. These amounts are included
in accounts payable at December 31, 1999.
Also see Notes 2, 3, and 5.
10. SIGNIFICANT CONCENTRATIONS:
At December 31, 1999, sales and receivables from significant customers
were as follows:
1998 1999
--------- ----------
Accounts Accounts
Customer Sales Receivable Sales Receivable
A 32% 19% 30% 31%
B 0% 0% 8% 22%
C 8% 19% 0% 0%
An industry concentration also exists because the majority of the
Company's customers are engaged in the petroleum industry, mining or in
construction.
Prior to shipment, the Company generally evaluates each customer's
financial condition and establishes the amount of credit which may be
extended. If a customer desires credit in excess of this amount, the
Company generally obtains a letter-of-credit or other collateral to
support the higher level of credit.
F-20
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's refineries and oil and gas properties are located in
Nevada. While there have been significant oil discoveries in this area,
the remote location may result in delays and/or shortages of labor and
certain services. The incremental cost of transporting goods and
personnel may result in higher costs than those incurred by companies
doing business in other areas of the United States. In addition to the
crude oil production from the Company's properties, the refining
operations are dependent upon other oil producers in this area to
ensure an adequate supply of feedstock. In the current low oil price
environment, the Company could experience shortages of feedstock if the
producers of crude oil decide to suspend operations until oil prices
recover.
As discussed in Note 5, the Company's largest creditor foreclosed on
substantially all the Company's assets subsequent to year-end.
11. INDUSTRY SEGMENTS:
Through July 1998, the Company's operations were concentrated in oil
and gas producing activities. Beginning in August 1998, the Company was
engaged in the refining and transportation segment.
The accounting policies of the segments are the same as those described
in Note 1. Sales from the oil and gas producing segment to refining are
based on posted prices. The Company evaluates performance based on net
income or loss.
F-21
<PAGE>
<TABLE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Presented below is a summary of results of operations for each segment
for the years ended December 31, 1998 and 1999:
<CAPTION>
Oil and Gas Refining and Consolidation
Producing Transportation Entries Consolidated
------------ ---------- --------- ------------
DECEMBER 31, 1998
Revenue:
<S> <C> <C> <C> <C>
External customers $838,000 $9,704,000 $ - $10,542,000
Inter-segment 486,000 - (486,000) -
------------ ---------- --------- ------------
Total revenue 1,324,000 9,704,000 (486,000) 10,542,000
Costs and expenses:
Refining and transportation - 8,750,000 100,000 8,850,000
Oil production 974,000 - (586,000) 388,000
Enhanced recovery project 585,000 - - 585,000
Oil exploration 3,635,000 - - 3,635,000
General and administrative 940,000 383,000 - 1,323,000
Abandonment and impairment
costs 3,651 000 - - 3,651,000
Depreciation, depletion and
amortization 4,000 000 264 000 - 4,264,000
Interest and other, net 1,572,000 146,000 - 1,718,000
------------ ---------- --------- ------------
Total cost and expenses 15,357,000 9,543,000 (486,000) 24,414,000
------------ ---------- --------- ------------
Income (loss) before income
taxes (14,033,000) 161,000 - (13,872,000)
Income tax benefit (expense) 50,000 (50,000) - -
------------ ---------- --------- ------------
Net income (loss) $(13,983,000) $ 111,000 $ - $(13,872,000)
============ ========== ========= ============
<CAPTION>
DECEMBER 31, 1999
Revenue:
<S> <C> <C> <C> <C>
External customers $ - $28,217,000 $ - $28,217,000
Inter-segment 1,595,000 58,000 (1,653,000) -
------------ ---------- --------- ------------
Total revenue 1,595,000 28,275,000 (1,653,000) 28,217,000
Costs and expenses:
Refining and transportation - 26,136,000 (915,000) 25,221,000
Oil production 959,000 - (738,000) 221,000
Oil exploration 320,000 - - 320,000
General and administrative 1,260,000 1,266,000 - 2,526,000
Depreciation, depletion and
amortization 120 000 764 000 - 884,000
Interest and other, net 2,356,000 434,000 - 2,790,000
------------ ---------- --------- ------------
Total cost and expenses 5,015,000 28,600,000 (1,653,000) 31,962,000
------------ ---------- --------- ------------
Net loss $ (3,420,000) $ (325,000) $ - $(3,745,000)
============ ========== ========= ============
</TABLE>
F-22
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INVESTMENT IN COWBOY ASPHALT TERMINAL:
During 1998, the Company formed Cowboy Asphalt Terminal, L.L.C. (CAT).
CAT is a limited liability company that is owned 67% by an unrelated
entity and 33% by the Company. CAT was formed to acquire and operate an
asphalt terminal located near Salt Lake City, Utah. Under CAT's
operating agreement, a portion of the asphalt terminal property has
been designated for joint activities of the owners, a portion has been
set aside for the other owner to conduct its paving asphalt business,
and the remainder is designated for the Company to conduct its roofing
asphalt business.
During 1998, CAT made payments totaling $286,164 to obtain the right to
purchase the asphalt terminal. On January 7, 1999, the closing for the
acquisition of the asphalt terminal occurred whereby CAT made an
additional cash payment of $195,000 and executed a promissory note for
$1,282,070. The note is collateralized by the asphalt terminal
property, provides for interest at 9%, and monthly payments of $20,627
are due until January 2006. In connection with the purchase agreement,
the seller retained a residual interest in the event the property is
sold and the parties agreed to provide a right of first refusal if a
member of CAT desires to sell its interest.
Through December 31, 1999, the Company incurred $394,557 for capital
contributions to CAT. The Company also recorded its share of the net
loss of CAT as equity in loss of affiliated company in the amount of
$23,000 using the equity method of accounting.
13. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES:
All oil and gas operations of the Company and its subsidiaries are
conducted in the United States. Capitalized costs relating to oil and
gas producing activities are as follows:
December 31,
1999
-----------
Proved oil and gas producing properties $13,103,000
Unproved properties, net of allowance
for impairment of $67,000 404,000
-----------
13,507,000
Accumulated depreciation, depletion and
amortization (12,609,000)
-----------
$ 898,000
===========
Costs incurred in oil and gas producing activities, whether capitalized
or expensed, during the years ended December 31, 1998 and 1999 are as
follows:
1998 1999
----------- ----------
Acquisition costs $ 602,292 $ -
========== ==========
Exploration costs $4,358,142 $ 320,000
========== ==========
Development costs $ 849,438 $ -
========== ==========
Results of operations from oil and gas producing activities (excluding
refining and transportation activities, general and administrative
expenses, and interest expense) for the years ended December 31, 1998
and 1999 are presented below.
1998 1999
---------- ----------
Oil sales $1,314,714 $1,595,000
Gain (loss) on sale of oil and
gas properties 2,635 -
Production costs:
Enhanced recovery project (585,117) -
Other (974,012) (959,000)
Exploration costs:
Dry hole costs (1,705,858) -
Delay rentals (175,055) (102,000)
Geologic and geophysical (1,753,710) (218,000)
Abandonment and impairment costs (3,650,533) -
Depreciation and depletion (3,929,360) (120,000)
---------- ----------
Results of operations from oil
and gas producing activities $(11,456,296) $ 196,000
============ ==========
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) -
Proved oil and gas reserves are the estimated quantities of crude oil,
which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed oil and
gas reserves are those expected to be recovered through existing wells
with existing equipment and operating methods. However, reserve
information should not be construed as the current market value of the
Company's oil and gas reserves or the costs that would be incurred to
obtain equivalent reserves. Reserve calculations involve the estimation
of future net recoverable reserves of oil and gas and the timing and
amount of future net revenues to be received therefrom. These estimates
are based on numerous factors, many of which are variable and
uncertain. Accordingly, it is common for the actual production and
revenues to vary from earlier estimates.
Reserve estimates for recently drilled wells and undeveloped properties
are subject to substantial upward or downward revisions after drilling
is completed and a production history obtained. Therefore, reserve esti
mates and estimates of future net revenues from production may be
subject to substantial revision from year to year. Reserve information
presented herein is based on reports prepared by independent petroleum
engineers.
F-23
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Set forth below is the unaudited summary of the changes in the net
quantities of the Company's proved oil reserves (in barrels) as of
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- ----------
<S> <C> <C>
Proved reserves, beginning of year 2,297,000 508,000
Production (159,000) (163,000)
Purchase of reserves in place 224,000 -
Revisions of previous estimates (1,854,000) 477,000
Reserves surrendered in voluntary foreclosure - (822,000)
----------- ----------
Proved reserves, end of year 508,000 -
=========== ==========
Proved developed reserves, beginning of year 1,450,000 508,000
=========== ==========
Proved developed reserves, end of year 508,000 -
=========== ==========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) -
Statement of Financial Accounting Standards No. 69 prescribes
guidelines for computing a standardized measure of future net cash
flows and changes therein relating to estimated proved reserves. The
Company has followed these guidelines which are briefly discussed
below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated
quantities of oil and gas to be produced. Estimated future income taxes
are computed using current statutory income tax rates including
consideration for estimated future statutory depletion and tax credits.
The resulting future net cash flows are reduced to present value
amounts by applying a 10% annual discount factor. The Company's
year-end reserve reports were prepared based upon average oil prices of
approximately $5.80 and $19.88 per barrel as of December 31, 1998 and
1999, respectively.
December 31,
---------------------------
1998 1999
---------- -----------
Future cash inflows $2,949,000 $16,351,000
Future production costs (2,313,000) (8,418,000)
Future development costs - -
Future income tax expense - -
---------- -----------
Future net cash flows 636,000 7,933,000
10% annual discount for estimated
timing of cash flows (145,000) (2,800,000)
Surrender of reserves in voluntary
foreclosure - (5,133,000)
---------- -----------
Standardized measure of discounted
future net cash flows $ 491,000 $ -
========== ===========
F-24
<PAGE>
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are the principal sources of change in the standardized
measure of discounted future net cash flows for the years ended
December 31, 1998 and 1999:
1998 1999
---------- -----------
Standardized measure,
beginning of year $6,712,000 $ 491,000
Sales of oil and gas, net
of production costs (372,000) (857,000)
Extensions, discoveries and other, net - -
Purchase of reserves in place 799,000 -
Net change due to revisions in
quantity estimates and other (2,565,000) 2,166,000
Net change due to changes in prices
and production costs (6,882,000) 3,284,000
Net change in future development
costs 2,128,000 -
Net change in income taxes - -
Accretion of discount 671,000 49,000
Surrender of reserves in voluntary
foreclosure - (5,133,000)
---------- -----------
Standardized measure, end of year $ 491,000 $ -
========== ===========
As discussed in Note 5 to the financial statements, the Company
surrendered substantially all its assets, including all its producing
oil and gas properties, as well as a portion of its undeveloped
properties. The Company expects no future production from these
reserves, therefore, the standardized measure has been reduced to zero
for financial reporting purposes. The disclosure in the standardized
measure for the reserves surrendered is not indicative of the fair
value of these reserves.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do
not necessarily reflect the Company's expectations for actual revenues
to be derived from those reserves nor their present worth nor is it
representative of any fair value in the foreclosure proceedings. The
limitations inherent in the reserve quantity estimation process, as
discussed previously, are equally applicable to the standardized
measure computations since these estimates are the basis for the
valuation process.
F-25
State of
Name Incorporation
EAGLE SPRINGS PRODUCTION LIMITED LIABILITY COMPANY NEVADA
KRUTEX ENERGY UTAH
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the registration statements of
Foreland Corporation on Forms S-3, SEC File Nos. 333-19063 and 333-3779 and
333-49471 and the registration statement on Form S-8, SEC File No. 333-45025 of
our report dated March 9, 2000 , except for Note 2 for which the date is April
19, 2000 on our audits of the consolidated financial statements of Foreland
Corporation as of December 31, 1999 and for years in the ending December 31,
1999 and December 31, 1998 which report is included in this Annual Report on
Form 10-K-SB.
HEIN + ASSOCIATES LLP
Denver, Colorado
May 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHECULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1999, AND STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 2,784,000
<ALLOWANCES> 30,000
<INVENTORY> 1,764,000
<CURRENT-ASSETS> 4,793,000
<PP&E> 21,835,000
<DEPRECIATION> 13,822,000
<TOTAL-ASSETS> 13,588,000
<CURRENT-LIABILITIES> 20,195,000
<BONDS> 0
10,000
0
<COMMON> 0
<OTHER-SE> (6,975,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,588,000
<SALES> 28,217,000
<TOTAL-REVENUES> 28,217,000
<CGS> 20,679,000
<TOTAL-COSTS> 31,962,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,773,000
<INCOME-PRETAX> (3,745,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,745,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,745,000)
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
