-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RUWmhBmADvL/VrA07uKsdLnfUK/d+a+ciqdBjFC73UlnKOKTg3tFOg1Xe0FlmQpq 3aGHGltD9vhvLnJPUWhJKA== 0000914233-99-000028.txt : 19990419 0000914233-99-000028.hdr.sgml : 19990419 ACCESSION NUMBER: 0000914233-99-000028 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORELAND CORP CENTRAL INDEX KEY: 0000773326 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 870422812 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14096 FILM NUMBER: 99595361 BUSINESS ADDRESS: STREET 1: 143 UNION BOULEVARD STREET 2: SUITE 210 CITY: LAKEWOOD STATE: CO ZIP: 80228 BUSINESS PHONE: 3039883122 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number 0-14096 Foreland Corporation (Exact name of registrant as specified in its charter) Nevada 87-0422812 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 143 Union Boulevard, Suite 210 Lakewood, Colorado 80228-2019 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (303) 988-3122 Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to section 12(g) of the Act: Common Stock, Par Value $0.001 Preferred Stock Purchase Rights (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[x] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.[ ] The aggregate market value of the registrant's voting stock held by nonaffiliates computed at the average closing bid and asked prices in the over- the-counter market as quoted on the National Association of Securities Dealers National Quotation system ("NASDAQ") on April 13, 1999, was approximately $ 7,441,748. As of April 13, 1999, Foreland had outstanding 9,696,240 shares of its common stock, par value $0.001. Foreland's definitive proxy statement related to the 1999 annual meeting of stockholders is incorporated herein by reference in response to Part III of this annual report. - ------------------------------------------------------------------------------- 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: . 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 prices of oil and the sales prices of finished goods; * the successful integration of the refining, transportation, and marketing operations with the exploration and production operations of Foreland; * the construction and operation of the asphalt processing facility; * the availability of feedstock for refining; * achievement of operating goals; * quarterly fluctuations in operating results;and * unanticipated changes in expenses or capital expenditures; and . actual results and events may differ materially from those in the forward- looking statements as a result of various factors, including: * general economic conditions in the markets in which Foreland operates; * competitive pressures within the industry and/or the markets in which Foreland operates; * the effect of future legislation or regulatory changes on Foreland's operations; and * other factors described in risk factors contained in this report. 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. PART I. - ------------------------------------------------------------------------------ ITEMS 1 AND 2. BUSINESS AND PROPERTIES - ------------------------------------------------------------------------------ Company Overview Foreland's refinery and transportation segment refines crude oil in Nevada and distributes and markets petroleum products throughout the western U.S. Its oil and gas production segment explores for and produces crude oil in the central Nevada region. Refining and Marketing Foreland owns and operates 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. Foreland also owns 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 Foreland's Tonopah refinery yields gasoline, diesel, and other specialty products that are marketed by Foreland. Foreland owns 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 is nearing completion of a manufacturing facility at Cowboy Asphalt Terminal for converting asphalt flux into premium roofing asphalt. Foreland's Eagle Springs Refinery produces high-quality asphalt flux from crude oil produced from one of Foreland's Nevada oilfields. Foreland owns a trucking fleet consisting of 24 truck tractors and 75 oil gathering and finished goods delivery tank trailers. Foreland's trucks are 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 purchased the refining and marketing assets from an unrelated firm on August 12, 1998. Exploration and Production Foreland is engaged in the exploration for, and production of, crude oil in the central Nevada region. Foreland owns an interest in four producing oilfields in Nevada. All of the crude oil produced from these fields is gathered by Foreland's trucks and refined at its Eagle Springs Refinery. Foreland pioneered the use of 3D seismic in Nevada and has assembled a proprietary technical database which is used in its exploration efforts. Foreland has established a substantial inventory of exploration leads in Nevada for possible exploration. Certain Risks Foreland's activities are subject to significant risks. See "Risk Factors" below. Foreland's Current Precarious Financial Condition Foreland is suffering from extreme shortages of working capital, defaults on major indebtedness and due or past due current liabilities and the need for substantial amounts of additional investment, strategic alliances, or a sale, merger, or reorganization involving all or portions of its business and operations. Foreland Had a Working Capital Deficit of $9.8 Million (disregarding $1.2 ------------------------------------------------------------------------- million non-cash accrued discount for debt issuance) as of December 31, ----------------------------------------------------------------------- 1998, and Faces Extreme Working Capital Requirements. Based on current ----------------------------------------------------- oil production and prices, refinery throughput, and finished goods sales and margins, Foreland does not generate sufficient revenues to satisfy its cash requirements for general and administrative expenses, dividends on preferred stock, principal payments on debt, and other payments to trade creditors and others respecting approximately $15.2 million in short-term liabilities as of December 31, 1998, including $12.4 million resulting from reclassification of Foreland's long-term debt. Similarly, Foreland has insufficient cash to undertake material oil and gas exploration. Foreland Has Insufficient Cash to Pay $12.6 Million in Secured Indebtedness. --------------------------------------------------------------------------- Foreland was not able to pay the principal payment of $338,096 due April 1, 1999, on $12.6 million indebtedness due Energy Income Fund ("EIF"), did not make earlier payments that were subsequently deferred and has not been in compliance with certain financial covenants relating to minimum collateral to indebtedness ratio, cash flow, equity requirements, current ratio, debt service ratio, and general and administrative expense percentages. All of Foreland's assets and operations used in its refinery, transportation and marketing activities and its producing properties are encumbered as security for this obligation. On April 15, 1999, EIF agreed to defer the first principal payment (now $347,437) until May 1, 1999, and waive compliance with the financial covenants until May 15, 1999. Foreland is implementing cost cutting measures and restructuring its resources in order to be able to make the required payments and comply with the financial covenants, but there is no assurance it will be able to do so. If Foreland fails to make a required payment or comply with the financial covenants, EIF will have the legal right to implement its remedies on default, initiate foreclosure and seek to take possession of substantially all of Foreland's assets. There can be no assurance that EIF will agree to any further extensions or modifications or continue to forbear from exercising its remedies in the event of a default. Foreland's Audit Report for the Year Ended December 31, 1998, Contains a ----------------------------------------------------------------------- Going Concern Explanatory Paragraph. Foreland's independent auditor's ------------------------------------ report on the December 31, 1998, financial statements, as for preceding fiscal years, contains an explanatory paragraph which indicates there is substantial doubt as to Foreland's ability to continue as a going concern. As of December 31, 1998, Foreland had a working capital deficit of $9.8 million (disregarding the $1.2 million non-cash accrued discount for debt issuance) and an accumulated deficit of $39.6 million since its inception in 1985. Foreland had losses of $13.9 million for the year ended December 31, 1998, and expects its losses to continue. Foreland is delinquent in payments to trade creditors and others. There can be no assurance that Foreland's efforts to obtain forbearance from EIF, trade creditors, or others; implement adequate cost cutting measures; severely restrict activities; or implement other measures that will enable Foreland to continue. Foreland Will Need Additional Investment, Strategic Alliance or Sale/Merger. -------------------------------------------------------------------------- In order for Foreland to continue, it will need to capitalize on its market position, technical capabilities, management, assets and identified business opportunities by either raising additional capital, creating a strategic alliance with another company, or selling or merging some or all of its lines of business. Foreland has engaged an investment banker to assist in these efforts. 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 goal is to realize high margins on the sale of refined products by: . owning fully-integrated exploration and production as well as refining and marketing assets; . focusing on niche product markets where Foreland is not in competition with larger, integrated oil companies; . developing new markets for its products throughout the western U.S.; and . owning its own crude oil supply for a substantial portion of its refinery feedstock, supplemented by an aggressive exploration program in central Nevada. Corporate Strategy Foreland seeks to attain its goal of becoming an integrated regional exploration, production, refining, and marketing company that competes in niche markets by implementing a strategy with the following principal components: . Develop and significantly expand refined product marketing throughout the western U.S. . Manufacture and market roofing asphalt from its terminal in Salt Lake City. . Increase refinery feedstock throughput to achieve economics of scale by (a) acquisition of producing properties; (b) refinery feedstock purchase contracts; and (c) identification of backhaul opportunities (hauling product using otherwise empty trucks) using Foreland's transportation fleet. . Increase the effective value of existing and future crude oil production by owning fully-integrated refining and marketing assets. . Explore and develop the central Nevada region to generate additional crude oil feedstock for its oil refinery and marketing segments. 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 is now integrating the refining and transportation assets with its Nevada oil production and markets a range of refined products. Foreland employs about 60 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 2,025 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 Foreland's trucking fleet. All of the crude oil processed at Eagle Springs Refinery is obtained from Nye County, Nevada, and is delivered by Foreland's 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 Eagle Springs Refinery will 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 Foreland's crude from the Eagle Springs and Ghost Ranch fields), 220 barrels of Nevada heavy crude (including crude from its 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 may justify expenditures for oilfield workovers and maintenance as well as exploration during the current low oil price environment. Foreland believes that the refinery's isolated location for captive crude supplies and products markets is the reason for its consistently high margins. 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 its truck fleet enables Foreland to backhaul finished gasoline and diesel into the Las Vegas and Sparks/Reno markets when prices are favorable. Foreland consistently evaluates new markets for specialty products that can be produced at Tonopah Refinery. For example, Foreland is currently studying the economics of producing specialty waxes that could be sold to manufacturers of wax firelogs in California. The wax sold to the manufacturers would be a blend of wax bought in Utah and backhauled to the Tonopah Refinery, plus wax produced from Foreland crude refined at Eagle Springs Refinery. Management believes that it can supply a quality wax product into the California market at a lower price than that offered by the manufacturers' existing suppliers in Salt Lake City. Two firelog manufacturers have indicated an interest in purchasing Foreland's estimated wax production from Tonopah Refinery. Asphalt Marketing Foreland owns 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 for Foreland: . Heated asphalt storage capacity for roofing asphalt flux produced at Eagle Springs Refinery; . A variety of other product storage tanks; . Strategic location for distribution of roofing flux to potential purchasers; and . Land for future expansion. By virtue of its ownership of the Eagle Springs field, Foreland has a dedicated supply of crude oil that makes excellent asphalt flux. Foreland is nearing completion of construction of an 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 believes that it can gain market share in the asphalt roofing market and increase gross margin per ton by selling asphalt as high quality roofing asphalt. This is expected to enhance the value to Foreland of its Nevada crude used to produce flux at Eagle Springs Refinery. Foreland estimates that approximately 25% of the roofing asphalt produced at Cowboy will be sold in the Salt Lake City area, with the remaining 75% sold throughout ten western states, predominantly California and Nevada. 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. Foreland's transportation fleet consists of approximately 24 truck tractors (18 leased, six owned) and 75 oil gathering and finished goods delivery tank trailers (six leased, 69 owned). Foreland believes that it is 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 employs 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 is nearing completion of 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 are 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: . Naphtha. Naphtha is marketed to other refineries as a gasoline blendstock if it cannot be sold locally as mineral spirits. The closest refineries are in Salt Lake City, with alternative markets in Los Angeles and Bakersfield. . No. 1 Diesel. No.1 diesel is currently sold to a military base near Las Vegas under a new three-year contract. An alternative market for No. 1 diesel is as a highway diesel fuel in Nevada. . 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 currently sells most of its No. 2 diesel to one mine in Nevada. . Fuel Oils. Fuel oils from the Eagle Springs Refinery go 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 is currently sold to three customers in Nevada. Surplus low sulfur fuel oil, and high sulfur fuel oil that cannot be blended to have less than 1 percent sulfur, are sold as feedstock to refineries in Salt Lake City, Los Angeles or Bakersfield. . 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 is able to market all of its current production of paving asphalt to private contractors and the State of Nevada. . 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 is now being stored at Cowboy Asphalt Terminal. All of the projected future production of roofing asphalt flux from the Eagle Springs Refinery will be trucked to Cowboy Asphalt Terminal, blown to produce roofing asphalt and marketed by Foreland. If the production of flux from the Eagle Springs Refinery exceeds the capacity of Cowboy Asphalt Terminal, potential markets exist with manufacturers in Denver, Los Angeles and Portland. Since acquisition of the Eagle Springs and Tonopah Refineries, Foreland does not sell any crude oil to external purchasers. Sales to Round Mountain Gold Corporation account for 20% of the refining and transportation operations revenues Exploration and Production Producing Oilfields Foreland owns working interests in four oil fields in Nevada. They are 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 has now been terminated because the fractured nature of the reservoirs led to minimal increased production and rapid breakthrough of injected air. Foreland intends to return a former air injector into production. 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 160 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 owns 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. 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 is trucked to the Eagle Springs Refinery for processing. 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 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. Foreland currently leases approximtely 166,600 gross (136,700 net) acres in Nevada, and has developed a five-year, 3D-defined exploration and exploitation program. The program consists of a balance of lower-risk opportunities to exploit areas with large estimated amounts of oil in place, along with exploration prospects with higher reserve and deliverability potential. A summary of three of Foreland's large-target exploration prospects follows: Hay Ranch Exploitation Area, Pine Valley, Nevada Foreland has identified six leads in the Northern Pine Valley area using 2D seismic. . Foreland has 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. 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 has not been installed. Foreland projects that the thickness of the source rock averages approximately 700 feet. Foreland has proposed a 30 square mile 3D seismic shoot to delineate the structural blocks updip, and pinpoint drilling locations. 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 20,000 acres over the prospect. During 1998, Foreland conducted the following activities: . drilled and placed into production one well in the Sand Dune prospect; . entered into a joint venture with Conley P. Smith Operating Company for exploration in Cave Valley, Nevada, for a 33% interest, and under such joint venture drilled one exploration test, the Flat Top 27-15, which was plugged and abandoned; . entered into an agreement with McMurry Oil Company to participate in Foreland's Dixie Flats prospect for a 50% interest, and under such agreement drilled the initial test well, which was plugged and abandoned; and . drilled and tested North Pine Creek 1-6 exploratory well, subsequently plugged and abandoned; and . drilled and tested the Eagle Springs no. 14-35 development well and Ghost Ranch no. 58-35 development well, both of which were plugged and abandoned. Management expects that it will take several years to fully explore the Nevada target areas that have been identified by Foreland. In the meantime, Foreland continues to increase and improve its geological and geophysical expertise in central Nevada through its own drilling and field exploration efforts, and by obtaining data from third parties as part of joint exploration, property acquisition and data sharing arrangements. Foreland also reanalyzes existing information as additional drilling data is gathered, and as new computer techniques become available to the industry. Proved Reserves Foreland is engaged in the exploration for, and production of, crude oil in the central Nevada region. Foreland owns an interest in four producing oilfields in Nevada. All of the crude oil produced from these fields is 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, 1998. The reserve information is based on the independent appraisal prepared by Malkewicz Hueni Associates, Inc., Golden, Colorado, and 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 are made using a sales price of $5.80 per barrel, held constant throughout the life of the properties, and do not consider the price that Foreland may receive after refining the crude oil into finished products. Due to the low oil price of $5.80 at December 31, 1998, as compared to the oil prices of $12.55 and $18.05 per barrel used in the previous two year- end reserve studies, Foreland recognized substantial downward revisions in its oil reserve quantities, the standardized measure and net capitalized costs due to impairment. 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..... 348.9 $362.3 Ghost Ranch field....... 159.5 129.2 Kate Springs field...... -- -- Sand Dune field -- -- ---------- --------------------- Total............... 508.5 $491.5 ========== ===================== - -------- (1) The price used in the evaluation was the year-end values at the wellhead of $5.80 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 in the appraisal, the resulting values would change substantially. The reserve estimates contained in the engineering report 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. The 1998 reserve report gives effect to future oil recovery that may be realized from returning a former air injection well to production. There are numerous uncertainties inherent in estimating quantities of proved oil reserves. The estimates in the appraisal 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 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. The actual amount of Foreland's proved reserves are dependent on the prevailing price for oil, which is beyond Foreland's control or influence. World oil prices declined significantly during 1997 and 1998 from previous years. 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 has acquired and is operating the Eagle Springs and Tonopah refineries. Additionally, Foreland is constructing 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, 1998. 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, 1998. Developed Acreage Undeveloped Acreage ----------------- ---------------------- Gross Net Gross Net ------ ------- -------- -------- 4,280 4,184 166,600 136,700 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) are held by production. Foreland's undeveloped leases have various primary terms ranging from one to ten years. Management believes that the expiration of any individual or group of related undeveloped leasehold interests would not have a material adverse effect on Foreland. Annual rentals on all undeveloped leases for 1999 are expected to be approximately $168,400. Drilling Activities Set forth below is a tabulation of wells drilled and completed in which Foreland has participated and the results thereof for each of the periods indicated. Year Ended December 31, --------------------------------------- 1996 1997 1998 ----------- ------------ ------------ Gross Net Gross Net Gross Net ----- ---- ----- ----- ----- ----- Exploratory: Dry.................... 2.0 1.16 -- -- 3.0 1.36 Oil.................... 2.0 1.60 -- -- -- -- Gas.................... -- -- -- -- -- -- ----- ---- ----- ----- ----- ----- Totals............. 4.0 2.76 -- -- 3.0 1.36 ===== ==== ===== ===== ===== ===== Development: Dry.................... -- -- -- -- 2.0 2.0 Oil.................... -- -- 2.0 1.2 1.0 1.0 Gas.................... -- -- -- -- -- -- ----- ---- ----- ----- ----- ----- Totals............. -- -- 2.0 1.2 3.0 3.0 ===== ==== ===== ===== ===== ===== Production and Sale of Oil The following table summarizes certain information relating to Foreland's net oil produced and sold from Foreland's Nevada properties, after royalties, during the periods indicated. Year Ended December 31, ------------------------ 1996 1997 1998 ------- ------ -------- Average net daily production of oil (Bbl) 325 492 436 Average sales price of oil ($ per Bbl) $15.87 $12.46 $8.37 Average production cost ($ per Bbl)(1) $4.01 $5.03 $5.83 - ---------- (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. Production from Eagle Springs started in January 1994, and currently accounts for about 70% of Foreland's oil production. As part of routine field maintenance wells are 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. Foreland's activities are generally dependent on the prevailing price for oil and finished goods sales, which are beyond Foreland's control or influence. Management believes that refinery margins are less volatile than oil prices. However, oil prices will continue to have an effect on the supply of crude oil available to Foreland for processing, the level of exploration and development activities generally in Nevada and surrounding areas, and the prices and margins of finished goods. 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: . the supply and demand for refined products; . 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 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 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. Overall operating costs are a combination of costs associated with each well and costs associated with operation of the entire field. In addition, operating costs may continue to vary materially due to the costs of ongoing treatment or reworking of existing wells and the impact of the other factors discussed above. Foreland has only minor gas production which is used in operations to reduce lifting costs. 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, as well as 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 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, production, refining and transportation of oil. These hazards include, but are not limited to, 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 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. Foreland has general liability insurance of $1 million per occurrence, with a $2 million aggregate limitation, including coverage for certain oil industry activities. Management believes that Foreland's current insurance coverage is adequate; however, Foreland may not be insured against all losses or liabilities which may arise from all hazards because such insurance is unavailable at economic rates, because of limitations on the insurance policy, or other factors. Foreland's insurance does 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 Foreland currently has 93 full-time employees, distributed between the following locations: . Executive and exploration offices, Lakewood, Colorado: 16 employees . Foreland Refining Corporation, Woods Cross, Utah: 16 employees . Eagle Springs Refinery, Nevada: 19 employees; . Tonopah Refinery, Nevada: 11 employees . Foreland Transportation, Nevada: 31 employees. None of Foreland's employees is represented by a collective bargaining organization, and Foreland considers its relationship with its employees to be satisfactory. 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 January 2004, and requiring monthly payments of $9,766, including certain common area charges. Foreland's refining and transportation segments executive offices are located at 2561 South 560 West, Suite 200, Woods Cross, Utah 84087, are rented from an unrelated party under a lease expiring January 2003 requiring monthly payment of $4,185. Risk Factors The business of Foreland is subject to a number of material risks, including, but not limited to, the factors set forth below. Foreland May Incur Costs and Experience Delays in its Refining, Transportation, and Marketing Operations In order for Foreland to operate successfully its refining, transportation, and marketing segment acquired in August 1998, Foreland may incur substantial costs or experience significant delays as it assumes management, implements various operating changes, constructs modifications or improvements, implements new marketing strategies, or makes other changes. These operations will be under the supervision of Foreland's executive officers and directors, who have no substantial experience or expertise in refining, transportation, and marketing operations. Foreland is significantly dependent on the management employees who previously worked for Petro Source in refinery and transportation management and operations and on Foreland's ability to integrate skills and activities with those of Foreland's management and personnel. Foreland's Refining and Marketing Strategy is Substantially Dependent on Successful Roofing Asphalt Manufacturing and Marketing. Foreland's strategy to increase the revenues and margins received from the crude oil it produces is substantially dependent on Foreland's ability to manufacture and market roofing asphalt. Foreland's success in entering the roofing asphalt market is dependent on successfully: . completing construction, now underway, at the Cowboy terminal of a manufacturing facility to produce roofing asphalt from asphalt flux produced at Eagle Springs; and . marketing roofing asphalt to be produced, notwithstanding competition from established manufacturers with established sales forces and customer relations and greater financial and technical resources than Foreland. Foreland Must Acquire More Refinery Feedstock to Achieve Economies of Scale At current levels of Eagle Springs Refinery throughput of approximately 2,025 barrels per day, Foreland's revenues from refining, transportation, and marketing operations are meeting related costs but do not provide sufficient funds for exploration, development, and production operations, for general and administrative expenses or to make interest and principal payments due on the EIF secured indebtedness. In order to increase cash flows substantially, Foreland must achieve economies of scale by significantly increasing refinery throughput. Eagle Springs Refinery is currently processing all oil being produced in Nevada. Therefore, Foreland will have to increase refinery feedstock to achieve economies of scale by: . establishing increased oil production through development and exploration drilling; . increasing oil production from existing producing properties; . entering into additional refinery feedstock purchase contracts with non- Nevada producers; or . identifying backhaul opportunities using Foreland's transportation fleet. Other than the exploration activities of Foreland, there is presently little exploration currently in Nevada, and given the current depressed prices of oil, there is little incentive for exploration firms to incur substantial exploration and development drilling costs. In the event Foreland's activities do not yield additional oil production in Nevada, Foreland would be required to purchase feedstock from outside the area, which would cause Foreland to incur transportation costs. Such transportation costs would ultimately reduce the margins at which Foreland's refined products are sold. Foreland cannot assure that it can increase or acquire additional feedstock and maintain reasonable profit margins. Foreland Must Compete for Transmix Feedstock for the Tonopah Refinery. In order to purchase from pipeline operators and others transmix feedstock for processing at Tonopah Refinery, Foreland must compete with other processing facilities, including transmix processors in other states. Foreland is Dependent on Refinery Feedstock Purchase Contract for its Feedstock Supply Foreland has entered into agreements to purchase approximately 1,700 barrels per day of crude oil from other producers in Nevada, or about 82% of the crude oil it refines. The terms of such contracts range from one-year contracts (about 45% of amount purchased) to contracts terminable on 30 days' written notice (about 17% of amount purchased). Foreland's operations would be adversely affected if it were unable to purchase crude oil from these producers. Foreland is aware of only two other refineries, which are located in Salt Lake City, Utah, where Nevada crude could be processed. Foreland believes their location in Salt Lake City and the need to run small quantities of Nevada crude oil in small blocks rather than continuously, make this unlikely. Foreland is unaware of any other refinery near Nevada at which Nevada crude oil could be readily processed, but there is no assurance any such refineries could not be modified or constructed. Foreland continues to identify other sources of feedstock, including oil produced in Utah, Wyoming, and California. Obtaining feedstock from such sources would result in increased transportation costs to Foreland and impact the margins received from selling finished goods. Foreland May be Subject to Contingent Environmental Liabilities Related to the Acquired Refinery Assets Foreland may be financially responsible for clean-up or other remediation costs resulting from environmental contamination that existed as of the date of acquisition, or subsequently, by Foreland at Eagle Springs Refinery, Tonopah Refinery, or Cowboy Terminal. There can be no assurance that Foreland's pre- acquisition inspection, investigation and agreements with the prior owners of the purchased properties will protect Foreland from such contingencies. Foreland's Refining, Transportation, and Marketing Operations are Subject to Volatility of Gross Refining Margins and Current Market Conditions Foreland's earnings and cash flows from operations will be primarily dependent upon processing crude oil and selling quantities of refined products at refining and marketing margins sufficient to cover fixed and variable expenses and to fund its other operations. Crude oil costs and refined product prices typically experience periods of extreme price volatility and may vary based on numerous factors beyond Foreland's control, including: . the supply of, and demand for, crude oil, gasoline and other refined products; . changes in national and regional economies; . production levels; . 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 extent of domestic production and importation of oil; . the marketing of competitive fuels; . market demand; . the extent of government regulation; . seasonal fluctuations; . product pipeline capacity; . local market conditions; . the level of operations of competing refineries. . political conditions in international oil producing regions; and . the effect of federal and state regulation on the production, transportation and sale of oil. A substantial amount of Foreland's refined products are sold on the spot market or under short-term contracts at market prices. Spot market prices for feedstock and finished products are subject to volatile trading patterns in the commodity futures markets. Foreland has entered into agreements to buy all of the crude oil currently being produced in Nevada and is seeking to increase its supply of feedstock. Foreland may maintain inventories of crude oil, other feedstock, intermediate products and refined products, the values of which are subject to fluctuations in market prices. Factors that are beyond the control of Foreland may cause the cost of crude oil and other feedstock purchased by Foreland and the price of refined products sold by Foreland to fluctuate widely. Although prices of crude oil and refined petroleum products generally move in the same direction, prices of refined products often do not respond immediately to changes in crude oil costs. An increase in market prices for crude oil and other feedstock obtained from others, or a decrease in market prices for refined products, could have an adverse impact on Foreland's income and cash flow. Foreland's Different Products have Widely Varying Margins, which may be Further Affected by Government Regulations The finished products sold by Foreland have widely varying margins. The refining operations are subject to regulatory requirements of certain agencies. In the event of changes by such regulatory agencies affecting the product specifications of Foreland's specific products, these margins could be adversely affected. For example, should regulations impose a decrease on the amount of sulfur allowable in diesel fuel, Foreland's operations would be adversely impacted as it modifies its refining process to decrease such sulfur content. Foreland's Finished Products are Subject to Seasonal Volume and Price Fluctuations Foreland's principal customers are in the mining, construction and agricultural industries, which are subject to seasonal fluctuations. During years of severe winter or substantial precipitation, these industries scale back in operations and require less finished goods produced by Foreland. These fluctuations have the effect of reducing both sales volumes and prices. Therefore, the sale of finished products by the Foreland refineries will be subject to substantial fluctuations in results as a consequence of weather and other seasonal fluctuations. Foreland also makes sales to the federal government during winter months which partially mitigates the seasonal fluctuations. There can be no assurance that this will continue A Significant Amount of Foreland's Revenues Comes From a Few Customers Foreland sells a substantial portion of its finished products to a key group of customers, including Round Mountain Gold Corporation that results in 20% of the refining and transportation operations revenues. The contract with that customer is for one year. In most instances, there are limited contractual obligations of such customers to continue to purchase Foreland's finished products. Although Foreland generally believes, based on historical business, such customers will continue to purchase finished products from the Foreland refineries, there can be no assurance that this will actually be the case. Uncertainty of Reserve Estimates and Future Net Revenues There are numerous uncertainties inherent in estimating quantities of proved oil reserves. The estimates of reserves are based on various assumptions relating to: . rates of future production; . timing and amount of development expenditures; . oil prices; . the results of planned development work; . actual future production rates and volumes; . revenues; . taxes; . operating expenses; . development expenditures; and . quantities of recoverable oil reserves. The estimates of quantities and future net cash flows 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. 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. Given current oil prices, it is unlikely that this will change in the near future. Except to the extent Foreland successfully locates commercial quantities of economically recoverable oil and gas, Foreland's reserves will decline as reserves are produced. There can be no assurance that Foreland will be able to discover additional commercial quantities of oil and gas. 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 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, 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. 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: . fire; . explosion; . flood; . pipe failure; . cave in and collapse; . unusual or unexpected formations, pressures, and other conditions; . environmental damage; . personal injury; . uncontrollable flows of oil and gas; and . other occurrences. Foreland could be subject to significant interruption if the refineries that it operates were to experience a fire, flood, major accident, shutdown or equipment failure, or damage due to severe weather or other natural disaster. 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 - ------------------------------------------------------------------------------ Foreland is not a party to any material legal 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 1998. PART II. - ------------------------------------------------------------------------------ ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK 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 Nasdaq under the symbol "FORL." 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 ------- -------- 1997 First Quarter............ 5.6875 4.3125 Second Quarter........... 4.375 2.6875 Third Quarter ........... 3.50 2.0625 Fourth Quarter........... 5.00 3.375 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 On April 13, 1999, the closing bid price of Foreland's common stock on Nasdaq was approximately $0.75. Foreland has approximately 1,727 common stock shareholders of record. 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 1.1 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 1,650,000 shares of common stock at prices ranging from $3.75 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 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. Foreland intends to continue using any cash from operations to expand its business operations. Foreland's debt financing with Energy Income Fund, established in 1998, prohibits the payment of dividends on common stock. Unregistered Sales of Securities During 1998, 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 20,000 shares of 1991 Preferred Stock into 6,667 shares of Common Stock; 12,000 shares of 1994 Preferred Stock into 4,000 shares of common stock and 72,000 shares of 1995 Preferred Stock into 24,000 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 Section 3(a)(9) thereof. 2. Foreland granted options to purchase 8,000 shares of common stock to an employee. Two employees exercised options to purchase an aggregate of 8,000 shares of common stock. 3. Foreland issued 863,602 shares of common stock to Petro Source Corporation in partial consideration of the purchase of the Eagle Springs and Tonopah refineries and crude oil transportation corporation assets. 4. In connection with the debt financing arrangement, Foreland granted to EIF warrants to purchase an aggregate of 1,500,000 shares of common stock at an exercise price of $6.00 per share, sold 2,000 shares of 1998 Series Preferred Stock, convertible into an aggregate of 333,333 shares of common stock, for $2,000,000, and issued 250,0000 shares of common stock . 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 Section 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. SELECTED FINANCIAL DATA - ------------------------------------------------------------------------------ The following selected financial data of Foreland for each of the past five years, including the period ended December 31, 1998, are derived from the audited financial statements and notes thereto of Foreland. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of Foreland and related notes thereto included with this report. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data." Foreland effected a three-to-one reverse stock split on June 15, 1996. All share and per share amounts herein have been retroactively adjusted to give effect to such reverse split.
Year Ended December 31, ------------------------------------------------------------------------------ 1994 1995 1996 1997 1998 -------------- -------------- -------------- -------------- -------------- Statement of Operations Data: Revenues.................. $ 542,991 $ 1,115,876 $ 2,018,816 $2,300,744 $10,542,237 Net Loss.................. (4,453,718) (2,275,565) (3,385,287) (3,129,900) (13,872,311) Net Loss Applicable to Common Stockholders...... (4,453,718) (2,275,565) (5,715,489) (3,509,929) (13, 909,133) Net Loss Per Share........ (1.03) (0.48) (0.99) (0.46) (1.57) Weighted Average Number of Common Shares Outstanding.............. 4,330,000 4,757,000 5,752,000 7,656,000 8,870,000 December 31, ------------------------------------------------------------------------------ 1994 1995 1996 1997 1998 -------------- -------------- -------------- -------------- -------------- Balance Sheet Data: Working Capital (Deficit). $ 47,629 $(2,005,407) $ 2,340,858 $(495,155) $(8,552,265) Total Assets.............. 5,197,414 5,601,098 10,760,457 7,953,172 14,642,687 Long-Term Debt............ 400,000 23,091 1,018,247 642,951 -- Current Portion of Long- Term Debt ............... -- 404,237 4,844 25,301 12,375,279 Discount on Long-Term Debt -- -- -- -- (1,219,796) Stockholders' Equity (Deficit)................. 3,708,472 3,012,872 8,884,365 6,456,288 (562,087)
- ------------------------------------------------------------------------------ ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - ------------------------------------------------------------------------------ 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 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 employ the Eagle Spring Refinery and Tonopah Refinery assets and trucking fleet purchased from Petro Source in August 1998. Foreland produces oil in Nevada from the Eagle Springs, Ghost Ranch, Kate Springs and Sand Dune fields. Foreland purchased a 60% working interest in the Eagle Springs field in 1993 and the remaining 40% working interest in November 1996. Foreland discovered the Ghost Ranch field in 1996 and purchased the 40% working interests in the field held by another firm in 1997. Foreland also owns a 21.8% working interest in a well in Kate Springs. 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, 1998, Foreland had borrowed $12.4 million from EIF. During 1999, the credit facility was amended, with a net additional draw of $200,000, and further loan commitments have now been 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, Foreland is now in default on the EIF loan, which was classified as a short-term liability as of December 31, 1998. In 1999, Foreland Refining Corporation, a subsidiary of Foreland, established a line of credit with First Security Bank for $2,000,000 at 8.75% which is collateralized by accounts receivable and inventory. 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 is 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. The auditor's report on the financial statements of Foreland as of December 31, 1998, contains an explanatory paragraph as to the ability of Foreland to continue as a going concern because of its continuing losses from operations. Foreland had a working capital deficit as of December 31, 1998, of $9.8 million (not including $1.2 million of debt that is reflected on the financial statements as an unamortized discount for the debt). Results of Operations (Reported by Segments, see Financial Statements Note 11) 1998 and 1997 Oil sales decreased $898,600, or 40.6%, to $1,324,700 in 1998 as compared to 1997, consisting principally of a decrease of $275,000 in Ghost Ranch field revenue, a $573,800 decrease in Eagle Springs field revenue and a $47,800 decrease in the revenue from Foreland's other producing properties. The decrease in total oil revenue was the result of a decrease of 11.4% in barrels of oil sold and a decrease of 32.4% in the average price per barrel of oil sold. Other revenue decreased $77,400, or 88.7%, to $9,900 in 1998 as compared to 1997, due to a reduction of $58,800 in water disposal income, a reduction of $10,200 in overhead income and a decrease of $7,100 in miscellaneous and rental equipment income. The refining and transportation revenues for August through December 1998 were $9,704,000 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. Oil and gas production costs for 1998 increased $66,700, or 7.3%, to $974,000. Per barrel production expense increased $0.80 per barrel, or 15.9%, to $5.83 in 1998, as compared to $5.03 per barrel in 1997. The Eagle Springs field decreased $22,100, while the Ghost Ranch field contributed a $61,000 increase and Foreland's remaining wells contributed a $27,800 increase to oil and gas production costs. Additionally, Foreland's enhanced oil recovery (EOR) pilot program that was instituted on the Eagle Springs field contributed $585,100 of cost during 1998. This EOR pilot program did not produce the desired results and was terminated in November 1998. Refinery and transportation operations cost of goods sold for August through December 1998 (before inter-company consolidation entries) was $8,751,200. Crude oil purchases were $7,350,700 for the purchase of approximately 451,400 barrels of crude oil, repairs and maintenance costs were $266,500 and other costs (primarily transportation costs) were $1,134,000. The refinery and transportation operations cost of goods sold for the period June 1 through the closing date were approximately $4.2 million. The sales during such period were accounted for as adjustments to the purchase price of the assets. Oil and gas exploration costs increased $675,900, or 54.0%, to $1,928,800 in 1998 as compared to a year earlier as a result of Foreland's increased exploration and development activity. Primary contributors were 3-D seismic cost increases of $774,200 to $1,006,000, for costs primarily associated with the Hay Ranch 3-D seismic, exploration personnel cost decreases of $70,800, and costs associated with lease rentals in 1998 that decreased $39,000 when compared to 1997. During 1998, oil exploration dry hole costs increased $1,692,800 to $1,705,900, as compared to 1997. Foreland drilled five dry holes (the Flat Top Federal no. 27-15, North Pine Creek no. 1-6, Dixie Flats no. 1-4, Eagle Springs no. 14-35, and Ghost Ranch no. 58-35 wells). The 1998 abandonment and impairment expenses increased $3,085,100 to $3,650,500. The primary contributor is impairment of the producing wells of $3,617,900. This was required by assessment of the carrying cost of long-lived assets whenever events or circumstances (i.e., reduced oil and gas prices) indicate that the carrying value of the long-lived assets may not be recoverable. Additionally, Foreland also impaired $32,600 of capitalized non- producing leasehold cost associated with leases that will expire at the end of their primary term in 1999. Depreciation, depletion and amortization increased $2,974,900, or 330.8%, to $4,263,700, as compared to the previous year. The 1998 increase was due principally to a significant decrease in reserves. The December 31, 1998, oil prices adversely affected the estimated quantity of Foreland's reserves contributing to such increased depreciation and depletion. Additionally, refining and transportation depreciation, depletion and amortization related to refining and transportation operations contributed $264,000 to this increase. General and administrative expenses increased $246,400, or 25.6%, to $1,207,900 for 1998, as compared to 1997. Refining and transportation general and administrative costs were $382,900 while exploration and production general and administrative expenses decreased $136,500, when compared to 1997. Primary changes in the exploration and production general and administrative expenses were professional fee cost increases of $49,200, bad debt expense decreases of $35,500, contract services decreases of $6,500, and non-cash compensation decreases of $147,000. The refinery and transportation general and administrative costs for the time period from June 1 through the closing date were approximately $109,000. The expenses from June 1 through the effective date were accounted for as adjustments to the purchase price of the assets. Shareholder/investor services decreased $85,800 during 1998 to $106,900 as compared to 1997. This decrease relates to a reduction in the number of investor relations advisors, and a reduction of cost of printed material mailed to shareholders and investors. During 1998 compensation costs for below market options decreased $176,700 to $8,700 for 1998. These costs incurred in 1997 were primarily for options associated with debt retirement for three officers and directors. Interest income increased $21,400, or 18.9%, to $134,800, primarily on the monies invested in short term certificates of deposit which were used as collateral for letters of credit issued to the sellers of crude oil to the refineries. Interest expense increased $1,696,700 to $1,865,900 primarily because of the interest payments associated with the $12,375,279 of debt payable to EIF. Interest accrued or paid in cash was $1,081,900 and amortization of debt issuance cost was $947,600. During 1998, net loss applicable to common stockholders was increased by dividends of $36,800 incurred on preferred. 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. 1997 and 1996 Oil sales increased $255,000, or 13.0%, to $2,213,300 in 1997 as compared to 1996, consisting principally of an increase of $449,700 in Ghost Ranch field revenue offset by a $169,200 decrease in Eagle Springs field revenue and a $25,500 decrease in the revenue from Foreland's other properties. The increase in total oil revenue was the result of an increase of 51.6% in barrels of oil sold and a decrease of 21.5% in the average price per barrel of oil sold. Other revenue increased $26,900, or 44.6%, to $87,400 in 1997 as compared to 1996, due to the drilling of two additional Ghost Ranch wells and production overhead charges on the three Ghost Ranch wells during 1997 Oil and gas production costs for 1997 increased $374,000, or 70.1%, reflecting the general increase in production during 1997. Per barrel production expense increased $1.02 per barrel, or 25.4%, to $5.03 in 1997, as compared to $4.01 per barrel in 1996. The Eagle Springs field contributed $173,100 of the increase, partially due to workover cost on the water injection well. Additionally the Ghost Ranch field contributed $142,600 of the increase due to two additional wells beginning operations in 1997, and Foreland's remaining wells contributed $58,300 to the increased oil and gas production costs. Oil and gas exploration cost increased $418,400, or 50.2%, to $1,252,800 in 1997 as compared to a year earlier as a result of Foreland's increased exploration activity. Primary contributors were exploration personnel cost increases of $208,600, while 3-D seismic cost increased $129,500 when compared to the prior year's activity, and costs associated with lease rentals in 1997 increased $30,600 when compared to 1996. During 1997, dry hole, abandonment and impairment costs decreased $906,900, or 61.0 %, to $578,900 as compared to 1996. The 1997 expenses include $411,000 in impairment expense related to a well in progress at the end of 1996 that was determined to be uneconomic. Foreland also expensed $154,400 in capitalized leasehold cost associated with leases that expired at the end of their primary term. Depreciation, depletion and amortization increased $577,200, or 81.1%, in 1997 to $1,288,800 as compared to the previous year. The 1997 increase was due principally to a significant increase in production combined with a decrease in reserves. The December 31, 1997, oil prices adversely affect the reserve quantity of Foreland's reserves. Lower reserves and increased oil sales for 1997 increased the percentage used to calculate the depletion for 1997. General and administrative expenses increased $393,200, or 69.2% to $961,500 for 1997 as compared to 1996. Administrative personnel cost increased $175,400 and a non-cash compensation charge of $147,000 associated with the overriding royalty interest conveyed as part of an employee termination agreement was recognized in 1997. Shareholder/investor services decreased $865,500 during 1997 to $192,700 as compared to 1996. This decrease relates to a reduction in the number of investor relations advisors. During 1996 the company incurred a non-cash expense of $418,000 resulting from the application of SFAS 123, Accounting for Stock Based Compensation. (See Note 8 to Notes to Consolidated Financial Statements.) Foreland did not have any such investor related expenses in 1997. During 1997 compensation for below market options increased $25,800, or 16.2% when compared to 1996. These were primarily for options associated with debt retirement for four officers and directors. During 1997, net loss applicable to common stockholders was increased by dividends of $164,000 incurred on preferred stock converted during the year and imputed dividends of $216,000, as a result of convertibility of its outstanding preferred stock into common stock at below-market prices. These amounts are for earnings per share calculations only and are not recorded in Foreland's financial statements. Accounting Treatment of Certain Capitalized Costs Foreland follows the "successful efforts" method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory and development wells that find proved reserves, are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. Foreland's accounting policy requires it to assess the carrying cost of long-lived assets whenever events or changes of circumstances indicate that the carrying value of long lived assets may not be recoverable. When an assessment for impairment of oil and gas properties is performed, Foreland is required to compare the net carrying value of proved oil and gas properties on a lease by lease basis (the lowest level at which cash flows can be determined on a consistent basis) to the related estimates of undiscounted future net cash flows for such properties. If the carrying value exceeds the net cash flows, then impairment is recognized to reduce the carrying value to the estimated fair value. The result of this accounting policy caused Foreland to recognize an impairment charge of $411,000 in the fourth quarter of 1997 and an impairment charge of $3,650,500 in the fourth quarter of 1998. 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 Current Period/Future Requirements Foreland's operations used net cash of $1,458,500 in 1998 when Foreland reported a net loss of $13,872,300. The 1998 loss included expenses which generally did not require cash for the current period of $5,356,400 for dry holes, abandonments and impairment, $4,263,700 for depreciation, depletion and amortization, and $784,000 for amortization of debt issuance and debt discount costs associated with the $12,375,279 debt financing with Energy Income Fund. Components of working capital requiring cash expenditures included $19,300 used to increase inventories, and $71,900 used for prepaid expenses and other miscellaneous assets. Components of working capital providing cash are a reduction of accounts receivable of $1,811,600, and increased accounts payable of $231,100. This is compared to Foreland's operations that used net cash of $453,900 in 1997 when Foreland reported a net loss of $3,129,900. The 1997 loss included non-cash expenses of $579,000 for abandonments and impairments, $1,288,800 for depreciation, depletion and amortization, and $185,400 for below market options. Components of working capital requiring cash expenditures included $102,200 used to reduce accounts payable and accrued expenses, and $30,600 for prepaid expenses and other miscellaneous assets. Components of working capital providing cash are a reduction of accounts receivable of $522,700, use of existing inventory of $19,500 and an increase of officers and other salaries payable of $78,600. Investing activities required cash of $5,058,800 in 1998, including approximately $4.4 million for additions to property and equipment. Additionally Foreland used $700,000 to purchase other certificates of deposit that were pledged as security on letters of credit. The letters of credit are used as security against the oil purchased from unaffiliated companies for processing in the refineries. Investing activities in 1997 required cash of $1,477,300 including approximately $1.4 million for additions to oil and gas properties, conversion cost for an air injection well for the pilot EOR program in the Eagle Spring field and the completion of two Ghost Ranch wells. Additionally Foreland used $71,900 to purchase other 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, 1998. 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. Financing activities for 1997 used $353,200, primarily for the payment of debt associated with the credit facility with Colorado National Bank. The nature, extent, and cost of exploring prospects in the Great Basin province over several years cannot be predicted, but the total cost could amount to tens of millions of dollars. Because of the size of the total exploration possibilities and Foreland's limited resources, it is likely that the interest of Foreland's shareholders in Foreland and the interest of Foreland in its drilling prospects will continue to be diluted substantially as Foreland continues to obtain funding through the sale of additional securities or through sharing arrangements with industry participants. There can be no assurance that exploration funds will be available to Foreland when required or, if available, that such funds can be obtained on terms acceptable or favorable to Foreland. In addition to the above, Foreland's oil and gas exploration and production activities were also advanced by approximately $698,000, $868,000 and $478,000 provided during 1996, 1997, and 1998, respectively, by others under industry sharing arrangements related to specific drilling or other exploration. Debt Financing In January 1998, Foreland completed the debt financing arrangement with EIF. This arrangement was amended in August 1998. During the year, Foreland drew an aggregate of $12,375,279 under this facility to fund most of its cash requirements, including the purchase of the refinery and transportation assets from Peto Source. 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 a 48-month period; provided, however, that the final payment of all accrued but unpaid interest and the remaining principal balance is due on January 1, 2002. Foreland also agreed to transfer to Energy Income Fund 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 are collateralized by oil and gas properties and Foreland is required to maintain certain financial ratios and comply with other terms and conditions while any balance of indebtedness remains outstanding. Foreland initially issued to Energy Income Fund five-year warrants to purchase 750,000 shares of common stock at $6.00 per share and 250,000 shares at $10.00 per share. The warrants were subsequently amended to purchase an aggregate of 1,500,000 shares at $6.00 per share. Foreland granted Energy Income Fund the right to designate a representative for appointment to the board of directors of Foreland. EIF designated Robert Gershen as its representative. 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 is not in compliance with certain financial covenants relating to minimum cash flow, equity requirements, current ratio, debt service ratio, and general administrative expense percentages. On April 15, 1999, EIF agreed to defer the first principal payment (now $347,437) until May 1, 1999, and waive compliance with the financial covenants until May 15, 1999. Foreland is implementing cost cutting measures and restructuring its resources in order to be able to make the required payments and comply with the financial covenants, but there is no assurance it will be able to do so. If Foreland fails to make a required payment or comply with the financial covenants, EIF will have the legal right to implement its remedies on default, initiate foreclosure and seek to take possession of substantially all of Foreland's assets. There can be no assurance that EIF will agree to any further extensions or modifications or continue to forbear from exercising its remedies in the event of a default. It may be impossible for Foreland to continue if EIF were to foreclose on essentially all of Foreland's oil producing, refining, and transportation assets. 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. Impact of the Year 2000 Issue Many existing computer programs use only two digits, rather than four, to define a year within the date field in order to conserve memory resources. Such programs were designed and developed without considering the potential impact of the upcoming change of the century. After December 31, 1999, any of the computer programs used by Foreland that contain date-sensitive computer codes that are not "year 2000 compliant," may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, such computer applications could fail or create erroneous results. Foreland uses computers principally for processing and analyzing geological and geophysical data, map-making, and administrative functions, including word- processing, accounting, electronic mail and other applications. Its refining operations principally do not use computer systems. Foreland has implemented an ongoing program to ensure that its computer systems are year 2000 compliant. Foreland has contacted its vendors who have represented that the systems and software used by Foreland are year 2000 compliant. Foreland will require future vendors to make such representation. There can be no assurance that such programs are actually year 2000 compliant. Foreland also interacts with the computer systems of others. There can be no assurance that such computer systems are year 2000 compliant. Foreland believes that it will not incur material expenditures in connection with this issue, but there can be no assurance that Foreland has anticipated every circumstance where Foreland's operations may be impacted. Although Foreland believes its own internal systems will be year 2000 compliant, no assurance can be given that the systems of vendors, telephone and utility providers, customers, and other third parties with which Foreland has a material relationship will be year 2000 compliant. Foreland does not believe it can develop contingency plans to adequately deal with major external infrastructure failures such as in communications, transportation or utilities. However, such failures would likely not impact Foreland worse than they would any other business. Foreland has been notified by the vendor of its accounting software that the software is not year 2000 compliant and that there exists a problem that will generate errors in the general ledger if not corrected. Foreland has been informed by the vendor that it expects to have this problem resolved by the end of the second quarter of 1999. - ------------------------------------------------------------------------------ ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------------------------------------------------------------------------------ Foreland's major market risk exposures will continue to be the prices it pays for crude oil and other feedstock and the sales prices and margins it receives from the sale of its refined products. These prices are volatile and affected by various factors beyond Foreland's control, as described in this report. Foreland does not engage in any hedging activities to protect itself against the market risks associated with these fluctuations, although its ultimate strategy in acquiring the refinery and transportation assets and operations was to stabilize and increase the margins received from its activities. - ------------------------------------------------------------------------------ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------------------------------------------------------------------------------ The table of contents of the financial statements and supplementary data included in this report is contained in "ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K." - ------------------------------------------------------------------------------ ITEM 9. 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. PART III. - ------------------------------------------------------------------------------ ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT - ------------------------------------------------------------------------------ The information from the definitive proxy statement for the 1999 annual meeting of stockholders under the caption "1. ELECTION OF DIRECTORS: Directors and Executive Officers" is incorporated herein by reference. - ------------------------------------------------------------------------------ ITEM 11. EXECUTIVE COMPENSATION - ------------------------------------------------------------------------------ The information from the definitive proxy statement for the 1999 annual meeting of stockholders under the caption "1. ELECTION OF DIRECTORS: Executive Compensation" is incorporated herein by reference. - ------------------------------------------------------------------------------ ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------------ The information from the definitive proxy statement for the 1999 annual meeting of stockholders under the caption "1. ELECTION OF DIRECTORS: Certain Beneficial Owners and Management" is incorporated herein by reference. - ------------------------------------------------------------------------------ ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------------------------------ The information from the definitive proxy statement for the 1999 annual meeting of stockholders under the caption "1. ELECTION OF DIRECTORS: Certain relationships and Related Transactions" is incorporated herein by reference. PART IV - ------------------------------------------------------------------------------ ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------------ (a)(1) Financial Statements. The following financial statements are included in this report: Title of Document Page Table of Contents F-1 Report of Hein + Associates LLP, Certified Public Accountants F-2 Consolidated Balance Sheets - As of at December 31, 1997 and 1998 F-3 Consolidated Statements of Operations - For the Years Ended December 31, 1996, 1997, and 1998 F-5 Consolidated Statements of Stockholders' Equity (Deficit) - For the Years Ended December 31, 1996, 1997, and 1998 F-6 Consolidated Statements of Cash Flows - For the Years Ended December F-8 31, 1996, 1997, and 1998 Notes to Consolidated Financial Statements F-10 (a)(2) Financial Statement Schedules. Schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the financial statements. (a)(3) Exhibits. The following exhibits are included as part of this report: SEC Exhibit Reference No. No. Title of Document Location Item 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 2.01 2 Option and Purchase Agreement between Incorporated Foreland, Petro Source Corporation, by Petrosource Refining Corporation, and Reference(14) Petrosource Transportation dated December 31, 1997 2.02 2 Amendment to Option and Purchase Incorporated Agreement between Foreland, Petro Source by Corporation, Foreland Refining Reference(16) Corporation, and Petrosource Transportation 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) Instruments Defining the Rights of Security Holders, Including Indentures Item 4. 4.01 4 Specimen Common Stock Certificate Incorporated by Reference(1) 4.02 4 Designation of Rights, Privileges, and Incorporated Preferences of 1991 Series Preferred by Stock Reference(1) 4.03 4 Designation of Rights, Privileges and Incorporated Preferences of 1994 Series Convertible by Preferred Stock Reference(3) 4.04 4 Designation of Rights, Privileges and Incorporated Preferences of 1995 Series Convertible by Preferred Stock Reference(7) 4.05 4 Form of Warrants to Kevin L. Spencer and Incorporated Jay W. Enyart by Reference(8) 4.06 4 Form of Rights Agreement dated effective Incorporated April 12, 1997, between Foreland and by Atlas Stock Transfer Corporation Reference(12) 4.07 4 Warrant of Energy Income Fund, L.P., Incorporated dated January 6, 1998, to purchase by 750,000 shares of common stock at $6.00 Reference(14) per share 4.08 4 Warrant of Energy Income Fund, L.P., Incorporated dated August 10, 1998, to purchase by 250,000 shares of common stock at $10.00 Reference(16 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 Incorporated Preferences for 1998 Series Convertible by Preferred Stock Reference(16) 4.10 4 Registration Rights Agreement between Incorporated Energy Income Fund, L.P., and Foreland, by dated as of August 10, 1998 Reference(16) Item 10. Material Contracts 10.01 10 Option Agreement between N. Thomas Steele Incorporated and Foreland, dated June 24, 1985** by Reference(6) 10.02 10 Option Agreement between Grant Steele and Incorporated Foreland, dated June 24, 1985** by Reference(6) 10.03 10 Form of Options to directors dated April Incorporated 30, 1991 with respect to options by previously granted 1986** Reference(1) 10.04 10 Form of Nonqualified Stock Option between Incorporated Foreland and unrelated third parties, by with related schedule Reference(4) 10.05 10 Form of Promissory Notes relating to Incorporated certain options exercised by officers, by with related schedule Reference(5) 10.06 10 Form of Option granted pursuant to reload Incorporated provisions of previously granted options by with related schedule Reference(5) 10.07 10 Form of Registration Agreement relating Incorporated to Units consisting of 1995 Series by Preferred Stock and M Warrants Reference(7) 10.08 10 Form of Revised Executive Employment Incorporated Agreement between Foreland and executive by officers, with related schedule** Reference(9) 10.09 10 Form of Nonqualified Stock Options Incorporated granted to executive officers dated July by 18, 1996, with related schedule** Reference(9) 10.10 10 Form of Nonqualified Stock Options Incorporated granted to executive officers in by connection with employment agreements, Reference(9) with related schedule** 10.11 10 Form of Nonqualified Stock Options Incorporated granted to employees in connection with by employment agreements, with related Reference(9) schedule 10.12 10 Purchase and Sale Agreement dated Incorporated November 14, 1996, between Plains by 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 Incorporated 6, 1998, by and among Foreland, Eagle by Springs Production Limited Liability Reference(14) Company and Energy Income Fund, L.P. 10.14 10 Refinancing Note dated as of January 6, Incorporated 1998, by Foreland and Eagle Springs by Production Limited Liability Company Reference(14) 10.15 10 Development Note dated as of January 6, Incorporated 1998, by Foreland and Eagle Springs by Production Limited Liability Company Reference(14) 10.16 10 Acquisition Note dated as of January 6, Incorporated 1998, by Foreland and Eagle Springs by Production Limited Liability Company Reference(14) 10.17 10 Deed of Trust, Security Agreement, Incorporated Assignment of Production and Proceeds, by Financing Statement and Fixture Filing Reference(14) 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 Incorporated dated effective as of January 1, 1998, by of a 3% net revenue interest from Reference(14) Foreland and Eagle Springs Production Limited Liability Company to Energy Income Fund, L.P. 10.19 10 Assignment of Overriding Royalty Interest Incorporated dated effective as of January 1, 1998, by of a 1% net revenue interest from Reference(14) Foreland and Eagle Springs Production Limited Liability Company to Energy Income Fund, L.P. 10.20 10 Option and Purchase Agreement between Incorporated Foreland Corporation and Petro Source by Corporation respecting the purchase of Reference(15) Petro Source Transportation dated effective December 31, 1997 10.21 10 Purchase and Sale Agreement dated Incorporated effective December 31, 1998, between by Foreland and Plains Petroleum Operating Reference(15) Company 10.22 10 Purchase Contract Confirmation dated Incorporated effective December 15, 1997, between by Foreland and Petro Source Refining Reference(15) Partners 10.23 10 First Amendment to Financing Agreement Incorporated between Foreland, Eagle Springs by 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, Incorporated 1998, between Energy Income Fund, L.P., by and Foreland Reference(16) 10.25 10 First Allonge to Acquisition Note in the Incorporated original principal amount of $2,327,000, by dated as of August 10, 1998 Reference(16) 10.26 10 First Allonge to Development Note in the Incorporated original principal amount of by $13,893,000, dated as of August 10, 1998 Reference(16) 10.27 10 First Allonge to Refinancing Note in the Incorporated original principal amount of $680,000, by dated as of August 10, 1998 Reference(16) 10.28 10 Environmental Indemnity Agreement between Incorporated Petro Source Corporation, Petrosource by Investments, Inc., Foreland, Foreland Reference(16) Refining Corporation, Foreland Asset Corporation, and Petrosource Transportation dated August 11, 1998 10.29 10 Second Amendment to Deed of Trust, Incorporated Security Agreement, Assignment of by Production and Proceeds, Financing Reference(16) 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. 10.30 10 Operating Agreement of Cowboy Asphalt This Filing* Terminal, LLC, between Crown Asphalt Company, and Foreland Asphalt Corporation, dated as of January 12, 1999 10.31 10 Second Amendment to Financing Agreement This Filing* between Foreland, Eagle Springs Production Limited Liability Company, 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 This Filing* Agreement between Energy Income Fund, L.P., and Foreland, dated as of February 4, 1999 10.33 10 First Amendment to Common Stock Purchase This Filing* Warrant dated January 6, 1998 (Warrant No. 1), dated as of February 4, 1999 10.34 10 First Amendment to Common Stock Purchase This Filing* Warrant dated August 10, 1998 (Warrant No. 2), dated as of February 4, 1999 10.35 10 Common Stock Issuance Agreement between This Filing* Energy Income Fund, L.P., and Foreland, dated as of February 4, 1999 10.36 10 Security Agreement (relating to fixtures) This Filing* between Foreland Asphalt Corporation and Energy Income Fund, L.P., dated as of February 4, 1999 10.37 10 Pledge and Security Agreement (Cowboy This Filing* Asphalt Terminal, L.LC. membership interests) from Foreland Asphalt Corporation to Energy Income Fund, L.P., dated as of February 4,1 999 10.38 10 Letter/deferral/waiver/release agreement This Filing* dated April 14, 1999, between Energy Income Fund, L.P. and Foreland Corporation and subsidiaries. Item 21. Subsidiaries 21.01 Subsidiaries of Foreland Corporation This Filing* Item 23. Consents of Experts and Counsel 23.01 23 Consent of Hein + Associates LLP, This Filing* certified public accountants 23.02 23 Consent of Malkewicz Hueni Associates, This Filing* Inc. Item 27. Financial Data Schedule 27.01 Financial Data Schedule This Filing* - ------------ (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. (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. * 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, 1998, Foreland filed reports on form 8-K as follows: Date of Event Reported Item Reported October 14, 1998 Item 5. Other Events October 28, 1998 Item 5. Other Events November 18, 1998 Item 5. Other Events December 8, 1998 Item 5. Other Events - ------------------------------------------------------------------------------ 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: April 15, 1999 By/s/ --------------------------------- 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: April 15, 1999 /s/ N. Thomas Steele, President and Director (Principal Executive and Financial Officer) Dated: April 15, 1999 /s/ Grant Steele, Director Dated: April 15, 1999 /s/ Bruce C. Decker, Director Dated: April 15, 1999 /s/ Don W. Treece, Controller (Principal Accounting Officer) Dated: April 15,, 1999 Robert D. Gershen, Director Dated: April 15, 1999 /s/ Lee Brian Van Ramshorst, Director INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Independent Auditor's Report...............................................F-2 Consolidated Balance Sheets - As of December 31, 1997 and 1998.............F-3 Consolidated Statements of Operations - For the Years Ended December 31, 1996, 1997, and 1998........................................................F-5 Consolidated Statements of Stockholders' Equity (Deficit) - For the Years Ended December 31, 1996, 1997, and 1998..... ...............................F-6 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1996, 1997, and 1998........................................................F-8 Notes to Consolidated Financial Statements................................F-10 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, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 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, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the real- ization of assets and liquidation of liabilities in the normal course of business. As discussed in Note 2 to the financial statements, the Company has suffered cumulative losses from inception of $39.6 million and, at December 31, 1998, the Company has a working capital deficit of $8.6 million. 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 10, 1999, except for the last sentence of Note 5 as to which the date is April 1, 1999 FORELAND CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, -------------------- 1997 1998 ----- ---- ASSETS CURRENT ASSETS: Cash and equivalents $40,631 $1,849,782 Trade receivables 245,041 2,771,085 Inventories 61,108 1,166,361 Marketable securities - 700,000 Prepaid expenses and other 11,998 164,921 ---------- ---------- Total current assets 358,778 6,652,149 PROPERTY AND EQUIPMENT, at cost: Oil and gas properties, under the successful efforts method 11,878,336 13,566,505 Refineries and building - 4,845,472 Transportation and other equipment 146,745 1,007,571 Office furniture and equipment 215,426 419,317 Construction in progress - 367,509 ---------- ---------- 12,240,507 20,206,374 Less accumulated depreciation, depletion and amortization (5,346,333) (13,115,997) ---------- ---------- 6,894,174 7,090,377 OTHER ASSETS: Debt issuance costs, net of accumulated amortization of $368,190 in 1998 ($-0- in 1997) 49,390 576,190 Investment in Cowboy Asphalt Terminal - 172,177 ---------- ---------- Deposits and other 650,830 151,794 ---------- ---------- Total other assets 700,220 900,161 TOTAL ASSETS $7,953,172 $14,642,687 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt, net of discount of $1,219,796 in 1998 ($-0- in 1997) $25,301 $11,168,213 Accounts payable 424,769 2,378,274 Officers' salaries payable 364,276 434,813 Accrued expenses and other 39,587 1,223,474 ---------- ---------- Total current liabilities 853,933 15,204,774 LONG-TERM DEBT, less current maturities 642,951 - COMMITMENTS AND CONTINGENCIES (Notes 2, 5, and 9) STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.001 par value, 5,000,000 shares authorized; 761,807 shares issued and outstanding in 1997 (liquidation preference of $1,215,280), 524,243 shares issued and outstanding in 1998 (liquidation preference of $2,891,757) 762 524 Common stock, $.001 par value, 50,000,000 shares authorized; 8,467,703 and 9,673,191 shares issued and outstanding, respectively 8,468 9,673 Additional paid-in capital 32,486,345 39,366,477 Less stock subscriptions receivable (311,758) (338,921) Accumulated deficit (25,727,529) (39,599,840) ---------- ---------- Total stockholders' equity (deficit) 6,456,288 (562,087) ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,953,172 $14,642,687 (DEFICIT) ========== =========== FORELAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 1996 1997 1998 ---------- --------- ---------- (Note 11) REVENUE: Refining and transportation $ - $ - $9,703,996 Oil sales 1,958,348 2,213,336 828,293 Other 60,468 87,408 9,948 ---------- ---------- ----------- Total revenue 2,018,816 2,300,744 10,542,237 EXPENSES: Refining and transportation: Cost of goods sold - - 6,864,301 Repairs and maintenance - - 266,520 Other - - 1,720,217 Oil production costs: Enhanced recovery project - - 585,117 Other 533,339 907,332 387,769 Oil exploration: Dry hole costs 943,120 13,405 1,705,858 Other 834,407 1,252,838 1,928,765 General and administrative: Shareholder and investor services 1,058,145 192,664 106,898 Stock-based compensation - 159,500 185,371 8,718 employees Other 568,348 961,528 1,207,926 Abandonment and impairment costs 542,700 565,483 3,650,533 Depreciation, depletion, and amortization 711,608 1,288,780 4,263,704 ---------- ---------- ----------- Total expenses 5,351,167 5,367,401 22,696,326 ---------- ---------- ----------- OPERATING LOSS (3,332,351) (3,066,657) (12,154,089) OTHER INCOME (EXPENSE): Interest income 107,234 113,407 134,845 Interest expense (160,170) (169,176) (1,865,920) Gain (loss) on sale of property and equipment - (7,474) 12,853 ---------- ---------- ----------- NET LOSS (3,385,287) (3,129,900) (13,872,311) PREFERRED STOCK DIVIDENDS: Converted to common stock (61,138) (164,029) - Accrued (24,064) - (36,822) Imputed (2,245,000) (216,000) - ---------- ---------- ----------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(5,715,489) $(3,509,929) $(13,909,133) =========== =========== =========== NET LOSS PER COMMON SHARE $(.99) $(.46) $(1.57) =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,752,000 7,656,000 8,870,000 =========== =========== =========== FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 NOTES FOR TOTAL PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK STOCKHOLDERS' ------------------ -------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS EQUITY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE (DEFICIT) --------- ------- --------- --------- ------------ ------------- ------------- ------------- BALANCES, January 1, 1996 1,489,020 $ 1,489 4,829,800 $ 4,830 $ 23,311,517 $(19,212,342) $(1,092,622) $ 3,012,872 Preferred stock offerings 5,255 5 - - 7,549,995 - - 7,550,000 Offering costs - - - - (820,861) - - (820,861) Preferred stock exchanged for common (675,533) (676) 1,932,212 1,932 (1,256) - - - Accrued preferred stock dividends converted to common stock - - 15,957 16 (16) - - - Exercise of warrants for common stock - - 455,050 455 1,937,822 - - 1,938,277 Fair value of options granted - - - - 418,000 - - 418,000 to consultants for services Options granted to employees at below market exercise prices - - - - 159,500 - - 159,500 Acquisition of oil and gas property for common stock - - 8,276 8 34,907 - - 34,915 Collection of principal on notes - - - - - - 28,850 28,850 Accrued interest on notes - - - - - - (51,901) (51,901) Common stock returned by former officer in payment of subscriptions receivable and accrued interest - - (3,118) (3) (21,433) - 21,436 - Net loss - - - - - (3,385,287) - (3,385,287) --------- ------- --------- ------- ------------ ------------ ----------- ----------- BALANCES, December 31, 1996 818,742 818 7,238,177 7,238 32,568,175 (22,597,629) (1,094,237) 8,884,365 Preferred stock exchanged for common (56,935) (56) 1,126,872 1,127 (1,071) - - - Accrued preferred stock dividends converted to common stock - - 71,759 71 (71) - - - Fair value of options granted to consultants for services - - 46,250 46 6,987 - - 7,033 Options granted to employees at below market exercise prices - - - - 67,488 - - 67,488 Acquisition of oil and gas property for common stock - - 6,040 6 27,552 - - 27,558 Collection of principal on notes - - - - - - 2,323 2,323 Accrued interest on notes - - - - - - (66,544) (66,544) Stock options returned by officers in payment of subscriptions receivable and accrued interest - - - - - - 117,883 117,883 Common stock returned in payment of subscriptions receivable and accrued interest - - (151,395) (151) (702,584) - 728,817 26,082 Issuance of common stock for option to acquire Petro Source - - 130,000 131 519,869 - - 520,000 Net loss - - - - - (3,129,900) - (3,129,900) --------- ------- --------- ------- ------------ ------------ ----------- ----------- BALANCES, December 31, 1997 761,807 762 8,467,703 8,468 32,486,345 (25,727,529) (311,758) 6,456,288 Exercise of options and warrants for common stock - - 8,000 8 31,992 - - 32,000 Issuance of 1998 series preferred stock 2,000 2 - - 1,999,998 - - 2,000,000 Preferred stock exchanged for common (239,564) (240) 79,855 80 160 - - - Issuance of common stock for: Services - - 4,031 4 18,146 - - 18,150 Refinery assets - - 863,602 863 3,021,743 - - 3,022,606 Common stock issued for debt issuance costs - - 250,000 250 179,375 - - 179,625 Accrued interest on notes - - - - - - (27,163) (27,163) Options granted to employees - - - - 8,718 - - 8,718 Warrants granted for debt discount - - - - 1,620,000 - - 1,620,000 Net loss - - - - - (13,872,311) - (13,872,311) --------- ------- --------- ------- ------------ ------------ ----------- ----------- BALANCES, December 31, 1998 524,243 $ 524 9,673,191 $ 9,673 $ 39,366,477 $(39,599,840) $ (338,921) $ (562,087) ========= ======= ========= ======= ============ ============ =========== ===========
See accompanying notes to these consolidated financial statements. FORELAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1996 1997 1998 ----------- ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(3,385,287) $(3,129,900) $(13,872,311) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion and amortization 711,608 1,288,780 4,263,704 Bad debt expense - 36,241 774 Dry holes, abandonments and impairments 1,485,820 578,888 5,356,391 Issuance of stock and options for services 418,000 7,033 18,150 Accrued note receivable interest (51,901) (66,544) (27,163) Amortization of debt discount and issuance - 3,912 784,039 costs Stock-based compensation - employees 159,500 67,488 8,718 Stock options surrendered for stock - 117,883 - subscriptions receivable Loss (gain) on sale of assets - 7,474 (12,853) Oil and royalty interest conveyed under - 147,000 - severance agreement Other 33,362 - Changes in operating assets and liabilities, net of effects of acquisition: (Increase) decrease in: Accounts receivable (336,981) 522,698 1,811,616 Inventories 814 19,460 (19,289) Prepaid expenses and other (8,219) (30,627) (71,914) Increase (decrease) in: Accounts payable and accrued expenses (568,345) (102,230) 231,065 Officers' salaries payable (106,741) 78,555 70,537 --------- --------- --------- Net cash used in operating activities (1,648,370) (453,889) (1,458,536) ----------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets - 2,050 12,853 Net cash received in acquisition of refining and - - 162,718 transportation businesses Investment in certificates of deposit - - (700,000) Investment in Cowboy Asphalt Terminal, L.L.C. - - (172,177) Capital expenditures for property and equipment (5,356,151) (1,479,398) (4,362,175) ----------- ------------ ----------- Net cash used in investing activities (5,356,151) (1,477,348) (5,058,781) ----------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of stock 7,550,000 - 2,000,000 Proceeds from exercise of warrants and options 1,938,277 - 32,000 Payment of offering and registration costs (813,780) - - Payment of long-term debt and promissory notes (404,237) (355,533) (25,522) Payment of debt issuance costs - - (81,010) Collection of principal on notes 28,850 2,322 - Proceeds from long-term debt 1,000,000 - 6,401,000 ----------- ------------ ---------- Net cash provided by financing activities 9,299,110 (353,211) 8,326,468 ----------- ------------ ---------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,294,589 (2,284,448) 1,809,151 CASH AND EQUIVALENTS, beginning of year 30,490 2,325,079 40,631 ----------- ------------ ----------- CASH AND EQUIVALENTS, end of year $2,325,079 $ 40,631 $1,849,782 =========== ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid for interest $175,508 $169,175 $918,325 =========== ============ =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisition of refining and transportation businesses for: Common stock $ - $520,000 $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 =========== ============ ========== Issuance of common stock for acquisition of oil and gas properties $34,915 $ 27,558 $ - =========== ============ ========== Return of common stock by officers for subscription receivable $21,436 $ 728,817 $ - =========== ============ ========== Accrued preferred stock dividends converted to common stock $61,138 $ 164,032 $ - =========== ============ ==========
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. 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 $663,160, $1,243,485, and $3,929,360 for the years ended December 31, 1996, 1997, and 1998, 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 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 3-7 equipment 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 $48,448, $45,295, and $334,344 for the years ended December 31, 1996, 1997, and 1998, 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 $3,650,533 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. 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. 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. For the years ended December 31, 1996 and 1997, the Company recognized imputed preferred dividends of $2,245,000 and $216,000, respectively, in arriving at the net loss applicable to common stockholders. This charge relates to preferred stock that was convertible to common stock at a discount. 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. 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. However, management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent discoveries are more imprecise than those for properties with long production histories. Accordingly, the Company's estimates are expected to change as future information becomes available. As discussed above, the reserve estimates are also the basis for assessment of impairment of proved oil and gas properties. In addition to the uncertainties inherent in the reserve estimation process, this amount is affected by historical prices for oil which have typically been volatile. It is reasonably possible that the Company's oil reserve estimates will materially change in the forthcoming year. Reverse Stock Split - On June 15, 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. Accordingly, at December 31, 1997 and 1998, management's best estimate is that the carrying amount of all financial instruments approximates fair value. Reclassifications - Certain reclassifications have been made to the 1996 and 1997 financial statements to conform to the presentation in 1998. The reclassifications had no effect on the 1996 or 1997 net loss. 2.BASIS OF PRESENTATION: The accompanying consolidated financial statements have been prepared on the going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company incurred a net loss of $13.9 million in 1998 and has incurred cumulative losses of approximately $39.6 million since inception. Additionally, the Company is not in compliance with certain covenants of its loan agreements, and has a working capital deficit of approximately $8.6 million and a stockholders' deficit of $562,000 at December 31, 1998. As discussed in Note 5, the Company failed to make the April 1, 1999 payment under the revised debt financing arrangements. The ability of the Company to continue as a going concern is dependent on its ability to repay or refinance its debt, successfully develop its oil and gas properties, increase utilization at its refineries, and ultimately achieve profitable operations. 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 $8,688,371, which consisted of $520,000 in common stock issued by the Company in December 1997 to acquire the option, $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 $145,371. 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 reporting purposes, earnings between the effective date and the closing date 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 $2,676,322 (plus interest at 10% per annum), the Company is required to issue additional shares or pay cash for the deficiency. Based on the current trading price of the Company's common stock, the Company could be required to issue additional shares which may ultimately result in a change of control. The following unaudited pro forma information assumes that the acquisition had occurred on January 1, 1997: For the Years Ended December 31, ---------------------------- 1997 1998 Revenue $27,863,000 $13,798,000 =========== ============= Net loss applicable to common stockholders $(3,467,000) $(14,590,000) =========== ============= Net loss per share - basic and diluted $(.41) $(1.55) =========== ============= 4.INVENTORIES: Inventories consist of the following at December 31, 1997 and 1998: 1997 1998 -------- --------- Crude oil and other raw materials $ 5,090 $227,000 Refined oil products - 785,000 Oil field equipment and other 56,018 154,361 -------- --------- Total $61,108 $1,166,361 ======== =========== 5.LONG-TERM DEBT: Long-term debt at December 31, 1997 and 1998, consists of the following: 1997 1998 ----------- ---------- Note payable to Energy Income Fund (EIF), interest at 12% $ - $12,375,279 Less unamortized discount - (1,219,796) -------- --------- Net - 11,155,483 Note payable to bank pursuant to revolving credit agreement. Interest at variable rate (11% at December 31, 1997), collateralized by oil and gas properties. 650,000 - Other installment notes. Interest at 13.4%, monthly principal and interest payments of approximately $639 through October 1999 when the remaining balance is due. The notes are collateralized by vehicles. 18,252 12,730 Total long-term debt 668,252 11,168,213 Less current maturities (25,301) (11,168,213) -------- --------- Total Long-term debt, less current maturities $642,951 $ - ======== ========== 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 the Company is required to maintain certain financial ratios and comply with other terms and conditions while any balance of indebtedness remains outstanding. During 1998, the Company violated certain covenants and was not in compliance with certain financial ratios and other terms and conditions of the loan. In February 1999, EIF agreed to reschedule the principal amortization to commence April 1999 (previously scheduled to commence in November 1998), extend certain financial covenants of the Company, and waive EIF's exercise of remedies upon default until April 1999. As amended, the Company is required to make 34 monthly payments of $338,096 plus accrued interest commencing April 1, 1999. However, the Company does not have the ability to comply with the amended covenants during 1999 and, accordingly, the entire balance is included in current liabilities in the accompanying financial statements. Despite this presentation, management continues to negotiate a payment plan with EIF and is hopeful that EIF will continue to make concessions to prevent acceleration of the entire principal balance. In connection with the establishment of the financing arrangement, the Company issued to EIF five-year warrants to purchase 750,000 shares of common stock at $6.00 per share and 250,000 shares at $10.00 per share and granted EIF the right to designate a representative for appointment to the Board of Directors of the Company. In connection with the modification of the financing arrangement in August, the Company increased the outstanding warrant to purchase 250,000 shares at $10.00 per share to 750,000 shares and reduced the exercise price to $6.00 per share. 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 $1,219,796 at December 31, 1998. 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. During 1999, the Company entered into a line-of-credit agreement with a bank. The line provides for borrowings up to $2,000,000 and has an interest rate of 8.75%, and has a maturity date of February 15, 2000. Borrowings under the line-of-credit are collateralized by accounts receivable and inventories. The Company failed to make the April 1, 1999 payment under the revised debt agreement with EIF. 6.INCOME TAXES: Deferred tax assets (liabilities) are comprised of the following at December 31, 1997 and 1998: 1997 1998 ----------- ------------ Long-term deferred tax assets (liabilities): Net operating loss carryforward $11,645,000 $14,000,000 Property and equipment basis differences (430,000) (120,000) Below-market stock options 200,000 200,000 ----------- ------------ Net deferred tax assets 11,415,000 14,080,000 Less valuation allowance (11,415,000) (14,080,000) ----------- ------------ Net deferred tax assets $ - $ - =========== ============ The Company has a net operating loss carryforward of approximately $38 million for income tax purposes. This carryforward expires in varying amounts from 1999 through 2018. A portion of this net operating loss carryforward may be subject to reduction or limitation of use as a result of changes in ownership or certain consolidated return filing regulations. 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, 1998: Convertible to Preferred Common Stock Liquidation Series Shares Shares Preference - -------------------------- ----------- ------------ ----------- 1991 Convertible Preferred Stock 20,000 6,667 $25,000 1994 Convertible Preferred Stock 153,140 51,047 306,280 1995 Convertible Preferred Stock 349,103 116,368 523,655 1998 Convertible Preferred Stock 2,000 333,333 2,036,822 --------- -------- --------- Total 524,243 507,415 $2,891,757 ========= ======== ========== None of the series of preferred stock outstanding at December 31, 1998 provides for dividends to the holders. The 1994 convertible preferred stock is redeemable at $4.00 per share at the Company's option. EIF is the sole holder of the 1998 convertible preferred stock. As of December 31, 1998, the Company has authority to issue approximately 348,000 shares of preferred stock. Such shares may be issued in the future in such series and preferences as determined by the Company's Board of Directors. Imputed Dividends - During 1996, the Company issued four series of convertible preferred stock whereby the holders were provided the opportunity to convert shares of preferred stock to common stock pursuant to a formula that provided for a discount of 10% to 35% of the market price of the Company's common stock. The amount of this discount has been accounted for as an imputed dividend to the holders of the preferred stock, and was recognized over the period from the issuance date to the earliest date when each series of preferred stock was convertible. For the years ended December 31, 1996 and 1997, imputed dividends amounted to $2,245,000 and $216,000, respectively. Preferred Stock Warrants - The Company has outstanding warrants exercisable at $6.60 per share to purchase preferred stock convertible into 43,874 shares of common stock. These warrants expire in July 1999. 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. 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, 1996, 1997, and 1998:
1996 1997 1998 ------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of Shares Price of Shares Price of Shares Price ---------- -------- ---------- -------- ---------- -------- Outstanding, beginning of year 434,000 $6.01 1,098,667 $5.25 1,653,000 $3.89 Granted 804,667 4.80 1,119,667 3.45 20,000 3.50 Surrendered for notes - - (408,334) 5.70 - - receivable Expired (23,333) 8.13 (16,333) 6.13 (16,667) 5.70 Canceled - - - - (8,000) 4.00 Exercised - - - - (8,000) 4.00 Repriced (116,667) 4.39 (140,667) 4.41 - - ---------- ---------- -------- -------- Outstanding, end of 3.87 year 1,098,667 5.25 1,653,000 3.89 1,640,333 ========== ========== ==========
At December 31, 1998, outstanding options vest as follows: Range of Weighted Exercise Prices Number Average --------------- Vested at Low High of Shares Exercise Price December 31, 1998 $ 2.50 $ 9.00 825,333 $4.31 1999 2.50 5.00 293,000 3.52 2000 2.50 5.00 293,000 3.52 2001 2.50 4.00 229,000 3.16 --------- 1,640,333 3.87 ========= If not previously exercised, options outstanding at December 31, 1998, will expire as follows: Range of Exercise Prices Weighted ---------------- Average Year Ending Exercise Number December 31, Low High Price of Shares - ----------------- ------- ------ -------- --------- 1999 $ 6.38 $ 9.00 $8.40 36,666 2002 3.93 4.50 4.40 126,667 2003 - 2006 4.00 5.00 4.73 567,000 2007 2.50 4.00 3.58 487,500 2008 - 2010 2.50 2.50 2.50 422,500 --------- 3.87 1,640,333 ========= Modification of Option Terms - During 1996 and 1997, the Company extended the exercise period for certain non-qualified common stock options which had been granted to officers and directors. The following is a summary of these activities: Original Terms New Terms ---------------------------- --------------------------- Grant Exercise Expiration Grant Exercise Expiration Number of Date Price Date Date Price Date Shares ------ -------- ---------- ----- -------- ---------- --------- 1996 Modification ----------------- 1986 $ 4.50 1996 1996 $ 4.50 1997 94,000 1993 3.93 1996 1996 3.93 1997 11,111 1986 3.93 1996 1996 3.93 1997 11,556 ------- 116,667 ======= 1997 Modification ----------------- 1996 $ 4.50 1997 1997 $ 4.50 2002 94,000 1993 4.50 1998 1997 4.50 2002 24,000 1996 3.93 1997 1997 3.93 2002 22,667 ------- 140,667 ======= The market price of the Company's common stock exceeded the exercise price for 116,667 options whose term was extended in 1996 and, accordingly, the Company recognized a stock-based compensation charge of $159,500 in 1996. Based on vesting provisions for these repriced options, the Company recognized additional compensation of $52,568 in 1997 and $8,718 in 1998. Options for 33,334 shares were extended in 1997 and compensation of $14,921 was recognized. During 1997, the expiration dates of options for 107,333 shares were extended for five years and no compensation was recognized since the market price of the Company's common stock was less than the exercise price on the date the options were extended. Additional stock-based compensation of $117,882 was recognized in 1997 related to the value of options surrendered by officers and directors to settle notes receivable. 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, 1996, 1997, and 1998:
1996 1997 1998 --------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- -------- ---------- --------- Outstanding, beginning of year 1,006,224 $15.58 326,025 $ 9.38 740,025 $10.84 Granted for goods and services 433,333 5.20 - - - - Granted in equity offerings 90,920 5.39 - - - - Granted to previous holders of L warrants - - 414,000 12.00 - - Reload grants 175,200 9.23 - - - - Granted for debt discount and issuance costs - - - - 1,750,000 6.57 Canceled - - - - (250,000) 10.00 Anti-dilution adjustments 41,600 2.52 - - - - Expired (956,202) 15.74 - - (583,222) 12.00 Exercised (455,050) 4.26 - - - - Repriced (10,000) 9.00 - - - - -------- -------- --------- ------ Outstanding, end of year 326,025 9.38 740,025 $10.84 1,656,803 6.05 ======== ======== =========
All outstanding warrants and non-qualified options granted to non-employees were exercisable at December 31, 1998. If not previously exercised, these instruments will expire as follows: Range of Exercise Prices Weighted ---------------- Average Year Ending Exercise Number December 31, Low High Price of Shares - ----------------- ------- ------ -------- --------- 1999 $ 3.75 $ 3.75 $3.75 10,000 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 --------- 6.05 1,656,803 ========= Reload Options - At December 31, 1998, 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. Stock Subscriptions Receivable - During 1994, officers and directors exercised stock options to acquire an aggregate of 216,667 shares of common stock at a weighted average exercise price of $4.67 per share. Pursuant to the terms of the options exercised, each optionee paid the purchase price of the options by the delivery of a promissory note payable in three equal, consecutive installments of principal plus interest on the unpaid balance at 7% per annum, payable annually commencing on the first anniversary of the exercise. The note installments are payable in cash or the delivery of Common Stock or other options valued at the trading price at the time of payment. Also pursuant to the terms of the options exercised, the Company automatically granted new five year options to purchase 216,667 shares of Common Stock at $6.38 per share. In connection with the issuance of shares on the exercise of such options, in 1994 the optionees returned an aggregate of 24,118 shares of Common Stock to satisfy withholding obligations of the Company, as provided for in the terms of the options exercised. The first payment for the above referenced notes became due in September 1995, when the officers returned an aggregate of 57,159 shares of Common Stock in satisfaction of the first installment of principal and interest on their notes. In connection with employment agreements executed in 1996, the due dates for the September 1996 and 1997 installments were deferred for one year. The remaining balance due under these notes of $735,523 was satisfied in 1997 through the delivery of an aggregate of 151,395 shares of common stock owned by the directors. The fair value of these shares amounted to $617,640 and the directors also agreed to surrender stock options for an aggregate of 208,334 shares of common stock with an exercise price of $6.38 per share as additional consideration for the repayment of the notes receivable. The Company recognized a charge of $117,883 related to the exchange of the stock options for the remaining obligations under the notes receivable. 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 FAS 123 rather than the intrinsic value 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, -------------------------------- 1996 1997 1998 ------- ------- ------ Net loss applicable to common stockholders: As reported $(5,715,489) $(3,509,929) $(13,909,133) Pro forma (6,648,000) (5,068,313) (13,937,133) Net loss per common share: As reported $(.99) $(.46) $(1.57) Pro forma (1.19) (.66) (1.57) The weighted average fair value of options granted to employees amounted to $3.03, $1.54, and $1.40 for the years ended December 31, 1996, 1997, and 1998, respectively. 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, ------------------------ 1996 1997 1998 ------ ------- ------- Expected volatility 70.0% 70.0% 70.0% Risk-free interest rate 6.5% 6.4% 6.1% Expected dividends - - - Expected terms 4.7 6.7 3.5 (in years) 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 $69,879, $60,125, and $88,922 for the years ended December 31, 1996, 1997, and 1998, respectively. The total minimum rental commitment under all operating leases is as follows: Year Ending December 31, 1999 $167,000 2000 171,000 2001 174,000 2002 178,000 2003 135,000 -------- $825,000 ======== Delay Rentals - At December 31, 1998, the Company has an investment in undeveloped oil and gas leases with a carrying value of $472,238. In order to retain these leases, management estimates that delay rental payments of approximately $168,000 will be required in 1999. Delay rental expense amounted to $175,055 for the year ended December 31, 1998 and is included in oil exploration expense in the accompanying statement of operations. Employment Agreements - In September 1997, the Company entered into employment agreements with four officers, directors, and employees of the Company. The agreements automatically renew each month for a period of 3 years and provide for aggregate annual salaries of $388,000. The agreements also provide for an increase in the aggregate annual salaries to $484,000 when the Company sustains net oil production at an average of at least 1,000 barrels of oil per day for any calendar month. Employee Royalties - During 1996, the Company agreed to transfer a 1% overriding royalty interest in substantially all of the Company's wells to a limited liability company to be formed to hold this interest. The proceeds from this royalty interest are required to be distributed to employees as additional compensation. Through December 31, 1998, total royalties related to this interest amounted to $64,500. During October 1997, in connection with an officer's severance arrangements, the Company agreed to transfer a 1% overriding royalty in properties which comprise substantially all of the Company's proved reserves. The estimated fair value of this royalty interest of approximately $147,000 is included in general and administrative expenses in the 1997 statement of operations. 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. 10. SIGNIFICANT CONCENTRATIONS: At December 31, 1998, the Company had cash on deposit with a single financial institution for approximately $884,000, $472,000, and $368,000. These amounts are Federally-insured to the extent of $100,000 for each financial institution. The Company also had an investment in a certificate of deposit for $550,000 which was not Federally-insured. At December 31, 1998, the Company had trade receivables of $538,000 and $516,000 from refining customers. The Company's refining customers include other petroleum companies and entities that are primarily engaged in mining and 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. 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, substantially all of the Company's debt financing has been obtained from a single lender and the Company is not in compliance with several covenants under this financing arrangement. In August 1998, the lender also purchased 2,000 shares of convertible preferred stock with a liquidation preference of $2,000,000. In connection with these financing activities, the Company has granted warrants to this lender for the purchase of an aggregate of 1,500,000 shares of common stock, exercisable at $6.00 per share. 11. INDUSTRY SEGMENTS: Through July 1998, the Company's operations were concentrated in oil and gas producing activities. Beginning in August 1998, the Company is also 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 prices paid to unrelated parties. The Company evaluates performance based on net income or loss. Presented below is a summary of results of operations for each segment for the year ended December 31, 1998:
Oil and Gas Refining Consolida- and tion Producing Transpor- Entries Consoli- tation dated --------------- ----------- ---------- ------------ Revenue: External customers $ 838,241 $9,703,996 $ - $10,542,237 Inter-segment 486,421 - (486,421) - --------------- ----------- ---------- ------------ Total revenue 1,324,662 9,703,996 (486,421) 10,542,237 Costs and expenses: Refining and transportation - 8,751,210 99,828 8,851,038 Oil production 974,018 - (586,249) 387,769 Enhanced recovery project 585,117 - - 585,117 Oil exploration 3,634,623 - - 3,634,623 General and administrative 940,640 382,902 - 1,323,542 Abandonment and impairment costs 3,650,533 - - 3,650,533 Depreciation, depletion and amortization 3,999,750 263,954 - 4,263,704 Interest and other, net 1,572,279 145,943 - 1,718,222 --------------- ----------- ---------- ------------ Total cost and expenses 15,356,960 9,544,009 (486,421) 24,414,548 Income (loss) before income taxes (14,032,298) 159,987 - (13,872,311) Income tax benefit 50,000 (50,000) - - (expense) --------------- ----------- ---------- ------------ Net income (loss) $(13,982,298) $109,987 $ - $(13,872,311) =============== =========== ========== ============
Total assets for each segment as of December 31, 1998 are as follows: Oil and Gas Refining Consolida- and tion Producing Transpor- Entries Consoli- tation dated --------------- ----------- ---------- ------------ $3,769,498 $11,132,330 $(259,141) $14,642,687 =============== =========== ========== ============ 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, 1998, the Company incurred $172,177 for capital contributions to CAT. The Company also incurred $367,509 for construction in progress expenditures related to the 100% owned roofing asphalt business. Management expects that the roofing asphalt business will be operational during the second quarter of 1999. 13. FOURTH QUARTER ADJUSTMENTS AND TRANSACTIONS: During the fourth quarter of 1998, the Company recognized charges totaling approximately $7 million for depletion, depreciation and impairment related to oil and gas properties that did not have economic reserves based on prices in effect at December 31, 1998. 14. 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, -------------------------- 1997 1998 ------------ ------------- Proved oil and gas producing properties $11,406,799 $13,094,267 Unproved properties, net of allowance for impairment of $169,000 in 1997 and $67,000 in 1998 471,537 472,238 ------------ ------------- 11,878,336 13,566,505 Accumulated depreciation, depletion and amortization (5,114,382) (12,556,271) ------------ ------------- $6,763,954 $1,010,234 ============ ============= Costs incurred in oil and gas producing activities, whether capitalized or expensed, during the years ended December 31, 1996, 1997, and 1998 are as follows: 1996 1997 1998 ----------- ----------- ---------- Acquisition costs $2,908,254 $358,403 $602,292 =========== =========== ========== Exploration costs $2,205,883 $1,252,838 $4,358,142 =========== =========== ========== Development costs $477,210 $1,076,636 $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, 1996, 1997, and 1998 are presented below. 1996 1997 1998 ----------- ------------ ----------- Oil sales $1,958,348 $2,213,336 $1,314,714 Gain (loss) on sale of oil and gas properties - (7,474) 2,635 Production costs: Enhanced recovery project - - (585,117) Other (533,339) (907,332) (974,012) Exploration costs: Dry hole costs (943,120) (13,405) (1,705,858) Delay rentals (184,421) (214,019) (175,055) Geologic and geophysical (649,986) (1,038,819) (1,753,710) Abandonment and impairment costs (542,700) (565,483) (3,650,533) Depreciation and depletion (663,160) (1,243,485) (3,929,360) ----------- ------------ ----------- Results of operations from oil and gas producing activities $(1,558,378) $ (1,776,681)$(11,456,296) =========== ============ =========== 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 estimates 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. 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, 1996, 1997, and 1998: 1996 1997 1998 ---------- ------------ ----------- Proved reserves, beginning of year 2,006,000 3,723,000 2,297,000 Production (118,000) (180,000) (159,000) Purchase of reserves in place 1,321,000 16,000 224,000 Transfer of royalty interests to employees (50,000) (28,000) - Discoveries, extensions and other additions 646,000 - - Revisions of previous estimates (82,000) (1,234,000) (1,854,000) ---------- ------------ ----------- Proved reserves, end of year 3,723,000 2,297,000 508,000 ========== ============ =========== Proved developed reserves, beginning of year 1,175,000 1,900,000 1,450,000 ========== ============ =========== Proved developed reserves, end of year 1,900,000 1,450,000 508,000 ========== ============ =========== 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 $18.05, $12.55, and $5.80 per barrel as of December 31, 1996, 1997, and 1998, respectively. 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. 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. DECEMBER 31, --------------------------------------- 1996 1997 1998 ------------ ------------ ----------- Future cash inflows $67,226,000 $28,838,000 $2,949,000 Future production costs (19,216,000) (14,502,000) (2,313,000) Future development costs (5,182,000) (2,240,000) - Future income tax expense (3,630,000) - - ------------ ------------ ----------- Future net cash flows 39,198,000 12,096,000 636,000 10% annual discount for estimated timing of cash flows (18,218,000) (5,384,000) (145,000) ------------ ------------ ----------- Standardized measure of discounted future net cash flow $20,980,000 $6,712,000 $ 491,000 ============ ============ =========== The following are the principal sources of change in the standardized measure of discounted future net cash flows for the years ended December 31, 1996, 1997, and 1998: 1996 1997 1998 ----------- ----------- ----------- Standardized measure, beginning of year $6,200,000 $20,980,000 $6,712,000 Sales of oil and gas, net of production costs (1,425,000) (1,306,000) (372,000) Extensions, discoveries and other, net 6,977,000 - - Purchase of reserves in place 8,964,000 37,000 799,000 Transfer of royalty interests to employees (290,000) (213,000) - Net change due to revisions in quantity estimates (1,913,000) (5,728,000) (2,565,000) Net change due to changes in prices and production costs 5,719,000 (13,530,000) (6,882,000) Net change in future development costs (1,930,000) 2,432,000 2,128,000 Net change in income taxes (1,942,000) 1,942,000 - Accretion of discount 620,000 2,098,000 671,000 ----------- ----------- ----------- Standardized measure, end of year $20,980,000 $6,712,000 $491,000 =========== =========== =========== Due to the low oil prices at December 31, 1998 of approximately $5.80 per barrel, the Company recognized substantial downward revisions in oil reserve quantities, the standardized measure, and net capitalized costs due to impairment. In addition to the adverse impact on current operating results, low oil prices tend to dramatically reduce estimates of future oil reserve quantities since the wells become uneconomic at an earlier date. The following pro forma information illustrates the sensitivity of reserve quantities and the standardized measure to changes in oil prices as prepared for the Company's lender by an independent petroleum engineering firm: Pro Forma Quantity Standardized Oil Price (bbls) Measure $ 9.75 1,716,000 $2,198,000 $12.50 2,039,000 $4,126,000 In March 1999, oil prices related to the Company's properties had recovered to approximately $10 per barrel. EX-10 2 OPERATING AGREEMENT OF COWBOY ASPHALT TERMINAL, L.L.C. THIS OPERATING AGREEMENT of COWBOY ASPHALT TERMINAL, L.L.C. (this "Agreement"), is made and entered into effective as of the 12th day of February 1999, by and among CROWN ASPHALT PRODUCTS COMPANY, a Utah corporation ("Capco"), and FORELAND ASPHALT CORPORATION, a Utah corporation ("Foreco") (collectively referred to herein as the "Members"). RECITALS A. The parties desire to engage in the business of acquiring, holding, managing, and operating an asphalt terminal. B. On or about June 16, 1998, Articles of Organization were filed with the Division of Corporations and Commercial Code of the Department of Commerce, state of Utah, to form Cowboy Asphalt Terminal, L.L.C. (the "Company"). C. It is the intent of the parties that additional improvements for the joint use of the parties will be made by the Company to that portion of the Property (as defined below) that is designated for the joint use of the parties, in which case the parties will share in the cost and expense of such improvements in proportion with their Ownership Percentages (as defined below) and will receive an increase in each such party's Capital Account in the amount paid by such party. Further, upon the mutual agreement of the parties, each party may erect and install equipment and other improvements, as such party's sole and separate property and at its sole cost and expense, on that portion of the Property that is designated for such Party's exclusive use, in which case the cost and expense of such improvements shall not be treated as Capital Contributions and such improvements will be owned by the party bearing the cost thereof and not by the Company. D. The parties hereto desire to provide for the regulation and management of the affairs of the Company. AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINED TERMS When used in this Agreement, the following terms shall have the meanings set forth below: 1.1 "Act" shall mean the Utah Limited Liability Company Act, as amended or revised from time to time. 1.2 "Affiliate" of a Person shall mean a Person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Person in question. The term "control," as used in the immediately preceding sentence, means, respecting a Person that is a corporation, the right to exercise, directly or indirectly, more than 50% of the voting rights attributable to the shares of the controlled corporation, and, respecting a Person that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled Person. 1.3 "Agreement" shall mean this Operating Agreement of Cowboy Asphalt Terminal, L.L.C., as originally executed and as amended from time to time. Words such as "herein," "hereinafter," "hereof," "hereto," "hereby," and "hereunder," when used with reference to this Agreement, refer to this Agreement as a whole, unless the context otherwise requires. 1.4 "Available Cash" of the Company shall mean all cash funds of the Company on hand from time to time (including cash funds obtained as contributions to the capital of the Company by the Members, loans to the Company, and net proceeds from Capital Transactions, but excluding cash funds obtained from Terminating Transactions) after (i) payment of all expenses of the Company as of such time, including all costs, expenses, or charges respecting the ownership, operation, development, maintenance, and upkeep of the Company property, including ad valorem taxes, debt amortization (including interest payments), advertising expenses, professional fees, wages, and utility costs, (ii) provision for payment of all outstanding and unpaid current obligations of the Company as of such time, and (iii) provision for an adequate working capital reserve as determined by the Manager to be reasonably necessary for operations of the business of the Company. 1.5 "Capital Account" shall have the meaning set forth in Section 3.3(a). 1.6 "Capital Transaction" shall mean a transaction (i) pursuant to which the Company borrows funds, (ii) pursuant to which part of the assets of the Company are sold, condemned, exchanged, abandoned or otherwise disposed of, (iii) pursuant to which insurance proceeds or other damages are recovered by the Company in respect of a capital asset of the Company (and, not for such items as business interruption or similar items), or (iv) that, in accordance with generally accepted accounting principles, is otherwise considered capital in nature. 1.7 "Code" shall mean the Internal Revenue Code of 1986, as amended (or any corresponding provision or provisions of succeeding law). 1.8 "Company" shall mean the limited liability company operated pursuant to the terms hereof for the limited purposes and scope set forth herein. 1.9 "Fiscal Year" of the Company shall mean the calendar year. 1.10 "Liquidation" of a Member's interest shall mean and shall be deemed to occur upon the earlier of (i) the date upon which the Company is terminated under section 708(b)(1) of the Code; (ii) the date upon which the Company ceases to be a going concern (even though it may continue in existence for the limited purpose of winding up its affairs, paying its debts, and distributing any remaining Company assets to the Members); or (iii) the date upon which there is a liquidation of the Member's interest (but the Company is not terminated) under section 1.761-1(d) of the Regulations. 1.11 "Manager" shall mean the Person designated pursuant to Section 5.3 to manage and operate the business of the Company. 1.12 "Members" shall mean the parties to this Agreement and such other persons or entities that are admitted to the Company as additional or substituted Members. Reference to a "Member" shall mean any one of the Members. 1.13 "Net Income or Loss" of the Company for any Fiscal Year (or portion thereof) shall mean the excess or deficit, as the case may be, of (i) the gross income of the Company derived from Operations as calculated under federal income tax accounting principles for such Fiscal Year over (ii) all items of expense [incurred, in case the Company selects the accrual method of accounting for tax purposes, or paid, in the case the Company selects the cash method of accounting for tax purposes,] by the Company respecting Operations during such Fiscal Year which are allowable as deductions under federal income tax accounting principles and depreciation, cost recovery or other amortization deduction allowable to the Company for federal income tax purposes respecting any Company asset for such Fiscal Year. 1.14 "Operations" shall mean revenue producing activities of the Company other than (a) activities relating to Capital Transactions; or (b) activities conducted separately by either Capco or Foreland. It is contemplated that Operations shall be limited to ownership of the Property and the leasing of tank capacity as the Members shall agree. 1.15 "Ownership Percentage" means, respecting each Member, the product of (a) 100%, multiplied by (b) a fraction, the numerator of which shall be the number of Units held by such Member and the denominator of which shall be the total number of Units outstanding at that time. 1.16 "Person" shall mean any individual, partnership, corporation, trust or other entity or association. 1.17 "Property" shall mean the Cowboy Asphalt Terminal comprising the real property located in Davis County, Utah, as more particularly described in Exhibit "A" attached hereto and incorporated herein by this reference, together with the buildings, fixtures, and improvements and certain items of personal property from time-to-time located thereon, excluding improvements to the Property made pursuant to Section 3.2(d). 1.18 "Regulations" shall mean the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute proposed or final Regulations. 1.19 "Terminating Transaction" shall mean a sale, condemnation, exchange or other disposition, whether by foreclosure, abandonment, or otherwise, of all or substantially all of the then remaining assets of the Company which is entered into in connection with the dissolution, termination and winding up of the Company or that will result in the dissolution of the Company. 1.20 "Unit" shall mean an interest in the Company consisting of the rights, covenants, and responsibilities more particularly set forth herein. ARTICLE II GENERAL PROVISIONS 2.1 Formation of the Company. The Members previously formed the Company as a limited liability company pursuant to the provisions of the Act, by filing Articles of Organization with the Division of Corporations and Commercial Code of the Department of Commerce, state of Utah, and hereby adopt this Agreement to provide for the regulation and management of the affairs of the Company. 2.2 Name. The business of the Company shall be conducted under the name "Cowboy Asphalt Terminal, L.L.C." or such other name that the Members may select. 2.3 Purposes and Scope. Subject to the provisions of this Agreement, the Company is formed to acquire, hold, manage, and operate an asphalt receiving, processing, storage, and handling terminal, to engage in any activity necessary or convenient to accomplish its purposes and operate its business as set forth herein as the Members may from time-to-time determine; and to exercise all powers permitted thereby. This Agreement does not and shall not be construed to govern any business relationships between the parties other than those specified in this Agreement. 2.4 Articles of Organization. The Members further agree and obligate themselves to execute, acknowledge, file, record and/or publish, as necessary, such amendments to the Articles of Organization as may be required by the terms hereof or by law and such other certificates and documents as may be appropriate to comply with the requirements of law for the continuation, preservation, and/or operation of the Company as a limited liability company. 2.5 Fictitious Name. Concurrently with the execution of this Agreement, the Company shall make any filings or disclosures required by the laws of the state of Utah respecting its use of a fictitious name, if any. 2.6 Ownership. The interest of each Member in the Company shall be personal property for all purposes. All property and interests in property, real or personal, owned by the Company shall be deemed owned by the Company as an entity, and no Member, individually, shall have any ownership in any property or interest in property owned by the Company except as a Member in the Company. Each of the Members irrevocably waives, during the term of the Company and during any period of its liquidation following any dissolution, any right that such Member may have to maintain any action for partition respecting any of the assets of the Company. 2.7 Membership Certificates. Units of membership interest in the Company shall be represented by certificates which shall state on their face the name of the Company and that it is organized under the laws of the state of Utah, the name of the Member to whom the certificate is issued, and the number and, if applicable, the class or other designation of the series, if any, the certificate represents. Each share certificate must be signed by the Manager and may contain such other information as the Manager or the Members consider necessary or appropriate. The Company shall maintain a membership ledger indicating the name, address, certificate serial number, and number of units or other interests held by each Member from time to time, showing the cancellation of certificates, as appropriate. 2.8 No Individual Authority. Except as otherwise specifically provided in this Agreement, no Member, acting alone, shall have any authority to act for, or to undertake or assume any obligation, debt, duty or responsibility on behalf of, any other Member or the Company. 2.9 Place of Business. The principal place of business of the Company shall be at 215 South State Street, Suite 650, Salt Lake City, Utah 84111, or at such other or additional place or places as the Members shall reasonably determine. 2.10 Term of the Company. The term of the Company shall continue until terminated pursuant to the provisions of this Agreement or such other date as the Members shall select in accordance with the provisions of Section 8.1. 2.11 Registered Agent. The registered agent of the Company shall be Jay Mealey, whose office address is 215 South State Street, Suite 650, Salt Lake City, Utah 84111. 2.12 Registered Office. The registered office of the Company shall be 215 South State Street, Suite 650, Salt Lake City, Utah 84111. ARTICLE III CAPITAL CONTRIBUTIONS 3.1 Initial Capital Contributions; Units. In connection with the formation of the Company, each Member shall be deemed to have contributed to the capital (the "Capital Contributions") of the Company the approximate amount of cash paid to Hancock-Geisler R.I.C. through November 30, 1998, respecting the payments due under that certain amortization schedule regarding the purchase of the Property, and has been credited with the number of Units, set forth opposite such Member's name set forth below: OWNERSHIP NAME CONTRIBUTION UNITS HELD PERCENTAGES - ------------------------------ ------------ ---------- ----------- Crown Asphalt Products Company $174,533 66.67 66.67% Foreland Asphalt Corporation $87,267 33.33 33.33% 3.2 Additional Contributions. (a) Each Member shall be obligated to contribute one-half of (i) such additional amounts as may be required, not to exceed a total of $650,000, for the Company to fulfill its obligations under such corrective action plan that may be acceptable to the Company and the Utah Department of Environmental Quality for environmental management, remediation, and containment costs of bringing the Property into compliance with applicable environmental laws respecting conditions existing as of the date of this Agreement, which such additional contribution shall be paid within ten (10) days after demand therefor by the Manager; and (ii) such additional amounts required to cover legal costs incurred in obtaining title to the Property from Hancock Geisler R.I.C., or relating to the environmental remediation work referenced in clause (i). (b) Each Member shall be obligated to contribute, pro rata in proportion to its Ownership Percentage, such additional amounts as may be required for the Company to fulfill its obligations under the following: (i) the payment of the balance of the purchase price for the Property as reflected under that certain Memorandum of Closing dated January 7, 1999, attached hereto as Exhibit "B" for by and between Hancock Geisler R.I.C., Inc., and the Company and the special warranty deed, trust deed note, deed of trust, and other documents to be executed and delivered in consummation of the transaction contemplated thereby; (ii) environmental management and containment costs other than those described in subparagraph (a) of this Section 3.2, which such additional contribution shall be paid within ten (10) days after demand therefor by the Manager; (iii) the Company's expenses for Operations, which such additional contribution shall be paid within ten (10) days after demand therefor by the Manager; and (iv) the construction of capital improvements to the Property that, in the judgment of the Manager and, if required in accordance with the provisions of Section 5.7, the approval of the Members, will be beneficial to the business interests and for the joint use of both Members. (c) Any additional Capital Contributions of a Member shall increase the Member's Capital Account, but as long as such contributions are made in proportion to their respective obligations as set forth in subparagraph (a) and (b) above of this Section 3.2, shall not result in an increase in the number of Units held by the Members. No Member shall be required to purchase additional Units or make any additional Capital Contributions beyond those set forth in Section 3.1 and this Section 3.2, respectively. (d) In addition to the foregoing, the Members anticipate that each Member may deem it necessary or desirable to make certain capital improvements to the Property intended to benefit only such Member in all material respects and not the other Member, all as more particularly provided in this Section 3.2(d). To the extent that the improvement sought to be made is located in the area set forth on Exhibit "C" as being devoted to the exclusive use of the Member making such improvement, no approval from any other Member shall be required. If, however, the subject improvement is to be located on an area not designated on Exhibit "C" for such Member's exclusive use, any such improvements shall be made only upon the prior written consent of both Members, which such consent shall not be unreasonably withheld if, in the exercise of the Members' reasonable commercial judgment, it does not appear that it will be likely that the proposed improvements will materially and interfere on a recurring basis with the continued use of the remainder of the facility in accordance with then contemporaneous practice. The Member receiving the principal benefits of such capital improvements shall fund all related costs and expenses of installation, construction, and operation of such improvements and shall be entitled to all revenues and profits in connection therewith. The payment of such costs and expenses of installation and construction shall in no event be treated as additional Capital Contributions or loans to the Company but shall be for the sole account of the Member bearing such payments. All improvements to the Property made pursuant to this Section 3.2(d) shall be owned solely by the Member funding the installation, construction and operation thereof, and shall not be considered Company property.. 3.3 Capital Accounts. (a) A separate "Capital Account" (herein so called) shall be maintained for each Member in accordance with the capital accounting rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Member shall have only one Capital Account, regardless of the number or classes of Units in the Company owned by such Member and regardless of the time or manner in which such Units were acquired by such Member. Pursuant to the basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each Member's Capital Account shall be: (i) credited with: (1) the amount of money contributed by such Member to the Company and the fair market value of any property contributed by such Member to the Company (net of liabilities secured by such property that the Company assumes or takes subject to); (2) except as provided below, the amount of taxable income or gain allocated to such Member; and (3) such Member's pro rata share of any tax exempt income or gain of the Company; and (ii) debited with: (1) the amount of money (excluding guaranteed payments) and the agreed fair market value of any property distributed to such Member (net of liabilities secured by such property that the Member assumes or takes subject to); (2) except as provided below, the amount of taxable loss and deductions (or items thereof) allocated to such Member; and (3) such Member's pro rata share of any expenditures of the Company described in section 705(a)(2)(B) of the Code (or expenditures which are so treated under section 1.704-(b) of the Regulations); and (iii) otherwise adjusted in accordance with the other capital account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations. In addition, if property is distributed in kind by the Company, the Capital Accounts of the Members shall be adjusted to reflect the manner in which the unrealized income, gain, loss and deduction inherent in such property (that has not already been reflected in the Members' Capital Accounts) would be allocated to the Members if there were a taxable disposition of such property for its agreed fair market value on the date of distribution. (b) Notwithstanding the foregoing, if property is contributed to the Company by a Member, the Company shall thereafter compute gain, loss and depreciation in respect of the contributed property separately for book and tax purposes as required by sections 1.704-1(b)(2)(iv), 1.704-1(b)(4)(i) and 1.704-(b)(4)(iii) of the Regulations. Such items so computed for book purposes shall be allocated among the Members in the manner provided in Article IV below and shall be reflected in the Members' Capital Accounts by appropriate increases or decreases thereto as required by section 1.704-1(b)(2)(iv)(b) of the Regulations. Such items so allocated for tax purposes shall not be reflected in the Members' Capital Accounts. (c) Notwithstanding the foregoing, it is the intention of the Members that their Capital Accounts in the Company be maintained strictly in accordance with the capital account maintenance requirements of section 1.704-1(b) of the Regulations, and that their Capital Accounts be adjusted to the extent required by the provisions of such Regulations or any successor provisions thereto. (d) A loan by a Member to the Company shall not be considered a contribution of money to the capital of the Company, and the balance of such Member's Capital Account shall not be increased by the amount so loaned, unless such loan is determined by the Internal Revenue Service in a final administrative proceeding to be a Capital Contribution by such Member. No repayment of principal or interest on any such loan, or reimbursement made to a Member respecting advances or other payments made by such Member on behalf of the Company, or payments of fees to a Member or its Affiliates which are made by the Company shall be considered a return of capital or in any manner affect the balance of such Member's Capital Account. (e) Notwithstanding any other provision in this Agreement to the contrary, in the event that a Member has a negative balance in its Capital Account following the Liquidation of such Member's interest in the Company or the occurrence of a Terminating Transaction or other event resulting in the termination of the Company (such Member's Capital Account balance to be determined after it has been adjusted to reflect (i) all Company transactions during the Fiscal Year in question, including gain or loss realized in connection with a Terminating Transaction and (ii) the gain or loss which would be recognized by the Company if it were to sell its remaining assets for the fair market value thereof), such Member shall contribute to the Company an amount of money equal to such negative balance by the later of (1) the end of the Fiscal Year during which the Member's interest is liquidated or the Terminating Transaction occurs or (2) ninety (90) days after the date on which the Member's interest is liquidated or the Terminating Transaction occurs. Amounts contributed to the Company pursuant to this Section 3.3(e) shall be paid to the Company's creditors or distributed to the other Members in accordance with the positive balances in their respective Capital Accounts (after such Capital Accounts have been adjusted in the manner provided herein). 3.4 Return of Capital. Except to the extent provided in Article IV below, no Member shall have the right to demand or receive the return of such Member's Capital Contributions to the Company. 3.5 No Interest on Capital Contributions. Except as otherwise provided herein, no Member shall receive any interest on such Member's Capital Contributions to the Company or such Member's Capital Account, notwithstanding any disproportion therein as between the Members. ARTICLE IV ALLOCATIONS AND DISTRIBUTIONS 4.1 Distributions of Available Cash. The Manager, in its sole discretion, shall determine whether the Company should distribute its Available Cash; provided, however, that the Manager shall use its best efforts to distribute sufficient Available Cash to allow the Members to meet their obligations to federal and state taxing authorities. In the event that the Manager decides that part or all of the Company's Available Cash should be distributed to the Members, such Available Cash shall be distributed to the Members pro rata in accordance with their respective Ownership Percentages. Notwithstanding the foregoing, the net proceeds of a Terminating Transaction shall be distributed in accordance with Section 8.2 hereof. 4.2 Allocations of Income and Loss. Subject to the provision of Section 4.3, the Company's items of Net Income and Loss from Operations for each Fiscal Year and gain and loss realized by the Company in connection with each Capital Transaction, after giving effect to all Capital Account adjustments attributable to contributions and distributions of money and property made during such Fiscal Year (but excluding income and loss, if any, that is required to be separately determined and allocated to the Members for federal income tax purposes in the same manner as prescribed under section 704(c) of the Code), shall be allocated to the Members, pro rata in accordance to their respective Ownership Percentages. 4.3 Limitations and Qualifications Regarding Allocations. Notwithstanding the provisions of Section 4.2, Net Income and Loss for each Fiscal Year and gain and loss realized by the Company (or items of income, gain, loss, deduction, or credit, as the case may be) shall be allocated in accordance with the following provisions. If the allocation of Net Loss (or items thereof) as provided in Section 4.2 hereof would cause or increase a deficit balance in a Member's Capital Account, there shall be allocated to such Member only that amount of net loss (or items thereof) as will not cause or increase a deficit balance in the Member's Capital Account. The net loss (or items thereof) that would, absent the application of the preceding sentence, otherwise be allocated to such Member shall be allocated (i) first, to other Members having positive balances in their Capital Accounts, in proportion to such positive balances; and (ii) second, to all the Members in accordance with their respective Ownership Percentages. For purposes hereof, each Member's Capital Account shall be reduced for the items described in clauses (4), (5), and (6) of Regulation section 1.704- 1(b)(2)(ii)(d). If any allocation of net loss (or items thereof) is made under this Section 4.3, any allocation of Net Income and gain (including income and gain exempt from tax) of the Company allocated thereafter shall first be allocated as necessary to offset in reverse order the allocation made pursuant to this Section 4.3. 4.4 Allocation of Income and Loss and Distributions in Respect of Units Transferred. (a) If any Units in the Company are transferred, or are increased or decreased by reason of the admission of a new Member or otherwise, during any Fiscal Year of the Company, each item of income, gain, loss, deduction, or credit of the Company for such Fiscal Year shall be assigned pro rata to each day in the particular period of such Fiscal Year to which such item is attributable (i.e., the day on or during which it is accrued or otherwise incurred) and the amount of each such item so assigned to any such day shall be allocated to the Members based upon their respective Units in the Company at the close of such day. For purposes of accounting convenience and simplicity, the Company shall treat a transfer of, or an increase or decrease in, Units in the Company which occurs at any time during a semi- monthly period (commencing with the semi-monthly period including the date hereof) as having been consummated on the first day of such semi-monthly period, regardless of when during such semi-monthly period such transfer, increase, or decrease actually occurs (i.e., sales and dispositions made during the first fifteen (15) days of any month will be deemed to have been made on the first day of the month and sales and dispositions thereafter will be deemed to have been made on the 16th day of the month). (b) Distributions of assets of the Company in respect of Units in the Company shall be made only to the persons or entities who, according to the books and records of the Company, are the holders of record of Units in respect of which such distributions are made on the actual date of distribution or, if authorized by the record holder of such Units as evidenced by written notice to the Manager, such holder's designee. Neither the Company nor the Manager shall incur any liability for making distributions in accordance with the provisions of the preceding sentence, whether or not the Company, the Members, or the Manager have knowledge or notice of any transfer or purported transfer of ownership of any Units in the Company. (c) Notwithstanding any provision above to the contrary, gain or loss of the Company realized in connection with a sale or other disposition of any of the assets of the Company shall be allocated solely to the parties owning Units in the Company as of the date such sale or other disposition occurs. ARTICLE V STATUS OF MEMBERS AND MANAGEMENT OF THE COMPANY 5.1 Participation in Management. Except as otherwise provided herein, the Members shall not participate in the management or control of the Company's business nor shall they transact any business for the Company, nor shall they have the power to act for or bind the Company, said powers being vested solely and exclusively in the Manager. 5.2 Limited Liability. Except as otherwise provided herein to the contrary, the Members shall not be bound by, or personally liable for, the expenses, liabilities, or obligations of the Company, except as provided in the Act. 5.3 Management. Unless the Articles of Organization have dispensed with or limited the authority of the Manager, all power of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Manager. The Manager shall have exclusive power and control over the business of the Company; only the Manager shall have the power to bind the Company. The initial Manager shall be Capco. The Manager shall act as such until (a) its resignation, withdrawal, removal, bankruptcy, or dissolution; or (b) the dissolution of the Company, whichever occurs first. Manager vacancies shall be filled by the Members. 5.4 Removal of Manager. The Members shall have the right, without further obligation to the Manager other than for reimbursement of expenses previously incurred, to remove, with or without cause, the Manager. 5.5 Members, Manner of Acting. (a) Unless the Articles of Organization provide otherwise, any or all Members may participate in a meeting by, or conduct the meeting through the use of, any means of communication by which all Members participating may simultaneously speak to and be heard by each other during the meeting. A Member participating in a meeting by this means is deemed to be present in person at the meeting. (b) A Member who is present at a meeting of the Members when an action is taken is deemed to have assented to the action taken unless: (1) it objects at the beginning of the meeting (or promptly upon its arrival) to holding it or transacting business at the meeting; or (2) its dissent or abstention from the action taken is entered in the minutes of the meeting; or (3) it delivers written notice of its dissent or abstention to the presiding officer of the meeting before its adjournment or to the Company immediately after adjournment of the meeting. The right of dissent or abstention is not available to a Member who votes in favor of the action taken. (c) Unless the Articles of Organization provide otherwise, any action required or permitted to be taken by the Members at a meeting may be taken without a meeting if the required majority of the Members as set forth in subparagraph (d) below sign a written consent (unless the action which is the subject of the consent requires a greater percentage under the Articles of Organization or this Agreement) describing the action taken, and the consents are filed with the records of the Company. Action taken by consents is effective when the last Member signs the consent, unless the consent specifies a subsequent effective date. A signed consent has the effect of a meeting vote and may be described as such in any document. (d) Unless this Agreement or the Articles of Organization require a greater percentage, the Members shall determine all matters based upon the approval or consent of at least 75% in Ownership Interest in the Company. In the event that, for any reason, at least 75% in Ownership Interest of the Members shall not be able to agree on a matter under consideration by the Members, within five days after the matter is submitted to the Members, the resolution thereof shall be determined by the majority decision of a panel consisting of one unrelated, independent third party selected by each Member (which appointment shall have been made within 15 days after the disputed matter is submitted to the Members or the Member who shall not have made such appointment shall have been deemed to have consented to the disputed matter) and one unrelated, independent third party selected by the persons so selected. All matters submitted to dispute resolution as described in this Section 5.5(d) shall have been finally resolved within 30 days. 5.6 Manager; Specific Powers. Except as otherwise specifically provided in this Agreement, all matters in connection with the day-to-day conduct of the Company's business and the use or disposition of its assets shall be decided solely by the Manager. Without limiting the generality of the foregoing, the Manager shall have the power and authority on behalf of the Company to: (a) acquire such tangible and intangible personal property as may be necessary or desirable to carry on the business of the Company; (b) negotiate leases for and execute and deliver leases for office space for the operation of the Company's business; (c) purchase equipment, supplies, and materials and produce and market products as, in its sole discretion, it shall deem advisable; (d) employ, terminate the employment of, supervise, and compensate such persons, firms, or corporations as, in its sole discretion and judgment, it shall deem advisable for the proper operation and management of the business of the Company; (e) invest Company funds in interest-bearing accounts, commercial paper, government securities, certificates of deposit, or similar investments; (f) execute promissory notes, deeds of trust, regulatory agreements, and all other documents, agreements, or certifications; (g) sell, transfer, exchange (whether or not qualifying as a tax-free exchange under section 1031 of the Internal Revenue Code), assign, convey, lease, further encumber, hypothecate or otherwise dispose of all or any part of the assets of the Company in the ordinary course of the business of the Company; (h) execute and file all reports and maintain all records required by law or by this Agreement; and (i) coordinate the management and operation of the Company and perform other normal business functions and otherwise operate and manage the business and affairs of the Company in accordance with and as limited by this Agreement. 5.7 Limitation on Powers and Authority of Manager. Notwithstanding the provisions of this Article V or any other provisions herein, the Manager shall not have the right or power to do any of the following without the consent of Members holding 75% or more of all of the outstanding Units. (a) Take any action respecting the Company's rights and obligations as successor in interest to that certain Letter of Intent dated November 12, 1990, between Hancock-Geisler R.I.C., Inc., an Idaho corporation, which appears therein as "Seller," for the sale of the Property to Crysen Refining, Inc., which has thereafter assigned its rights under the Purchase Arrangement to Refinery Technologies, Inc., which has in turn assigned certain of its rights to the Company. (b) Submit any corrective action plan or other remediation proposal to the Utah Department of Environmental Quality or any other governmental authority or bind the Company in any way respecting any such matter; (c) Perform any act that would make it impossible to carry on the ordinary business of the Company; (d) Confess a judgment against the Company; (e) Use the Company name, credit or assets for other than Company purposes; (f) Perform any act in contravention of this Agreement; (g) Amend this Agreement; (h) Commingle the funds of the Company with the funds of any other person or entity; (i) Submit any dispute involving the Company to binding arbitration; (j) Execute or deliver any assignment for the benefit of the creditors of the Company; (i) Cause the Company to borrow any sums for which the Members have recourse liability; (k) Transact any business on behalf of the Company in any jurisdiction, unless the Members would not, as a result thereof, become Manager and have any liability greater than that provided in this Agreement; (l) Cause the Company to borrow or incur any indebtedness, in the aggregate, in excess of $100,000; (m) Obligate the Company to make capital expenditures in excess of $100,000 in any calendar year; (n) Dispose of all or any part of the Property described in Exhibit "A" or the buildings, fixtures, or improvements from time to time located thereon or dispose of all or substantially all of the assets or the goodwill of any business of the Company or any of its businesses, all except for routine sales, leases, other transfers, replacements, renovations, and repairs in the ordinary course of the Company's business that do not, singly or in the aggregate, have a material adverse effect on the business of the Company; (o) Admit a person or entity as a Member, except as provided herein, except that Capco shall be entitled to transfer its interest as a Member in the Company at any time to Crown Asphalt Distribution, L.L.C., a Utah limited liability company ("CAD") without obtaining the consent of any Member or Manager of the Company; and (p) In case of an actual emergency, the Manager may take on behalf of the Company any reasonable action it deems necessary to protect life or property, to protect the assets of the Company, or to comply with applicable law, without the approval of the Members as required elsewhere within this Section 5.7 if time does not permit obtaining such approval. The Manager shall promptly notify the Members of the emergency or unexpected expenditure. Any Member may thereafter dispute the reasonableness or necessity of an expenditure incurred by the Manager for any such action by giving written notice of such dispute to the Manager. Thereafter, the Manager and the Member shall negotiate in good faith to resolve such dispute. In the event any dispute is not resolved, the provisions of Section 5.5(d) shall apply. 5.8 Standard of Conduct. The Manager at all times shall operate and manage the business and affairs of the Company in a reasonable and prudent manner. 5.9 Compensation of Manager. (a) Except as agreed to by the Members, the Manager shall not receive compensation in consideration of the performance of the duties and responsibilities of the Manager. However, the Manager shall be reimbursed for all costs and expenses incurred on behalf of the Company. Except as otherwise provided herein, neither the Manager nor any other Member shall be entitled to a fee for services to the Company in its capacity as a Member. (b) The Company shall be obligated, and the Manager is authorized, to pay from Company assets all expenses relating to the organization of the Company. Such expenses may be paid directly by the Company or paid by the Manager and then reimbursed by the Company. Without limiting the generality of the foregoing, such organizational expenses include legal, accounting, consulting, duplication and printing, telephone, telex, postage, air freight, travel and entertainment, and other expenses and fees (including filing fees) paid or incurred in organizing the Company. No part of the amount so paid pursuant to this section shall be deemed to be a management fee payable to the Manager. (c) The Manager shall devote such time, effort, and skill to the affairs of the Company as the Members may deem to be reasonably required for the welfare and success of the Company, but shall not be obligated to devote all of its business time to the affairs of the Company. 5.10 Use of Facilities. The Members shall have the right to use the facilities comprising the Property without cost or the payment of any consideration other than the Capital Contributions to the Company. Each Member shall be entitled to the exclusive use of that portion of the Property more particularly set forth in Exhibit "C" attached hereto and incorporated herein by this reference. Each Member shall be entitled to make that portion of the property marked as Reserved for such Member Exclusive to that Member by written notice to the Company of its intent to utilize such Property in their respective businesses ninety (90) days prior to such action. Any revenues generated from the property marked Exclusive shall be the sole property of that respective Member. Any revenues generated from the property marked Reserved or Joint will be allocated according to Sharing Ratio subject to the change of certain property from Reserved to Exclusive. The portions of the Property not designated for the exclusive use of either Member shall be available for the use of both Members, as coordinated from time-to-time by the Members. 5.11 Execution of Documents. Except as limited by Section 5.7, the Manager is hereby authorized to execute on behalf of the Company any and all documents in connection with the Company's business including, but not limited to, deeds, deeds of trust, promissory notes, guaranties, leases, certificates, affidavits, assignments, security agreements and contracts. 5.12 Tax Matters Member. (a) The Manager is hereby designated the "tax matters partner" as that term is defined in section 6231(a)(7) of the Code (referred to herein as the "Tax Matters Member"). (b) The Tax Matters Member shall take no action in such capacity without the authorization or consent of the other Members, other than such action as the Tax Matters Member may be required to take by law. The Tax Matters Member shall use its best efforts to comply with the responsibilities outlined in sections 6222 through 6232 of the Code and in doing so shall incur no liability to the other Members. Notwithstanding the Tax Matters Member's obligation to use its best efforts in the fulfillment of its responsibilities, the Tax Matters Member shall not be required to incur any expenses for the preparation for or pursuance of administrative or judicial proceedings unless the Members agree on a method for sharing such expenses. (c) The Tax Matters Member shall not enter into any extension of the period of limitations for making assessments on behalf of the other Members without first obtaining the written consent of the other Members. (d) No Member shall file, pursuant to section 6227 of the Code, a request for an administrative adjustment of items for any Company taxable year without first notifying the other Members. If the other Members agree with the requested adjustment, then the Tax Matters Member shall file the request for administrative adjustment on behalf of the Member. If unanimous consent is not obtained within thirty (30) calendar days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Member, including the Tax Matters Member, may file a request for administrative adjustment on its own behalf. (e) Any Member intending to file a petition under sections 6226, 6228, or other section of the Code respecting any item or other matter involving the Company shall notify the other Members of such intention and the nature of the contemplated proceeding. In the case where the Tax Matters Member is the Member intending to file such petition on behalf of the Company, such notice shall be given within a reasonable period of time to allow the other Members to participate in the choosing of the forum in which such petition will be filed. If the Members do not agree on the appropriate forum, then the appropriate forum shall be decided by vote of a majority in interest of the Members. Each Member shall have a vote in accordance with its aggregate percentage right to distributions of Available Cash for the year under audit. If such a majority cannot agree, then the Tax Matters Member shall choose the forum. If any Member intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding provisions of this Section 5.12(e), then such Member shall notify the other Members of such intended action. (f) The Tax Matters Member shall not bind any Member to a settlement agreement without obtaining the written concurrence of such Member. For purposes of this Section 5.12(f), the term "settlement agreement" shall include a settlement agreement at either an administrative or judicial level. Any Member who enters into a settlement agreement respecting any partnership items, as defined in section 6231(a)(3) of the Code, shall notify the other Members of such settlement agreement and its terms within ninety (90) calendar days from the date of settlement. (g) The provisions of this Section 5.12 shall survive the termination of the Company or the termination of any Member's interest in the Company and shall remain binding on the Members for a period of time necessary to resolve with the Internal Revenue Service or the United States Department of the Treasury any and all matters regarding the United States federal income taxation of the Company. 5.13 Other Tax Elections. The Manager may, in its sole discretion, make or revoke the elections referred to in section 754 of the Code or any corresponding provisions of state tax laws. Each of the Members will upon request supply the information necessary to properly give effect to such elections. The Manager shall revalue Company property to its fair market value (taking into account section 7701(g) of the Code) on the revaluation date in accordance with section 1.704-1(b)(2)(iv)(f) of the Regulations, and shall adjust the Capital Accounts of the Members as described herein when any new or existing Member contributes money or other property (other than a de minimis amount) to the Company in exchange for an interest in the Company or when the Company distributes money or other property (other than a de minimis amount) to a withdrawing or continuing Member in exchange for all or a portion of such Member's interest in the Company. 5.14 Inconsistent Treatment of Item. If any Member intends to file a notice of inconsistent treatment under section 6222(b) of the Code, then such Member shall give reasonable notice under the circumstances to the other Members of such intent and the manner in which the Member's intended treatment of an item is (or may be) inconsistent with the treatment of that item by the other Members. ARTICLE VI MEMBERS' RESPONSIBILITIES AMONG THEMSELVES 6.1 Liability of Manager to the Other Members. The Manager, its directors, officers, shareholders, representatives, employees and agents shall not be liable to the Company or to the other Members for losses sustained or liabilities incurred as a result of any good faith error in judgment or mistake of law or fact, or for any act done or omitted to be done in good faith in conducting the Company's business, unless such error, mistake, act or omission was performed or omitted fraudulently, or constituted willful misconduct or a breach of this Agreement. This provision is not for the benefit of any third party. 6.2 Company Indemnity to Manager. The Company shall protect, defend, indemnify and hold harmless the Manager and each of its directors, officers, shareholders, representatives, employees and agents (collectively, the "Indemnified Parties"), from and against any loss, expense, damage or injury suffered or sustained by any of them by reason of any acts, omissions, or alleged acts or omissions arising out of the activities of any Indemnified Party on behalf of the Company or in furtherance of the interests of the Company, including, but not limited to, any judgment, award, settlement, reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim if the acts, omissions or alleged acts or omissions upon which such actual or threatened action, proceeding or claim is based were for a purpose believed in good faith by any Indemnified Party, to be in the best interest of the Company or were not performed or omitted fraudulently and did not constitute willful misconduct or a breach of this Agreement by such Indemnified Party. The Company shall further indemnify and hold harmless each Indemnified Party for losses or liabilities due to the negligence, including gross negligence, dishonesty, willful misconduct, or bad faith of any employee, broker, or other agent of the Company if such employee, broker, or agent was solicited, engaged, or retained and supervised by the Manager with reasonable care. The Members each acknowledge that the intention of the preceding provisions is to cause the Company to indemnify the Manager respecting the Manager's negligence, but in no event shall the Manager be indemnified respecting its gross negligence or willful misconduct. 6.3 Conflicts of Interest. This Agreement shall not preclude the Company from dealing with any Member or any Member's Affiliates in connection with the business of the Company as independent contractors or as agents for others, and such Affiliates may receive from such others or the Company normal profits, compensation, commissions or other income incident to such dealings. The amount payable by the Company to any Member or any Affiliate of any Member shall not be greater than the amount which the Company would have to pay under an arms-length contract with a non-related entity. 6.4 Members Look Solely to Company Assets. Each Member shall look solely to the assets of the Company for all distributions respecting the Company and return of its Capital Contributions, and no Member shall have any recourse in connection therewith against any Member except as provided in Section 6.1. 6.5 Dealings Outside the Company. Neither the Manager nor any Member shall be required to devote full time to Company business, and the Manager and Members may, at any time and from time to time, engage in and possess an interest in other business ventures of any and every type and description, independently or with others. Specifically, the Members anticipate that Capco will exploit the facilities and services of the Company, in conjunction with improvements to the Property made by Capco pursuant to Section 3.2(d), solely to operate an integrated paving asphalt business and that Foreco will exploit the facilities and services of the Company, in conjunction with improvements to the Property made by Foreland pursuant to Section 3.2(d), solely to operate an integrated roofing asphalt business, Neither the Company nor any Member shall by virtue of this Agreement have any right, title or interest in or to such independent venture of any Member. 6.6 Respective Responsibilities for Damages. Each Member agrees to indemnify and hold harmless the Company and the other Member from any injury, damages, costs, liability, fines, causes of action or fees (including reasonable attorney's fees) resulting from, or alleged to result from, the business activities of such Member as described in Section 6.5 which are conducted upon the Property or in conjunction with improvements to the Property made by such Member pursuant to Section 3.2(d),. 6.7 Non-Solicitation. No Member shall solicit, divert, hire, or induce, or attempt to solicit, divert, or hire any of the other's employees who are providing substantially full-time services to such party while they are Members of the Company or affiliated with any Member of the Company. 6.8 Confidentiality. Each Member agrees to keep confidential and not use, reveal, provide, or transfer to any third party any confidential information ("Confidential Information") it obtains or has obtained concerning any other Member, except (a) disclosure to actual or prospective sources of debt or equity funding for such Member, including their legal, accounting, and other advisors, (b) to the extent that disclosure to a third party is required by applicable law; (c) information that, at the time of disclosure, is generally available to the public (other than as a result of a breach of this Agreement or any other confidentiality agreement to which the party is subject or which it has knowledge), as evidenced by generally available documents or publications; (d) information that was in its possession prior to disclosure (as evidenced by appropriate written materials) and was not acquired directly or indirectly from the other Members; (e) to its employees, consultants, or advisors for the purposes of carrying out their duty hereunder to the extent disclosure is necessary or advisable; (f) to third parties to the extent necessary to enforce this Agreement; provided, however, that in the case of disclosure pursuant to (e), the party or parties to whom disclosure is made shall agree to be bound by this confidentiality provision. The obligation of each Member not to disclose Confidential Information except as provided herein shall not be affected by either the termination of this Agreement or the resignation or removal of any Member of the Company. ARTICLE VII TRANSFERS OF MEMBER INTERESTS 7.1 Assignment of Member's Interest. Subject to the provisions of this Article VII, a Member may assign or transfer that Member's interest in the Company at any time, either voluntarily by an instrument in writing or involuntarily by court order or by operation of law. Upon the assignment or transfer of a Member's interest in the Company, (i) the Company shall not be required to recognize any such assignment or transfer until the Company has received written notice of the same; (ii) no such assignment or transfer of an interest in the Company, whether voluntary or involuntary, shall of itself, dissolve the Company; (iii) the assignee or transferee of the Member's interest in the Company shall not thereby become entitled to vote or otherwise participate in the management of the Company's business and affairs, or to require any information or accounts of Company transactions, or to inspect the Company books and records, or to become a Member; (iv) the assignee or transferee shall only be entitled to receive, in accordance with the contract or order of assignment or transfer, the share of profits or other compensation by way of income and the return of contributions to which the assigning Member would otherwise be entitled under this Agreement and, in case of the winding-up of the Company, the assignee or transferee shall be entitled to receive such distributions as would otherwise be made to the assigning Member. 7.2 Admission as Substituted Member. With the exception of permitted transfers as provided in Section 7.7 of this Agreement, no purchaser, assignee or other transferee (by conveyance, operation of law or otherwise) of all or any part of an interest in the Company shall have the right to become a substituted Member in place of that person's seller, assignor or transferor, and, thereby, become entitled to vote and participate in the management of the business and affairs of the Company, unless all of the following conditions are satisfied (all subsequent references in this agreement to "assignor" and "assignee" shall be construed to include sellers and purchasers, transferors and transferees, donors and donees, and otherwise, as the case may be): (a) The fully-exercised and acknowledged written instrument or order of sale, assignment or transfer, which sets forth the intention of the assignor that the assignee become a substituted Member in that Member's place, has been filed with the Company; (b) The assignor and assignee execute and acknowledge such other instruments as the Members may from time to time reasonably require, in order to effect such admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement; (c) The assignee shall bear all reasonable expenses incurred in effecting the substitution; and (d) Members (other than the assignor) have consented in writing to the substitution, which consent shall be exercisable in the Member's sole discretion. 7.3 Right of First Refusal to Purchase Units. (a) If any Member desires to assign, transfer or otherwise dispose of all or any portion of such Member's interest in the Company for value other than in accordance with the provisions of Section 7.4, the other Member shall have the option to purchase all or any part of such interest. (b) The Member(s) desiring to so dispose of its Transferable Interest (a "Transferring Member") shall give written notice (a "Transfer Notice") to the other Member setting forth (i) that the Transferring Member desires to transfer its Units or other interest in the Company (the "Transferable Interest"); (ii) the identity and address of the proposed purchaser or other transferee thereof; (iii) that the Transferring Member has received a bona fide offer for all or a portion of the Transferable Interest, if a sale is contemplated; (iv) the cash and other consideration (per Unit and in the aggregate) to be received by the Transferring Member in connection with such disposition; (v) a true copy of the offer or agreement, if any, for such sale or other disposition and a certification by the Transferring Member that, to the best of his knowledge and belief, the offer or agreement is genuine and in all respects what it purports to be; (vi) an offer to sell to the other Member the Transferable Interest in accordance with this Section 7.3; and (vii) such other information as may be necessary or desirable in order to afford to the other Member the benefits intended to be conferred by this Section 7.3. To the extent the terms of such sale or other transfer provide for the receipt by the Transferring Member of consideration other than cash or cash equivalents, the Transfer Notice shall also include a fair market appraisal of such consideration prepared by a qualified independent appraiser. (c) The other Member shall have ten (10) days after the effective date of the Transfer Notice to elect to purchase all, but not less than all, of the Transferable Interest, without regard to whether the Transferring Member proposed initially to sell only a portion of such Transferring Member's Units or other interest in the Company. (d) If the other Member has timely elected to purchase all of the Transferable Interest, then the other Member shall purchase all, but not less than all, of the Transferable Interest, on a date and at a time designated by the other Member in a written notice to be given at least two (2) days in advance to the Transferring Member by the other Member, and at the principal place of business of the Company. At the closing, the Transferring Member shall deliver certificates or other evidence of ownership representing the Transferable Interest being purchased, duly endorsed in blank or accompanied by duly executed transfer documents acceptable to the other Member. (e) The purchase by the other Member shall be at the price per Unit or per percentage interest and upon the same terms and conditions as contained in the Transfer Notice unless the parties shall agree otherwise; provided, however, that if the Transfer Notice provides for payment of all or any portion of the purchase price by delivery of consideration other than cash or cash equivalents, the other Member may make payment of such portion of the purchase price in cash or cash equivalents in the amount of the fair market value of such non-cash consideration as set forth in the appraisal accompanying the Transfer Notice. If, however, the other Member electing to purchase the Transferable Interest shall object to such appraisal of the non-cash consideration within the period set forth above for electing to purchase the Transferable Interest, the other Member shall within such period select an independent appraiser to determine such fair market value. In the event that the independent appraisers selected by each of the Transferring Member and the other Member cannot agree on the fair market value, then the two independent appraisers shall mutually select a third independent appraiser to determine the fair market value, and the value selected by such third independent appraiser shall be binding on all of the parties hereto. Each such independent appraiser may use any customary method of determining fair market value. Each party shall bear the cost of the independent appraiser selected by that party, and the cost of the independent appraiser, if any, mutually selected by the two independent appraisers shall be paid one-half by the Transferring Member and one-half by the other Member electing to purchase. (f) If the other Member does not timely elect to purchase all of the Transferable Interest pursuant to this Section 7.3, the Transferring Member, within thirty (30) days after the expiration of the applicable option exercise period, may transfer the Transferable Interest to the purchaser or other transferee named in the Transfer Notice for the consideration and on the other terms set forth in the Transfer Notice and not otherwise. Upon failure of the Transferring Member to effect such transfer pursuant to the terms and conditions contained in the Transfer Notice within such thirty (30)-day period, the right to transfer such interest shall lapse, and any desired transfer thereafter shall be made only upon compliance again with the notice and election procedures of this Section 7.3. (g) Purchasing Members shall become substituted Members respecting interests purchased under this Section 7.3 as soon as the purchase has been accomplished according to the terms hereof. Any other purchaser or transferee of a Transferring Member's interest shall not be entitled to become a substitute Member except as provided in Section 7.2. 7.4 Encumbrances.6 Other Encumbrances{tc \l 2 ".6 Other Encumbrances"}. (a) Notwithstanding any other provision in this Article VII respecting the transfer of a Member's interest in the Company in other circumstances, in the event that any Member (an "Encumbering Member") desires hereafter to encumber in any way all or any part of its Units or the capital improvements of such Encumbering Member on or appurtenant to the Property as contemplated by Section 3.2(d), it shall be able to do so only if it gives written notice (an "Encumbrance Notice") to the other Member at least 30 days prior to granting or otherwise creating such encumbrance and obtains the written consent of the other Member to such encumbrance, which consent may be granted or withheld at the sole discretion of such other Member. The Encumbrance Notice shall set forth or otherwise include (i) the number or other amount of Units or the capital improvements of such Encumbering Member on or appurtenant to the Property as contemplated by Section 3.2(d) that the Encumbering Member desires to encumber (the "Collateral"); (ii) a description of the proposed encumbrance; (iii) the identity and address of the person to whom or for whose benefit such encumbrance is to be granted or created (the "Secured Party"); (iv) the amount of the indebtedness (the "Secured Indebtedness") to be secured by such encumbrance and the principal terms thereof to be secured by such encumbrance; and (v) a true copy of the definitive Secured Party Undertaking (hereafter defined) duly executed by the Secured Party. (b) The Secured Party Undertaking (herein so called) shall evidence the obligation of the Secured Party (or any assignee or successor thereof), before taking any action to enforce any right which the Secured Party may have to execute on such encumbrance, including a conveyance in lieu of foreclosure, against the Collateral, to (i) give written notice (a "Sale Notice") to the other Member and Refinery Technologies, Inc. ("RTI") and (ii) afford to the other Member and RTI successive options to purchase the Collateral and the right to notice of any execution or foreclosure sale or conveyance in lieu thereof and as hereinafter provided in this Section 7.4. (c) The Sale Notice shall set forth (i) the identity and address of the Encumbering Member or other then current holder of the Collateral; (ii) the number or other amount of Units or the capital improvements of such Encumbering Member on or appurtenant to the Property as contemplated by Section 3.2(d) then comprising the Collateral; (iii) the fair market value of such Collateral as determined by a qualified independent appraiser engaged by the Secured Party; and (iv) the identity and address of the Secured Party. (d) During the period consisting of 30 days after the delivery of the Sale Notice to the other Member and RTI and the date of the proposed foreclosure sale or conveyance in lieu thereof as provided in subparagraph (c) above, first the other Member and, if not exercised by such other Member, then RTI shall have the right to purchase all, but not less than all, of the Collateral from the Secured Party at a price agreed to by them or, in the absence of such agreement, at the fair market value of such Collateral as set forth in the Sale Notice. If, however, the other Member or RTI shall object to such appraisal of the Collateral within five days after receipt of such Sale Notice, the other Member (but not RTI) shall within such five days appoint an independent appraiser to determine such fair market value. In the event that the independent appraisers selected by each of the Secured Party and the other Member cannot agree on the fair market value, then the two independent appraisers shall mutually select a third independent appraiser to determine the fair market value, and the value selected by such third independent appraiser shall be binding on all of the parties hereto. Each such independent appraiser may use any customary and accepted method of determining fair market value. The Secured Party and the other Member each shall bear the cost of the independent appraiser selected by it, and the cost of the independent appraiser, if any, mutually selected by the two independent appraisers shall be paid one-half by the Secured Party and one-half by the other Member. The election of the other Member or RTI to purchase the Collateral shall be evidenced by its timely written notice to the Secured Party at its address set forth in the Sale Notice. In the event both the other Member and RTI both elect to purchase the Collateral, the election of the other Member shall be accepted, and the Collateral shall be sold to the other Member on the terms and conditions set forth herein. Capco's and Foreco's rights under this Section 7.4 with respect to any sale of the Collateral by Secured Party shall be in lieu of, and not in addition to, Capco's, Foreco's and RTI's respective rights under the Assignment and Agreement entered into September 11, 1998, a copy of which is attached hereto as Exhibit "D" (the "Assignment and Agreement"), which shall otherwise remain in full force and effect. (e) If the Collateral is not sold to the other Member or RTI in accordance with subparagraph (d) above, the Secured Party shall have the right to take a conveyance in lieu of foreclosure or dispose of such Collateral (w) at either private or public sale, (x) by way of one or more contracts, (y) as a unit or in parcels, and (z) on any terms, all as the Secured Party may determine; provided that such disposition, including the method, manner, time, place and terms of sale are commercially reasonable. All of the Collateral shall be offered and sold separate from and not as part of a unit including other collateral of the Secured Party. (f) If all or any portion of the Collateral is to be sold to the other Member or RTI in accordance with this Section 7.4, then such sale shall be closed not more than 60 days after the determination of the purchase price in accordance with Section 7.4(d) on a date and at a time designated by the Secured Party in a written notice given by the Secured Party to the purchasing other Member or RTI, as the case may be. On such date and at such time, payment of such purchase price in cash or other immediately available funds shall be made to the Secured Party at its office, against receipt of documents evidencing and assigning to the purchasing Company, other Members or RTI, as the case may be, the Collateral being purchased and all encumbrances securing the same (or corresponding part thereof proportional to the Secured Indebtedness so purchased), without restriction. (g) If the sale to the other Member or RTI, as the case may be, is not closed within the 60-day period provided for in subparagraph (f) of this Section 7.4, Secured Party shall be entitled to exercise its rights under paragraph (e) of this Section 7.4; provided that RTI shall not have the right to exercise its rights under the Assignment and Agreement more than once. Any transfer of any or all of the Collateral upon foreclosure by the Secured Party following compliance with the preceding provisions of this Section 7.4 shall thereafter continue to be subject to the provisions of this Agreement, and the transferee shall assume all obligations hereunder. (h) Upon compliance by the Secured Party with the provisions of this Article VII, such Secured Party, or the purchaser on any foreclosure sale, shall be admitted as a Member of the Company on its written notice to the Company of its election to become a Member, without the consent of either the Company or any other Member. 7.5 Purchase of Specialized Improvements. If, upon the withdrawal of a Member from the Company, whether in connection with a transaction described in Section 7.3 or otherwise but other than as provided in and in accordance with Section 7.4, the other Member shall have the option to purchase any equipment and other improvements (the "Specialized Improvements") at the Property that were funded solely by the withdrawing Member, were treated as owned by such withdrawing Member and not by the Company, and respecting which the withdrawing Member was not treated as having made a contribution to the capital of the Company pursuant to Section 3.2. The price of such purchase shall be determined by the mutual consent of the withdrawing Member and the other Member. If the other Member elects not to purchase the Specialized Improvements, the withdrawing Member shall have the right to (a) if the withdrawal is in connection with a transaction described in Section 7.3 respecting which the other Member did not elect to purchase the Transferable Interest, sell the Specialized Improvements together with the Transferable Interest, (b) remove the Specialized Improvements from the Property and restore the premises in all material respects to their condition prior to the construction or installation of the Specialized Improvements at the sole cost of the withdrawing Member, without liability for consequential damages, or (c) abandon the Specialized Improvements to the Company. 7.6 Option to Purchase Interest Upon Certain Events. (a) If all or any portion of a Member's interest is proposed to be transferred other than as provided in and in accordance with Section 7.4 pursuant to (i) an adjudication of the Member as a bankrupt; (ii) an entry of an order, judgment or decree by any court of competent jurisdiction appointing a trustee, receiver or liquidator of the assets of the Member; (iii) an assignment or attempted assignment by the Member for the benefit of creditors; or (iv) the institution or attempted institution of voluntary bankruptcy proceedings by the Member, then, in any such event (an "Option Event"), the Company and, to the extent the Company does not elect to purchase all of such interest, the other Member shall have the option, but not the obligation, to purchase from such Member (or from such Member's legal successor(s)) (the "Subject Member") all or any portion of the Subject Member's interest in the Company transferred, as the Company or the other Member may elect, without respect to whether all or only a portion of such Member's interest was initially subject to the proposed transfer. (b) Not later than ninety (90) days after the occurrence of an Option Event, the Subject Member (or the Subject Member's successor(s)) shall notify the Company of such occurrence, which notice shall set forth (i) a description of the Option Event; (ii) the Units (the "Option Units") that the Company and the other Member have the right to purchase pursuant to this Section 7.6 by reason of such Option Event; (iii) the identity of the Subject Member; and (iv) such other information as may be necessary or desirable in order to afford to the Company and the other Member the benefits intended to be conferred by this Section 7.6. Following the receipt of such notice, the Company shall give like notice to the other Member of the occurrence of the Option Event and of its option to purchase the Subject Member's interest pursuant to this Agreement. (c) The Company shall have ten (10) days after the effective date of the Option Notice to elect to purchase all or any part of the Option Units. To the extent the Company does not elect to purchase all of such interest, the other Member shall have twenty (20) days after the date of the expiration of the Company's option to elect to purchase all or any part of the Option Units, such election to be made by delivering written notice of such election to the Subject Member within such twenty (20)-day period. (d) If the Company and/or the other Member have timely elected to purchase Option Units, then the Company and the electing other Member shall purchase that part of the Option Units that it has elected to purchase within five (5) days after expiration of the applicable option exercise period on a date and at a time designated by the Company and/or other Member in a written notice to be given at least two (2) days in advance to the Subject Member by the Company and/or other Member, and at the principal place of business of the Company. (e) The purchase price for the Option Units purchased by the Company or other Member shall be the fair market value ("FMV") of the interest as of the date of the occurrence of the Option Event as determined herein. The Company shall pay for and obtain an independent appraisal of all real estate. Listed securities shall be valued at the latest closing price for such securities. All other assets shall be valued at their book value, net of depreciation and amortization. The FMV of the interest being purchased shall be based on the relative percentage of ownership of the Company based on the total number of Units outstanding as of the valuation date multiplied by the sum of (i) the fair market value of the real estate as determined by appraisal; plus (ii) the market price for any listed securities; plus (iii) the book value, net of depreciation and amortization, of all other assets; minus (iv) total Company liabilities at the valuation date. (f) Payment by the Company or the Members of the purchase price for Option Units shall be made in cash or other immediately available funds at closing. (g) If and to the extent that the Company and/or the other Member do not purchase all of the Option Units pursuant to the preceding provisions of this Section 7.6, then the remaining Option Units shall be transferred to the person or persons to whom the same would have passed in the absence of the provisions of this Agreement. 7.7 Option to Purchase Property. (a) If the Company desires to assign, transfer or otherwise dispose of the Property for value, Capco and Foreco shall have the option, exercisable first by Capco and thereafter by Foreco, to purchase all of the Property desired to be sold by the Company. If the Company has not received an offer from a third party for the purchase of the Property, the price and terms of such sale shall be as agreed to by Capco or Foreco and the Company. (b) If the Company has received an offer from a third party purchaser, the Company shall notify Capco and Foreco setting forth (i) the identity and address of the proposed purchaser or other transferee thereof; (ii) that the Company has received a bona fide offer therefor, if a sale is contemplated; (iii) the cash and other consideration to be received by the Company in connection with such disposition; (iv) a true copy of the offer or agreement, if any, for such sale or other disposition and a certification by the Company that, to the best of its knowledge and belief, the offer or agreement is genuine and in all respects what it purports to be; (v) an offer to sell the Property to Capco and Foreco in accordance with this Section 7.7; and (vi) such other information as may be necessary or desirable in order to afford to Capco and Foreco the benefits intended to be conferred by this Section 7.7. To the extent the terms of such sale or other transfer provide for the receipt by the Company of consideration other than cash or cash equivalents, the notice shall also include a fair market appraisal of such consideration prepared by a qualified independent appraiser. (c) Capco shall have ten (10) days after the effective date of the notice to elect to purchase all of the Property. To the extent Capco does not elect to purchase all of the Property, Foreco shall have ten (10) days after the date of the expiration of Capco's option to elect to purchase all of the Property. Any such election to be made by delivering written notice of such election to the Company within such applicable ten (10)-day period. (d) If Capco or Foreco has timely elected to purchase all of the Property, then such electing party shall purchase the Property within five (5) days after expiration of the applicable period set forth herein, on a date and at a time designated by the electing party in a written notice to be given at least two (2) days in advance to the Company by the electing party, and at the principal place of business of the Company. At the closing, the Company shall deliver a special warranty deed and other transfer documents acceptable to the electing party duly executed on behalf of the Company. (e) The purchase by the electing party shall be at the price and upon the same terms and conditions as contained in the notice unless the Company and all Members shall agree otherwise; provided, however, that if the notice provides for payment of all or any portion of the purchase price by delivery of consideration other than cash or cash equivalents, the electing party may pay such portion of the purchase price in cash or cash equivalents in the amount of the fair market value of such non-cash consideration as set forth in the appraisal accompanying the notice. If, however, the electing party shall object to such appraisal of the non-cash consideration within the period set forth above for electing to purchase the Property, the fair market value shall be determined as set forth in Section 7.3(f). (f) If neither Capco nor Foreco timely elects to purchase all of the Property pursuant to this Section 7.7, the Company, within thirty (30) days after the expiration of the applicable option exercise period, may transfer the Property to the purchaser or other transferee named in the notice for the consideration and on the other terms set forth in the notice and not otherwise. Upon failure of the Company to effect such transfer pursuant to the terms and conditions contained in the notice within such thirty (30)- day period, the right to transfer such interest shall lapse, and any desired transfer thereafter shall be made only upon compliance again with the notice and election procedures of this Section 7.7. 7.8 Permitted Transfers. Nothing in this Agreement shall be deemed to prohibit or limit the sale, assignment or transfer from a Member of all or any part of the Member's interest in the Company to (a) another existing Member of the Company, (b) either (i) a Member's wholly owned subsidiary corporation or limited liability company (ii) a limited partnership of which only entities described in clause (i) hereof are the general partners, (iii) a limited liability company of which only entities described in clause (i) hereof are the managers; (c) a general partnership or joint venture consisting only of entities described in clauses (i) through (iii) of subparagraph (b), (d) in the case of Capco, the transfer to CAD; or (e) any other person to which all other Members consent in writing; provided, that in each case the interest in the Company so sold, assigned or transferred continues to be subject to the provisions of this Agreement in all respects. No such sale, assignment or transfer shall create a right, interest or power in any other Member, or in the Company, or any other person, to purchase or acquire such interest in the Company, nor shall the Member who desires to sell, assign or transfer all or any part of that Member's interest in the Company to another Member be required to obtain the prior consent of the other Members or the Company or to offer such interest to the other Members or to the Company. ARTICLE VIII DISSOLUTION AND TERMINATION 8.1 Events of Dissolution. The Company shall, without further action of the Members, be dissolved upon the first to occur of the following: (a) The dissolution of the Company by judicial decree; (b) The merger or consolidation of the Company with another limited liability company or other entity where the Company is not the surviving entity; (c) The sale of all or substantially all of the assets of the Company; (d) December 31, 2048; or (e) The written consent to dissolve of Members holding in the aggregate at least 75% of the outstanding Units. Unless approved by Members holding, in the aggregate, at least 75% of the outstanding Units, no Member shall have the right, and all Members hereby agree not, to dissolve, terminate, partition, or liquidate, or to petition a court for the dissolution, termination, partition, or liquidation of, the Company except as provided in this Agreement. 8.2 Winding Up and Liquidation. Upon the occurrence of an event of dissolution as provided in Section 8.1, the Company shall be wound up and liquidated as rapidly as business circumstances will permit by selling Company assets and distributing the proceeds from any such sale or sales of the assets of the Company as follows and in the following order of priority: (a) to pay the expenses of winding up and to pay or provide for payment of all amounts owing by the Company to creditors other than Members; (b) to establish any reserves which the Members may deem necessary for any anticipated, contingent or unforeseen liabilities or obligations of the Company arising out of, or in connection with, the conduct of the Company business; (c) to pay all amounts owing by the Company to any Member as a creditor; (d) thereafter to the Members in accordance with their Ownership Percentages up to the amount of $2,500,000; and (e) then in equal portions to Capco and Foreland. 8.3 Authority to Wind Up. The winding up of the Company and liquidation of its assets shall be conducted by the Manager or, if there is no Manager, as determined by the remaining Members. ARTICLE IX BOOKS OF ACCOUNT, ACCOUNTING, REPORTS, AND BANKING 9.1 Books of Account. The Company books and records of account shall be maintained at the principal office of the Company or at such other location and by such person or persons as may be designated by the Manager. The Company shall pay the direct expense of maintaining its books of account. 9.2 Method of Accounting. The Company books of account shall be maintained and kept on a basis of accounting determined by the Members and consistently applied. 9.3 Financial Statements. Upon receipt of a written request from any Member, within ninety (90) days after the close of each Fiscal Year of the Company, the Company shall provide to each Member either unaudited or audited (as determined by the Members in their reasonable discretion) financial statements which fairly represent the financial condition of the Company as of the end of such Fiscal Year. Such financial statements shall indicate the share of each Member in the net income, net loss, depreciation and other relevant fiscal items of the Company for such Fiscal Year. Each Member shall be entitled to receive copies of all federal, state and local income tax returns and information returns, if any, which the Company is required to file. Additionally, quarterly, to the extent both requested by any Member and regularly prepared by the Company, the Company shall make available to any Member copies of the Company's financial documentation respecting the prior quarter, including, without limitation, balance sheets and income statements. 9.4 Bank Accounts. The funds of, and all monies actually received by the Company shall be deposited in a separate bank account or accounts in a national or state banking institution in the name of the Company. The Manager or agent of the Company shall be authorized to draw checks upon such account or accounts; provided, however, that no funds shall be withdrawn from any such account or accounts except for Company purposes. 9.5 Tax Returns. The Manager shall, for each Fiscal Year, file or caused to be filed at the expense of the Company and on behalf of the Company, a partnership return within the time prescribed by law (including extensions) for such filing and shall deliver to each Member a copy of such Member's K-1 relating to such return. The Manager shall also file or caused to be filed at the expense of the Company and on behalf of the Company such state and/or city income tax returns as may be required by law. 9.6 Audit. Each Member shall have the right at all reasonable times during usual business hours to audit, examine, and make copies of or extracts from the books of accounts and other records of the Company. Such right may be exercised through any agent or employee of such Member designated by such Member. Each Member shall bear all expenses incurred in any examination made for such Member's account. 9.7 Meetings. The Company shall hold an annual meeting of the Members at a time, date and place as determined by the Members. Special meetings of the Members, for any purpose or purposes described in the meeting notice, may be called by the Manager or by Members holding in the aggregate at least 33% of the outstanding Units. 9.8 Records. The Company shall keep at its place of business the following records: (a) a current list in alphabetical order of the full name and last known business street address of each Member; (b) a copy of the stamped Articles of Organization and all certificates of amendment thereto, together with executed copies of any powers of attorney pursuant to which any certificate of amendment has been executed; (c) copies of the Company's federal, state, and local income tax returns and reports, if any, for the three (3) most recent fiscal years; (d) copies of any financial statements of the Company for the three (3) most recent fiscal years; (e) a copy of this Agreement plus all amendments thereto; (f) unless otherwise set forth in the Articles of Organization or this Agreement, a written statement of (i) the amount of cash and a description and statement of the agreed value of the other property or services contributed or agreed to be contributed by each Member, (ii) the times at which, or events on the happening of which, any additional contributions agreed to be made by each Member are to be made, (iii) the right of any Member to receive distributions which include a return of all or any of the Member's contributions, and (iv) any event upon the happening of which the Company is to be dissolved and its affairs wound up. These records shall be subject to inspection and copying at the reasonable request, and at the expense, of any Member during ordinary business hours. ARTICLE X MISCELLANEOUS 10.1 Notices. All notices and other communications made or required to be given pursuant to this Agreement shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (if receipt is confirmed by the facsimile operator of the recipient), or delivered by overnight courier service or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof): If to Capco, to: Crown Asphalt Products Company 215 South State Street, Suite 650 Salt Lake City, Utah 84111 Attention: Jay Mealey, President Telephone: (801) 537-5610 Facsimile: (801) 537-5609 If to Foreco, to: Foreland Asphalt Corporation 2561 South 1560 West, Suite 200 Woods Cross, Utah 84087 Attention: Bruce C. Decker, President Telephone: (801) 298-9866 Facsimile: (801) 298-9889 Any notice hereunder delivered in person or by facsimile (if receipt is confirmed by the facsimile operator of the recipient) shall be deemed given on the date thereof; any notice by registered or certified mail shall be deemed given three (3) days after the date of mailing; and any notice by overnight courier shall be deemed given two (2) days after shipment or the date of receipt, whichever is earlier. 10.2 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Members, their successors and assigns. 10.3 Duplicate Originals. For the convenience of the Members, any number of counterparts hereof may be executed, and each of such counterparts shall be deemed to be an original instrument, and all of which, taken together, shall constitute one agreement. 10.4 Construction. The title of articles and sections herein have been inserted as a matter of convenience for reference only and shall not control or affect the meaning or construction of any of the terms or provisions herein. 10.5 Governing Law. This Agreement is entered into and shall be governed by the laws of the state of Utah. To the extent permitted by the Act and other applicable law, the terms and provisions of this Agreement shall control in the event of any conflict between such terms or provisions and the Act. 10.6 Other Instruments. The parties hereto covenant and agree that they will execute such assumed name certificates and other and further instruments and documents which are or may become necessary or convenient to effectuate and carry out the purposes of the Company created by this Agreement. 10.7 Legal Construction. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if the invalid, illegal or unenforceable provision had never been contained herein. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be automatically added as part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 10.8 Gender and Number. Wherever the context shall so require all words herein in any gender shall be deemed to include the masculine, feminine or neuter gender, all singular words shall include the plural and all plural words shall include the singular. 10.9 Reliance. No person dealing with any Manager shall be required to determine his authority to make any commitment or undertaking on behalf of the Company, nor to determine any fact or circumstances bearing upon the existence of such authority. In addition, no purchaser of any asset of the Company from a Manager shall be required to see to the application or distribution of revenues or proceeds paid or credited in connection therewith, unless such purchaser shall have received notice affecting same. 10.10 Entirety and Modifications. This Agreement embodies the entire agreement between the parties hereto and supersedes any prior understandings or written or oral agreements between the parties respecting the subject matter of this Agreement. No term, condition or provision of this Agreement shall be altered, amended or modified without the prior written consent of Members holding at least 75% of the issued and outstanding Units, except as provided to the contrary in this Agreement. IN WITNESS WHEREOF, this Agreement has been executed by the undersigned as of the date first above written. Capco: CROWN ASPHALT PRODUCTS COMPANY By /s/ Jay Mealey, President Foreco: FORELAND ASPHALT CORPORATION By /s/ Bruce C. Decker, President Exhibit A...Property Description Exhibit B...Memorandum of Closing Exhibit C...Use of Facilities Exhibit D...Assignment and Agreement EX-10 3 SECOND AMENDMENT TO FINANCING AGREEMENT Second Amendment to Financing Agreement dated as of this 4th day of February, 1999 (the "Amendment"), by and among Foreland Corporation, a Nevada corporation ("Foreland"), Eagle Springs Production Limited-Liability Company, a Nevada limited liability company ("Eagle Springs"), Foreland Refining Corporation, a Texas corporation ("Foreland Refining"), Foreland Asphalt Corporation, a Utah corporation ("Foreland Asphalt"), Foreland Asset Corporation, a Nevada corporation ("Foreland Asset") and Foreland Transportation, Inc., a Utah corporation (formerly known as Petrosource Transportation) ("Transportation") (each a "Borrower" and collectively referred to as "Borrowers"), and Energy Income Fund, L.P., a Delaware limited partnership ("EIF"), to that certain Financing Agreement dated as of January 6, 1998, as amended by that First Amendment to Financing Agreement dated as of August 10, 1998 (as amended, the "Financing Agreement"). RECITALS WHEREAS, pursuant to the Financing Agreement, EIF agreed to make loans to Borrowers for the purposes and subject to the terms and conditions set forth therein; WHEREAS, Borrowers have failed to pay recent payments due under the Financing Agreement; WHEREAS, Borrowers have requested that EIF defer principal payments under the Financing Agreement and advance additional funds for completion of the development and improvement of the Cowboy Asphalt Terminal located in Woods Cross, Utah and for completion of additional capital improvements on the Refineries; WHEREAS, Borrowers have requested that EIF grant to them an option to reacquire all warrants acquired pursuant to the Financing Agreement and all preferred stock purchased pursuant to the Stock Purchase Agreement dated as of August 10, 1998 between EIF and Foreland (the "Stock Purchase Agreement"); WHEREAS, EIF is willing to agree to Borrowers' requests on the terms and conditions set forth in this Amendment; WHEREAS, Section 11.2(a) of the Financing Agreement provides that the parties thereto may amend or modify the Financing Agreement by a written instrument duly executed by the parties; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. All capitalized terms used herein shall have the meanings assigned to them in the Financing Agreement unless expressly defined otherwise in this Amendment. 2. Except as otherwise specifically provided herein, all terms and conditions of the Financing Agreement shall apply to the interpretation and enforcement of this Amendment as if explicitly set forth herein. 3. On November 1, 1998, a principal payment of $228,103.93 became due and payable under the Financing Agreement and Borrowers have made no payment thereon. On November 10, 1998, a payment of $1,300,000 related to repayment of the Petro Source Inventory Financing became due and payable under the Financing Agreement and Borrowers have made no payment thereon. On December 1, 1998, a principal payment of $228,103.93 became due and payable under the Financing Agreement and Borrowers have made no payment thereon. On January 1, 1999, a principal payment of $296,535.21 became due and payable under the Financing Agreement and Borrowers have made no payment thereon. On February 1, 1999, a principal payment of $296,535.21 became due and payable under the Financing Agreement and Borrowers have made no payment thereon. Borrowers acknowledge and agree that deficiencies of $228,103.93, $1,300,000, $228,103.93, $296,535.21 and $296,535.21 remain due and unpaid under the Financing Agreement from November 1, 1998, November 10, 1998, December 1, 1998, January 1, 1999 and February 1, 1999 respectively, and that such deficiencies constitute Events of Default pursuant to Section 8.1 of the Financing Agreement. Borrowers have requested, and EIF agrees, that EIF (i) shall forbear from accelerating the balance of the Loans, (ii) shall forbear from exercising its rights and remedies under the Security Instruments, and (iii) shall forbear from assessing interest at the Default Rate, each as a result of such payment deficiencies; provided however, that, nothing contained in this Amendment shall prohibit EIF from declaring an Event of Default or exercising any and all remedies available to it pursuant to the terms of the Loan Documents, should any other Default or Event of Default occur. Borrowers acknowledge that, subject to the forbearance set forth in the preceding sentence, EIF has not waived any Default or Event of Default or any of the remedies available to it under the Loan Documents. Borrowers hereby expressly acknowledge that any failure by EIF to enforce its rights under the Financing Agreement in the past does not entitle Borrowers to any such forbearance under any section of the Financing Agreement in the future. Any breach of the terms of this Amendment shall be a Default under the Financing Agreement. 4. The preamble to the Financing Agreement is amended by changing the name of Petrosource Transportation to Foreland Transportation, Inc. to reflect its corporate name change. By executing this Amendment, Foreland Transportation, Inc. agrees to be bound by and expressly adopts, ratifies, confirms and restates all provisions under the Financing Agreement as if it were an original party to the Financing Agreement, including but not limited to all representations and warranties, each of which shall be deemed to have been made as of the date hereof. Prior to any Funding under the Cowboy Improvement Financing or the Restructuring Closing Financing, Borrowers shall execute and deliver all certificates and opinions requested by EIF and its counsel. 5. Section 1.1 of the Financing Agreement is amended to include the following definitions, inserted in the appropriate alphabetical order: "Common Stock Issuance Agreement" shall mean that certain Common Stock Issuance Agreement dated February 4, 1999 between EIF and Foreland relating to the issuance of 250,000 shares of the common stock of Foreland to EIF. "Cowboy Asphalt Pledge and Security Agreement" shall mean that certain Pledge and Security Agreement, dated as of February 4, 1999, from Foreland Asphalt to EIF, related to Foreland Asphalt's one-third membership interest in Cowboy Asphalt Terminal, L.L.C., a Utah limited liability company ("Cowboy Asphalt"). "Cowboy Asphalt Security Agreement" shall mean that certain Security Agreement, dated February 4, 1999, from Foreland Asphalt to EIF, related to certain fixtures owned by Foreland Asphalt and located on the real property of Cowboy Asphalt. "Restructuring Closing Financing" shall have the meaning set forth in Section 2.3(a)(x) of the Financing Agreement. "Stock Purchase Agreement" shall mean that certain Stock Purchase Agreement dated as of August 10, 1998 between EIF and Foreland relating to convertible preferred stock of Foreland purchased by EIF. 6 Section 1.1 is further amended to delete the following definitions, and to replace them in their entirety with the following definitions, respectively: "Borrower" shall mean any of Foreland, Eagle Springs, Foreland Refining, Foreland Asphalt, Foreland Asset and Transportation. "Borrowers" shall mean Foreland, Eagle Springs, Foreland Refining, Foreland Asphalt, Foreland Asset and Transportation, jointly and severally. 7. Article II is amended by deleting Section 2.3(a)(vi) and replacing it with the following: " (vi) up to Five Hundred Thousand Dollars ($500,000) to finance working capital associated with the Refineries (the "Petro Source Working Capital Financing"); 8. Article II is further amended by adding the following Section 2.3(a)(x): " (x) up to One Hundred Thousand Dollars ($100,000) to finance certain of EIF's costs related to the closing of the transactions contemplated by this Amendment (the "Restructuring Closing Financing"); 9. Article II is further amended by deleting Section 2.7 and replacing it with the following: 2.7 Repayment of Principal and Interest on Refinancing Loan. The first payment on the funds advanced under the Refinancing Loan shall be due and payable on February 1, 1998 (the "First Interest Only Payment Date") and shall be a payment of interest only, but not principal, such payment to be the amount of interest accrued from the date on which the Refinancing Loan is first funded until the First Interest Only Payment Date. The next thirteen (13) payments on the Refinancing Loan shall be made on the first Business Day of each of the thirteen (13) calendar months following the First Interest Only Payment Date and shall be a payment of accrued interest only and not principal. (The date on which the last of such payments is due will be hereinafter referred to as the "Last Interest Only Payment Date.") The principal amount of and the interest accrued on the Refinancing Loan shall then be repaid in thirty-four (34) monthly installments, each payment (other than the final payment) equal to an amount set forth in a schedule to be provided to Borrowers, sufficient to amortize the principal amount of the Loan over forty-eight (48) months. Such payments will be due in arrears on the first day of each month, beginning April 1, 1999, unless such day is not a Business Day, in which event payment shall be due on the first Business Day thereafter, with the final payment of interest and all outstanding principal due on January 1, 2002. All unpaid principal and accrued and unpaid interest shall be due and payable on the Final Payment Date. 10. Article IV is amended by deleting subsection 4.1(m) and replacing it with the following: " (m) All of each Borrower's right, title and interest in the one- third membership interest in Cowboy Asphalt, the proceeds thereof and other properties as defined as Collateral and described in the Cowboy Asphalt Pledge and Security Agreement. 11. Article IV is amended by adding the following subsection to Section 4.1: " (o) All of each Borrower's right, title and interest in certain fixtures located on the real property of Cowboy Asphalt, the proceeds thereof and other properties defined as Collateral and described in the Cowboy Asphalt Security Agreement. 12. Article V is amended by deleting Section 5.23(a) and replacing it with the following: " (a) The authorized capital of Foreland consists of (i) 50,000,000 shares of common stock, par value $0.001 per share (the "Shares"), of which 9,423,190 shares are issued and outstanding as of the date hereof, and (ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which 2,000,000 preferred shares are designated as 1991 Series Convertible Preferred Stock with 20,000 of such preferred shares issued and outstanding as of the date hereof (convertible into 6,667 shares of Common Stock); 1,650,000 preferred shares are designated as 1994 Series Convertible Redeemable Preferred Stock with 153,140 of such preferred shares issued and outstanding as of the date hereof (convertible into 51,047 shares of Common Stock); 1,000,000 preferred shares are designated as 1995 Series Convertible Preferred Stock with 349,103 of such preferred shares issued and outstanding as of the date hereof (convertible into 116,368 shares of Common Stock); 50,000 preferred shares are designated as Series A Preferred Stock with none of such preferred shares issued and outstanding as of the date hereof; 2,000 preferred shares are designated as 1998 Series Convertible Preferred Stock with all of such preferred shares issued and outstanding as of the date hereof (convertible into 333,333 shares of Common Stock); and 298,000 preferred shares are not designated (together, the "Capital Stock"). Foreland has no other shares of Capital Stock of any class or other equity securities authorized, issued, or outstanding. Foreland has reserved a sufficient number of authorized Shares for issuance pursuant to the Warrants and the conversion of the preferred stock. Except as set forth in Schedule 5.23, there are no outstanding or authorized options, warrants, calls, subscriptions, rights, agreements or commitments of any character obligating Foreland to issue any Shares or securities convertible into or exchangeable for or evidencing the right to purchase or subscribe for any capital stock of Foreland. 13. Article VII is amended by deleting the heading of Section 7.23 and replacing it with the following: "7.23 Financial Covenants. The following financial covenants refer to the financial position of the Borrowers on a consolidated basis. 14. Article VII is amended by deleting Section 7.23(e) and replacing it with the following: " (e) For the first three fiscal quarters of calendar year 1998, Borrowers' exploration expenses and general and administrative overhead expenses will not exceed $400,000 per fiscal quarter. For the fourth fiscal quarter of calendar year 1998 and for the first two fiscal quarters of calendar year 1999, Borrowers' exploration expense and general and administrative overhead expenses, excluding delay rentals and third party seismic costs, will not exceed $650,000 per fiscal quarter and Borrowers shall not increase any compensation levels without the prior written approval of EIF. For the third quarter of the calendar year 1999 and thereafter, Borrowers' exploration expense and general and administrative overhead expenses, excluding delay rentals and third party seismic costs, will not exceed twenty-five percent (25%) of Borrowers' net income before income taxes, plus interest expense, depreciation, depletion, amortization and other non-cash expense items used in or provided by operating activities, exploration expense and general and administrative expenses deducted in determining such net income, calculated on the last day of each fiscal quarter. 15. Article VII is amended by deleting the third paragraph of Section 7.39(b) and replacing it with the following: "The foregoing provisions of this Section 7.39 shall not apply to (i) each issuance of additional securities, if any, the proceeds of which are used to repay the Loans in full within thirty (30) days (ii) each issuance of equity securities, if any, that is pursuant to an offering with net proceeds to Foreland of Twenty Million Dollars ($20,000,000) or more or (iii) the issuance of securities pursuant to the Stock Purchase Agreement or the Common Stock Issuance Agreement. The occurrence of any issuance described in (i), (ii) or (iii) above shall not in any way limit the subsequent application of any other provision of this Section. 16. Article VII is amended by deleting Section 7.40 and replacing it with the following: "7.40 Real Property of Cowboy Asphalt. No Borrower other than Foreland Asphalt shall place fixtures or other property on the real property of Cowboy Asphalt. 17. Article VII is further amended by deleting Section 7.41 and replacing it with the following: "7.41 Repayment of the Petro Source Inventory Financing. Borrowers shall repay the Petro Source Inventory Financing by April 1, 1999. 18. EIF agrees to waive, until March 31, 1999, Borrowers' compliance with the (i) financial covenants set forth in subsections 7.23(a), 7.23(b), 7.23(c) and 7.23(d) of the Financing Agreement and (ii) the collateral/indebtedness ratio covenant set forth in Section 2.14 of the Financing Agreement; provided that, from and after April 1, 1999, the Borrowers' failure to comply with any of these covenants will be considered an Event of Default under the Financing Agreement. EIF agrees to waive, until October 1, 1998, Borrowers' compliance with the financial covenants set forth in subsection 7.23(e); provided that, from and after October 1, 1998, Borrowers' failure to comply with subsection 7.23(e) will be considered an Event of Default under the Financing Agreement. These waivers are limited to the circumstances described in this Amendment and will not be deemed to be a waiver of the covenants contained in Section 7.23 or Section 2.14 of the Financing Agreement or a waiver of any other provision of the Financing Agreement, except as expressly set forth herein. Borrowers hereby expressly acknowledge that failure by EIF to enforce its rights under Section 7.23 or Section 2.14 of the Financing Agreement in the past does not entitle Borrowers to any such forbearance under these or any other Sections of the Financing Agreement in the future. 19. EIF further agrees to waive Borrowers' compliance with Section 7.39(c) of the Financing Agreement regarding consummation of a Qualified Offering. Borrowers hereby expressly acknowledge that failure by EIF to enforce its rights under Section 7.39(c) of the Financing Agreement in the past does not entitle Borrowers to any such forbearance under any other Section of the Financing Agreement in the future. 20. Until March 31, 1999, EIF grants to Borrowers the option to reacquire (i) Warrant No. 1, (ii) Warrant No. 2 and (iii) the convertible preferred stock issued pursuant to the Stock Purchase Agreement upon payment of (x) Three Million One Hundred Twenty Thousand Dollars ($3,120,000) and (y) repayment in full of all obligations due under the Financing Agreement. The prepayment premiums set forth in Section 2.10 of the Financing Agreement shall not apply to the full prepayment of Loans under this paragraph but are not waived as to any prepayment of Loans occurring after March 31, 1999. 21. In exchange for EIF's agreements set forth herein, Foreland agrees to issue to EIF 250,000 shares of restricted Common Stock pursuant to the terms and conditions set forth in the Common Stock Issuance Agreement and the Registration Rights Agreement between EIF and Foreland dated August 10, 1998 as amended by the First Amendment to Registration Rights Agreement dated as of even date herewith and to extend the term of the Warrants to December 31, 2003. In addition, if Borrowers fail to repay the Loans in full by the earlier of (i) the expiration of the Oppenheimer Engagement (as defined in the following sentence) or any similar engagement, reasonably acceptable to EIF, that replaces the Oppenheimer Engagement or (ii) December 1, 1999, the exercise price of each of the Warrants shall be reduced to $3.00 per share, effective as of such date. The "Oppenheimer Engagement" shall mean Foreland's engagement of CIBC Oppenheimer Corp. to render certain financial advisory and investment banking services to Foreland and its affiliates pursuant to the Exclusive Engagement Letter Agreement between CIBC Oppenheimer Corp. and Foreland dated October 26, 1998. 22. Borrowers and EIF agree that all financing commitments of EIF under the Financing Agreement, other than the commitments related to $100,000 of the Cowboy Improvement Financing and the Restructuring Closing Financing, are terminated and canceled as of the date of this Amendment; provided however, that, nothing in this paragraph shall limit any of EIF's rights under the Financing Agreement, including but not limited to, its rights in the Overriding Royalty Interests, as set forth in Section 2.12 of the Financing Agreement, and to its additional financing right of first refusal, as set forth in Article 3 of the Financing Agreement. EIF agrees to fund (i) $100,000 of the Cowboy Improvement Financing and (ii) the balance of the Escrow Account within five (5) days of the satisfaction by Borrowers of all conditions precedent to such funding under Article 6 of the Financing Agreement and this Amendment. 23. EIF agrees to waive Borrowers' compliance with Section 7.27 of the Financing Agreement as it pertains to the corporate name change of Petrosource Transportation to Foreland Transportation, Inc. as of December 1, 1998 and the change in the location of the Borrowers' executive offices on or about November 15, 1998. EIF further agrees to waive Borrowers' compliance with Sections 3.3(m) of the Security Agreements and Sections 3.3(k) of the Pledge and Security Agreements to the extent they required Borrowers to notify EIF of the corporate name change of Petrosource Transportation to Foreland Transportation, Inc. as of December 1, 1998 and the change in the location of the Borrowers' executive offices on or about November 15, 1998. EIF further agrees to waive Borrowers' compliance with those provisions of Sections 3.3(c) of the Security Agreements that prohibit the removal of Collateral as defined in the Security Agreements from the locations specified therein to the extent such provisions prohibited the relocation of such Collateral from the old executive offices of Borrowers to the new executive offices of Borrowers on or about November 15, 1998. These waivers are limited to the circumstances described in this paragraph and will not be deemed to be a waiver of the covenants contained in Section 7.27 of the Financing Agreement, Sections 3.3(c) of the Security Agreements, Sections 3.3(m) of the Security Agreements, Sections 3.3(k) of the Pledge and Security Agreements or any other provision of the Financing Agreement, Security Agreements or Pledge and Security Agreements except as expressly set forth herein, including that nothing in this paragraph shall be deemed to waive Borrowers' compliance with the provisions of Sections 3.3(m) of the Security Agreements and Section 3.3(k) of the Pledge and Security Agreements to the extent they require that Borrowers take all necessary action required by EIF to continue perfection of EIF's security interest under such agreements as a result of the corporate name change and change in executive offices described in this paragraph or otherwise. Borrowers hereby expressly acknowledge that failure by EIF to enforce its rights under Section 7.27 of the Financing Agreement, Sections 3.3(c) of the Security Agreements, Sections 3.3(m) of the Security Agreements and Sections 3.3(k) of the Pledge and Security Agreements in the past does not entitle Borrowers to any such forbearance under such Sections or any other Section of such agreements in the future. 24. Foreland shall execute and deliver to EIF, concurrent with the signing hereof, the First Amendment to Common Stock Purchase Warrant Dated January 6, 1998 (Warrant No. 1) between EIF and Foreland dated February 4, 1999 and the First Amendment to Common Stock Purchase Warrant Dated August 10, 1998 (Warrant No. 2) between EIF and Foreland dated February 4, 1999. 25. Foreland shall execute and deliver to EIF, concurrent with the signing hereof, the First Amendment to Registration Rights Agreement between EIF and Foreland dated February 4, 1999 and the Common Stock Issuance Agreement. 26. Borrowers and EIF acknowledge that the new amortization schedules, as set forth in Exhibit A to this Amendment, reflect the changes set forth in this Amendment, and that Borrowers have accepted the new schedules in substitution for the existing schedules that are currently attached to the Notes. 27. To induce EIF to execute this Amendment, and in consideration of EIF's agreements herein, each Borrower represents and warrants that it does not have any claims, counterclaims, setoffs, actions or causes of action of any kind or nature whatsoever against EIF, its directors, officers, partners, employees, agents, attorneys, legal representatives, successors or assigns, directly or indirectly, arising out of, based upon or in any manner connected with any "Prior Related Event" (as hereinbelow defined), and hereby releases, discharges and forever waives and relinquishes any and all such claims, and causes of action against EIF, whether known or unknown, to the date hereof. As used herein the term "Prior Related Event" means any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, prior to the date hereof that occurred pursuant to any of the terms of any of the Loan Documents, or which was related to the Loans or any of the Loan Documents. Neither the offer of this release by Borrowers nor its acceptance by EIF shall constitute an acknowledgment of or admission by EIF of liability for any matter or a precedent upon which any liability may be asserted. 28. Wherever the term "Borrowers" includes Foreland, Eagle Springs, Foreland Refining, Foreland Asphalt, Foreland Asset and Transportation, the remaining language in such section of the Financing Agreement shall be interpreted to apply to each of Foreland, Eagle Springs, Foreland Refining, Foreland Asphalt, Foreland Asset and Transportation, as the context requires. 29. THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. 30. Except as expressly amended hereby, the Financing Agreement remains in full force and effect. Any references to the Financing Agreement in the Loan Documents shall refer to the Financing Agreement as amended hereby. 31. This Amendment shall be of no force and effect until receipt and execution of this Amendment by EIF in its offices in Longmeadow, Massachusetts. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. FORELAND CORPORATION By: /s/ N. Thomas Steele, President EAGLE SPRINGS PRODUCTION LIMITED-LIABILITY COMPANY By: /s/ N. Thomas Steele, Manager FORELAND REFINING CORPORATION By: /s/ Bruce C. Decker, President FORELAND ASPHALT CORPORATION By: /s/ Bruce C. Decker, President FORELAND ASSET CORPORATION By: /s/ Bruce C. Decker, President FORELAND TRANSPORTATION, INC. By: /s/ Bruce C. Decker, President ENERGY INCOME FUND, L.P. By: EIF General Partner, L.L.C., its General Partner By: /s/ Robert D. Gershen, A Managing Director EX-10 4 EXECUTION COPY FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT First Amendment to Registration Rights Agreement dated as of this 4th day of February, 1999 (the "Amendment"), by and between Foreland Corporation, a Nevada corporation ("Foreland") and Energy Income Fund, L.P., a Delaware limited partnership ("EIF") to that certain Registration Rights Agreement between Foreland and EIF dated as of August 10, 1998 (the "Registration Rights Agreement"). WHEREAS, pursuant to the Financing Agreement dated January 6, 1998, by and among Foreland and certain other borrowers (collectively, the "Borrowers") and EIF, as amended by that First Amendment to Financing Agreement dated as of August 10, 1998 and that Second Amendment to Financing Agreement (the "Second Amendment") dated as of even date herewith (as amended, the "Financing Agreement"), EIF agreed to make loans to Borrowers for the purposes and subject to the terms and conditions set forth therein; WHEREAS, pursuant to the Second Amendment, EIF has agreed to defer principal payments and advance additional funds under the Financing Agreement in exchange for, among other consideration, 250,000 shares of Common Stock of Foreland (the "EIF Shares"), issued pursuant to that certain Common Stock Issuance Agreement made between EIF and Foreland dated as of the same date herewith and restricted from resale for one year as described in the Common Stock Issuance Agreement; WHEREAS, in connection with the issuance of the EIF Shares, Foreland and EIF have agreed to amend the Registration Rights Agreement on the terms and conditions set forth herein to, among other things, include registration rights related to the EIF Shares; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, EIF and Foreland agree as follows: 1. Amendments to the Registration Rights Agreement: a. Section 1 of the Registration Rights Agreement is amended by deleting it and replacing it with the following: 1. For purposes of the Shelf Registration under Sections 2 and 2A hereof, the term "Registrable Securities" means the shares of the Company's Common Stock issued to EIF, including but not limited to the EIF Shares on and after the first anniversary of the date of the Common Stock Issuance Agreement and those shares issuable or issued upon conversion of the Series 1998 Preferred Stock, together with any capital stock issued in replacement of, in exchange for or otherwise in respect of such Common Stock, except that shares that have been resold in a public transaction shall not constitute "Registrable Securities" for purposes of a Shelf Registration under Sections 2 or 2A hereof. The number of "Registrable Securities then outstanding" shall be determined by the number of shares of Registrable Securities at the time of such determination. For purposes of a Piggyback Registration under Section 3 hereof or a Demand Registration under Section 4 hereof, "Registrable Securities" shall have the meaning set forth above except that EIF Shares and shares of Common Stock obtainable on conversion of the Preferred Stock (in whole or in part) shall also not constitute Registrable Securities for purposes of a Piggyback Registration under Section 3 hereof or a Demand Registration under Section 4 hereof if those shares of Common Stock may be resold without delay and without limitation in volume or manner of sale in a public transaction without registration under the Act, including without limitation pursuant to Rule 144 under the Act. b. Subsections (a) and (b) of Section 2 of the Registration Rights Agreement are amended by deleting them and replacing them with the following: 2. Shelf Registration. (a) At any time but no later in any event than within 2 months of the date of the First Amendment to the Registration Rights Agreement, Foreland shall have filed a registration statement ("Registration Statement") on Form S-3 (or other suitable form, at Foreland's discretion but subject to the reasonable approval of EIF), covering the resale of all shares of Registrable Securities then outstanding including an indeterminable number of shares of Common Stock as required to effect conversion of certain of the Registrable Securities (the "Shelf Registration"). (b) The Registration Statement shall be prepared as a "shelf" registration statement under Rule 415, and shall be maintained effective until the distribution described in the Registration Statement is completed or until all shares to be registered thereunder may be resold in a public transaction without registration pursuant to Rule 144(k) of the 1933 Act. Foreland shall use its best efforts to have the Registration Statement declared effective within three (3) months of the date of the First Amendment to the Registration Rights Agreement (the "Shelf Date"). c. Section 2A is added following Section 2 of the Registration Rights Agreement: 2A. Shelf Registration of the EIF Shares. (a) At any time but no later in any event than within 14 months of the date of the First Amendment to the Registration Rights Agreement, Foreland shall have filed a registration statement (the "Second Registration Statement") on Form S-3 (or other suitable form, at Foreland's discretion but subject to the reasonable approval of EIF), covering the resale of all shares of EIF Shares that are Registrable Securities (the "Registrable EIF Shares") then outstanding (the "Second Shelf Registration"). (b) The Registration Statement shall be prepared as a "shelf" registration statement under Rule 415, and shall be maintained effective until the distribution described in the Second Registration Statement is completed or until all shares to be registered thereunder may be resold in a public transaction without registration pursuant to Rule 144(k) of the 1933 Act. Foreland shall use its best efforts to have the Second Registration Statement declared effective within 15 months of the date of the First Amendment to the Registration Rights Agreement (the "Second Shelf Date"). (c) If the Second Registration Statement is not declared effective by the Second Shelf Date, the Company must continue to use its best efforts to obtain a declaration of effectiveness and shall pay EIF an amount equal to two percent (2%) per month of the closing trading price of the EIF Shares as of the Second Shelf Date, compounded monthly and accruing daily, until the Second Registration Statement or a registration statement filed pursuant to Section 3 or Section 4 in relation to the Registrable EIF Shares is declared effective, payable in common stock, which common stock shall also be deemed "Registrable EIF Shares" for the purpose of this Agreement. The accrual amount payable will be tolled for any periods occasioned by a delay of the Second Registration Statement under Section 4 as a result of the choice of EIF to have such Registration Statement underwritten. d. Section 3 of the Registration Rights Agreement is amended by deleting it and replacing it with the following: "Piggyback Registration Rights. If, at any time, Foreland proposes to file a registration statement for the public sale of any shares of the Common Stock of Foreland, any capital stock issued in replacement of, in exchange for or otherwise in respect of such Common Stock, or any securities or other rights convertible into Common Stock, or entitled to receive Common Stock, or any other equity security entitled to participate with the Common Stock in the earnings or assets of Foreland under the Securities Act of 1933, as amended (the "1933 Act") (other than a registration statement provided for in Sections 2 or 4 hereof) Foreland shall, not later than thirty (30) days prior to the initial filing of the registration statement, deliver notice of its intent to file such registration statement to EIF, setting forth the minimum and maximum proposed offering price, commissions, and discounts in connection with the offering, and other relevant information. Within twenty (20) days after receipt of notice of Foreland's intent to file a registration statement, EIF shall be entitled to request that any Registrable Securities owned by EIF or its assigns ("EIF Registrable Securities") be included in such registration statement, and Foreland will use its best efforts to cause the EIF Registrable Securities to be included in the offering covered by such registration statement (a "Piggyback Registration"). e. Section 4 of the Registration Rights Agreement is amended by deleting it and replacing it with the following: "Demand Registration Rights. (a) At any time, EIF shall be entitled to request that any EIF Registrable Securities be registered under the 1933 Act if Foreland is already subject to, or becomes subject to, periodic reporting requirements under the regulations of the United States Securities and Exchange Commission. As soon as practicable after receipt by Foreland of a written request for registration, Foreland shall file, and use its best efforts to cause to become effective, an appropriate registration statement under the 1933 Act covering the EIF Registrable Securities, provided that in the opinion of Foreland's counsel, no events preclude such registration. EIF shall have the right to demand registration once EIF pursuant to this Section 4; provided however, that, the right shall not be deemed exhausted unless the registration statement covering so much of the EIF Registrable Securities as EIF and its assigns wish to sell pursuant to the registration statement becomes effective; provided further however, that, if the right is exhausted once prior to the date upon which the EIF Shares are no longer Restricted, EIF shall be entitled to make an additional request for registration pursuant to this Section in relation to Registrable EIF Shares that are outstanding at the time of such request. 2. Pursuant to Section 2 of the Registration Rights Agreement, Foreland was required to file a "shelf" registration statement covering the resale of all shares of Registrable Securities then outstanding by October 10, 1998 and to use its best efforts to have such registration statement declared effective by November 10, 1998. In the event the registration statement was not declared effective by November 10, 1998, Section 2(c) of the Registration Rights Agreement required that Foreland pay certain penalties to EIF. Foreland filed this shelf registration statement on December 21, 1998, more than two months after filing was required under the Agreement. Foreland has requested, and EIF agrees that EIF shall forbear on penalties against Foreland under Section 2(c) of the Registration Rights Agreement that have accrued as of the date of this Amendment; provided however that, nothing contained in this Amendment shall limit EIF's rights to such penalties in the event that any further violations of Section 2(c) or any violations of Section 2A(c) occur. Foreland acknowledges that, subject to the forbearance set forth in the preceding sentence, EIF has not waived any of its rights or any remedies available to it under the Registration Rights Agreement. Foreland hereby expressly acknowledges that any failure by EIF to enforce its rights under the Registration Rights Agreement in the past does not entitle Foreland to any such forbearance under any section of the Registration Rights Agreement in the future. 3. EIF and Foreland hereby represent and warrant that the representations and warranties made by each of them, respectively, in the Registration Rights Agreement, including but not limited to the representations and warranties contained in Sections 2, 7 and 8 of the Registration Rights Agreement, are true and correct as of the date of this Amendment. 4. All capitalized terms used herein shall have the meanings ascribed to them in the Registration Rights Agreement unless expressly defined otherwise in this Amendment. 5. THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. 6. Except as expressly amended hereby, the Registration Rights Agreement remains in full force and effect. Any references to the Registration Rights Agreement in the Loan Documents (as defined in the Financing Agreement) shall refer to the Registration Rights Agreement as amended hereby. 7. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each complete set of which, when so executed by the parties, constitutes an original but all such counterparts together constituting but one and the same instrument. IN WITNESS WHEREOF, the undersigned, by each of their respective duly authorized officers or representatives, have set their hands hereto as of the 4th day of February, 1999. FORELAND CORPORATION By: /s/ N. Thomas Steele, President ENERGY INCOME FUND, L.P. By: EIF General Partner, L.L.C., its General Partner By: /s/ Steven P. McDonald, Vice President EX-10 5 EXECUTION COPY FIRST AMENDMENT TO COMMON STOCK PURCHASE WARRANT DATED JANUARY 6, 1998 (WARRANT NO. 1) WHEREAS, Foreland Corporation, a Nevada corporation (the "Company") has granted to Energy Income Fund, L.P., a Delaware limited partnership (the "Holder") a warrant to purchase 750,000 shares of Common Stock of the Company pursuant to that certain Common Stock Purchase Warrant, dated January 6, 1998 ("Warrant No. 1") in connection with that certain Financing Agreement entered into between the Company and the Holder on January 6, 1996, as amended by that First Amendment to Financing Agreement dated August 10, 1998 and that Second Amendment to Financing Agreement (the "Second Amendment") dated as of even date herewith (as amended, the "Financing Agreement"); and WHEREAS, in exchange for a deferral of principal payments, an advance of additional funds and other consideration set forth in the Second Amendment, the Company has agreed to extend the expiration date of Warrant No. 1; and WHEREAS, the Company and the Holder desire to amend certain terms of Warrant No. 1 to reflect these and other changes. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Holder agree as follows: 1. Amendments to Warrant No. 1. a. The first sentence of the first paragraph following the legend of Warrant No. 1 is amended by deleting it and replacing it with the following: FOR VALUE RECEIVED, Energy Income Fund, L.P., a Delaware limited partnership (the "Holder"), is entitled to purchase from Foreland Corporation, a Nevada corporation (the "Company"), subject to the terms and conditions herein set forth, at any time before 5:00 p.m. Longmeadow, Massachusetts time on December 31, 2003, or the first business day thereafter if such day is not a business day or such other date as may be established in accordance with the terms of this Warrant (the "Expiration Date"), Seven Hundred Fifty Thousand (750,000) of the shares of duly authorized, validly issued, fully paid and nonassessable Common Stock of the Company, one-tenth of a cent ($.001) par value (the "Warrant Stock"), subject to adjustment of the number or kind of shares constituting Warrant Stock as hereinafter provided. b. Section 1.7 of Warrant No. 1 is deleted and replaced with the following: 1.7 "Expiration Date" means December 31, 2003, or the first business day thereafter if such day is not a business day, or such other date as may be established in accordance with the terms of this Warrant. c. The following definition is added to Article 1: 1.20 "Warrant No. 2" means the warrant issued by Foreland to EIF dated August 10, 1998 for Seven Hundred Fifty Thousand (750,000) shares of Common Stock with an exercise price of Six Dollars ($6) per share. d. Section 4.5 of Warrant No. 1 is deleted and replaced with the following: 4.5 Anti-dilution Adjustment. Pursuant to Section 7.39 of the Financing Agreement, if, during the term of this Warrant or Warrant No. 2, or both, Foreland issues additional shares of common stock at a price of less than Six Dollars ($6) or issues securities convertible or exercisable into common stock of Foreland at a conversion or exercise price of less than Six Dollars ($6) and such securities are converted or exercised into common stock or repurchased by Foreland, the following calculation shall be made and additional warrants shall be delivered by Foreland to EIF in the number and manner described below. Effective December 31, 1998, EIF and Foreland shall jointly calculate, at six month intervals, the number of shares issued as described in the above paragraph. In making this determination, EIF and Foreland shall not consider shares issued pursuant to stock options of directors and officers of Foreland outstanding as of the date hereof as set forth on Schedule 5.23 to the Financing Agreement. Within 10 days of receipt of a written request from EIF for delivery of additional warrants based on this calculation, Foreland shall deliver to EIF additional warrants for the number of shares of common stock of Foreland equal to 15% of the shares issued as described in the above paragraph during such six month interval. Such warrants shall be in the form of Warrant No. 2 with an exercise price of Six Dollars ($6) per share. The foregoing provisions of this Section shall not apply to (i) each issuance of additional securities, if any, the proceeds of which are used to repay the Loan in full within thirty (30) days (ii) each issuance of equity securities, if any, that is pursuant to an offering with net proceeds to Foreland of Twenty Million Dollars ($20,000,000) or more or (iii) the issuance of securities pursuant to the Stock Purchase Agreement or Common Stock Issuance Agreement (as each term is defined in the Financing Agreement). The occurrence of any issuance described in (i), (ii) or (iii) above shall not in any way limit the subsequent application of any other provision of this Section. e. The following Sections 8.01 and 8.02 are added to Warrant No. 1 immediately before Section 8.1: 8.01 For purposes of the Shelf Registration under Section 8.2 hereof, the term "Warrant Stock" means the Warrant Stock together with any capital stock issued in replacement of, in exchange for or otherwise in respect of such Warrant Stock. The number of shares of "Warrant Stock then outstanding" shall be determined by the number of shares of Warrant Stock which have been issued or are issuable upon exercise of the Warrant at the time of such determination other than shares of Warrant Stock that have been resold in a public transaction. For purposes of a Piggyback Registration under Section 8.1 hereof or a Demand Registration under Section 8.2 hereof, "Warrant Stock" shall have the meaning set forth above except that the following shall not constitute "Warrant Stock" for such purposes: (i) Warrant Stock that may be resold in a public transaction without registration under the 1933 Act, including without delay or limitation as to volume or manner of sale pursuant to Rule 144 under the 1933 Act; and (ii) Warrant Stock that has been resold in a public transaction. 8.02 Shelf Registration. (a) At any time but no later in any event than within two (2) months of written notice by the Holder of any exercise of the Warrant, as required by Section 2.2 of the Warrant, the Company shall file a registration statement ("Registration Statement") on Form S-3 (or other suitable form, at the Company's discretion but subject to the reasonable approval of the Holder), covering the resale of all shares of Warrant Stock then outstanding including an indeterminate number of shares of Common Stock as required to effect exercise of the Warrant (the "Shelf Registration"). (b) The Registration Statement shall be prepared as a "shelf" registration statement under Rule 415, and shall be maintained effective until the distribution described in the Registration Statement is completed or until all shares to be distributed thereunder may be resold in a public transaction pursuant to Rule 144(k) of the 1933 Act. The Company shall use its best efforts to have the Registration Statement declared effective within three (3) months after notification by the Holder of any exercise of the Warrant, as described in Section 8.2(a) above (the "Shelf Date"). (c) If the Registration Statement is not declared effective by the Shelf Date, the Company must continue to use its best efforts to obtain a declaration of effectiveness and shall pay the Holder an amount equal to two percent (2%) per month of the aggregate amount of the Warrant, compounded monthly and accruing daily, until the Registration Statement or a registration statement filed pursuant to Section 8.1 or Section 8.2 is declared effective, payable in Common Stock, which Common Stock shall also be deemed "Warrant Stock" for the purpose of this Agreement. The accrual amount payable will be tolled for any periods occasioned by a delay of a registration statement under Section 8.2 as a result of the choice of the Holder to have that registration statement underwritten. (d) The Company represents that it is presently eligible to effect the registration contemplated hereby on Form S-3 and will use its best efforts to continue to take such actions as necessary to maintain such eligibility. f. The first paragraph of Section 8.1 of Warrant No. 1 is deleted and replaced with the following: 8.1 Piggyback Registration Rights. If, at any time on or before the expiration of this Warrant, the Company proposes to file a registration statement for the public sale of any of its Common Stock or Common Stock Equivalents under the 1933 Act (other than registration statements (i) provided for in Section 8.2 hereof or (ii) pursuant to Form S-4 and Form S-8 of the Securities Act of 1933) the Company shall, not later than thirty (30) days prior to the initial filing of the registration statement, deliver notice of its intent to file such registration statement to the Holder, setting forth the minimum and maximum proposed offering price, commissions, and discounts in connection with the offering, and other relevant information. Within twenty (20) days after receipt of notice of the Company's intent to file a registration statement, the Holder shall be entitled to request that some or all of the Warrant Stock be included in such registration statement, and the Company will use its best efforts to cause such Warrant Stock to be included in the offering covered by such registration statement. In the event the Warrant Stock is included in the registration statement (a "Piggyback Registration"), the Holder may transfer this Warrant to an underwriter or broker for exercise by such underwriter or broker in connection with a distribution of the Warrant Stock. The managing underwriter or underwriters in an underwritten offering, or the holders of a majority in number of shares of Warrant Stock requesting registration, may determine that the number of securities proposed to be sold in the underwriting or offering exceeds the number that can be sold without having a materially adverse effect on the price at which the securities could be sold. If it or they make such a determination in good faith, then the Company may reduce the number of shares of Common Stock to be included in the registration to the highest number that the managing underwriter (or underwriters) or a majority of the holders (as the case may be) determine will not have a material adverse effect on the price of the shares to be sold. If the number of shares of Common Stock to be sold in a registration are limited pursuant to this paragraph, the Company will include in the registration: (i) First, all shares the Company proposes to sell; (ii) Second, all shares of Common Stock for which registration was requested pursuant to rights to require the Company to register shares in the absence of any other registration reduced, if necessary, to the maximum number of shares consistent with the limitation required by this Section 8.1; and (iii) Third, shares of Common Stock for which registration was requested pursuant to rights to require the Company to register shares incidental to the registration of other shares reduced pro rata according to the number of shares for which registration was requested by each Person so requesting registration, or in such other proportions as such Persons may agree. g. The first paragraph of Section 8.2 of Warrant No. 1 is deleted and replaced with the following: 8.2 Demand Registration Rights. At any time, the Holder shall be entitled to request that the Warrant Stock be registered under the 1933 Act. The Company shall, as soon as practicable after receipt of a written request for registration, file, and use its best efforts to cause to become effective, an appropriate registration statement under the 1933 Act covering the Warrant Stock, provided that in the opinion of the Company's counsel, no events preclude such registration. The Company may postpone for a reasonable period of time (not to exceed 90 days) the filing of any registration statement otherwise required to be prepared and filed by it pursuant to this Section if, at the time it receives a request for registration: (1) the Company is conducting or about to conduct an offering of its securities and the Company is advised by its investment banker that such offering would be affected adversely by the registration so demanded and the Company shall have furnished to the Holder seeking a demand registration a certificate signed by the President of the Company to that effect; (2) the Board of Directors of the Company shall determine in good faith that such offering will interfere with a pending or contemplated financing, merger, sale of assets, recapitalization or other similar corporate action of the Company and the Company shall have furnished to the Holder seeking a demand registration a certificate signed by the President of the Company to that effect, accompanied by a certified copy of the relevant board resolutions; or (3) the Board of Directors of the Company shall determine in good faith that the disclosures required in connection with registration of the Warrant Stock might adversely affect the business or prospects of the Company and the Company shall have furnished to the Holder seeking a demand registration a certificate signed by the President of the Company to the effect, accompanied by a certified copy of the relevant board resolutions. If the Holder intends to distribute the Warrant Stock covered by its request by means of an underwriting, the Holder shall so advise the Company as a part of its request made pursuant to this Section. If a registration requested pursuant to the Section is to involve an underwritten public offering in which the obligation of the underwriters is to take all of the securities to be sold if any are to be taken, the Company and other holders of securities of the Company may include securities in such registration only if the managing underwriter of such public offering concludes that such inclusion will not adversely affect the successful marketing or the price of the Warrant Stock to be included in such public offering. Such other holders of securities (together with the Company as provided in subsection 8.5(d)) shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Holder and reasonably acceptable to the Company. h. The references to Section 9.2 in the third and fourth paragraphs of Section 8.2 of Warrant No. 1 are deleted and replaced with references to Section 8.2. i. Section 8.3 is deleted and replaced with the following: 8.3 Filing Obligations of the Company. In connection with any registration of the Warrant Stock, the Company shall: (a) prepare and file the registration statement and such amendments and supplements to the registration statement and the prospectus or offering circular used in connection therewith as may be necessary to keep the registration statement effective until the Holders of the Warrant Stock covered by such registration statement have completed the distribution described in the registration statement or until all shares to be distributed thereunder may be resold in a public transaction pursuant to Rule 144(k) of the 1933 Act and to comply with the provisions of the 1933 Act and the rules and regulations thereunder with respect to the disposition of the Warrant Stock covered by the registration statement for the period required to effect the distribution thereof; (b) furnish to the Holder such number of copies of any prospectus or offering circular, including a preliminary prospectus, and of a full registration statement and exhibits in conformity with the requirements of the 1933 Act and rules and regulations thereunder, as the Holder may reasonably request in order to facilitate the disposition of Warrant Stock owned by such Holder; (c) use its best efforts to register or qualify the Warrant Stock covered by the registration statement, as the case may be, under the securities or blue sky laws of such jurisdictions as the Holder may reasonably request, and accomplish any and all other acts and things which may be necessary or advisable to permit sale in such jurisdictions of such Warrant Stock; provided, however, that the Company shall not be required to register as a dealer or to qualify as a foreign corporation in any such jurisdictions or to escrow any shares of its capital stock; (d) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Holder shall also enter into and perform its obligations under such an agreement; (e) furnish, at the request of the Holder, on the date that such Warrant Stock is delivered to the underwriters for sale in connection with a registration pursuant to this Agreement, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the outside counsel of recognized standing (or reasonably acceptable to the Holder) representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in such underwritten public offering, addressed to the underwriters, if any, and to the Holder and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holder; (f) as promptly as practicable after becoming aware of such event, notify the Holder of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the registration statement to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to the Holder; (g) provide the Holder with written notice of the date that a registration statement registering the resale of the Warrant Stock is declared effective by the SEC, and the date or dates when the registration statement is no longer effective; (h) provide the Holder and their representatives the opportunity to conduct a reasonable due diligence inquiry of the Company's pertinent financial and other records and make available its officers, directors and employees for questions regarding such information as it related to information contained in the registration statement; and (i) provide the Holder and its representatives the opportunity to review the registration statement and all amendments thereto no later than three (3) days prior to their filing with the SEC. j. The reference to "Sections 9.1 or 9.2" in Section 8.4 of Warrant No. 1 is deleted and replaced with "Sections 8.2, 8.3 or 8.4." k. Paragraph (a) of Section 8.5 is deleted and replaced with the following: (a) By the Company. In connection with the filing of any registration statements and sales of the Warrant Stock thereunder, the Company shall indemnify and hold harmless the Holder of this Warrant, its directors and officers, any underwriter, and each other Person, if any, who controls the Holder or the underwriter within the meaning of the 1933 Act, against losses, claims, damages or liabilities, joint or several (or actions in respect thereto) ("Losses"), to which any such Holder, underwriter, or controlling Person may become subject under the 1933 Act or otherwise, insofar as such Losses arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which the Warrant Stock was registered under the 1933 Act, any preliminary prospectus, offering circular or final prospectus contained therein, or any amendment or supplement thereto, or any report filed with the Securities and Exchange Commission (the "Disclosure Documents"), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse any such Holder, underwriter, or controlling Person for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claims, excluding any amounts paid in settlement of litigation, commenced or threatened, if such settlement is effected without the prior written consent of the Company; provided, however, that the Company shall not be liable in any such case to the extent that any such Losses arise out of or are based upon any untrue statement, alleged untrue statement or omission or alleged omission made in such Disclosure Document in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of the Holder of this Warrant for use specifically in connection with the preparation of such Disclosure Document. l. The following Section 8.7 is added to Warrant No. 1: 8.7 Reports under Securities Exchange Act of 1934 (the "1934 Act"). With a view to making available to the Holder the benefits of Rule 144 promulgated under the 1933 Act and any other rule or regulation of the SEC that may at any time permit the Holder to sell securities of the Company to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; and (c) furnish to the Holder, so long as the Holder owns any Warrant Stock, forthwith upon request (i) a written statement by the Company, if true, that it has complied with the reporting requirements of SEC Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing the Company of any rule or regulation of the SEC which permits the selling of any such securities without registration. 2. All capitalized terms used herein shall have the meanings ascribed to them in Warrant No. 1 unless expressly defined otherwise in this Amendment. 3. THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. 4. Except as expressly amended hereby, Warrant No. 1 remains in full force and effect. Any references to this Warrant in the Loan Documents (as defined in the Financing Agreement) shall refer to Warrant No. 1 as amended hereby. 5. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each complete set of which, when so executed by the parties, constitutes an original but all such counterparts together constituting but one and the same instrument. IN WITNESS WHEREOF, the undersigned, by each of their respective duly authorized officers or representatives, have set their hands hereto as of the 4th day of February, 1999. FORELAND CORPORATION By: /s/ N. Thomas Steele, President ENERGY INCOME FUND, L.P. By: EIF General Partner, L.L.C., its General Partner By: /s/ Steven P. McDonald, Vice President EX-10 6 EXECUTION COPY FIRST AMENDMENT TO COMMON STOCK PURCHASE WARRANT DATED AUGUST 10, 1998 (WARRANT NO. 2) WHEREAS, Foreland Corporation, a Nevada corporation (the "Company") has granted to Energy Income Fund, L.P., a Delaware limited partnership (the "Holder") a warrant to purchase 750,000 shares of Common Stock of the Company pursuant to that certain Common Stock Purchase Warrant, dated August 10, 1998 ("Warrant No. 2") in connection with that certain Financing Agreement entered into between the Company and the Holder on January 6, 1996, as amended by that First Amendment to Financing Agreement dated August 10, 1998 and that Second Amendment to Financing Agreement (the "Second Amendment") dated as of even date herewith (as amended, the "Financing Agreement"); and WHEREAS, in exchange for a deferral of principal payments, an advance of additional funds and other consideration set forth in the Second Amendment, the Company has agreed to extend the expiration date of Warrant No. 2; and WHEREAS, the Company and the Holder desire to amend certain terms of Warrant No. 2 to reflect these changes. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Holder agree as follows: 1. Amendments to Warrant No. 2. a. The first sentence of the first paragraph following the legend of Warrant No. 2 is amended by deleting it and replacing it with the following: FOR VALUE RECEIVED, Energy Income Fund, L.P., a Delaware limited partnership (the "Holder"), is entitled to purchase from Foreland Corporation, a Nevada corporation (the "Company"), subject to the terms and conditions herein set forth, at any time before 5:00 p.m. Longmeadow, Massachusetts time on December 31, 2003, or the first business day thereafter if such day is not a business day or such other date as may be established in accordance with the terms of this Warrant (the "Expiration Date"), Seven Hundred Fifty Thousand (750,000) of the shares of duly authorized, validly issued, fully paid and nonassessable Common Stock of the Company, one-tenth of a cent ($.001) par value (the "Warrant Stock"), subject to adjustment of the number or kind of shares constituting Warrant Stock as hereinafter provided. b. Section 1.7 of Warrant No. 2 is deleted and replaced with the following: 1.7 "Expiration Date" means December 31, 2003, or the first business day thereafter if such day is not a business day, or such other date as may be established in accordance with the terms of this Warrant. c. Section 1.19 of Warrant No. 2 is deleted and replaced with the following: 1.19 "Warrant No. 1" means the warrant dated January 6, 1998 issued by Foreland to EIF for Seven Hundred Fifty Thousand (750,000) shares of Common Stock with an exercise price of Six Dollars ($6) per share. d. The third paragraph of Section 4.5 is deleted and replaced with the following: The foregoing provisions of this Section shall not apply to (i) each issuance of additional securities, if any, the proceeds of which are used to repay the Loan in full within thirty (30) days (ii) each issuance of equity securities, if any, that is pursuant to an offering with net proceeds to Foreland of Twenty Million Dollars ($20,000,000) or more or (iii) the issuance of securities pursuant to the Stock Purchase Agreement or Common Stock Issuance Agreement (as each term is defined in the Financing Agreement). The occurrence of any issuance described in (i), (ii) or (iii) above shall not in any way limit the subsequent application of any other provision of this Section. e. The first paragraph of Section 8.3 of Warrant No. 2 is deleted and replaced with the following: 8.3 Piggyback Registration Rights. If, at any time on or before the expiration of this Warrant, the Company proposes to file a registration statement for the public sale of any of its Common Stock or Common Stock Equivalents under the 1933 Act (other than registration statements (i) provided for in Section 8.4 hereof or (ii) pursuant to Form S-4 and Form S-8 of the Securities Act of 1933) the Company shall, not later than thirty (30) days prior to the initial filing of the registration statement, deliver notice of its intent to file such registration statement to the Holder, setting forth the minimum and maximum proposed offering price, commissions, and discounts in connection with the offering, and other relevant information. Within twenty (20) days after receipt of notice of the Company's intent to file a registration statement, the Holder shall be entitled to request that some or all of the Warrant Stock be included in such registration statement, and the Company will use its best efforts to cause such Warrant Stock to be included in the offering covered by such registration statement. In the event the Warrant Stock is included in the registration statement (a "Piggyback Registration"), the Holder may transfer this Warrant to an underwriter or broker for exercise by such underwriter or broker in connection with a distribution of the Warrant Stock. f. The first paragraph of Section 8.4 of Warrant No. 2 is deleted and replaced with the following: 8.4 Demand Registration Rights. At any time, the Holder shall be entitled to request that the Warrant Stock be registered under the 1933 Act. The Company shall, as soon as practicable after receipt of a written request for registration, file, and use its best efforts to cause to become effective, an appropriate registration statement under the 1933 Act covering the Warrant Stock, provided that in the opinion of the Company's counsel, no events preclude such registration. The Company may postpone for a reasonable period of time (not to exceed 90 days) the filing of any registration statement otherwise required to be prepared and filed by it pursuant to this Section if, at the time it receives a request for registration: 2. All capitalized terms used herein shall have the meanings ascribed to them in Warrant No. 2 unless expressly defined otherwise in this Amendment. 3. THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. 4. Except as expressly amended hereby, Warrant No. 2 remains in full force and effect. Any references to this Warrant in the Loan Documents (as defined in the Financing Agreement) shall refer to Warrant No. 2 as amended hereby. 5. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each complete set of which, when so executed by the parties, constitutes an original but all such counterparts together constituting but one and the same instrument. IN WITNESS WHEREOF, the undersigned, by each of their respective duly authorized officers or representatives, have set their hands hereto as of the 4th day of February, 1999. FORELAND CORPORATION By: /s/ N. Thomas Steele, President ENERGY INCOME FUND, L.P. By: EIF General Partner, L.L.C., its General Partner By: /s/ Steven P. McDonald, Vice President EX-10 7 COMMON STOCK ISSUANCE AGREEMENT This Common Stock Issuance Agreement (this "Agreement") dated as of February 4, 1999, is made between Energy Income Fund, L.P., a Delaware limited partnership ("EIF") and Foreland Corporation, a Nevada Corporation ("Foreland"). RECITALS WHEREAS, pursuant to the Financing Agreement dated as of January 6, 1998 by and among Foreland, Eagle Springs, Foreland Refining, Foreland Asphalt, Foreland Asset, Transportation and Cowboy Asphalt (collectively referred to as the "Borrowers") and EIF, as amended from time to time (the "Financing Agreement"), EIF agreed to make loans to the Borrowers for the purposes and subject to the terms and conditions set forth therein; WHEREAS, pursuant to the Second Amendment to the Financing Agreement dated as of even date herewith (the "Second Amendment"), EIF agreed to, among other things, defer principal payments and advance additional funds under the Financing Agreement; WHEREAS, in exchange for this deferral and advance and other consideration set forth in the Second Amendment, Foreland agreed to issue to EIF 250,000 shares of the Common Stock of Foreland (the "EIF Common Stock") restricted from resale for one year from the date of this Agreement; NOW THEREFORE, in consideration of the premises, and other good and valuable consideration the adequacy of which is expressly acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS I.1 Defined Terms. The following terms shall have the meanings set forth herein: "Affiliate", an, an "affiliate of", or a Person "affiliated" with, a specified Person, is a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. "Business Day" shall mean any day other than a (i) Saturday, (ii) Sunday, or (iii) any day on which commercial banking institutions in New York, New York are authorized or obligated to close, provided that if four (4) consecutive days are not Business Days, the next day shall be deemed a Business Day whether or not banks located in New York are authorized or obligated to close. "Closing Date" shall mean the date when Closing actually occurs. "Common Stock" shall mean the common stock, par value $.001 per share, of Foreland. "Eagle Springs" shall mean Eagle Springs Production Limited-Liability Company, a Nevada limited liability company. "Foreland Asphalt" shall mean Foreland Asphalt Corporation, a Utah corporation. "Foreland Asset" shall mean Foreland Asset Corporation, a Nevada corporation. "Foreland Refining" shall mean Foreland Refining Corporation, a Texas corporation. "Lien" shall mean any mortgage, security interest, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge, preference, priority or other security agreement, option, warrant, attachment, right of first refusal, preemptive, conversion, put, call or other claim or right, restriction on transfer (other than restrictions imposed by federal and state securities laws), or preferential arrangement of any kind or nature whatsoever (including any restriction on the transfer of any assets, any conditional sale or other title retention agreement, any financing lease involving substantially the same economic effect as any of the foregoing and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). "Losses" shall mean losses, damages, claims, demands, suits, costs, expenses, liabilities and sanctions of every kind and character, including without limitation reasonable attorneys' fees, court costs and costs of investigation. "Person" shall mean any natural person, sole proprietorship, corporation, general partnership, limited partnership, limited liability company, union, association, court, agency, agreement, tribunal, instrumentality, commission, arbitrator, board, bureau, or other entity or authority. "Preferred Stock" shall mean all of the shares of the 1998 Series Convertible Preferred Stock of Foreland. "Qualified Offering" means an offering of the Common Stock in which the aggregate net proceeds to Foreland shall be at least Four Million Dollars ($4,000,000). "Registration Rights Agreement" shall mean that certain Registration Rights Agreement by and between EIF and Foreland dated August 10, 1998 as amended by the First Amendment to Registration Rights Agreement dated as of even date herewith. "Shareholder" shall mean any holder of Shares. "Shares" shall mean any and all issued and outstanding shares of capital stock of Foreland, including, without limitation, the Common Stock and the Preferred Stock. "Transportation" shall mean Foreland Transportation, Inc., a Utah Corporation (formerly known as Petrosource Transportation). In addition, the following terms are defined elsewhere in this Agreement: "Closing" Section 3.1 "Effective Time" Section 2.2 "EIF" Introductory paragraph "Indemnified Party" Section 6.3 "Indemnifying Party" Section 6.3 "Indemnity Obligation" Section 6.3 "Liability" Section 4.1(h) Terms used but not defined herein shall have the meanings ascribed to them in the Financing Agreement. I.2 Accounting Terms. Accounting terms used herein and not otherwise defined herein shall be construed in accordance with generally accepted accounting definitions and principles consistently applied. I.3 Singular and Plural. Words used herein in the singular, where the context so permits, shall be deemed to include the plural and vice versa. The definitions of words in the singular herein shall apply to such words when used in the plural where the context so permits and vice versa. ARTICLE II ISSUANCE II.1 Issuance. Pursuant to the terms and subject to the conditions hereof, on the Closing Date, but effective as of the Effective Time, Foreland shall issue to EIF the EIF Common Stock in consideration of EIF's deferral of principal payments and waiver of certain covenants under the Financing Agreement and other consideration as described in the Second Amendment. II.2 Effective Time. The issuance of the EIF Common Stock shall be effective as of February 4, 1999 (the "Effective Time"); provided however, that this Agreement shall be of no force and effect until receipt by EIF and execution of this Agreement by EIF in Massachusetts. ARTICLE III THE CLOSING III.1 Date of Closing. Subject to the conditions stated in this Agreement, the consummation of the transactions contemplated hereby (the "Closing") shall be held on such date as is mutually satisfactory to the parties hereto. III.2 Place of Closing. The Closing shall be held at such place as the parties hereto may agree in writing. III.3 Conditions to Foreland's Closing. The obligations of Foreland hereunder are subject to the following conditions, each of which must be satisfied or waived by Foreland prior to Closing: (a) Execution of the Second Amendment. At the Closing, the Second Amendment shall have been executed by EIF and Foreland. (b) Other Deliveries. EIF shall have delivered such documents, certificates and/or instructions as may be reasonably necessary or advisable to carry out EIF's obligations under, and to fulfill the purpose of, this Agreement. (c) Representations and Warranties True. Foreland shall be satisfied that all representations and warranties of EIF contained in this Agreement are true in all material respects at and as of the Closing as if such representations and warranties were made at and as of the Closing, and that EIF shall have performed and satisfied all material agreements in all material respects as required by this Agreement to be performed and satisfied by EIF at or prior to the Closing. III.4 Conditions to EIF's Closing. The obligations of EIF hereunder are subject to the following conditions, each of which must be satisfied or waived by EIF prior to Closing: (a) Execution of the Second Amendment. At the Closing, the Second Amendment shall have been executed by EIF and Foreland. (b) Resolutions. Prior to or at Closing, EIF shall have received resolutions of the Board of Directors and/or Shareholders of Foreland, as required by law and Foreland's By-laws, authorizing and approving the transactions contemplated by this Agreement, certified by the respective Secretary or Assistant Secretary of Foreland, together with certified copies of Foreland's Articles of Incorporation and By-laws and a good-standing certificate with respect to Foreland from the State of Nevada. (c) Stock Certificates. At the Closing, Foreland shall deliver to EIF a certificate representing the EIF Common Stock, with all necessary transfer taxes paid or other revenue stamps affixed thereto. (d) Opinion of Counsel. Prior to or at Closing, EIF shall have received an opinion of Kruse, Landa & Maycock, L.L.C. in form and substance reasonably acceptable to EIF. (e) Registration Rights Agreement. Prior to or at Closing, Foreland shall deliver the Registration Rights Agreement to EIF, executed by Foreland. (f) Other Deliveries. Foreland shall have delivered such additional instruments, as may be reasonably necessary or advisable to carry out EIF's obligations under, and to fulfill the purpose of, this Agreement and any other document, certificate or other instructions delivered pursuant hereto. (g) Representations and Warranties True. EIF shall be satisfied that all representations and warranties of Foreland contained in this Agreement shall be true in all material respects as at and as of the Closing as if such representations and warranties were made at and as of the Closing, and that Foreland have performed and satisfied all material agreements in all material respects as required by this Agreement to be performed and satisfied by Foreland at or prior to the Closing. ARTICLE IV REPRESENTATIONS AND WARRANTIES IV.1 Representations and Warranties of Foreland. Foreland represents and warrants as of the date hereof and as of the Closing Date as follows: (a) Organization. Foreland is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and is duly qualified to carry on its business as now being conducted. (b) Capital Stock. On the date hereof, the authorized capital of Foreland consists of (i) 50,000,000 shares of Common Stock, par value $0.001 per share, of which 9,423,190 shares are issued and outstanding as of the date hereof, and (ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which: (A) 2,000,000 preferred shares are designated as 1991 Series Convertible Preferred Stock with 20,000 of such preferred shares issued and outstanding (convertible into 6,667 shares of Common Stock); (B) 1,650,000 preferred shares are designated as 1994 Series Convertible Redeemable Preferred Stock with 153,140 of such preferred shares issued and outstanding (convertible into 51,047 shares of Common Stock); (C) 1,000,000 preferred shares are designated as 1995 Series Convertible Preferred Stock with 349,103 of such preferred shares issued and outstanding (convertible into 116,368 shares of Common Stock); (D) 50,000 preferred shares are designated as Series A Preferred Stock with none of such preferred shares issued and outstanding; (E) 2,000 preferred shares are designated as 1998 Series Convertible Preferred Stock with all of such preferred shares issued and outstanding (convertible into 333,333 shares of Common Stock); and (F) 298,000 preferred shares are not designated. Foreland has no other Shares or capital stock of any class or other equity securities or equity equivalents authorized, issued or outstanding. Foreland has reserved a sufficient number of authorized shares of Common Stock for issuance pursuant to Warrant No. 1 and Warrant No. 2 and for conversion of the Preferred Stock. Except as set forth in Schedule 4.1, there are no outstanding or authorized options, warrants, calls, subscriptions, rights, agreements or commitments of any character obligating Foreland to issue any Shares or securities convertible into or exchangeable for or evidencing the right to purchase or subscribe for any capital stock of Foreland. All issued and outstanding shares of the capital stock of Foreland (i) are, or shall be upon the Closing, duly authorized, validly issued, fully-paid and nonassessable, (ii) are, shall be and have been (other than the 1998 Series Preferred Stock) free of any preemptive rights, (iii) were not, and shall not be, issued in violation of the terms of any contract, agreement, lease, plan, instrument or other document binding on Foreland, and (iv) were and shall be issued in compliance with all applicable charter documents of Foreland and all applicable federal and state securities or "blue sky" laws and regulations. (c) Transfer of the EIF Common Stock. Upon the consummation of the transactions contemplated hereby, EIF will acquire title to the EIF Common Stock, free and clear of any and all Liens. The EIF Common Stock has been, or will be prior to the Closing, duly authorized and, when issued and delivered to EIF as provided in this Agreement, will be validly issued, fully paid, and nonassessable, and the issuance of such shares will not violate or contravene the terms of any contract, agreement, note, bond, mortgage, indenture, deed or trust, license, franchise, permit, lease, plan, instrument, or other document binding on Foreland. The EIF Common Stock shall be restricted from resale for one year from the date of this Agreement and has registration rights pursuant to the Registration Rights Agreement. (d) No Conflict. Foreland has all requisite power and authority to carry on its business as presently conducted, to enter into this Agreement and to perform its obligations hereunder. The consummation of the transactions contemplated by this Agreement will not violate, or be in conflict with, any material provision of the certificate of incorporation of Foreland or any material provision of any agreement or instrument to which Foreland is a party or by which it is bound (except for any provision in any agreement relating to required consents to transfer), noncompliance with which would have a materially adverse effect upon EIF, upon EIF's acquisition or ownership of the EIF Common Stock after the Closing Date or upon any of the transactions contemplated by this Agreement or, to the knowledge of Foreland, any judgment, decree, order, statute, rule or regulation applicable to Foreland (subject to required approvals of Federal, state or other governmental agencies). (e) Authorization. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite action on the part of Foreland. (f) Enforceability. This Agreement has been duly executed and delivered on behalf of Foreland. This Agreement constitutes legal, valid and binding obligations of Foreland enforceable in accordance with their respective terms. (g) Proceedings. There are no actions, suits, proceedings or governmental investigations or inquiries pending, or, to the knowledge of Foreland, threatened against Foreland or any of its Affiliates, or their respective properties, assets, operations or businesses, which would, singly or in the aggregate, have a material adverse effect on the business of Foreland. (h) Financial Statements. The financial statements of Foreland dated as of September 30, 1998 (i) fairly present the assets, liabilities, and financial condition of Foreland as of the dates thereof and the results of operations of Foreland for the respective periods ended on such dates, (ii) have been prepared from the books and records of Foreland in accordance with generally accepted accounting principles consistently applied, and (iii) include all adjustments that are necessary for a fair presentation of the information shown and do not contain any items of a special or nonrecurring nature that are not identified as such. Foreland has no direct or indirect liability, indebtedness, obligation, expense, claim, deficiency, guaranty, or endorsement of or by any Person (other than endorsements of notes, bills, and checks presented to banks for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute, contingent, matured, unmatured, or otherwise ("Liability") other than Liabilities that are reflected, accrued or reserved for in the Financial Statements or arise in the ordinary course of Foreland's business consistent with past practice. The Financial Statements do not contain as of the date hereof any misstatement of material fact and does not fail to state any facts necessary (in lights of the circumstances in which they were made) to make the statements therein not misleading. Since the date of such Financial Statements, there has been no material adverse change in the assets, business, financial condition or prospects of Foreland. (i) Compliance with Law. Foreland is not in violation of any order, injunction, judgment, ruling, law, or regulation of any court or governmental authority applicable to the property or business of Foreland, which violation or violations in the aggregate would have a material adverse effect on Foreland. The licenses, permits and other governmental authorizations held by Foreland are valid and sufficient for the conduct of Foreland's businesses as currently conducted, except where the failure to hold such licenses, permits, and other governmental authorizations would not have a material adverse effect. (j) Fees. Foreland has not incurred any liability, contingent or otherwise, for brokers' or finders' fees relating to the transactions contemplated by this Agreement for which EIF or Foreland shall have any responsibility whatsoever. IV.2 Representations and Warranties of EIF. EIF represents and warrants to Foreland as of the date hereof and as of the Closing Date as follows: (a) Organization. EIF is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to carry on its business as currently conducted. (b) No Conflict. EIF has all requisite power and authority to carry on its business as presently conducted, to enter into this Agreement, and to perform its obligations under this Agreement. The consummation of the transactions contemplated by this Agreement will not violate, or be in conflict with, any material provision of the limited partnership or partnership agreement of EIF or any agreement or instrument to which EIF is a party or by which it is bound, noncompliance with which would have a materially adverse effect upon Foreland or upon EIF's acquisition or ownership of the EIF Common Stock or upon any of the transactions contemplated by this Agreement, or, to the knowledge of EIF, any judgment, decree, order, statute, rule or regulation applicable to EIF (subject to required approvals of Federal, state or other governmental agencies). (c) Accredited Investor. EIF is an Accredited Investor as defined by Regulation D of the Securities Act of 1933, as amended. (d) Authorization. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite action on the part of EIF. (e) Enforceability. This Agreement has been duly executed and delivered on behalf of EIF. This Agreement constitutes legal, valid and binding obligations of EIF, enforceable in accordance with their respective terms. (f) Investment Intent. EIF acknowledges that the EIF Common Stock has not been registered under the Securities Act of 1933, as amended, or applicable state securities laws and that the certificates representing such shares will bear a legend to such effect. EIF is acquiring the EIF Common Stock hereunder for investment purposes only and not with a view to, or for resale in connection with, the distribution thereof and with no intention of distributing or selling any thereof except in compliance with federal or state securities laws, and will make no sale or other transfer of the EIF Common Stock except in compliance with federal or state securities laws. (g) Fees. EIF has incurred no liability, contingent or otherwise, for brokers' or finders' fees relating to the transactions contemplated by this Agreement for which Foreland shall have any responsibility whatsoever. ARTICLE V OBLIGATIONS AFTER CLOSING V.1 Transfer Taxes. Foreland shall pay all transfer, documentary, sales, use, registration, excise or similar taxes in connection with the transactions contemplated by this Agreement. V.2 Financial Information. During the term of the Loans, Foreland shall prepare financial statements in accordance with generally accepted accounting principles consistently applied as of each March 31, June 30, September 30, and December 31 for the periods then ended. Quarterly statements shall contain consolidated financial statements including a balance sheet, statement of income, and statements of the source and application of cash flow for the period then ended. Annual statements prepared as of each December 31 and for the year period then ended shall be audited and accompanied by an opinion from an independent certified public accountant. Copies of the financial statements required by this subsection shall be furnished to EIF within 45 days after the end of each fiscal period except for the annual statements, copies of which shall be furnished within 90 days after the end of the fiscal period to which they relate. EIF acknowledges that, while the Financing Agreement is in place, delivery of such financial information as is required pursuant to the Financing Agreement will satisfy Foreland's obligation under this Section 5.2. V.3 Registration. In addition to any and all rights set forth in this Agreement, EIF shall have registration rights as set forth in the Registration Rights Agreement. V.4 Further Assurances. After Closing, Foreland and EIF shall each execute, acknowledge and deliver or cause to be executed, acknowledged and delivered such instruments and take such other action as may be necessary or advisable to assure to the other the rights, titles, interests, estates, and privileges intended to be assigned, delivered, or reserved to such party and to consummate the transactions and to carry out their obligations under this Agreement and under any document, certificate, or other instrument delivered pursuant hereto. ARTICLE VI INDEMNIFICATION VI.1 Indemnification by EIF. From and after the Closing Date, EIF shall defend, indemnify and save and hold harmless Foreland, its directors, officers, employees and agents against all Losses arising out of or resulting from any breach of any representation, warranty, covenant or agreement of EIF under this Agreement (including the Schedules and the Exhibits hereto). VI.2 Indemnification by Foreland. From and after the Closing Date, Foreland shall defend, indemnify and save and hold harmless EIF, its directors, officers, employees and agents against all Losses (a) arising out of or resulting from any breach of any representation, warranty, covenant or agreement of Foreland under this Agreement (including the Schedules and the Exhibits hereto); (b) that relate to claims or other demands by third parties with respect to any violation by Foreland of any federal or state securities laws in connection with the transactions contemplated by this Agreement; or (c) in connection with the operating of the Properties from the Closing Date. VI.3 Procedures. The parties hereto agree promptly to notify the other party of the making of any demand, the assertion of any claim, or the commencement of any suit, action or proceeding by any third party for which indemnity may be sought under this Agreement (an "Indemnity Obligation") prior to expending or committing to expend funds for which indemnity may be sought. The party from whom indemnification is sought (the "Indemnifying Party") shall have the right, but not the obligation, to assume the defense or settlement of any Indemnity Obligation of which the party seeking indemnification (the "Indemnified Party") gives notice; provided, however, that if the Indemnifying Party does not elect to assume such defense or settlement, the Indemnified Party shall have the right, but not the obligation, to assume such defense or settlement but shall not thereby waive any right to indemnity therefor by the Indemnifying Party pursuant to this Agreement, and the Indemnifying Party shall at all times have the right, at its option and expense, to participate fully therein. Each party shall have reasonable access to the books, records and personnel in the possession or control of the other party which are pertinent to the defense or settlement of any Indemnity Obligation. The parties shall cooperate in the defense or settlement of any Indemnity Obligation, but the party electing to assume such defense or settlement shall have full authority to determine all action to be taken with respect thereto and the terms of the settlement; provided, however, that without the consent of the Indemnified Party, no settlement shall be entered into that does not include as an unconditional term thereof the giving by the Person asserting such claims of an unconditional release of the Indemnified Party from all personal liability with respect to such claim. The Indemnified Party may join the Indemnifying Party in any suit, action or proceeding to which any such right of indemnity created by this Agreement would or might apply, for the purpose of enforcing any such right. ARTICLE VII MISCELLANEOUS VII.1 Survival. The representations, warranties, covenants, agreements and indemnities set forth in this Agreement shall survive the Closing; provided, however, that any claim or demand for breach of a representation or warranty under Sections 6.1 or 6.2(a) and any claim or demand under Section 6.2 must be asserted in writing on or before the one (1) year anniversary date of the Closing Date, after which date such indemnities shall expire except to the extent this Agreement expressly provides that any such provision shall survive for a longer period. If the Closing occurs, all conditions of Closing shall be deemed to have been satisfied or waived, and, after the Closing, neither party shall have any liability whatsoever to the other arising out of, resulting from or attributable to any such conditions of Closing, regardless of whether such conditions of Closing were, in fact, satisfied or waived. VII.2 Exhibit and Schedules. The Exhibit and Schedules referred to in this Agreement are hereby incorporated in this Agreement by reference and constitute a part of this Agreement. Each party to this Agreement and its counsel has received a copy of the Exhibits and Schedules prior to and as of the execution of this Agreement. VII.3 Expenses. Foreland shall be responsible for payment of all expenses, including legal fees, incurred by Foreland and EIF to negotiate, document, and close the transactions contemplated hereby. VII.4 Notices. All notices and communications required or permitted under this Agreement shall be in writing and any communication or delivery hereunder shall be deemed to have been duly made when personally delivered to the individual indicated below, or if sent by telecopier or mailed, when received by the party charged with such notice and addressed as follows: If to EIF: Energy Income Fund, L.P. 136 Dwight Road Longmeadow, MA 01106 Attn: Robert D. Gershen Facsimile No.: (413) 567-7926 If to Foreland: Foreland Corporation 143 Union Blvd. Suite 210 Lakewood, CO 80228 Attn: N. Thomas Steele Facsimile No.: (303) 988-3234 Copies of all notices (other than reports or other routine communications), which shall not constitute notice hereunder, shall be delivered to: Wilmer, Cutler & Pickering 2445 M Street, N.W. Washington, D.C. 20037 Attn: Russell J. Bruemmer Facsimile No.: (202) 663-6363 - and - Kruse, Landa & Maycock, L.L.C. Eighth Floor, Bank One Tower 50 West Broadway (300 South) Salt Lake City, UT 84101-2034 Attn: James R. Kruse, Esq. Facsimile No.: (801) 359-3954 Any party may, by written notice so delivered to the other parties, change the address or individual to which delivery shall thereafter be made. VII.5 Amendments. Except for waivers specifically provided herein, this Agreement may not be amended nor any rights hereunder waived except by an instrument in writing signed by the party to be charged with such amendment or waiver and delivered by such party to the party claiming the benefit of such amendment or waiver. VII.6 Limitation of Remedies. In no event shall either party to this Agreement be entitled to recover special or consequential damages from the other party as a result of a breach of this Agreement by such other party, including, without limitation, special damages in the nature of lost or future profits. VII.7 Counterparts. This Agreement may be executed by EIF and Foreland in any number of counterparts, no one of which need be executed by all parties hereto, but all of which together shall constitute one and the same instrument. VII.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. VII.9 Entire Agreement. This Agreement (including the Exhibits and Schedules hereto and all other agreements executed in connection herewith) constitutes the entire understanding among the parties with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. VII.10 Parties in Interest. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and, except as otherwise prohibited, their respective heirs, devisees, executors, administrators, successors and assigns; and except as provided in this Article VII, which is also intended to benefit and be enforceable by the Indemnified Parties, nothing contained in this Agreement, express or implied, is intended to confer upon any other Person any benefits, rights or remedies. VII.11 Nonwaiver. No course of dealing or any delay or failure to exercise any right, power or remedy hereunder on the part of EIF shall operate as a waiver of or otherwise prejudice EIF's rights, powers or remedies. VII.12 Drafting. Each Party acknowledges that its legal counsel participated in the preparation of this Agreement. The Parties therefore stipulate that the rule of construction that ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement to favor any Party against the other. IN WITNESS WHEREOF, the parties hereto each has caused this Agreement to be executed by its duly authorized officer all as of the day and year first set forth above. ENERGY INCOME FUND, L.P. By: EIF General Partner, L.L.C., its General Partner By: /s/ Robert D. Gershen, A Managing Director FORELAND CORPORATION By: /s/ N. Thomas Steele, President SCHEDULE 4.1 The following schedule sets forth the number of shares of common stock issuable pursuant to outstanding options, warrants, calls, subscriptions, rights, agreements or commitments of any character obligating Foreland to issue any Shares or securities convertible into or exchangeable for or evidencing the right to purchase or subscribe for any Capital Stock of Foreland: Reason for Potential Shares Issuance Issuable - ----------------------- ----------- Preferred Stock 1991 Series 6,667 1994 Series 51,047 1995 Series 116,368 1998 Series 333,333 Options 1,222,334 Warrants 1,546,803 Warrants to Purchase 43,874 Preferred Stock TOTAL ISSUABLE 3,320,426 The foregoing schedule does not include shares that may be issuable pursuant to applicable anti-dilution provisions respecting the foregoing. EX-10 8 SECURITY AGREEMENT (FORELAND ASPHALT CORPORATION--FIXTURES) This Security Agreement (this "Agreement"), dated as of February 4, 1999, is from FORELAND ASPHALT CORPORATION, a Utah corporation ("Debtor"), to ENERGY INCOME FUND, L.P., a Delaware limited partnership ("Secured Party"). RECITALS A. Foreland Corporation, a Nevada corporation ("Foreland Corp.") and Secured Party are parties to a Financing Agreement dated as of January 6, 1998 (the "Original Financing Agreement") between Foreland Corp. and Eagle Springs Production Limited Liability Company, a Nevada limited liability company ("Eagle Springs"), as borrowers, and Secured Party. B. By a First Amendment to Financing Agreement dated as of August 10, 1998 (the "First Amendment to Financing Agreement") by and among Foreland Corp., Eagle Springs, Foreland Refining Corporation, a Texas corporation ("Foreland Refining"), Foreland Asset Corporation, a Nevada corporation ("Foreland Asset"), Petrosource Transportation, a Utah corporation now known as Foreland Transportation, Inc. ("Transportation"), and Debtor, as borrowers, and Secured Party, the Original Financing Agreement was amended to, among other things, add Debtor, Foreland Refining, Foreland Asset and Transportation as borrowers thereunder. Foreland Corp., Eagle Springs, Foreland Refining, Foreland Asset, Transportation and Debtor are referred to collectively as "Borrowers". C. By a Second Amendment to Financing Agreement of even date herewith (the "Second Amendment to Financing Agreement") by and among Borrowers and Secured Party, Secured Party agreed to, on the terms and conditions set forth therein, make Loans (as defined below) to Borrowers for the purpose of, among other things, Debtor's acquisition of a membership interest in Cowboy Asphalt Terminal, L.L.C., a Utah limited liability company ("Cowboy"). The Original Financing Agreement as amended by the First Amendment to Financing Agreement and the Second Amendment to Financing Agreement and as it may be further amended from time to time is herein referred to as the "Financing Agreement". D. Pursuant to the Financing Agreement, Secured Party has agreed to extend credit by agreeing to make, subject to the terms and conditions set forth in the Financing Agreement, the following loans (collectively, the "Loans") to Borrowers: (i) a Refinancing Loan (as such term is defined in the Financing Agreement) in an aggregate principal amount of up to $674,279.34; (ii) a Development Loan (as such term is defined in the Financing Agreement) in an aggregate principal amount of up to $7,175,720.66; and (iii) an Acquisition Loan (as such term is defined in the Financing Agreement) in an aggregate principal amount of up to $9,050,000, in each case in one or more advances and for the purposes set forth in the Financing Agreement. E. Debtor, Foreland Refining, Foreland Asset, and Eagle Springs are wholly-owned subsidiaries of Foreland Corp., and Transportation is a wholly- owned subsidiary of Foreland Asset. Debtor is the owner of a 33.33% membership interest in Cowboy. F. Cowboy owns the property, rights and interests described on Exhibit A attached hereto (the "Cowboy Properties"). G. It is a condition precedent to such extension of credit by Secured Party pursuant to the Financing Agreement that, among other things, Debtor shall have executed and delivered to Secured Party a pledge and security agreement granting to Secured Party a security interest in the Collateral (as defined below). AGREEMENT In consideration of the foregoing recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Secured Party to extend such credit under the Financing Agreement, Debtor hereby agrees with Secured Party as follows: ARTICLE I DEFINITIONS AND REFERENCES Section 1.1. General Definitions. As used herein, the terms "Agreement," "Debtor," "Secured Party," "Foreland Corp.," "Original Financing Agreement," "Eagle Springs," "First Amendment to Financing Agreement," "Foreland Refining," "Foreland Asset," "Transportation," "Borrowers," "Second Amendment to Financing Agreement," "Cowboy," "Financing Agreement," "Loans" and "Cowboy Properties" shall have the meanings ascribed thereto above, and the following terms shall have the following meanings: (a) The term "Acquisition Note" shall mean the Acquisition Note, dated as of January 6, 1998, in the maximum principal amount of $2,327,000 made by Foreland Corp. and Eagle Springs, as amended and supplemented by First Allonge to Acquisition Note, dated August 10, 1998, and executed by Borrowers, which, among other things, added Foreland Refining, Foreland Asset, Transportation and Debtor as makers and obligors thereunder. (b) The term "Affiliate" shall mean, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such Person, and any other Person that is an officer, director, or full-time employee of such other Person. (c) The term "Business Day" shall mean any day on which national banking institutions in Massachusetts are open for the transaction of banking business. (d) The term "Code" shall mean the Uniform Commercial Code currently in effect in the Commonwealth of Massachusetts; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, priority or exercise of remedies of Secured Party's security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the Commonwealth of Massachusetts, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, priority or exercise of remedies and for purposes of definitions related to such provisions. (e) The term "Collateral" shall mean all property of whatever type, in which Secured Party at any time has a security interest pursuant to Section 2.1. (f) The term "Commitment" shall mean the agreement or commitment by Secured Party to make loans or otherwise extend credit to Borrowers under the Financing Agreement, and any other agreement, commitment, statement of terms or other document contemplating the making of loans or advances or other extension of credit by Secured Party to or for the account of Borrowers which is now or at any time hereafter intended to be secured by the Collateral under this Agreement. (g) The term "Cowboy Real Property" shall mean the real property described on Exhibit A attached hereto, located in Davis County, Utah, the legal description of which is attached as Exhibit B hereto. (h) The term "Default" shall mean any Event of Default or any event that with the giving of notice or the passage of time, or both, would constitute an Event of Default. (i) The term "Development Note" shall mean the Development Note, dated as of January 6, 1998, in the maximum principal amount of $13,893,000 made by Foreland Corp. and Eagle Springs, as amended and supplemented by First Allonge to Development Note, dated August 10, 1998, and executed by Borrowers, which, among other things, added Foreland Refining, Foreland Asset, Transportation and Debtor as makers and obligors thereunder. (j) The term "Environmental Laws" shall have the meaning ascribed thereto in Subsection 3.1(f). (k) The term "Event of Default" shall have the meaning ascribed thereto in Section 5.1. (l) The term "Fixtures" shall have the meaning ascribed thereto in Subsection 2.1(a). (m) The term "Hazardous Materials" shall have the meaning ascribed thereto in Subsection 3.1(f). (n) The term "Hydrocarbons" shall have the meaning ascribed thereto in the Refinery Deed of Trust. (o) The terms "Indemnified Party" and "Indemnified Parties" shall have the meanings ascribed thereto in Article VI. (p) The term "Lien" shall mean any lien, security interest, burden, adverse claim, option, put, call, warrant or other charge, encumbrance or restriction of any kind. (q) The term "Notes" shall mean the Refinancing Note, the Development Note and the Acquisition Note. (r) The term "Obligations" shall mean all present and future indebtedness, obligations and liabilities of whatever type which are or shall be secured pursuant to Section 2.2. (s) The term "Obligation Documents" shall mean this Agreement, the Financing Agreement, the Notes, and all other documents and instruments under, by reason of which, or pursuant to which any or all of the Obligations are evidenced, governed, secured or otherwise dealt with, and all other agreements, certificates, legal opinions, documents, instruments and other writings heretofore or hereafter delivered in connection herewith or therewith. (t) The term "Other Collateral" shall mean all property, rights and interests (present and future, personal and real, tangible and intangible) of Borrowers (whether now owned or hereafter acquired by operation of law or otherwise), or in which Borrowers otherwise (whether now or hereafter) have any rights, including, without limitation, all fixtures, accounts, goods, inventory, instruments, equipment, chattel paper, documents and general intangibles (as such terms are defined in the Code), that now or hereafter constitute or are intended to constitute security for any of the Obligations under any Obligation Document but that do not constitute Collateral under this Agreement. (u) The term "Other Liable Party" shall mean any Person, other than Debtor, who may now or may at any time hereafter be primarily or secondarily liable for any of the Obligations or who may now or may at any time hereafter have granted to Secured Party a security interest or lien upon any property as security for the Obligations including, without limitation, Borrowers. (v) The term "Person" shall mean an individual, corporation, association, partnership, limited liability company, joint stock company, joint venture, trust or trustee thereof, estate or executor thereof, unincorporated organization or joint venture, court or governmental unit or any agency or subdivision thereof, or any legally recognizable entity. (w) The term "Proposed Hydrocarbon Contracts" shall have the meaning ascribed thereto in Section 3.2(t). (x) The term "Refinancing Note" shall mean the Refinancing Note, dated as of January 6, 1998, in the maximum principal amount of $680,000 made by Foreland Corp. and Eagle Springs, as amended and supplemented by First Allonge to Refinancing Note, dated August 10, 1998, and executed by Borrowers, which, among other things, added Foreland Refining, Foreland Asset, Transportation and Debtor as makers and obligors thereunder. (y) The term "Refinery Deed of Trust" shall mean the Deed of Trust, Security Agreement, Assignment of Rents, Profits and Proceeds, Financing Statement and Fixture Filing dated as of August 11, 1998, from Foreland Corp., Foreland Refining and Foreland Asset, as debtors, to First American Title Company of Nevada, as trustee for the benefit of Secured Party, and recorded or to be recorded in the real property records of Nye County, State of Nevada. (z) The term "Refinery Facilities" shall mean (i) the refinery and related facilities located in part in the E/2 SE/4 of Section 24, T. 9 N., R. 56 E., M.D.M., County of Nye, State of Nevada, and sometimes referred to as the Eagle Springs Refinery, and (ii) the refinery and related facilities located in part on 63 acres within or adjacent to the Tonopah Airport, County of Nye, State of Nevada. (aa) The term "Related Person" shall mean Secured Party, each Affiliate of Secured Party, each Other Liable Party and Cowboy. (bb) The term "RTI Agreement" shall mean that certain Assignment and Agreement entered into on September 11, 1998 by and among Cowboy, Crown Asphalt Products Company, a Utah corporation, Debtor and Refinery Technologies, Inc., a Utah corporation, a true and correct copy of which has previously been furnished to Secured Party. Section 1.2. References. Reference is hereby made to the Financing Agreement for a statement of the terms thereof. All capitalized terms used in this Agreement which are defined in the Financing Agreement and not otherwise defined herein shall have the same meanings herein as set forth therein. All terms used in this Agreement which are defined in Article 9 of the Code and not otherwise defined herein or in the Financing Agreement shall have the same meanings herein as set forth therein, except where the context otherwise requires. Section 1.3. Exhibits and Schedules. All exhibits and schedules attached to this Agreement are a part hereof for all purposes. Section 1.4. Amendment of Defined Instruments. Unless the context otherwise requires or unless otherwise provided herein, references in this Agreement to a particular agreement, instrument or document (including without limitation, references in Section 2.1) also refer to and include all renewals, extensions, amendments, modifications, supplements or restatements of any such agreement, instrument or document, provided that nothing contained in this Section 1.4 shall be construed to authorize any Person to execute or enter into any such renewal, extension, amendment, modification, supplement or restatement. Section 1.5. References and Titles. All references in this Agreement to Exhibits, Schedules, Articles, Sections, Subsections, and other subdivisions refer to the Exhibits, Schedules, Articles, Sections, Subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles and headings appearing at the beginning of any subdivision are for convenience only and do not constitute any part of any such subdivision and shall be disregarded in construing the language contained in this Agreement. The words "this Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Section" and "this Subsection" and similar phrases refer only to the Sections or Subsections hereof in which the phrase occurs. The word "or" is not exclusive. Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender. Words in the singular form shall be construed to include the plural, and words in the plural form shall be construed to include the singular, unless the context otherwise requires. ARTICLE II SECURITY INTEREST Section 2.1. Grant of Security Interest. As security for all of the Obligations, Debtor hereby pledges and assigns to Secured Party and grants to and for the benefit of Secured Party a continuing security interest in all of the following whether now owned or hereafter acquired (by operation of law of otherwise): (a) Fixtures. All fixtures in any form and of any kind located on the Cowboy Real Property, whether now or hereafter existing, which are owned by Debtor or in which Debtor otherwise has any rights (any and all of the foregoing herein collectively called "Fixtures"). (b) Proceeds. All proceeds and products of, and accessions to, any and all of the foregoing and, to the extent not otherwise included, any payments under insurance (whether or not Secured Party is the loss payee thereof) or under any indemnity, warranty or guaranty by reason of loss to or otherwise with respect to any of the foregoing. In each case, the foregoing shall be covered by this Agreement, whether Debtor's ownership or other rights therein are presently held or hereafter acquired (by operation of law or otherwise) and howsoever Debtor's interests therein may arise or appear (whether by ownership, security interest, claim or otherwise). Section 2.2. Obligations Secured. The security interest created hereby in the Collateral constitutes a continuing security interest for all of the following obligations, indebtedness and liabilities, whether now existing or hereafter incurred or arising: (a) Credit Payment. The payment by Borrowers, as and when due and payable, of all amounts from time to time owing by Borrowers, or any of them, under or with respect to the Financing Agreement, the Notes and the other Obligation Documents or any other instrument now or hereafter delivered in connection with or as security for the Financing Agreement, the Notes or the other Obligation Documents or any part thereof. (b) Other Indebtedness. All loans and future advances made by Secured Party to Borrowers, or any of them, and all other debts, obligations and liabilities of every kind and character of Borrowers, or any of them, now or hereafter existing in favor of Secured Party, whether such debts, obligations or liabilities be direct or indirect, primary or secondary, joint or several, fixed or contingent, and whether originally payable to Secured Party or to a third party and subsequently acquired by Secured Party and whether such debts, obligations or liabilities are evidenced by notes, open account, overdraft, indorsement, security agreement, guaranty or otherwise (it being contemplated that one or more of Borrowers may hereafter become indebted to Secured Party in further sum or sums but Secured Party shall have no obligation to extend further indebtedness by reason of this Agreement). (c) Performance. The due performance and observance by Borrowers of all of their other obligations and undertakings from time to time existing under or with respect to the Obligation Documents or any other instrument now or hereafter delivered in connection with or as security for any of the Obligation Documents. (d) Renewals. All renewals, extensions, amendments, modifications, supplements or restatements of or substitutions for any of the foregoing. Section 2.3 Delivery of Collateral. All certificates and instruments representing or evidencing the Collateral shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Secured Party shall have the right at any time, in its discretion and without notice to Debtor, to transfer to or register in the name of Secured Party or any of its nominees any or all of the Collateral. Section 2.4 Limitation on Recourse. Except as otherwise provided herein, in no event shall Debtor have any personal liability for payment of principal and interest on the Notes. Secured Party shall look solely to the Collateral for the payment of such principal and interest and shall not seek a deficiency or other personal judgment against Debtor for such principal and interest in the event that any sale of the Collateral shall be insufficient to satisfy the Notes. Nothing herein contained shall, however, impair any right, remedy or security of Secured Party with respect to the Collateral under this Agreement, the Notes, the Financing Agreement or any other Obligation Document, nor limit Debtor's obligations to perform any of Debtor's other obligations under this Agreement, the Notes, the Financing Agreement or any other Obligation Document, including, without limitation, Secured Party's obligation to indemnify Secured Party as set forth in the Obligation Documents. Notwithstanding the foregoing limitation of recourse, Debtor shall remain fully liable for: (a) Fraud, breach of trust, or any material misrepresentation by Debtor or any other Borrower in the Obligation Documents or any other documents or instruments evidencing, securing or relating to the Loans; (b) Waste of a material nature to any part of the Collateral or the Other Collateral caused by Debtor's or any other Borrower's gross negligence or willful and wanton neglect or abuse of the Collateral or the Other Collateral or, with respect to portions of the Collateral and Other Collateral not operated by any of the Borrowers, failure to exert reasonable control appropriate for an owner that is not also the operator; (c) Failure to pay taxes, insurance, assessments, charges for labor or materials, or other charges, fees or assessments that can create or result in liens on any portion of the Collateral or the Other Collateral; (d) Any beaches of warranty or defects of title to the Collateral or the Other Collateral; (e) Any breach of a warranty or representation contained in this Agreement or any other Obligation Document; failure to perform any covenant or other agreement contained in this Agreement or any other Obligation Document, or any indemnity contained in this Agreement or any other Obligation Document; (f) Any attempt to communicate in any manner with the purchasers of Hydrocarbons or other products from the Collateral or Other Collateral after the delivery to such purchasers of a notice directing payments to be made directly to Secured Party (as set forth in section 3.1 of the Refinery Deed of Trust) in an attempt to hinder or interfere with the rights of Secured Party; (g) The return of, or reimbursement for, all monies received by Debtor or any other Borrower from the purchasers of Hydrocarbons or other products from the Collateral or Other Collateral for monies attributable to Hydrocarbons or other products from the Collateral or Other Collateral after receipt by any such purchaser of a notice directing payments to be made directly to Secured Party; (h) Any attempt to hinder or interfere with the foreclosure of or other realization on the Collateral or the Other Collateral (whether by judicial action, power of sale, trustee's sale or otherwise), including without limitation the filing of a lis pendens, the initiation of any lawsuit or the requesting of injunctive relief from any court or tribunal, having the effect of hindering or delaying the exercise by Secured Party (or the Trustee under the Refinery Deed of Trust) of any right or remedy under this Agreement or any other Obligation Document; and (i) After an Event of Default, Debtor or any other Borrower shall fail or refuse to execute and deliver to Secured Party any instrument reasonably requested by Secured Party and prepared at Borrowers' expense, which is necessary to fully vest title to the Collateral or the Other Collateral in Secured Party or the purchaser(s) of all or part of the Collateral or the Other Collateral pursuant to any sale as provided for in this Agreement or any other Obligation Document. Debtor shall be fully and personally liable for all attorneys' fees and costs and expenses incurred by Debtor arising out of any of the foregoing paragraphs (a) through (i). ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS Section 3.1. Representations and Warranties. Debtor represents and warrants as follows: (a) Corporate Matters; Enforceability. Debtor is a corporation duly organized, validly existing and in good standing in the State of Utah, and Debtor is duly qualified as a foreign corporation and in good standing in each jurisdiction where such qualification is necessary or appropriate. The execution and delivery of this Agreement and the performance by Debtor of the transactions contemplated herein are within Debtor's corporate powers and have been duly authorized by all necessary action, corporate and otherwise. This Agreement constitutes the legal, valid and binding obligations of Debtor, enforceable against Debtor in accordance with its terms. (b) Ownership and Liens. Debtor has good and marketable title to the Collateral free and clear of all Liens, except for the security interest created by this Agreement, the RTI Agreement and the security interests and other encumbrances expressly permitted by the Financing Agreement. No dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Collateral. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except such as may have been filed in favor of Secured Party relating to this Agreement and such as may have been filed to perfect or protect any security interest expressly permitted by the Financing Agreement. Cowboy is the owner of record of the Cowboy Real Property, a true and correct legal description of which is set forth on Exhibit B hereto. (c) No Conflicts or Consents. Neither the ownership or the intended use of the Collateral by Debtor, nor the grant of the security interest by Debtor to Secured Party herein, nor the exercise by Secured Party of its rights or remedies hereunder, will (i) conflict with any provision of (A) any applicable domestic or foreign law, statute, rule or regulation, (B) the articles or certificate of incorporation, charter or bylaws of Debtor, or (C) any agreement, judgment, license, order or permit applicable to or binding upon Debtor, or (ii) result in or require the creation of any lien, charge or encumbrance upon any assets or properties of Debtor or any Related Person except as expressly contemplated in the Obligation Documents. Except as expressly contemplated in the Obligation Documents or the LLC Agreement, no consent, approval, authorization or order of, and no notice to or filing with any court, governmental authority or third party is required in connection with the grant by Debtor of the security interest herein, or the exercise by Secured Party of its rights and remedies hereunder. (d) Security Interest. Debtor has and will have at all times full right, power and authority to grant a security interest in the Collateral to Secured Party in the manner provided herein, free and clear of any Lien, except as expressly permitted in the Financing Agreement. This Agreement creates a valid and binding security interest in favor of Secured Party in the Collateral securing the Obligations. The taking possession by Secured Party of all instruments and cash constituting Collateral from time to time, the filing of the financing statements delivered concurrently herewith by Debtor to Secured Party will perfect, and establish the first priority of, Secured Party's security interest hereunder in the Collateral securing the Obligations. No further or subsequent filing, recording, registration, other public notice or other action is necessary or desirable to perfect or otherwise continue, preserve or protect such security interest except for continuation statements or filings upon the occurrence of the events stated in Subsection 3.3(m). (e) Location of Borrowers, Records and Collateral. Schedule 3.1(e) sets forth the addresses of Borrowers' chief executive offices and principal places of business, the offices where the records concerning the Collateral and the Other Collateral are kept, and the addresses where the Collateral and the Other Collateral is located. (f) Environmental. (i) The Collateral and the Other Collateral is, and, except as previously disclosed to Secured Party in writing, to the best of Debtor's knowledge, at all times has been, operated in compliance with all applicable Environmental Laws (as hereinafter defined); and, except as previously disclosed to Secured Party in writing, to the best of Debtor's knowledge, no condition exists with respect to the Collateral, the Other Collateral, or other property owned or operated by Borrowers or any affiliate of or party related to Borrowers that would or could reasonably be expected to subject Borrowers, any affiliate of or party related to Borrowers, or Secured Party to any damages (including without limitation, actual, consequential, exemplary and punitive damages), material liability (absolute or contingent, determined or determinable), penalties, injunctive relief or cleanup costs under any applicable Environmental Laws, or that require or could reasonably be expected to require cleanup, removal, remedial action or other response by Borrowers, any affiliate of or party related to Borrowers, or Secured Party pursuant to any applicable Environmental Laws. (ii) Borrowers have not received and, to the best of Debtor's knowledge, none of their affiliates have received, and none of Borrowers' or their affiliates' or related parties' predecessors in title to the Collateral and the Other Collateral have received, any notice from a governmental agency asserting or alleging a violation of any Environmental Laws as they relate to the Collateral and the Other Collateral. (iii) There are no pending or threatened suits, actions, claims or proceedings against Borrowers or their affiliates or related parties or, to the best of Debtor's knowledge, Borrowers' or their affiliates' predecessors in title, arising from or related to, directly or indirectly, any Environmental Laws as they relate to the Collateral and the Other Collateral. (iv) Neither Borrowers, any affiliate of or party related to Borrowers, any part of the Collateral or the Other Collateral, nor, to the best of Debtor's knowledge, Borrowers' or any affiliate's or related parties' predecessors are subject to any judgment, decree, order or citation related to or arising out of any Environmental Laws, and neither Borrowers nor any affiliate or party related to Borrowers have been named or listed as a potentially responsible party by any governmental or other entity in a matter arising under or relating, directly or indirectly, to any Environmental Laws. (v) Borrowers have obtained or caused to be obtained all permits, licenses, and approvals required under all Environmental Laws to operate the Collateral and the Other Collateral. (vi) Except as previously disclosed to Secured Party in writing, there are not now, nor to the best of Debtor's knowledge have there ever been, Hazardous Materials (as hereinafter defined) discharged, leaked, spilled or released in, on, to, from or at the Collateral, the Other Collateral or other properties owned or operated by Borrowers or any of their affiliates or stored, treated, or recycled at or in tanks or other facilities thereon or related thereto which give rise or could reasonably be expected to give rise to material liability under any Environmental Laws. (vii) The use which Borrowers make and intend to make of the Collateral and the Other Collateral will not result in: (a) the use or storage of any Hazardous Materials on, in or in connection with the Collateral or the Other Collateral, or disposal of any Hazardous Materials from the Collateral or the Other Collateral except in compliance with all applicable Environmental Laws, or (b) the treatment, processing, discharge or release of any Hazardous Materials on, in, to or from the Collateral or the Other Collateral except in compliance with all applicable Environmental Laws. (viii) There are no underground storage tanks, surface impoundments, or wastewater injection wells located on or in the Collateral or the Other Collateral. As used herein, the term "Environmental Laws" shall mean any one or more of the following: (1) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986, 42 U.S.C. S 9601 et seq. ("CERCLA"); (2) the Resource Conservation and Recovery Act, as amended by the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C. S 6901 et seq. ("RCRA"); (3) the Clean Air Act, 42 U.S.C. S 7401 et seq.; (4) the Federal Water Pollution Control Act, 33 U.S.C. S 1251 et seq.; (5) the Toxic Substances Control Act, 15 U.S.C. S 2601 et seq.; (6) the Federal Safe Drinking Water Act, 42 U.S.C. SS 300f to 300j-11; (7) the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. S 1101 et seq.; (8) the Hazardous Materials Transportation Act, 49 U.S.C. S 1801 et seq.; and (9) all other foreign, federal, state, tribal and local laws (whether common or statutory), rules, regulations, consent agreements, compliance schedules, and orders directly and/or indirectly relating to public health and safety, air pollution, water pollution, noise control, wetlands, oceans, waterways, and/or the presence, use, generation, manufacture, transportation, processing, treatment, handling, discharge, release, disposal, or recovery of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or materials and/or underground storage tanks, including, without limitation, all rules, regulations and orders of all state and local governmental bodies, authorities and agencies pertaining or relating to the exploration, development, regulation and conservation of oil and gas resources, as each of the foregoing laws, rules, regulations, consent agreements, compliance schedules and orders may be enacted, amended, supplemented, or reauthorized from time to time. As used herein, the term "Hazardous Materials" shall mean any one or more of the following substances, wastes and materials: (1) any substance, waste or material defined as a "hazardous substance," "hazardous material," "hazardous waste," "pollutant," "contaminant," "toxic material," or "toxic substance," in any of the applicable Environmental Laws, or in the standards, criteria, rules and/or regulations promulgated pursuant to any of said Environmental Laws (including without limitation Hydrocarbons); and (2) any substance, waste or material, the presence of which requires investigation or remediation under any Environmental Laws. Section 3.2. Affirmative Covenants. Unless Secured Party shall otherwise consent in writing, Debtor shall at all times comply with the covenants and agreements contained in this Section 3.2 from the date hereof and so long as any part of the Obligations or the Commitment is outstanding. (a) Ownership and Liens. Debtor shall maintain good and marketable title to all Collateral free and clear of all liens, security interests, adverse claims or other charges or encumbrances, except for the security interest created by this Agreement and the security interests and other encumbrances expressly permitted by the Financing Agreement. Debtor shall use its best efforts to resolve any dispute, right of setoff, counterclaim or defense with respect to all or any part of the Collateral. Debtor shall cause to be terminated any financing statement or other security instrument with respect to the Collateral, except such as may exist or as may have been filed in favor of Secured Party and such as may exist or as may have been filed to perfect or protect any security interest expressly permitted by the Financing Agreement. Debtor shall defend Secured Party's right, title and special property and security interest in and to the Collateral against the claims of any Person. (b) Further Assurances. Debtor shall, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable or that Secured Party may reasonably request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest; (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to the Collateral; or (iii) to otherwise effect the purposes of this Agreement, including without limitation (A) executing and filing such financing or continuation statements, or amendments thereto, as may be necessary or desirable or that Secured Party may request in order to perfect and preserve the security interest created or purported to be created hereby, and (B) furnishing to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (c) Information. Debtor shall furnish to Secured Party any information that Secured Party may from time to time reasonably request concerning any covenant, provision or representation contained herein or any other matter in connection with the Collateral or Obligation Documents. (d) Chattel Paper, Documents, Instruments and Cash. Debtor shall at all times cause any certificates, chattel paper, documents or instruments which are a part of the Collateral to be valid and genuine. Debtor shall cause all chattel paper included in the Collateral to have only one original counterpart which constitutes chattel paper or collateral within the meaning of the Code or the law of any applicable jurisdiction. Upon request by Secured Party, Debtor shall deliver to Secured Party all cash and all originals of certificates, chattel paper, documents or instruments which are included in the Collateral. Upon request by Secured Party, Debtor shall mark each chattel paper which is a part of the Collateral with a legend indicating that such chattel paper is subject to the security interest granted by this Agreement. (e) Punctual Payment and Performance. Debtor shall, and shall cause the other Borrowers to, duly and punctually pay the principal and interest on the Loans and to perform all its obligations and covenants under the Obligation Documents. (f) Existence; Maintenance of Collateral. Debtor shall, and shall cause each other Borrower to, do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises, except when failure to do so would not have a material adverse effect on Debtor or such other Borrower, as the case may be. Debtor shall, and shall cause each other Borrower to, cause all of its property, rights and interests that constitute Collateral or Other Collateral under any Obligation Document and its business to be maintained and kept, in accordance with sound field practices, in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof. (g) Title to Properties. Debtor shall, and shall cause each other Borrower to, maintain good and marketable title to all of its property, rights and interests that constitute Collateral or Other Collateral under any Obligation Document, free and clear of all Liens, except for Liens expressly permitted by the Financing Agreement. Debtor shall, and shall cause each other Borrower to, warrant and forever defend its right, title and interest in such property and assets against the claims and demands of every Person whatsoever claiming or which may claim the same or any part thereof. Debtor shall cause Cowboy Asphalt Terminal, L.L.C. to maintain good and marketable title to the Cowboy Real Property and the buildings, improvements and structures described on Exhibit A hereto or located on the Cowboy Real Property by or on behalf of Cowboy after the date of this Agreement (excluding buildings, improvements and structures either (i) located on the Cowboy property by a member of Cowboy other than Debtor on its own behalf that do not constitute Cowboy property or (ii) designated for the exclusive use of a member of Cowboy other than Debtor in accordance with the LLC Agreement), and to warrant and forever defend its right, title and interest in such property and assets against the claims and demands of every Person whatsoever claiming or which may claim the same or any part thereof. (h) Insurance. Debtor shall, and shall cause each other Borrower to, acquire and continue to maintain, with financially sound and reputable insurers, insurance with respect to its respective properties and business against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated; provided, however, that Debtor shall, and Debtor shall cause each other Borrower to, maintain liability insurance in the amount of not less than $2,000,000 with a deductible not to exceed $25,000 per claim. Debtor shall, and shall cause each other Borrower to, furnish or cause to be furnished copies of binders relating to such insurance to Secured Party prior to Funding and from time to time a summary of the insurance coverage of Debtor and the other Borrowers in form and substance satisfactory to Secured Party and if requested to furnish Secured Party copies of the applicable policies. In the case of any fire, accident or other casualty causing loss or damage to the properties of Debtor or any other Borrower, Debtor shall, and shall cause such Borrower to, use the proceeds of such policies (i) to repair or replace the damaged property, or (ii) subject to Secured Party's prior written consent and notwithstanding any restriction on prepayment, to prepay the Obligations without premium or penalty. (i) Taxes and Other Claims. Debtor shall, and shall cause each other Borrower to, duly pay and discharge before the same shall become due or delinquent all taxes, assessments and other governmental charges imposed upon Debtor or such Borrower, as the case may be, and its respective properties, sales and activities, or any part thereof, or upon the income or profits therefrom, or burdening any of Debtor's or such Borrower's properties or assets, as the case may be, as well as all claims for labor, materials or supplies, including all claims incurred in connection with the operation of Debtor's and such Borrower's respective businesses, properties and assets, which if unpaid might by law become a lien or charge upon any of Debtor's or such Borrower's property; provided, however, that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested by Debtor or such Borrower, as the case may be, in good faith by appropriate proceedings and if Debtor or such Borrower, as the case may be, shall have set aside on its books adequate reserves with respect thereto; and provided, further, that Debtor shall, and shall cause each other Borrower to, pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. (j) Securities Filings. Debtor shall, and shall cause each other Borrower to, duly file or cause to be filed, within the times and within the manner prescribed by law (including all permitted extensions), all federal and state securities and blue sky filings that are required to be filed by, or with respect to, Debtor or such Borrower, as the case may be, including without limitation all filings required to be made pursuant to the Securities Exchange Act of 1934, as amended. Debtor shall, and shall cause each other Borrower to, deliver to Secured Party copies of all filings made by such Person with the Securities and Exchange Commission and any state securities commission or agency within three days of such filing. If a filing to be made by Debtor or any other Borrower with the Securities and Exchange Commission or a state securities commission or agency refers to Secured Party, preliminary copies of such filing shall be delivered to Secured Party and to Secured Party's counsel no later than five Business Days prior to such filing with a final copy delivered to Secured Party at the time of filing. Debtor shall, and shall cause each other Borrower to, deliver to Secured Party copies of all press releases at the time of release; unless such release refers to Secured Party, in which case advance copies shall be delivered to Secured Party and to Secured Party's counsel no later than two Business Days prior to such release. (k) Inspection of Properties and Books. Debtor shall, and shall cause each other Borrower to, permit Secured Party and its authorized representatives to (i) visit and inspect any of its properties and to examine its books and records (and to make copies thereof and extracts therefrom; provided, that Secured Party will use its reasonable efforts to preserve the confidentiality of any information derived therefrom), and (ii) discuss the affairs, finances and accounts of Debtor or such Borrower, as the case may be, with, and to be advised as to the same by, the officers of Debtor and such Borrower, independent accountants, and independent engineers all at such reasonable times and intervals as Secured Party may reasonably request. (l) Compliance with Laws, Contracts, Licenses and Permits. Debtor shall, and shall cause each other Borrower to, comply with (i) all Permits and Requirements of Law, (ii) the provisions of its charter or organizational documents and bylaws, (iii) all agreements and instruments by which it or any of its properties may be bound, and (iv) all applicable decrees, orders and judgments, except in each case where noncompliance would not have a material adverse effect on the business, assets or financial condition of Debtor or such Borrower, as the case may be. If at any time while any part of the Obligations or the Commitment is outstanding, any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or required in order that Debtor or any other Borrower may fulfill any of its obligations under any Obligation Document, Debtor shall, and shall cause such Borrower to, immediately take all reasonable steps within its power to obtain such authorization, consent, approval, permit or license and furnish Secured Party with evidence thereof. (m) Litigation. Debtor shall, and shall cause each other Borrower to, promptly give Secured Party notice of all legal or arbitral proceedings, and of all proceedings before any governmental or regulatory authority or agency, to which Debtor or such Borrower is a party or which affects Debtor or such Borrower and of which Debtor or such Borrower is aware, except for proceedings before any governmental or regulatory authority or agency occurring in the ordinary course of Debtor's or such Borrower's business, and that would not have a material adverse effect upon Debtor's or such Borrower's business or its properties and assets if determined adversely to Debtor or such Borrower, as the case may be. (n) Notices. Debtor shall, and shall cause each other Borrower to, promptly after acquiring knowledge thereof, notify Secured Party in writing of the occurrence of any Event of Default and of any material adverse change in the business, assets or financial condition of Debtor or such Borrower, as the case may be. If any Person shall give any notice or take any other action with respect to a claimed default (whether or not constituting an Event of Default) under any Obligation Document or any other note, evidence of indebtedness, indenture or other obligation to which or with respect to which Debtor or any other Borrower is a party or obligor, whether as principal or surety, Debtor shall, and shall cause such Borrower to, forthwith give written notice thereof to Secured Party, describing the notice or action and the nature of the claimed default. Debtor shall, and shall cause each other Borrower to, promptly notify Secured Party (i) if any representation or warranty of Debtor or such Borrower contained in this Agreement or any other Obligation Document is discovered to be or becomes untrue, or (ii) if Debtor or such Borrower fails to perform or comply with any covenant or agreement contained in this Agreement or any other Obligation Document or it is reasonably anticipated that Debtor or such Borrower will be unable to perform or comply with any covenant or agreement contained in this Agreement or any other Obligation Document. Debtor shall, and shall cause each other Borrower to, cause all the representations and warranties of Borrowers contained in this Agreement and the other Obligation Documents to be true and correct in all material respects from time to time and at all times. (o) Use of Loan Proceeds. Debtor shall, and shall cause each other Borrower to, use the proceeds of the Loans solely for the purposes expressly permitted by the Financing Agreement. Debtor shall, and shall cause each other Borrower to, maintain any funds that have been advanced for such purposes, but not expended, at a depository institution satisfactory to Secured Party and Debtor shall, and shall cause such Borrower to, deliver copies of all invoices for expenditure of such funds to Secured Party. (p) Key Employee. Debtor shall cause Foreland Corp. to continue to employ N. Thomas Steele as President of Foreland Corp. on a full-time basis with substantially the same responsibilities as of the date of this Agreement. (q) Environmental Laws Compliance. Debtor shall, and shall cause each other Borrower to: (i) Comply with all applicable Environmental Laws as they relate to the Properties and shall, and shall cause each other Borrower to, maintain and obtain, or cause to be maintained and obtained, all permits, licenses and approvals now or hereafter required under all applicable Environmental Laws as they relate to the Collateral and the Other Collateral; (ii) Not do or permit anything to be done that will subject the Collateral or the Other Collateral, Debtor, any other Borrower or Secured Party to any liability under any applicable Environmental Laws as they relate to the Collateral and the Other Collateral, assuming disclosure to governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Collateral or the Other Collateral; (iii) Promptly notify Secured Party in writing of any Environmental Complaint relating to the Collateral or the Other Collateral which is known to Debtor or such Borrower, as the case may be, or any other existing, pending or threatened investigation or inquiry by any governmental authority relating to the Collateral or the Other Collateral known to Debtor or such Borrower, as the case may be, and in connection with any applicable Environmental Laws. (iv) Take, or cause to be taken, all steps necessary to determine that no Hazardous Materials have been: (i) used or stored on, in or in connection with any Collateral or Other Collateral that Debtor or any other Borrower acquires with any funds that Debtor or such Borrower receives from Secured Party in accordance with the Financing Agreement, or disposed from such Collateral or Other Collateral, or (ii) treated, processed, discharged, or released on, to, in or from such Collateral or Other Collateral, except, in each case, in full compliance with all applicable Environmental Laws; (v) Not cause or permit: (i) the use or storage of Hazardous Materials on, in or in any manner in connection with the Collateral or Other Collateral, or (ii) the treatment, processing, discharge or release of any Hazardous Materials on, to, in or from the Collateral or Other Collateral, except, in each case, in full compliance with all applicable Environmental Laws; (vi) Keep, or cause the Collateral and the Other Collateral to be kept, free of any and all Hazardous Materials, and shall, and shall cause each other Borrower to, remove the same (or if removal is prohibited by applicable law, shall, and shall cause each other Borrower to, take whatever action is required by applicable law) promptly upon discovery of such Hazardous Materials at Borrowers' sole cost and expense, except in full compliance with all applicable Environmental Laws; and (vii) Provide, upon Secured Party's reasonable request, at any time, and from time to time, inspections, tests and audits of the Collateral and the Other Collateral from an engineering or consulting firm approved by Secured Party indicating the presence or absence of Hazardous Materials on the Collateral and the Other Collateral and compliance with all applicable Environmental Laws. (r) Change of Control. Debtor shall, and shall cause each other Borrower to, use its best efforts to not permit a Change of Control to occur and shall, and shall cause each other Borrower to, notify Secured Party within five Business Days of obtaining information that a Change in Control of such Person may occur or is contemplated by any Person. (s) Operation of Assets. Debtor shall operate the Collateral and shall cause the other Borrowers to operate the Other Collateral, including without limitation the Refinery Facilities, continuously in a good and workmanlike manner, in accordance with the best usage of operators of similar facilities and assets and in accordance with industry standards, and in conformity in all material respects with all applicable laws, rules, regulations and orders of all federal, state, tribal and local governmental bodies, authorities and agencies and in conformity in all material respects with the provisions of all leases, licenses, subleases, sublicenses, permits, easements, rights-of-way, servitudes, franchises, grants, certificates and authorizations or other contracts and agreements comprising a part of the Collateral or Other Collateral. (t) Contract Approval. Debtor shall, and shall cause each other Borrower to, submit to Secured Party for its review and approval at least ten days in advance of the date such Borrower intends to enter into a contract (including a modification or amendment of any existing contract), each proposed contract for the refining, fractionating, treatment, marketing, purchase, sale, transportation, exchange, manufacturing or processing of Hydrocarbons if such contract was not in effect as of the date of this Agreement and has a term of ninety days or more ("Proposed Hydrocarbon Contracts"). Debtor shall not, and shall cause each other Borrower not to, enter into any Proposed Hydrocarbon Contracts that establish pricing and have a term of one year or more or make deliveries thereunder without obtaining Secured Party's prior written approval, which approval shall not be unreasonably withheld if Secured Party's security position is not adversely affected thereby. (u) Additional Information. For so long as any part of the Obligations or the Commitment is outstanding, Debtor shall, and shall cause each other Borrower to, permit Secured Party to substantially participate in, and influence the conduct of, management of Borrowers through the exercise of any and all of the following rights (provided, however, that Secured Party shall have no right to direct the management of any Borrower): (i) promptly provide to Secured Party such information as Secured Party shall reasonably request regarding Debtor's or such Borrower's business, financial condition and prospects; (ii) if Secured Party reasonably believes that financial or other developments affecting Debtor or such Borrower have impaired or are likely to impair Debtor's or such Borrower's ability to perform its obligations under this Agreement, permit Secured Party, upon request, reasonable access to Debtor's and such Borrower's management or Board of Directors to present its views with respect to such developments; (iii) provide to Secured Party the financial information required in Section 7.3 of the Financing Agreement; and (iv) permit Secured Party to make the examinations and inspections of properties, books and records, and to consult with Debtor's and such Borrower's officers, as required in Section 7.11 of the Financing Agreement. Section 3.3. Negative Covenants. Unless Secured Party otherwise consents in writing, Debtor shall at all times comply with the covenants contained in this Section 3.3 from the date hereof and so long as any part of the Obligations or the Commitment is outstanding. (a) Transfer or Encumbrance. Debtor shall not sell, assign (by operation or law or otherwise), transfer, exchange, lease or otherwise dispose of any of the Collateral, nor shall Debtor grant a Lien on or in or execute, file or record any financing statement or other security instrument with respect to the Collateral, nor shall Debtor deliver actual or constructive possession of the Collateral to any other Person, other than (i) Liens or financing statements in favor of Secured Party or expressly permitted by the Financing Agreement; or (ii) sales or leases, other than during the continuance of an Event of Default, of Inventory in the ordinary course of business. (b) Impairment of Security Interest. Debtor shall not take or fail to take any action that would in any manner impair the value or enforceability of Secured Party's security interest in any Collateral. (c) Possession of Collateral. Debtor shall not cause or permit the removal of any item of the Collateral from its possession, control or risk of loss, nor shall Debtor cause or permit the removal of any item of the Collateral from the location specified herein other than removal in connection with (i) sales or leases, other than during the continuance of an Event of Default, of Inventory in the ordinary course of business; or (ii) possession of Collateral by Secured Party or by a bailee selected by Secured Party who is holding the Collateral for the benefit of Secured Party. (d) Compromise of Collateral. Debtor shall not adjust, settle, compromise, amend or modify any of the Collateral, other than any adjustment, settlement, compromise, amendment or modification, other than during the continuance of an Event of Default, of any General Intangible which does not detrimentally affect the rights or benefits of Secured Party hereunder or the value of such General Intangible to Secured Party hereunder. (e) Possession of Chattel Paper, Documents or Instruments. Debtor shall not cause or permit any certificates, chattel paper, documents or instruments which are included in the Collateral at any time to be in the actual or constructive possession of any Person other than Debtor or Secured Party. (f) Use of Proceeds. Debtor shall not, and shall cause each other Borrower not to, use the proceeds of the Loans for any purpose not expressly permitted by the Financing Agreement. Debtor shall not, and shall cause each other Borrower not to, without Secured Party's prior written approval, make any expenditure of the Development Loan in an amount in excess of 110% of the amount stated in the AFE pertaining to such expenditure that was approved by Secured Party. (g) Dividends, Distributions and Redemptions. Debtor shall not, and shall cause each other Borrower not to, declare or pay any dividend, purchase, redeem or otherwise acquire for value any of its stock now or hereafter outstanding, or return any capital or make any other distribution to its stockholders or members, except to the extent such declaration, payment, purchase, redemption, acquisition or return is solely between Borrowers. (h) Nature of Business. Debtor shall not, and shall cause each other Borrower not to, engage in any business other than oil and gas exploration, development, production, processing, refining, transportation and marketing, and business activities ancillary thereto. (i) Restrictions on Liens. Debtor shall not, and shall cause each other Borrower not to, create or incur, or suffer to be created or incurred or to exist, any Lien (other than Liens expressly permitted by the Financing Agreement) upon any of its properties, rights and interests that constitute Collateral or Other Collateral under any of the Obligation Documents, whether now owned or hereafter acquired, or upon the proceeds, income or profits therefrom, and shall, and shall cause each other Borrower to, pay all vendor payables and other trade payables when due. (j) Collateral Sales. Except as set forth in Sections 7.6 and 7.7 of the Financing Agreement, Debtor shall not, and shall cause each other Borrower not to, sell, lease, assign, transfer or otherwise dispose of any of the Collateral or the Other Collateral, except for (i) sales of Hydrocarbons in the ordinary course of Borrowers' respective businesses, and (ii) as otherwise permitted pursuant to the Obligation Documents. (k) Sale or Discount of Receivables. Debtor shall not, and shall cause each other Borrower not to, discount or sell any of their notes receivable or accounts receivable. (l) Affiliate Transactions. Debtor shall not, and shall cause each other Borrower not to, engage in any transaction with any of their Affiliates, except on terms no less favorable than are obtainable in arms- length transactions with third parties. (m) Financing Statement Filings. Debtor recognizes that financing statements pertaining to the Collateral and the Other Collateral have been or may be filed where any Borrower maintains any Collateral or Other Collateral, has its records concerning any Collateral or Other Collateral or has its chief executive office or chief place of business. Without limitation of any other covenant herein, Debtor shall not, and shall cause each other Borrower not to, cause or permit any change to be made in its name, identity or corporate structure, or any change to be made to a jurisdiction other than as represented in Section 3.1(e) in (i) the location of any Collateral or Other Collateral, (ii) the location of any records concerning any Collateral or Other Collateral, or (iii) the location of its chief executive office or principal place of business, or any change to be made to the record owner of the Cowboy Real Property as represented in Subsection 3.1(b), unless such Borrower has notified Secured Party of such change at least thirty days prior to the effective date of such change, and shall have first taken all action required by Secured Party for the purpose of further perfecting or protecting the security interest in favor of Secured Party in the Collateral and Other Collateral. Each notice furnished to Secured Party pursuant to this Subsection 3.3(m) shall expressly state that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purposes of continuing perfection of Secured Party's security interest in the Collateral and Other Collateral. (n) Mergers and Sales of Assets. Debtor shall not, and shall cause each other Borrower not to, merge or consolidate with or into any other entity unless Debtor or such other Borrower, as the case may be, is the surviving entity and no Event of Default has occurred or will occur as a result of such merger or consolidation. Debtor shall not, and shall cause each other Borrower not to, lease, sell or transfer all, or substantially all, of its property assets or business to any other Person, or dispose of or sell any material portion of its assets, property or business, or dispose of any equity in any Affiliate. (o) No Loans or Guarantees to Officers, Directors, Managers or Shareholders/Partners. Debtor shall not, and shall cause each other Borrower not to, directly or indirectly, make any guarantee, loan, advance, extension of credit, commitment to fund, or commitment to satisfy in any way, any debt, liability, or other obligation to pay any Person (except for the other Borrowers), including its officers, directors, managers, employees, shareholders, partners or any Affiliate of such Person, including, without limitation (a) an obligation to any bank under any letter of credit, (b) an obligation to maintain working capital or equity capital of the business other than the initial investment, or (c) an obligation to otherwise maintain the net worth or solvency of the business, with respect to any business in which Debtor or such other Borrower is engaged other than the business described in section 7.18 of the Financing Agreement. Debtor shall not, and shall cause each other Borrower not to, make any repayment on any Indebtedness owed to any of their respective Affiliates, or any shareholder, member, officer, director, manager or Affiliate of such Person, except as expressly permitted pursuant to the Financing Agreement. (p) Foreclosure. Debtor shall not, and shall cause each other Borrower not to, attempt in any way to hinder or interfere with the exercise of the power of sale granted in any of the Obligation Documents, including without limitation the filing of a lis pendens, the initiation of any lawsuit or the requesting of injunctive relief from any court or tribunal, or any other action which would have the effect of hindering or delaying the exercise by Secured Party of any right or remedy under this Agreement or any other Obligation Document, and Debtor shall, and shall cause each other Borrower to execute and deliver to Secured Party any instrument reasonably requested by Secured Party and prepared at Debtor's expense, which is necessary to fully vest title to the Collateral and the Other Collateral or the purchaser(s) of all or part of the Collateral or the Other Collateral pursuant to any sale as provided for in the Obligation Documents. ARTICLE IV POWERS AND AUTHORIZATIONS Section 4.1. Additional Financing Statement Filings. Debtor hereby authorizes Secured Party to file, without the signature of Debtor where permitted by law, one or more financing or continuation statements, and amendments thereto, relating to the Collateral. Debtor further agrees that a carbon, photographic or other reproduction of this Agreement or any financing statement describing any Collateral is sufficient as a financing statement and may be filed in any jurisdiction Secured Party may deem appropriate. Section 4.2. Power of Attorney. Debtor hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact and proxy, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation (i) to obtain and adjust insurance required to be paid to Secured Party pursuant to Section 3.2(h), (ii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (iii) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (i) or clause (ii) above, (iv) to file any claims or take any action or institute any proceedings which Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral, and (v) to execute and file one or more financing or continuation statements, and amendments thereto, relating to the Collateral. Such appointment is coupled with an interest and shall be irrevocable from the date hereof and so long as any part of the Obligations or the Commitment is outstanding. Section 4.3. Performance by Secured Party. If Debtor fails to perform any agreement or obligation contained herein, Secured Party may itself, at its option and in its sole discretion, perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be payable by Debtor under Section 7.4; provided, however, that nothing herein shall impose any obligation of any kind whatsoever on Secured Party to perform under any obligation or agreement of Debtor. ARTICLE V EVENTS OF DEFAULT AND REMEDIES Section 5.1. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" hereunder: (a) Failure of Debtor to pay any fee or other amount due Secured Party under this Agreement within 10 days after the date that any such payment is due; (b) Failure of Debtor to perform or observe any covenant, agreement, indemnity, condition or provision in this Agreement and such failure shall continue for 30 days after written notice of such failure has been given to Debtor; (c) Any of Debtor's representations or warranties made in this Agreement or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any material respect as of the date made or deemed made; or (d) An "Event of Default" as defined in the Financing Agreement shall occur. Section 5.2. Remedies. Upon the occurrence of any Event of Default, or at any time thereafter, in addition to all other rights, powers and remedies herein conferred, conferred in the other Obligation Documents or conferred by operation of law, Secured Party may declare the Obligations immediately due, payable and performable, including all principal and interest remaining unpaid on the Notes and all other amounts secured hereby or thereby, all without demand, presentment or notice, all of which are hereby expressly waived; and from time to time in its discretion, without limitation and without notice except as expressly provided below Secured Party may: (a) Exercise with respect to the Collateral all the rights and remedies of a secured party on default under the Code (whether or not the Code applies to the affected Collateral); (b) Require Debtor to, and Debtor hereby agrees that it shall at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties; (c) Reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest created hereby by any available judicial procedure; (d) Dispose of, at its office, on the premises of Debtor or elsewhere, all or any part of the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale of any part of the Collateral shall not exhaust Secured Party's power of sale, but sales may be made from time to time, and at any time, until all of the Collateral has been sold or until the obligations have been paid and performed in full), and at any such sale it shall not be necessary to exhibit any of the Collateral; (e) Buy the Collateral, or any portion thereof, at any public sale; (f) Buy the Collateral, or any portion thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type that is the subject of widely distributed standard price quotations; (g) Apply by appropriate judicial proceedings for appointment of a receiver for the Collateral, or any part thereof, and Debtor hereby consents to any such appointment; and (h) At its discretion, retain the Collateral in satisfaction of the Obligations whenever the circumstances are such that Secured Party is entitled to do so under the Code or otherwise. Debtor agrees that, to the extent notice of sale shall be required by law, five days' notice to Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Section 5.3. Sale of Securities. Debtor recognizes that Secured Party may be unable to effect a public sale of any or all the portions of Collateral that constitute securities by reason of certain prohibitions contained in the Securities Act of 1933, as amended and applicable state securities laws, but may be compelled to resort to one or more private sales thereof to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. Secured Party shall be under no obligation to delay a sale of any of such securities for the period of time necessary to permit Debtor to register such securities for public sale under the Securities Act of 1933, as amended, or under applicable state securities laws. Section 5.4. Application of Proceeds. Upon the occurrence of any Event of Default, or at any tine thereafter, Secured Party may in its discretion apply any cash held by Secured Party as Collateral, and any cash proceeds received by Secured Party with respect to any sale of, collection from, or other realization upon all or any part of the Collateral, to any or all of the following in such order as Secured Party may elect: (a) To the repayment of the reasonable out-of-pocket costs and expenses, including attorneys' fees and legal expenses, incurred by Secured Party in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder; or (iv) the failure of Debtor to perform or observe any of the provisions hereof; (b) To the payment or other satisfaction of any liens and other encumbrances upon any of the Collateral; (c) To the reimbursement of Secured Party for the amount of any obligations of Debtor or any Other Liable Party paid or discharged by Secured Party pursuant to the provisions of this Agreement or the other Obligation Documents, and of any expenses of Secured Party payable by Debtor hereunder or under the other Obligation Documents; (d) To the satisfaction of any other Obligations or any other indebtedness of Debtor to Secured Party; (e) By holding the same as Collateral; (f) To the payment of any other amounts required by applicable law (including without limitation, Section 9-504(1)(c) of the Code or any successor or similar, applicable statutory provision); and (g) By delivery to Debtor or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction shall direct. Section 5.5. Deficiency. In the event that the proceeds of any sale, collection or realization of or upon the Collateral by Secured Party are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor shall be liable for the deficiency, together with interest thereon as provided in the governing Obligation Documents or (if no interest is so provided) at such other rate as shall be fixed by applicable law, together with the costs of collection and the fees and expenses of any attorneys employed by Secured Party to collect such deficiency. Section 5.6. Non-Judicial Remedies. In granting to Secured Party the power to enforce its rights hereunder without prior judicial process or judicial hearing, Debtor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Secured Party to enforce its rights by judicial process. In so providing for non-judicial remedies, Debtor recognizes and concedes that such remedies are consistent with the usage of trade, are responsive to commercial necessity, and are the result of a bargain at arm's length. Nothing herein is intended to prevent Secured Party or Debtor from resorting to judicial process at either party's option. Section 5.7. Other Recourse. Debtor waives any right to require Secured Party to proceed against any other Person, exhaust any Collateral or other security for the Obligations, or to have any Other Liable Party joined with Debtor in any suit arising out of the Obligations or this Agreement, or pursue any other remedy in Secured Party's power. Debtor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension for any period of any of the Obligations of any Other Liable Party from time to time. Debtor further waives any defense arising by reason of any disability or other defense of any Other Liable Party or by reason of the cessation from any cause whatsoever of the liability of any other Liable Party. Until all of the Obligations shall have been paid in full and the Commitment has terminated or expired, Debtor shall have no right to subrogation and Debtor waives the right to enforce any remedy which Secured Party has or may hereafter have against any Other Liable Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Secured Party. No action which Secured Party may take or omit to take in connection with any of the Obligation Documents or any of the Obligations shall release or diminish Debtor's obligations, liabilities, duties or agreements hereunder, including without limitation, from time to time: (a) taking or holding any other property of any type from any other Person as security for the obligations, and exchanging, enforcing, waiving and releasing any or all of such other property, (b) applying the Collateral or such other property and directing the order or manner of sale thereof as Secured Party may in its discretion determine which is not inconsistent with the Obligation Documents, (c) renewing, extending for any period, accelerating, modifying, compromising, settling or releasing any of the obligations of any Other Liable Party with respect to any or all of the obligations or other security for the obligations, (d) waive, enforce, modify, amend or supplement any of the provisions of any Obligation Document with any Person other than Debtor, and (e) release or substitute any Other Liable Party. Section 5.8. Remedies Not Exclusive. All rights, powers and remedies herein conferred are cumulative, and not exclusive, of (i) any and all other rights and remedies herein conferred or provided for, (ii) any and all other rights, powers and remedies conferred or provided for in the Obligation Documents, and (iii) any and all rights, powers and remedies conferred, provided for or existing at law or in equity, and Secured Party shall, in addition to the rights, powers and remedies herein conferred or provided for, be entitled to avail itself of all such other rights, powers and remedies as may now or hereafter exist at law or in equity for the collection of and enforcement of the Obligations and the enforcement of the warranties, representations, covenants, indemnities and other agreements contained in this Agreement and the Obligation Documents. Each and every such right, power and remedy may be exercised from time to time and as often and in such order as may be deemed expedient by Secured Party and the exercise of any such right, power or remedy shall not be deemed a waiver of the right to exercise, at the same time or thereafter, any other right, power or remedy. No delay or omission by Secured Party or other person in the exercise of any right, power or remedy will impair any such right, power or remedy or operate as a waiver thereof or of any other right, power or remedy then or thereafter existing. ARTICLE VI ENVIRONMENTAL INDEMNITY Debtor agrees to indemnify, defend, and hold harmless Secured Party, its affiliates and related parties, and their respective directors, officers, shareholders, partners, members, employees, consultants and agents (individually, an "Indemnified Party," and collectively, "Indemnified Parties") from and against, and shall reimburse and pay Indemnified Parties with respect to, any and all claims, demands, liabilities, losses, damages (including without limitation actual, consequential, exemplary and punitive damages), causes of action, judgments, penalties, fees, costs and expenses (including without limitation attorneys' fees, court costs and legal expenses and consultant's and expert's fees and expenses) of any and every kind or character, known or unknown, fixed or contingent, that may be imposed upon, asserted against, or incurred or paid by or on behalf of any Indemnified Party on account of, in connection with, or arising out of (a) the breach of any representation or warranty of Debtor relating to Environmental Laws or Hazardous Materials or any matter that would, but for the disclosure of such matter to Secured Party in writing in accordance with Section 3.1(f), constitute or give rise to the breach of any representation or warranty of Debtor relating to Environmental Laws or Hazardous Materials, (b) the failure of Borrowers to perform any agreement, covenant or obligation required to be performed by Borrowers relating to Environmental Laws or Hazardous Materials, (c) any violation of or failure to comply with any Environmental Law now existing or hereafter occurring, (d) the removal of Hazardous Materials from the Collateral or the Other Collateral (or if removal is prohibited by law, the taking of whatever action is required by law), (e) any act, omission, event or circumstance existing or occurring or resulting from or in connection with the ownership, construction, occupancy, operation, use or maintenance of the Collateral or the Other Collateral, regardless of whether the act, omission, event or circumstance constituted a violation of or failure to comply with any Environmental Law at the time of its existence or occurrence, and (f) any and all claims or proceedings (whether brought by private party or governmental agency) for bodily injury, property damage, abatement or remediation, environmental damage, or impairment or any other injury or damage resulting from or relating to any Hazardous Material located upon or migrating into, on, from or through the Collateral or the Other Collateral (whether or not any or all of the foregoing was caused by Borrowers, a prior owner of the Collateral or the Other Collateral, an operator or prior operator of the Collateral or the Other Collateral, their respective tenants or subtenants, or any third party and whether or not the alleged liability is attributable to the handling, storage, use, treatment, processing, distribution, manufacture, generation, discharge, transportation or disposal of such Hazardous Material or the mere presence of such Hazardous Material on the Collateral or the Other Collateral). Without limiting the generality of the foregoing, it is the intention of Debtor and Debtor agrees that the foregoing indemnities shall apply to each Indemnified Party with respect to claims, demands, liabilities, losses, damages (including without limitation actual, consequential, exemplary and punitive damages), causes of action, judgments, penalties, fees, costs, court costs and legal expenses and consultant's and expert's fees and expenses, of any kind or character, known or unknown, fixed or contingent, that in whole or in part are caused by or arise out of the negligence of such Indemnified Party; however, such indemnities shall not apply to any Indemnified Party to the extent the subject of the indemnification is caused by or arises out of the gross negligence or willful misconduct of such Indemnified Party. Any amount to be paid hereunder by Debtor to Secured Party or for which Debtor has indemnified an Indemnified Party shall be a demand obligation owing by Debtor to Secured Party and shall bear interest at the Default Rate until paid, and shall constitute a part of the Obligations and shall be indebtedness secured and evidenced by this Agreement. The foregoing agreements shall be perpetual and shall survive the payment or satisfaction of the Obligations and the release of this Agreement and the foreclosure or other termination of the liens and security interests created by this Agreement. ARTICLE VII MISCELLANEOUS Section 7.1. Notices. Any notice or communication required or permitted hereunder shall be given as provided in the Financing Agreement. Section 7.2. Entire Agreement. This Agreement (including the Exhibits hereto) and the Obligation Documents constitutes the entire understanding between the parties with respect to the subject matter hereof and supersedes all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. Section 7.3. Indemnity. Debtor agrees to indemnify, defend and hold harmless Secured Party, upon request, from and against any and all claims, losses and liabilities (whether or not caused by Secured Party's negligence) growing out of or resulting from this Agreement (including without limitation, enforcement of this Agreement); provided, however, that Debtor shall not be required to indemnify Secured Party for that portion of any such claims, losses or liabilities which are proximately caused by Secured Party's gross negligence or willful misconduct. If any Person (including, without limitation, any Related Person) ever alleges such gross negligence or willful misconduct by Secured Party, the indemnification provided for in this section shall nonetheless be paid upon demand, subject to later adjustment or reimbursement, until such time as a court of competent jurisdiction enters a final judgment as to the extent and effect of the alleged gross negligence or willful misconduct. Section 7.4. Costs and Expenses. Debtor shall upon demand pay to Secured Party the amount of any and all costs and expenses, including the fees and disbursements of Secured Party's counsel and of any experts and agents, which Secured Party may incur in connection with (a) the transactions which give rise to this Agreement, (b) the preparation of this Agreement and the perfection and preservation of the security interest created under this Agreement, (c) the administration of this Agreement, (d) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (e) the exercise or enforcement of any of the rights of Secured Party hereunder, or (f) the failure by Debtor to perform or observe any of the provisions hereof, except expenses resulting from Secured Party's gross negligence or willful misconduct. This Section 7.4 shall not govern matters that are covered by Article VI. Section 7.5. Amendments. No amendment of any provision of this Agreement shall be effective unless it is in writing and signed by Debtor and Secured Party, and no waiver of any provision of this Agreement, and no consent to any departure by Debtor therefrom, shall be effective unless it is in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given and to the extent specified in such writing. Section 7.6. Preservation of Rights. No failure on the part of Secured Party to exercise, and no delay in exercising, any right hereunder or under any other Obligation Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. Neither the execution nor the delivery of this Agreement shall in any manner impair or affect any other security for the Obligations. The rights of Secured Party under any Obligation Document against any party thereto are not conditional or contingent on any attempt by Secured Party to exercise any of its rights under any other Obligation Document against such party or against any other Person. Section 7.7. Unenforceability. All rights, powers and remedies hereunder conferred shall be exercisable by Secured Party only to the extent not prohibited by applicable law; and all waivers or relinquishments of rights and similar matters shall only be effective to the extent such waiver or relinquishments are not prohibited by applicable law. If any provision of this Agreement or of any of the Obligation Documents is invalid or unenforceable in any jurisdiction, such provision shall be fully and severable from this Agreement and the other provisions hereof and the Obligation Documents shall remain in full force and effect in such jurisdiction and the remaining provisions hereof shall be liberally construed in favor of Secured Party in order to carry out the provisions and intent hereof. The invalidity of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of any such provision in any other jurisdiction. Section 7.8. Survival of Agreements. All representations and warranties of Debtor herein, and all covenants and agreements herein shall survive the execution and delivery of this Agreement, the execution and delivery of the other Obligation Documents and the creation of the Obligations. Section 7.9. Other Liable Party. Neither this Agreement nor the exercise by Secured Party or the failure of Secured Party to exercise any right, power or remedy conferred herein or by law shall be construed as relieving any Other Liable Party from liability on the Obligations or any deficiency thereon. This Agreement shall continue irrespective of the fact that the liability of any Other Liable Party may have ceased or irrespective of the validity or enforceability of any other Obligation Document to which Debtor or any Other Liable Party may be a party, and notwithstanding the reorganization, death, incapacity or bankruptcy of any Other Liable Party, and notwithstanding the reorganization or bankruptcy or other event or proceeding affecting any Other Liable Party. Section 7.10. Binding Effect and Assignment. This Agreement creates a continuing security interest in the Collateral and (a) shall be binding on Debtor and its successors and permitted assigns, and (b) shall inure, together with all rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing, Secured Party may assign or otherwise transfer its rights under any Obligation Document to any other Person, and such other Person shall thereupon become vested with all of the benefits with respect thereto granted to Secured Party, herein or otherwise. None of the rights or obligations of Debtor hereunder may be assigned or otherwise transferred without the prior written consent of Secured Party. Section 7.11. Termination. It is contemplated by the parties hereto that there may be times when no Obligations are outstanding, but notwithstanding such occurrences, this Agreement shall remain valid and shall be in full force and effect as to subsequent outstanding obligations. Upon the satisfaction in full of the Obligations, upon the termination or expiration of the Commitment and any other commitment of Secured Party to extend credit to Debtor, and upon written request delivered by Debtor to Secured Party, the security interest created by this Agreement shall terminate and all rights to the Collateral shall revert to Debtor. Upon such event, Secured Party shall, upon Debtor's request and at Debtor's expense (a) return to Debtor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof, and (b) execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence such termination. The termination of the security interests created by this Agreement, shall not terminate or otherwise affect Secured Party's right or ability to exercise any right, power or remedy on account of any claim for breach of warranty or representation, for failure to perform any covenant or other agreement, under any indemnity or for fraud, deceit or other misrepresentation or omission. Section 7.12. Financing Statement. This Agreement shall be deemed to be and may be enforced from time to time as an assignment, contract, financing statement, fixture filing, pledge agreement or security agreement, and from time to time as one or more thereof is appropriate under applicable state law. A carbon, photographic or other reproduction of this Agreement or of any financing statement in connection herewith shall be sufficient as a financing statement for any and all purposes. Section 7.13. Rate of Interest. All interest required hereunder and under the Obligations shall be calculated on the basis of a year of 360 days. Section 7.14. Execution in Counterparts. This Agreement may be executed in one or more original counterparts. Each counterpart shall be deemed to be an original for all purposes, and all counterparts shall together constitute but one and the same instrument. Section 7.15 WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. DEBTOR HEREBY: (A) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS AND INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS OR ANY TRANSACTION PROVIDED FOR THEREIN OR ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY; (B) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (C) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE NOTES, THE FINANCING AGREEMENT AND ANY OTHER DOCUMENTS AND INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS AND THE TRANSACTIONS PROVIDED FOR HEREIN AND THEREIN, BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. Section 7.16 USURY SAVINGS. IT IS THE INTENTION OF THE PARTIES HERETO TO COMPLY WITH ALL APPLICABLE USURY LAWS; ACCORDINGLY, IT IS AGREED THAT NOTWITHSTANDING ANY PROVISIONS TO THE CONTRARY IN THIS INSTRUMENT, THE NOTES, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING, SECURING OR OTHERWISE RELATING TO THE OBLIGATIONS, IN NO EVENT SHALL SUCH DOCUMENTS OR INSTRUMENTS REQUIRE THE PAYMENT OR PERMIT THE COLLECTION OF INTEREST (WHICH TERM, FOR PURPOSES HEREOF, SHALL INCLUDE ANY AMOUNT WHICH, UNDER APPLICABLE LAW, IS DEEMED TO BE INTEREST, WHETHER OR NOT SUCH AMOUNT IS CHARACTERIZED BY THE PARTIES AS INTEREST) IN EXCESS OF THE MAXIMUM AMOUNT PERMITTED BY SUCH LAWS. IF ANY EXCESS INTEREST IS UNINTENTIONALLY CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THE TERMS OF THIS INSTRUMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS, OR IN THE EVENT THE MATURITY OF THE INDEBTEDNESS EVIDENCED BY THE NOTES IS ACCELERATED IN WHOLE OR IN PART, OR IN THE EVENT THAT ALL OR PART OF THE PRINCIPAL OR INTEREST OF THE NOTES SHALL BE PREPAID, SO THAT THE AMOUNT OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE AMOUNT OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THIS INSTRUMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS, ON THE AMOUNT OF PRINCIPAL ACTUALLY OUTSTANDING FROM TIME TO TIME UNDER THE NOTES SHALL EXCEED THE MAXIMUM AMOUNT OF INTEREST PERMITTED BY THE APPLICABLE USURY LAWS, THEN IN ANY SUCH EVENT (A) THE PROVISIONS OF THIS SECTION SHALL GOVERN AND CONTROL, (B) NEITHER DEBTOR OR THE OTHER BORROWERS NOR ANY OTHER PERSON OR ENTITY NOW OR HEREAFTER LIABLE FOR THE PAYMENT THEREOF, SHALL BE OBLIGATED TO PAY THE AMOUNT OF SUCH INTEREST TO THE EXTENT THAT IT IS IN EXCESS OF THE MAXIMUM AMOUNT OF INTEREST PERMITTED BY SUCH APPLICABLE USURY LAWS, (C) ANY SUCH EXCESS WHICH MAY HAVE BEEN COLLECTED SHALL BE EITHER APPLIED AS A CREDIT AGAINST THE THEN UNPAID PRINCIPAL AMOUNT THEREOF OR REFUNDED TO BORROWERS AT SECURED PARTY'S OPTION, AND (D) THE EFFECTIVE RATE OF INTEREST SHALL BE AUTOMATICALLY REDUCED TO THE MAXIMUM LAWFUL RATE OF INTEREST ALLOWED UNDER THE APPLICABLE USURY LAWS AS NOW OR HEREAFTER CONSTRUED BY THE COURTS HAVING JURISDICTION THEREOF. IT IS FURTHER AGREED THAT WITHOUT LIMITATION OF THE FOREGOING, ALL CALCULATIONS OF THE RATE OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THIS AGREEMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS WHICH ARE MADE FOR THE PURPOSE OF DETERMINING WHETHER SUCH RATE EXCEEDS THE MAXIMUM LAWFUL RATE OF INTEREST, SHALL BE MADE, TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAWS, BY AMORTIZING, PRORATING, ALLOCATING AND SPREADING IN EQUAL PARTS DURING THE PERIOD OF THE FULL STATED TERM OF THE OBLIGATIONS EVIDENCED THEREBY, ALL INTEREST AT ANY TIME CONTRACTED FOR, CHARGED OR RECEIVED FROM BORROWERS OR OTHERWISE BY SECURED PARTY IN CONNECTION WITH THE OBLIGATIONS. Section 7.17 GOVERNING LAW. THIS INSTRUMENT AND ALL MATTERS ARISING UNDER OR GROWING OUT HEREOF SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAWS, AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT TO THE EXTENT THAT PROCEDURAL AND SUBSTANTIVE MATTERS RELATING ONLY TO THE VALIDITY, CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS, SECURITY INTERESTS AND OTHER RIGHTS AND REMEDIES OF THIS AGREEMENT GRANTED HEREIN ARE PURSUANT TO APPLICABLE LAW GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS. EXCEPT AS TO THE VALIDITY, CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED HEREBY, DEBTOR AND SECURED PARTY AGREE THAT THE TRANSACTIONS PROVIDED FOR HEREIN BEAR A REASONABLE RELATIONSHIP TO THE COMMONWEALTH OF MASSACHUSETTS AND THAT THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS GOVERNS (A) ISSUES RELATING TO THE TRANSACTIONS PROVIDED FOR HEREIN, INCLUDING THE VALIDITY AND ENFORCEABILITY OF AN AGREEMENT RELATING TO SUCH TRANSACTIONS OR A PROVISION OF AN AGREEMENT, AND (B) THE INTERPRETATION OR CONSTRUCTION OF AN AGREEMENT RELATING TO SUCH TRANSACTIONS OR A PROVISION OF AN AGREEMENT. This Agreement is executed and delivered as of the date first above written. DEBTOR: FORELAND ASPHALT CORPORATION, a Utah corporation By: /s/ Bruce C. Decker, President Taxpayer I.D. No. 84-1669800 SECURED PARTY: ENERGY INCOME FUND, L.P., a Delaware limited partnership By: EIF GENERAL PARTNER, L.L.C., a Delaware limited liability company, its General Partner By: /s/ Robert D. Gershen, a Managing Director Taxpayer I.D. No. 04-3309082 EX-10 9 EXECUTION COPY PLEDGE AND SECURITY AGREEMENT (COWBOY ASPHALT TERMINAL, L.L.C. MEMBERSHIP INTERESTS) This Pledge and Security Agreement (this "Agreement"), dated as of February 4, 1999, is from FORELAND ASPHALT CORPORATION, a Utah corporation ("Pledgor"), to ENERGY INCOME FUND, L.P., a Delaware limited partnership ("Pledgee"). RECITALS A. Foreland Corporation, a Nevada corporation ("Foreland Corp.") and Pledgee are parties to a Financing Agreement dated as of January 6, 1998 (the "Original Financing Agreement") between Foreland Corp. and Eagle Springs Production Limited Liability Company, a Nevada limited liability company ("Eagle Springs"), as borrowers, and Pledgee. B. By a First Amendment to Financing Agreement dated as of August 10, 1998 (the "First Amendment to Financing Agreement") by and among Foreland Corp., Eagle Springs, Foreland Refining Corporation, a Texas corporation ("Foreland Refining"), Foreland Asset Corporation, a Nevada corporation ("Foreland Asset"), Petrosource Transportation, a Utah corporation now known as Foreland Transportation, Inc. ("Transportation"), and Pledgor, as borrowers, and Pledgee, the Original Financing Agreement was amended to, among other things, add Pledgor, Foreland Refining, Foreland Asset and Transportation as borrowers thereunder. Foreland Corp., Eagle Springs, Foreland Refining, Foreland Asset, Transportation and Pledgor are referred to collectively as "Borrowers". C. By a Second Amendment to Financing Agreement of even date herewith (the "Second Amendment to Financing Agreement") by and among Borrowers and Pledgee, Pledgee agreed to, on the terms and conditions set forth therein, make Loans (as defined below) to Borrowers for the purpose of, among other things, Pledgor's acquisition of a membership interest in Cowboy Asphalt Terminal, L.L.C., a Utah limited liability company ("Cowboy"). The Original Financing Agreement as amended by the First Amendment to Financing Agreement and the Second Amendment to Financing Agreement and as it may be further amended from time to time is herein referred to as the "Financing Agreement". D. Pursuant to the Financing Agreement, Pledgee has agreed to extend credit by agreeing to make, subject to the terms and conditions set forth in the Financing Agreement, the following loans (collectively, the "Loans") to Borrowers: (i) a Refinancing Loan (as such term is defined in the Financing Agreement) in an aggregate principal amount of up to $674,279.34; (ii) a Development Loan (as such term is defined in the Financing Agreement) in an aggregate principal amount of up to $7,175,720.66; and (iii) an Acquisition Loan (as such term is defined in the Financing Agreement) in an aggregate principal amount of up to $9,050,000, in each case in one or more advances and for the purposes set forth in the Financing Agreement. E. Pledgor, Foreland Refining, Foreland Asset, and Eagle Springs are wholly-owned subsidiaries of Foreland Corp., and Transportation is a wholly- owned subsidiary of Foreland Asset. Pledgor is the owner of a 33.33% membership interest in Cowboy. F. Cowboy owns the property, rights and interests described on Exhibit A attached hereto (the "Cowboy Properties"). G. It is a condition precedent to such extension of credit by Pledgee pursuant to the Financing Agreement that, among other things, Pledgor shall have executed and delivered to Pledgee a pledge and security agreement granting to Pledgee a security interest in the Collateral (as defined below). AGREEMENT In consideration of the foregoing recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Pledgee to extend such credit under the Financing Agreement, Pledgor hereby agrees with Pledgee as follows: ARTICLE I DEFINITIONS AND REFERENCES Section 1.1. General Definitions. As used herein, the terms "Agreement," "Pledgor," "Pledgee," "Foreland Corp.," "Original Financing Agreement," "Eagle Springs," "First Amendment to Financing Agreement," "Foreland Refining," "Foreland Asset," "Transportation," "Borrowers," "Second Amendment to Financing Agreement," "Cowboy," "Financing Agreement," "Loans" and "Cowboy Properties" shall have the meanings ascribed thereto above, and the following terms shall have the following meanings: (a) The term "Acquisition Note" shall mean the Acquisition Note, dated as of January 6, 1998, in the maximum principal amount of $2,327,000 made by Foreland Corp. and Eagle Springs, as amended and supplemented by First Allonge to Acquisition Note, dated August 10, 1998, and executed by Borrowers, which, among other things, added Foreland Refining, Foreland Asset, Transportation and Pledgor as makers and obligors thereunder. (b) The term "Affiliate" shall mean, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such Person, and any other Person that is an officer, director, or full-time employee of such other Person. (c) The term "Business Day" shall mean any day on which national banking institutions in Massachusetts are open for the transaction of banking business. (d) The term "Code" shall mean the Uniform Commercial Code currently in effect in the Commonwealth of Massachusetts; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, priority or exercise of remedies of Pledgee's security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the Commonwealth of Massachusetts, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, priority or exercise of remedies and for purposes of definitions related to such provisions. (e) The term "Collateral" shall mean all property of whatever type, in which Pledgee at any time has a security interest pursuant to Section 2.1. (f) The term "Commitment" shall mean the agreement or commitment by Pledgee to make loans or otherwise extend credit to Borrowers under the Financing Agreement, and any other agreement, commitment, statement of terms or other document contemplating the making of loans or advances or other extension of credit by Pledgee to or for the account of Borrowers which is now or at any time hereafter intended to be secured by the Collateral under this Agreement. (g) The term "Cowboy/Foreland Properties" shall mean the real property described on Exhibit A attached hereto and the buildings, improvements and structures described on Exhibit A or located on the real property described on Exhibit A by or on behalf of Cowboy after the date of this Agreement (excluding buildings, improvements and structures either (i) located on such real property by a member of Cowboy other than Pledgor on its own behalf that do not constitute Cowboy property or (ii) designated for the exclusive use of Crown in accordance with the LLC Agreement). (h) The term "Crown" shall mean Crown Asphalt Products Company, a Utah corporation and a wholly owned subsidiary of Crown Energy Corporation, a Utah corporation. (i) The term "Default" shall mean any Event of Default or any event that with the giving of notice or the passage of time, or both, would constitute an Event of Default. (j) The term "Development Note" shall mean the Development Note, dated as of January 6, 1998, in the maximum principal amount of $13,893,000 made by Foreland Corp. and Eagle Springs, as amended and supplemented by First Allonge to Development Note, dated August 10, 1998, and executed by Borrowers, which, among other things, added Foreland Refining, Foreland Asset, Transportation and Pledgor as makers and obligors thereunder. (k) The term "Environmental Laws" shall have the meaning ascribed thereto in Section 3.1(j). (l) The term "Event of Default" shall have the meaning ascribed thereto in Section 5.1. (m) The term "Hazardous Materials" shall have the meaning ascribed thereto in Section 3.1(j). (n) The term "Hydrocarbons" shall have the meaning ascribed thereto in the Refinery Deed of Trust. (o) The terms "Indemnified Party" and "Indemnified Parties" shall have the meanings ascribed thereto in Article VI. (p) The term "Lien" shall mean any lien, security interest, burden, adverse claim, option, put, call, warrant or other charge, encumbrance or restriction of any kind. (q) The term "LLC Agreement" shall mean that certain Operating Agreement for Cowboy Asphalt Terminal, L.L.C. dated as of February 12, 1999 between Pledgor and Crown. (r) The term "Notes" shall mean the Refinancing Note, the Development Note and the Acquisition Note. (s) The term "Obligations" shall mean all present and future indebtedness, obligations and liabilities of whatever type which are or shall be secured pursuant to Section 2.2. (t) The term "Obligation Documents" shall mean this Agreement, the Financing Agreement, the Notes, and all other documents and instruments under, by reason of which, or pursuant to which any or all of the Obligations are evidenced, governed, secured or otherwise dealt with, and all other agreements, certificates, legal opinions, documents, instruments and other writings heretofore or hereafter delivered in connection herewith or therewith. (u) The term "Other Collateral" shall mean all property, rights and interests (present and future, personal and real, tangible and intangible) of Borrowers (whether now owned or hereafter acquired by operation of law or otherwise), or in which Borrowers otherwise (whether now or hereafter) have any rights, including, without limitation, all fixtures, accounts, goods, inventory, instruments, equipment, chattel paper, documents and general intangibles (as such terms are defined in the Code), that now or hereafter constitute or are intended to constitute security for any of the Obligations under any Obligation Document but that do not constitute Collateral under this Agreement. (v) The term "Other Liable Party" shall mean any Person, other than Pledgor, who may now or may at any time hereafter be primarily or secondarily liable for any of the Obligations or who may now or may at any time hereafter have granted to Pledgee a security interest or lien upon any property as security for the Obligations including, without limitation, Borrowers. (w) The term "Person" shall mean an individual, corporation, association, partnership, limited liability company, joint stock company, joint venture, trust or trustee thereof, estate or executor thereof, unincorporated organization or joint venture, court or governmental unit or any agency or subdivision thereof, or any legally recognizable entity. (x) The term "Pledged LLC Interests" shall mean all of the issued and outstanding membership interests in Cowboy owned by Pledgor or in which Pledgor otherwise has any rights. (y) The term "Proposed Hydrocarbon Contracts" shall have the meaning ascribed thereto in Section 3.2(t). (z) The term "Refinancing Note" shall mean the Refinancing Note, dated as of January 6, 1998, in the maximum principal amount of $680,000 made by Foreland Corp. and Eagle Springs, as amended and supplemented by First Allonge to Refinancing Note, dated August 10, 1998, and executed by Borrowers, which, among other things, added Foreland Refining, Foreland Asset, Transportation and Pledgor as makers and obligors thereunder. (aa) The term "Refinery Deed of Trust" shall mean the Deed of Trust, Security Agreement, Assignment of Rents, Profits and Proceeds, Financing Statement and Fixture Filing dated as of August 11, 1998, from Foreland Corp., Foreland Refining and Foreland Asset as debtors, to First American Title Company of Nevada, as trustee for the benefit of Pledgee, and recorded or to be recorded in the real property records of Nye County, State of Nevada. (bb) The term "Refinery Facilities" shall mean (i) the refinery and related facilities located in part in the E/2 SE/4 of Section 24, T. 9 N., R. 56 E., M.D.M., County of Nye, State of Nevada, and sometimes referred to as the Eagle Springs Refinery, and (ii) the refinery and related facilities located in part on 63 acres within or adjacent to the Tonopah Airport, County of Nye, State of Nevada. (cc) The term "Related Person" shall mean Pledgor, each Affiliate of Pledgor, each Other Liable Party and Cowboy. (dd) The term "RTI Agreement" shall mean that certain Assignment and Agreement entered into on September 11, 1998 by and among Cowboy, Crown, Pledgor and Refinery Technologies, Inc., a Utah corporation, a true and correct copy of which has previously been furnished to Secured Party. (ee) The term "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.2. References. Reference is hereby made to the Financing Agreement for a statement of the terms thereof. All capitalized terms used in this Agreement which are defined in the Financing Agreement and not otherwise defined herein shall have the same meanings herein as set forth therein. All terms used in this Agreement which are defined in Article 8 or Article 9 of the Code and not otherwise defined herein or in the Financing Agreement shall have the same meanings herein as set forth therein, except where the context otherwise requires. Section 1.3. Exhibits and Schedules. All exhibits and schedules attached to this Agreement are a part hereof for all purposes. Section 1.4. Amendment of Defined Instruments. Unless the context otherwise requires or unless otherwise provided herein, references in this Agreement to a particular agreement, instrument or document (including without limitation, references in Section 2.1) also refer to and include all renewals, extensions, amendments, modifications, supplements or restatements of any such agreement, instrument or document, provided that nothing contained in this Section 1.4 shall be construed to authorize any Person to execute or enter into any such renewal, extension, amendment, modification, supplement or restatement. Section 1.5. References and Titles. All references in this Agreement to Exhibits, Schedules, Articles, Sections, Subsections, and other subdivisions refer to the Exhibits, Schedules, Articles, Sections, Subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles and headings appearing at the beginning of any subdivision are for convenience only and do not constitute any part of any such subdivision and shall be disregarded in construing the language contained in this Agreement. The words "this Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Section" and "this Subsection" and similar phrases refer only to the Sections or Subsections hereof in which the phrase occurs. The word "or" is not exclusive. Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender. Words in the singular form shall be construed to include the plural, and words in the plural form shall be construed to include the singular, unless the context otherwise requires. ARTICLE II SECURITY INTEREST Section 2.1. Grant of Security Interest. As security for all of the Obligations, Pledgor hereby pledges and assigns to Pledgee and grants to and for the benefit of Pledgee a continuing security interest in all of the following whether now owned or hereafter acquired (by operation of law of otherwise): (a) Membership Interests. All of the following, whether now or hereafter existing, which are owned by Pledgor or in which Pledgor otherwise has any rights: (i) the Pledged LLC Interests, and any and all certificates representing the Pledged LLC Interests, whether now or hereafter issued by Cowboy, (ii) all membership interests, securities and other property, rights or interests of any description at any time issued or issuable by Cowboy as an addition to, in substitution or exchange for or with respect to the Pledged LLC Interests, including without limitation any additional membership interests issued by Cowboy and the certificates, if any, representing such additional membership interests and securities or other instruments convertible into or exchangeable for membership interests of Cowboy, and (iii) all dividends and distributions (including, without limitation, dividends and distributions of membership interests or other securities of Cowboy), cash, instruments and other property from time to time received, receivable or otherwise distributed with respect to or in exchange for any or all of the Pledged LLC Interests or any of the membership interests, securities or other property described in clause (ii) of this Subsection 2.1(a) for any reason, including, without limitation, any change in the number or kind of outstanding membership interests in or shares of any securities of Cowboy, or any successor to Cowboy, by reason of any recapitalization, merger, consolidation, reorganization, separation, liquidation, membership interest split, membership interest dividend, combination of shares or other similar event. (b) Proceeds. All proceeds of any and all of the foregoing, whether such proceeds constitute property of the types described above in this Section 2.1 or otherwise. In each case, the foregoing shall be covered by this Agreement, whether Pledgor's ownership or other rights therein are presently held or hereafter acquired (by operation of law or otherwise) and howsoever Pledgor's interests therein may arise or appear (whether by ownership, security interest, claim or otherwise). Section 2.2. Obligations Secured. The security interest created hereby in the Collateral constitutes a continuing security interest for all of the following obligations, indebtedness and liabilities, whether now existing or hereafter incurred or arising: (a) Credit Payment. The payment by Borrowers, as and when due and payable, of all amounts from time to time owing by Borrowers, or any of them, under or with respect to the Financing Agreement, the Notes and the other Obligation Documents or any other instrument now or hereafter delivered in connection with or as security for the Financing Agreement, the Notes or the other Obligation Documents or any part thereof. (b) Other Indebtedness. All loans and future advances made by Pledgee to Borrowers, or any of them, and all other debts, obligations and liabilities of every kind and character of Borrowers, or any of them, now or hereafter existing in favor of Pledgee, whether such debts, obligations or liabilities be direct or indirect, primary or secondary, joint or several, fixed or contingent, and whether originally payable to Pledgee or to a third party and subsequently acquired by Pledgee and whether such debts, obligations or liabilities are evidenced by notes, open account, overdraft, indorsement, security agreement, guaranty or otherwise (it being contemplated that one or more of Borrowers may hereafter become indebted to Pledgee in further sum or sums but Pledgee shall have no obligation to extend further indebtedness by reason of this Agreement). (c) Performance. The due performance and observance by Borrowers of all of their other obligations and undertakings from time to time existing under or with respect to the Obligation Documents or any other instrument now or hereafter delivered in connection with or as security for any of the Obligation Documents. (d) Renewals. All renewals, extensions, amendments, modifications, supplements or restatements of or substitutions for any of the foregoing. Section 2.3 Delivery of Collateral. All certificates and instruments representing or evidencing the Collateral shall be delivered to and held by or on behalf of Pledgee pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Pledgee. Pledgee shall have the right at any time, in its discretion and without notice to Pledgor, to transfer to or register in the name of Pledgee or any of its nominees any or all of the Collateral. Section 2.4 Limitation on Recourse. Except as otherwise provided herein, in no event shall Pledgor have any personal liability for payment of principal and interest on the Notes. Pledgee shall look solely to the Collateral for the payment of such principal and interest and shall not seek a deficiency or other personal judgment against Pledgor for such principal and interest in the event that any sale of the Collateral shall be insufficient to satisfy the Notes. Nothing herein contained shall, however, impair any right, remedy or security of Pledgee with respect to the Collateral under this Agreement, the Notes, the Financing Agreement or any other Obligation Document, nor limit Pledgor's obligations to perform any of Pledgor's other obligations under this Agreement, the Notes, the Financing Agreement or any other Obligation Document, including, without limitation, Pledgor's obligation to indemnify Pledgee as set forth in the Obligation Documents. Notwithstanding the foregoing limitation of recourse, Pledgor shall remain fully liable for: (a) Fraud, breach of trust, or any material misrepresentation by Pledgor or any other Borrower in the Obligation Documents or any other documents or instruments evidencing, securing or relating to the Loans; (b) Waste of a material nature to any part of the Collateral or the Other Collateral caused by Pledgor's or any other Borrower's gross negligence or willful and wanton neglect or abuse of the Collateral or the Other Collateral or, with respect to portions of the Other Collateral not operated by any of the Borrowers, failure to exert reasonable control appropriate for an owner that is not also the operator; (c) Failure to pay taxes, insurance, assessments, charges for labor or materials, or other charges, fees or assessments that can create or result in liens on any portion of the Collateral or the Other Collateral; (d) Any beaches of warranty or defects of title to the Collateral or the Other Collateral; (e) Any breach of a warranty or representation contained in this Agreement or any other Obligation Document; failure to perform any covenant or other agreement contained in this Agreement or any other Obligation Document, or any indemnity contained in this Agreement or any other Obligation Document; (f) Any attempt by Pledgor or any other Borrower to communicate in any manner with the purchasers of Hydrocarbons or other products from the Other Collateral after the delivery to such purchasers of a notice directing payments to be made directly to Pledgee (as set forth in section 3.1 of the Refinery Deed of Trust) in an attempt to hinder or interfere with the rights of Pledgee; (g) The return of, or reimbursement for, all monies received by Pledgor or any other Borrower from the purchasers of Hydrocarbons or other products from the Other Collateral for monies attributable to Hydrocarbons or other products from the Other Collateral after receipt by any such purchaser of a notice directing payments to be made directly to Pledgee; (h) Any attempt by Pledgor or any other Borrower to hinder or interfere with the foreclosure of or other realization on the Collateral or the Other Collateral (whether by judicial action, power of sale, trustee's sale or otherwise), including without limitation the filing of a lis pendens, the initiation of any lawsuit or the requesting of injunctive relief from any court or tribunal, having the effect of hindering or delaying the exercise by Pledgee (or the Trustee under the Refinery Deed of Trust) of any right or remedy under this Agreement or any other Obligation Document; and (i) After an Event of Default, Pledgor or any other Borrower shall fail or refuse to execute and deliver to Pledgee any instrument reasonably requested by Pledgee and prepared at Borrowers' expense, which is necessary to fully vest title to the Collateral or the Other Collateral in Pledgee or the purchaser(s) of all or part of the Collateral or the Other Collateral pursuant to any sale as provided for in this Agreement or any other Obligation Document. Pledgor shall be fully and personally liable for all attorneys' fees and costs and expenses incurred by Pledgor arising out of any of the foregoing paragraphs (a) through (i). ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS Section 3.1. Representations and Warranties. Pledgor represents and warrants as follows: (a) Corporate Matters; Enforceability. Pledgor is a corporation duly organized, validly existing and in good standing in the State of Utah, and Pledgor is duly qualified as a foreign corporation and in good standing in each jurisdiction where such qualification is necessary or appropriate. The execution and delivery of this Agreement and the performance by Pledgor of the transactions contemplated herein are within Pledgor's corporate powers and have been duly authorized by all necessary action, corporate and otherwise. This Agreement constitutes the legal, valid and binding obligations of Pledgor, enforceable against Pledgor in accordance with its terms. Cowboy is a limited liability company duly organized, validly existing and in good standing in the State of Utah, and Cowboy is duly qualified as a foreign limited liability company and in good standing in each jurisdiction where such qualification is necessary or appropriate. (b) Pledged LLC Interests. The Pledged LLC Interests constitute 33.33% of the issued and outstanding membership interests in and to Cowboy and a 33.33% voting interest in Cowboy. The Pledged LLC Interests and all other membership interests in and to Cowboy have been duly authorized, validly issued, and are fully paid and non-assessable. The membership interests in Cowboy are owned by the Persons set forth on Schedule 3.1(b) in the percentages set forth on Schedule 3.1(b), and such membership interests constitute all of the issued and outstanding membership interests in and to Cowboy. None of the issued and outstanding membership interests in and to Cowboy, including, without limitation, the Pledged LLC Interests, was issued in violation of any right of first refusal, right of first offer, preemptive rights or any similar rights. There are no options, warrants, convertible or exchangeable securities, or other rights, agreements, arrangements or commitments of any character relating to the membership interests in and to Cowboy or obligating Pledgor or Cowboy to issue or sell any membership interests or any other interest in Cowboy. There are no outstanding contractual obligations of Cowboy to repurchase, redeem, or otherwise acquire any membership interest in Cowboy or to create or issue any other equity interest in Cowboy. Except as expressly set forth in the LLC Agreement or the RTI Agreement, there are no voting trusts, member agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any membership interest in Cowboy. None of the membership interests in Cowboy: are dealt in or traded on securities exchanges or in securities markets; expressly provide that they are a security governed by the Code; are an "investment company security" as defined in the Code; or are held by a securities intermediary for another person in a securities account whereby the securities intermediary has expressly agreed to treat such interests as a "financial asset" under the Code. (c) Cowboy LLC Documents. Attached hereto as Exhibit B is a true and complete copy of the LLC Agreement and all amendments, restatements, supplements and other modifications thereto, and attached hereto as Exhibit C is a true and complete copy of Cowboy's articles of organization and all amendments thereto. (d) Ownership and Liens. Pledgor is the sole legal and beneficial owner of the Pledged LLC Interests free and clear of any Lien (including, without limitation, any restriction, contractual or otherwise, on the transferability of the Pledged LLC Interests) except for (i) the security interest created by this Agreement, (ii) the RTI Agreement (iii) Liens expressly permitted by the Financing Agreement, (iv) restrictions imposed by the Securities Act and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, and (v) restrictions on transfer imposed by the LLC Agreement. The Pledged LLC Interests are registered in the name of Pledgor on the transfer records of Cowboy and are represented by the certificates described on Schedule 3.1(d)-1 attached hereto. Except as set forth in Schedule 3.1(d)-2, Cowboy owns the Cowboy Properties free and clear of any Lien. (e) Validity and Priority of Security Interest. Pledgor has and will have at all times full right, power and authority to pledge, assign and grant a security interest in the Collateral to Pledgee in the manner provided herein, free and clear of any Lien (including, without limitation, any restriction, contractual or otherwise, on the transferability of the Pledged LLC Interests except as expressly provided in Section 7.4 of the LLC Agreement) except as expressly permitted by the Financing Agreement, restrictions imposed by the Securities Act and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, and restrictions on pledges of the Pledged LLC Interests under the LLC Agreement. Pledgor represents and warrants that all restrictions under the LLC Agreement on the pledge, assignment and granting of a security interest to Pledgee in the Collateral have been fully complied with and that the Pledgor has full right, power and authority under the LLC Agreement to pledge, assign and grant a security interest in the Collateral to Pledgee pursuant to this Agreement. The pledge and assignment of, and grant of a security interest in the Collateral pursuant to this Agreement, the delivery to Pledgee of the certificates described on Schedule 3.1(d)-1 together with a stock power endorsed in blank for each such certificate, and the filing of the financing statements delivered concurrently herewith by Pledgor to Pledgee will perfect, and establish the first priority of, Pledgee's security interest hereunder in the Collateral securing the Obligations. No further or subsequent filing, recording, registration, other public notice or other action is necessary or desirable to perfect or otherwise continue, preserve or protect such security interest, except for continuation statements or filings upon the occurrence of the events stated in Subsection 3.3(m). (f) No Conflicts or Consents. Neither the ownership of the Collateral by Pledgor, nor the pledge and assignment of, and grant of a security interest in, the Collateral to Pledgee pursuant to this Agreement, nor the exercise by Pledgee of its rights or remedies hereunder, will (i) conflict with any provision of (A) any applicable domestic or foreign law, statute, rule or regulation (including, without limitation, federal and state securities laws, state "Blue Sky" laws and orders of the Securities and Exchange Commission), (B) the articles or certificate of incorporation, charter or bylaws of Pledgor, or (C) any agreement, judgment, license, order or permit applicable to or binding upon Pledgor, or (ii) result in or require the creation of any Lien upon any assets or properties of Pledgor or any Related Person except as expressly contemplated in the Obligation Documents or the LLC Agreement. Except as expressly contemplated in the Obligation Documents, no consent, approval, authorization or order of, and no notice to or filing with any court, governmental authority or third party is required in connection with the pledge and assignment of, and grant of a security interest in, the Collateral to Pledgee pursuant to this Agreement or the exercise by Pledgee of its rights and remedies hereunder. (g) Location of Borrowers, Records and Collateral. Borrowers' chief executive offices and principal places of business and the offices where the records concerning the Collateral and the Other Collateral are kept is located at 143 Union Boulevard, Suite 210, Lakewood, Colorado 80228. The Other Collateral is located at the Refinery Facilities in Nye County, Nevada. (h) Litigation. There is no action, suit or proceeding pending against, or to Pledgor's knowledge threatened against or affecting Cowboy before any court, any arbiter, or any governmental department, agency, official or instrumentality except for any actions, suits or proceedings that would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on Cowboy. (i) Compliance with Law. Cowboy is not in violation of any applicable law, rule, regulation, judgment, injunction, order or decree, except for violations that have not had and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on Cowboy. (j) Environmental. (1) The Cowboy Properties are, and, except as previously disclosed to Pledgee in writing, to the best of Pledgor's knowledge, at all times have been, operated in compliance with all applicable Environmental Laws (as hereinafter defined); and to the best of Pledgor's knowledge, no condition exists with respect to the Cowboy Properties or any other property owned or operated by Cowboy or any Affiliate of or party related to Cowboy that would or could reasonably be expected to subject Cowboy, any Borrower, any Affiliate of or party related to Cowboy or any Borrower, or Pledgee to any damages (including without limitation, actual, consequential, exemplary and punitive damages), material liability (absolute or contingent, determined or determinable), penalties, injunctive relief or cleanup costs under any applicable Environmental Laws, or that require or could reasonably be expected to require cleanup, removal, remedial action or other response by Cowboy, any Borrower, any Affiliate of or party related to Cowboy or any Borrower, or Pledgee pursuant to any applicable Environmental Laws. (2) Neither Pledgor nor Cowboy has received, and, to the best of Pledgor's knowledge, none of their respective Affiliates have received, and none of Cowboy's or its Affiliates' or Related Parties' predecessors in title to the Cowboy Properties have received, any notice from a governmental agency asserting or alleging a violation of any Environmental Laws as they relate to the Cowboy Properties. (3) There are no pending or threatened suits, actions, claims or proceedings against Cowboy or its Affiliates or Related Parties or, to the best of Pledgor's knowledge, Cowboy's or its Affiliates' predecessors in title, arising from or related to, directly or indirectly, any Environmental Laws as they relate to the Cowboy Properties. (4) Neither Pledgor, Cowboy, any Affiliate of or party related to Cowboy or any part of the Cowboy Properties, nor, to the best of Pledgor's knowledge, Cowboy's or any Affiliate's or Related Parties' predecessors are subject to any judgment, decree, order or citation related to or arising out of any Environmental Laws, and neither Cowboy nor any Affiliate or party related to Cowboy has been named or listed as a potentially responsible party by any governmental or other entity in a matter arising under or relating, directly or indirectly, to any Environmental Laws. (5) Cowboy has obtained or caused to be obtained all permits, licenses, and approvals required under all Environmental Laws to operate the Cowboy Properties. (6) Except as previously disclosed to Pledgee in writing, there are not now, nor to the best of Pledgor's knowledge have there ever been, Hazardous Materials (as hereinafter defined) discharged, leaked, spilled or released in, on, to, from or at any of the Cowboy Properties or other properties owned or operated by Cowboy or any of its Affiliates or stored, treated or recycled at or in tanks or other facilities thereon or related thereto which give rise or could reasonably be expected to give rise to material liability under any Environmental Laws. (7) The use which Cowboy and Pledgor make and intend to make of the Cowboy Properties will not result in: (a) the use or storage of any Hazardous Materials on, in or in connection with the Cowboy Properties, or disposal of any Hazardous Materials from the Cowboy Properties except in compliance with all applicable Environmental Laws, or (b) the treatment, processing, discharge or release of any Hazardous Materials on, in, to or from the Cowboy LLC Properties except in compliance with all applicable Environmental Laws. (8) There are no underground storage tanks, surface impoundments, or wastewater injection wells located on or in the Cowboy Properties. As used herein, the term "Environmental Laws" shall mean any one or more of the following: (i) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986, 42 U.S.C. S 9601 et seq. ("CERCLA"); (ii) the Resource Conservation and Recovery Act, as amended by the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C. S 6901 et seq. ("RCRA"); (iii) the Clean Air Act, 42 U.S.C. S 7401 et seq.; (iv) the Federal Water Pollution Control Act, 33 U.S.C. S 1251 et seq.; (v) the Toxic Substances Control Act, 15 U.S.C. S 2601 et seq.; (vi) the Federal Safe Drinking Water Act, 42 U.S.C. SS 300f to 300j-11; (vii) the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. S 1101 et seq.; (viii) the Hazardous Materials Transportation Act, 49 U.S.C. S 1801 et seq.; and (ix) all other foreign, federal, state, tribal and local laws (whether common or statutory), rules, regulations, consent agreements, compliance schedules, and orders directly and/or indirectly relating to public health and safety, air pollution, water pollution, noise control, wetlands, oceans, waterways, and/or the presence, use, generation, manufacture, transportation, processing, treatment, handling, discharge, release, disposal, or recovery of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or materials and/or underground storage tanks, including, without limitation, all rules, regulations and orders of all state and local governmental bodies, authorities and agencies pertaining or relating to the exploration, development, regulation and conservation of oil and gas resources, as each of the foregoing laws, rules, regulations, consent agreements, compliance schedules and orders may be enacted, amended, supplemented, or reauthorized from time to time. As used herein, the term "Hazardous Materials" shall mean any one or more of the following substances, wastes and materials: (i) any substance, waste or material defined as a "hazardous substance," "hazardous material," "hazardous waste," "pollutant," "contaminant," "toxic material," or "toxic substance," in any of the applicable Environmental Laws, or in the standards, criteria, rules and/or regulations promulgated pursuant to any of said Environmental Laws (including without limitation Hydrocarbons); and (ii) any substance, waste or material, the presence of which requires investigation or remediation under any Environmental Laws. (k) Permits. Cowboy is in possession of all licenses, permits and authorizations required for the conduct of Cowboy's business, and all such licenses, permits and authorizations are valid and in full force and effect. Cowboy is in compliance with all conditions imposed by or in connection with such licenses, permits and authorizations and with respect to the conduct of its business and Cowboy has not received notice of or has any knowledge or reason to believe that any authority intends to cancel, terminate or modify any of such licenses, permits or authorizations or adopt or modify rules and regulations which would adversely affect any such license, permit or authorization. Section 3.2. Affirmative Covenants. Unless Pledgee shall otherwise consent in writing, Pledgor shall at all times comply with the covenants and agreements contained in this Section 3.2 from the date hereof and so long as any part of the Obligations or the Commitment is outstanding. (a) Delivery of Collateral. Pledgor agrees to deliver all cash, instruments and other property described in Section 2.1 above and all additional membership interests and securities described in Section 2.1 above to Pledgee within three Business Days after receipt by Pledgor and to execute all pledge agreements, security agreements, stock powers, financing statements and all other documents that Pledgee deems necessary or advisable to grant Pledgee a valid, perfected first priority security interest in such Collateral. (b) Ownership and Liens. Pledgor shall at all times remain the sole legal and beneficial owner of the Collateral free and clear of all Liens, except for the security interest created by this Agreement, Liens expressly permitted by the Financing Agreement, and restrictions imposed by the Securities Act and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Pledgor shall defend Pledgee's right, title and special property and security interest in and to the Collateral against the claims of any Person. (c) Further Assurances. Pledgor shall, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable or that Pledgee may reasonably request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest; (ii) to enable Pledgee to exercise and enforce its rights and remedies hereunder with respect to the Collateral; or (iii) to otherwise effect the purposes of this Agreement, including, without limitation, (A) executing and filing such financing or continuation statements, or amendments thereto, and such other instruments or notices as may be necessary or desirable in order to perfect and preserve the pledge, assignment and security interest created or purported to be created hereby, and (B) furnishing to Pledgee from time to time statements and schedules further identifying and describing the Collateral and such other reports as Pledgee may reasonably request, all in reasonable detail. (d) Information. Pledgor shall, and shall cause the other Borrowers to, furnish to Pledgee any information that Pledgee may from time to time reasonably request concerning any covenant, provision or representation contained herein or any other matter in connection with the Collateral or the Obligation Documents. (e) Punctual Payment and Performance. Pledgor shall, and shall cause the other Borrowers to, duly and punctually pay the principal and interest on the Loans and to perform all its obligations and covenants under the Obligation Documents. (f) Existence; Maintenance of Collateral. Pledgor shall, and shall cause Cowboy and each other Borrower to, do or cause to be done all things necessary to preserve and keep in full force and effect its corporate or limited liability company existence, rights and franchises, as the case may be, except when failure to do so would not have a material adverse effect on Pledgor, Cowboy or such other Borrower, as the case may be. Pledgor shall, and shall cause each other Borrower to, cause all of its property, rights and interests that constitute Collateral or Other Collateral under any Obligation Document and its business to be maintained and kept, in accordance with sound field practices, in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof. Pledgor shall cause Cowboy to cause all of the Cowboy/Foreland Properties and its business to be maintained and kept, in accordance with sound field practices, in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof. (g) Title to Properties. Pledgor shall, and shall cause each other Borrower to, maintain good and marketable title to all of its property, rights and interests that constitute Other Collateral under any Obligation Document, free and clear of all Liens, except for Liens expressly permitted by the Financing Agreement. Pledgor shall, and shall cause each other Borrower to, warrant and forever defend its right, title and interest in such property and assets against the claims and demands of every Person whatsoever claiming or which may claim the same or any part thereof. Pledgor shall cause Cowboy to maintain good and marketable title to the Cowboy/Foreland Properties and to warrant and forever defend its right, title and interest in such property and assets against the claims and demands of every Person whatsoever claiming or which may claim the same or any part thereof. (h) Insurance. Pledgor shall, and shall cause each other Borrower to, acquire and continue to maintain, with financially sound and reputable insurers, insurance with respect to its respective properties and business against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated; provided, however, that Pledgor shall, and Pledgor shall cause each other Borrower to, maintain liability insurance in the amount of not less than $2,000,000 with a deductible not to exceed $25,000 per claim. Pledgor shall, and shall cause each other Borrower to, furnish or cause to be furnished copies of binders relating to such insurance to Pledgee prior to Funding and from time to time a summary of the insurance coverage of Pledgor and the other Borrowers in form and substance satisfactory to Pledgee and if requested to furnish Pledgee copies of the applicable policies. In the case of any fire, accident or other casualty causing loss or damage to the properties of Pledgor or any other Borrower, Pledgor shall, and shall cause such Borrower to, use the proceeds of such policies (i) to repair or replace the damaged property, or (ii) subject to Pledgee's prior written consent and notwithstanding any restriction on prepayment, to prepay the Obligations without premium or penalty. (i) Taxes and Other Claims. Pledgor shall, and shall cause Cowboy and each other Borrower to, duly pay and discharge before the same shall become due or delinquent all taxes, assessments and other governmental charges imposed upon Pledgor, Cowboy or such Borrower, as the case may be, and its respective properties, sales and activities, or any part thereof, or upon the income or profits therefrom, or burdening any of Pledgor's, Cowboy's or such Borrower's properties or assets, as the case may be, as well as all claims for labor, materials or supplies, including all claims incurred in connection with the operation of Pledgor's, Cowboy's and such Borrower's respective businesses, properties and assets, which if unpaid might by law become a lien or charge upon any of Pledgor's, Cowboy's or such Borrower's property; provided, however, that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested by Pledgor, Cowboy or such Borrower, as the case may be, in good faith by appropriate proceedings and if Pledgor, Cowboy or such Borrower, as the case may be, shall have set aside on its books adequate reserves with respect thereto; and provided, further, that Pledgor shall, and shall cause Cowboy and each other Borrower to, pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. (j) Securities Filings. Pledgor shall, and shall cause Cowboy and each other Borrower to, duly file or cause to be filed, within the times and within the manner prescribed by law (including all permitted extensions), all federal and state securities and blue sky filings that are required to be filed by, or with respect to, Pledgor, Cowboy or such Borrower, as the case may be, including without limitation all filings required to be made pursuant to the Securities Exchange Act of 1934, as amended. Pledgor shall, and shall cause Cowboy and each other Borrower to, deliver to Pledgee copies of all filings made by such Person with the Securities and Exchange Commission and any state securities commission or agency within three days of such filing. If a filing to be made by Pledgor or any other Borrower or Cowboy with the Securities and Exchange Commission or a state securities commission or agency refers to Pledgee, preliminary copies of such filing shall be delivered to Pledgee and to Pledgee's counsel no later than five Business Days prior to such filing with a final copy delivered to Pledgee at the time of filing. Pledgor shall, and shall cause each other Borrower to, deliver to Pledgee copies of all press releases at the time of release; unless such release refers to Pledgee, in which case advance copies shall be delivered to Pledgee and to Pledgee's counsel no later than two Business Days prior to such release. (k) Inspection of Properties and Books. Pledgor shall, and shall cause Cowboy and each other Borrower to, permit Pledgee and its authorized representatives to (i) visit and inspect any of its properties and to examine its books and records (and to make copies thereof and extracts therefrom; provided, that Pledgee will use its reasonable efforts to preserve the confidentiality of any information derived therefrom), and (ii) discuss the affairs, finances and accounts of Pledgor, Cowboy or such Borrower, as the case may be, with, and to be advised as to the same by, the officers of Pledgor, Cowboy and such Borrower, independent accountants, and independent engineers all at such reasonable times and intervals as Pledgee may reasonably request. (l) Compliance with Laws, Contracts, Licenses and Permits. Pledgor shall, and shall cause Cowboy and each other Borrower to, comply with (i) all Permits and Requirements of Law, (ii) the provisions of its charter or organizational documents and bylaws, (iii) all agreements and instruments by which it or any of its properties may be bound, and (iv) all applicable decrees, orders and judgments, except in each case where noncompliance would not have a material adverse effect on the business, assets or financial condition of Pledgor, Cowboy or such Borrower, as the case may be. If at any time while any part of the Obligations or the Commitment is outstanding, any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or required in order that Pledgor or any other Borrower may fulfill any of its obligations under any Obligation Document, Pledgor shall, and shall cause such Borrower to, immediately take all reasonable steps within its power to obtain such authorization, consent, approval, permit or license and furnish Pledgee with evidence thereof. (m) Litigation. Pledgor shall, and shall cause each other Borrower to, promptly give Pledgee notice of all legal or arbitral proceedings, and of all proceedings before any governmental or regulatory authority or agency, to which Pledgor or such Borrower or Cowboy is a party or which affects Pledgor, Cowboy or such Borrower and of which Pledgor or such Borrower is aware, except for proceedings before any governmental or regulatory authority or agency occurring in the ordinary course of Pledgor's, Cowboy's or such Borrower's business, and that would not have a material adverse effect upon Pledgor's, Cowboy's or such Borrower's business or its properties and assets if determined adversely to Pledgor, Cowboy or such Borrower, as the case may be. (n) Notices. Pledgor shall, and shall cause each other Borrower to, promptly after acquiring knowledge thereof, notify Pledgee in writing of the occurrence of any Default or Event of Default and of any material adverse change in the business, assets or financial condition of Pledgor, Cowboy or such Borrower, as the case may be. If any Person shall give any notice or take any other action with respect to a claimed default (whether or not constituting an Event of Default) under any Obligation Document or any other note, evidence of indebtedness, indenture or other obligation to which or with respect to which Pledgor or any other Borrower is a party or obligor, whether as principal or surety, Pledgor shall, and shall cause such Borrower to, forthwith give written notice thereof to Pledgee, describing the notice or action and the nature of the claimed default. Pledgor shall, and shall cause each other Borrower to, promptly notify Pledgee (i) if any representation or warranty of Pledgor or such Borrower contained in this Agreement or any other Obligation Document is discovered to be or becomes untrue, or (ii) if Pledgor or such Borrower fails to perform or comply with any covenant or agreement contained in this Agreement or any other Obligation Document or it is reasonably anticipated that Pledgor or such Borrower will be unable to perform or comply with any covenant or agreement contained in this Agreement or any other Obligation Document. Pledgor shall, and shall cause each other Borrower to, cause all the representations and warranties of Pledgor and the other Borrowers contained in this Agreement and the other Obligation Documents to be true and correct in all material respects from time to time and at all times. (o) Use of Loan Proceeds. Pledgor shall, and shall cause each other Borrower to, use the proceeds of the Loans solely for the purposes expressly permitted by the Financing Agreement. Pledgor shall, and shall cause each other Borrower to, maintain any funds that have been advanced for such purposes, but not expended, at a depository institution satisfactory to Pledgee and Pledgor shall, and shall cause such Borrower to, deliver copies of all invoices for expenditure of such funds to Pledgee. (p) Key Employee. Pledgor shall cause Foreland Corp. to continue to employ N. Thomas Steele as President of Foreland Corp. on a full-time basis with substantially the same responsibilities as of the date of this Agreement. (q) Environmental Laws Compliance. Pledgor shall, and shall cause Cowboy and each other Borrower to: (i) Comply with all applicable Environmental Laws as they relate to the Properties and the Cowboy/Foreland Properties and shall, and shall cause each other Borrower to, maintain and obtain, or cause to be maintained and obtained, all permits, licenses and approvals now or hereafter required under all applicable Environmental Laws as they relate to the Other Collateral or the Cowboy/Foreland Properties; (ii) Not do or permit anything to be done that will subject the Other Collateral, the Cowboy/Foreland Properties, Pledgor, Cowboy, any other Borrower or Pledgee to any liability under any applicable Environmental Laws as they relate to the Other Collateral or the Cowboy/Foreland Properties, assuming disclosure to governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Other Collateral and the Cowboy/Foreland Properties; (iii) Promptly notify Pledgee in writing of any Environmental Complaint relating to the Other Collateral or the Cowboy Properties which is known to Pledgor or such Borrower, as the case may be, or any other existing, pending or threatened investigation or inquiry by any governmental authority relating to the Other Collateral or the Cowboy Properties known to Pledgor or such Borrower, as the case may be, and in connection with any applicable Environmental Laws. (iv) Take, or cause to be taken, all steps necessary to determine that no Hazardous Materials have been: (i) used or stored on, in or in connection with any Other Collateral that Pledgor or any other Borrower acquires with any funds that Pledgor or such Borrower receives from Pledgee in accordance with the Financing Agreement, or disposed from such Other Collateral, or (ii) treated, processed, discharged, or released on, to, in or from such Other Collateral, except, in each case, in full compliance with all applicable Environmental Laws; (v) Not cause or permit: (i) the use or storage of Hazardous Materials on, in or in any manner in connection with the Other Collateral or the Cowboy/Foreland Properties, or (ii) the treatment, processing, discharge or release of any Hazardous Materials on, to, in or from the Other Collateral or the Cowboy/Foreland Properties, except, in each case, in full compliance with all applicable Environmental Laws; (vi) Keep, or cause the Other Collateral and the Cowboy/Foreland Properties to be kept, free of any and all Hazardous Materials, and shall, and shall cause Cowboy and each other Borrower to, remove the same (or if removal is prohibited by applicable law, shall, and shall cause Cowboy and each other Borrower to, take whatever action is required by applicable law) promptly upon discovery of such Hazardous Materials at Borrowers' or Cowboy's sole cost and expense, except in full compliance with all applicable Environmental Laws; and (vii) Provide, upon Pledgee's reasonable request, at any time, and from time to time, inspections, tests and audits of the Other Collateral and the Cowboy/ Foreland Properties from an engineering or consulting firm approved by Pledgee indicating the presence or absence of Hazardous Materials on the Other Collateral and the Cowboy/Foreland Properties and compliance with all applicable Environmental Laws. (r) Change of Control. Pledgor shall, and shall cause each other Borrower to, use its best efforts to not permit a Change of Control to occur and shall, and shall cause each other Borrower to, notify Pledgee within five Business Days of obtaining information that a Change in Control of such Person may occur or is contemplated by any Person. (s) Operation of Assets. Pledgor shall, and shall cause Cowboy and the other Borrowers to, operate the Other Collateral and the Cowboy/Foreland Properties continuously in a good and workmanlike manner, in accordance with the best usage of operators of similar facilities and in accordance with industry standards, and in conformity in all material respects with all applicable laws, rules, regulations and orders of all federal, state, tribal and local governmental bodies, authorities and agencies and in conformity in all material respects with the provisions of all leases, licenses, subleases, sublicenses, permits, easements, rights- of-way, servitudes, franchises, grants, certificates and authorizations or other contracts and agreements comprising a part of the Other Collateral or the Cowboy/Foreland Properties. (t) Contract Approval. Pledgor shall, and shall cause each other Borrower to, submit to Pledgee for its review and approval at least ten days in advance of the date such Borrower intends to enter into a contract (including a modification or amendment of any existing contract), each proposed contract for the refining, fractionating, treatment, marketing, purchase, sale, transportation, exchange, manufacturing or processing of Hydrocarbons if such contract was not in effect as of the date of this Agreement and has a term of ninety days or more ("Proposed Hydrocarbon Contracts"). Pledgor shall not, and shall cause each other Borrower not to, enter into any Proposed Hydrocarbon Contracts that establish pricing and have a term of one year or more or make deliveries thereunder without obtaining Pledgee's prior written approval, which approval shall not be unreasonably withheld if Pledgee's security position is not adversely affected thereby. (u) Additional Information. For so long as any part of the Obligations or the Commitment is outstanding, Pledgor shall, and shall cause each other Borrower to, permit Pledgee to substantially participate in, and influence the conduct of, management of Borrowers through the exercise of any and all of the following rights (provided, however, that Pledgee shall have no right to direct the management of any Borrower): (i) promptly provide to Pledgee such information as Pledgee shall reasonably request regarding Pledgor's or such Borrower's business, financial condition and prospects; (ii) if Pledgee reasonably believes that financial or other developments affecting Pledgor or such Borrower have impaired or are likely to impair Pledgor's or such Borrower's ability to perform its obligations under this Agreement, permit Pledgee, upon request, reasonable access to Pledgor's and such Borrower's management or Board of Directors to present its views with respect to such developments; (iii) provide to Pledgee the financial information required in Section 7.3 of the Financing Agreement; and (iv) permit Pledgee to make the examinations and inspections of properties, books and records, and to consult with Pledgor's and such Borrower's officers, as required in Section 7.11 of the Financing Agreement. Section 3.3. Negative Covenants. Unless Pledgee otherwise consents in writing, Pledgor shall at all times comply with the covenants contained in this Section 3.3 from the date hereof and so long as any part of the Obligations or the Commitment is outstanding. (a) Additional Shares. Pledgor shall not vote in favor of or approve any request to increase Cowboy's authorized membership interests, or to issue additional membership interests or securities convertible into or exchangeable for membership interests or other equity interests in Cowboy or to otherwise take any action that would render the Pledged LLC Interests less than 33.33% of Cowboy's issued and outstanding membership interests. (b) Transfer or Encumbrance. Pledgor shall not assign, sell or otherwise dispose of any Collateral and shall not create or suffer to exist any Lien (including, without limitation, any restriction, contractual or otherwise, on the transferability of the Pledged LLC Interests) on or with respect to the Collateral, nor shall Pledgor deliver actual or constructive possession of the Collateral to any other Person, except for (i) the security interest created by this Agreement, (ii) Liens expressly permitted by the Financing Agreement, (iii) restrictions imposed by the Securities Act and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, (iv) with respect to Pledgor's ability to transfer its membership interests in Cowboy, restrictions on transfer imposed by the LLC Agreement (provided that any such restrictions on transfer shall not restrict Pledgee's ability to transfer Pledgor's membership interests in Cowboy in accordance with this Agreement and applicable law except as provided in the LLC Agreement attached to this Agreement), and (v) possession by Pledgee or its nominee pursuant to this Agreement. (c) Governing Documents; Form of Membership Interests. Pledgor shall not consent to, cause or permit any amendment or modification to the LLC Agreement, Cowboy's articles of organization or other governing documents. Pledgor shall not consent to, cause or permit the Pledged LLC Interests to be in other than certificated form. (d) Possession of Collateral. Pledgor shall not cause or permit any certificates, chattel paper, documents or instruments which are included in the Collateral at any time to be in the actual or constructive possession of any Person other than Pledgor or Pledgee. (e) Impairment of Security Interest. Pledgor shall not take or fail to take any action that would in any manner impair the value or enforceability of Pledgee's security interest in any Collateral. (f) Use of Proceeds. Pledgor shall not, and shall cause each other Borrower not to, use the proceeds of the Loans for any purpose not expressly permitted by the Financing Agreement. Pledgor shall not, and shall cause each other Borrower not to, without Pledgee's prior written approval, make any expenditure of the Development Loan in an amount in excess of 110% of the amount stated in the AFE pertaining to such expenditure that was approved by Pledgee. (g) Dividends, Distributions and Redemptions. Pledgor shall not, and shall cause each other Borrower not to, declare or pay any dividend, purchase, redeem or otherwise acquire for value any of its stock now or hereafter outstanding, or return any capital or make any other distribution to its stockholders or members, except to the extent such declaration, payment, purchase, redemption, acquisition or return is solely between Borrowers. (h) Nature of Business. Pledgor shall not, and shall cause each other Borrower not to, engage in any business other than oil and gas exploration, development, production, processing, refining, transportation and marketing, and business activities ancillary thereto. Pledgor shall cause Cowboy not to engage in any business other than those businesses permitted by the LLC Agreement as of the date hereof. (i) Restrictions on Liens. Pledgor shall not, and shall cause each other Borrower not to, create or incur, or suffer to be created or incurred or to exist, any Lien (other than Liens expressly permitted by the Financing Agreement) upon any of its properties, rights and interests that constitute Collateral or Other Collateral under any of the Obligation Documents, whether now owned or hereafter acquired, or upon the proceeds, income or profits therefrom, and shall, and shall cause each other Borrower to, pay all vendor payables and other trade payables when due. (j) Collateral Sales. Except as set forth in Sections 7.6 and 7.7 of the Financing Agreement, Pledgor shall not, and shall cause each other Borrower not to, sell, lease, assign, transfer or otherwise dispose of any of the Collateral or the Other Collateral, except for (i) sales of Hydrocarbons in the ordinary course of Borrowers' respective businesses, and (ii) as otherwise permitted pursuant to the Obligation Documents. (k) Sale or Discount of Receivables. Pledgor shall not, and shall cause each other Borrower not to, discount or sell any of their notes receivable or accounts receivable. (l) Affiliate Transactions. Pledgor shall not, and shall cause Cowboy and each other Borrower not to, engage in any transaction with any of their Affiliates, except on terms no less favorable than are obtainable in arms-length transactions with third parties. (m) Financing Statement Filings. Pledgor recognizes that financing statements pertaining to the Collateral and the Other Collateral have been or may be filed where any Borrower maintains any Collateral or Other Collateral, has its records concerning any Collateral or Other Collateral or has its chief executive office or chief place of business. Without limitation of any other covenant herein, Pledgor shall not, and shall cause each other Borrower not to, cause or permit any change to be made in its name, identity or corporate structure, or any change to be made to a jurisdiction other than as represented in Section 3.1(g) in (i) the location of any Collateral or Other Collateral, (ii) the location of any records concerning any Collateral or Other Collateral, or (iii) the location of its chief executive office or principal place of business, unless such Borrower has notified Pledgee of such change at least thirty days prior to the effective date of such change, and shall have first taken all action required by Pledgee for the purpose of further perfecting or protecting the security interest in favor of Pledgee in the Collateral and Other Collateral. Each notice furnished to Pledgee pursuant to this Subsection 3.3(m) shall expressly state that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purposes of continuing perfection of Pledgee's security interest in the Collateral and Other Collateral. (n) Mergers and Sales of Assets. Pledgor shall not, and shall cause Cowboy and each other Borrower not to, merge or consolidate with or into any other entity unless Pledgor, Cowboy or such other Borrower, as the case may be, is the surviving entity and no Event of Default has occurred or will occur as a result of such merger or consolidation. Pledgor shall not, and shall cause Cowboy and each other Borrower not to, lease, sell or transfer all, or substantially all, of its property assets or business to any other Person, or dispose of or sell any material portion of its assets, property or business, or dispose of any equity in any Affiliate. (o) No Loans or Guarantees to Officers, Directors, Managers or Shareholders/Partners. Pledgor shall not, and shall cause each other Borrower not to, directly or indirectly, make any guarantee, loan, advance, extension of credit, commitment to fund, or commitment to satisfy in any way, any debt, liability, or other obligation to pay any Person (except for the other Borrowers), including its officers, directors, managers, employees, shareholders, partners or any Affiliate of such Person, including, without limitation (a) an obligation to any bank under any letter of credit, (b) an obligation to maintain working capital or equity capital of the business other than the initial investment, or (c) an obligation to otherwise maintain the net worth or solvency of the business, with respect to any business in which Pledgor or such other Borrower is engaged other than the business described in section 7.18 of the Financing Agreement. Pledgor shall not, and shall cause each other Borrower not to, make any repayment on any Indebtedness owed to any of their respective Affiliates, or any shareholder, member, officer, director, manager or Affiliate of such Person, except as expressly permitted pursuant to the Financing Agreement. (p) Foreclosure. Pledgor shall not, and shall cause Cowboy and each other Borrower not to, attempt in any way to hinder or interfere with the exercise of the power of sale granted in any of the Obligation Documents, including without limitation the filing of a lis pendens, the initiation of any lawsuit or the requesting of injunctive relief from any court or tribunal, or any other action which would have the effect of hindering or delaying the exercise by Pledgee of any right or remedy under this Agreement or any other Obligation Document, and Pledgor shall, and shall cause each other Borrower to execute and deliver to Pledgee any instrument reasonably requested by Pledgee and prepared at Borrowers' expense, which is necessary to fully vest title to the Collateral and the Other Collateral or the purchaser(s) of all or part of the Collateral or the Other Collateral pursuant to any sale as provided for in the Obligation Documents. ARTICLE IV POWERS AND AUTHORIZATIONS Section 4.1 Voting, Dividends and Other Payments. (a) So long as there exists no Default hereunder: (i) Pledgor shall be entitled to exercise any and all voting and/or consensual rights and powers relating or pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms hereof. (ii) Pledgor shall be entitled to receive and retain any and all dividends and other distributions paid with respect to the Collateral; provided, that any and all (A) dividends and other distributions (including without limitation dividends and distributions of membership interests) paid or payable other than in cash with respect to, and instruments and other property received, receivable or otherwise distributed with respect to, or in exchange for, any of the Collateral for any reason, including, without limitation, any change in the number or kind of outstanding shares of any securities of Cowboy or any successor to Cowboy by reason of any recapitalization, merger, consolidation, reorganization, separation, liquidation, stock split, stock dividend, combination of shares or other similar corporate event; (B) dividends and other distributions paid or payable in cash with respect to any of the Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus; and (C) cash paid, payable or otherwise distributed with respect to principal of, or in redemption of, or in exchange for any of the Collateral, shall be, and shall be forthwith delivered to Pledgee to hold as, Collateral and shall, if received by Pledgor, be received in trust for the benefit of Pledgee, be segregated from the other property or funds of Pledgor, and be forthwith delivered to Pledgee as Collateral in the same form as so received, with any necessary indorsement or assignment. (b) Upon the occurrence of a Default hereunder or at any time thereafter: (i) All rights of Pledgor (A) to exercise or refrain from exercising the voting and other consensual rights which Pledgor would otherwise be entitled to exercise pursuant to Section 4.1(a)(i), and (B) to receive the dividends and distributions to which Pledgor would otherwise be authorized to receive and retain pursuant to Section 4.1(a)(ii), shall automatically cease, and all such rights shall thereupon become vested in Pledgee which shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights and to receive and hold as Collateral such dividends. In furtherance of Pledgee's rights hereunder, Pledgor shall execute an undated letter to Cowboy in the form of Exhibit D attached hereto directing and authorizing Cowboy to make dividends and distributions payable to Pledgor directly to Pledgee pursuant to section 4.4(b) of the LLC Agreement and Pledgor hereby authorizes Pledgee, at any time a Default exists hereunder, to date and to deliver such letter to Cowboy. Pledgor further agrees to promptly notify Pledgee of any change in the name, identity or address of the manager of the Company, and if any Person other than Bruce Decker becomes president of Pledgor, and upon any such change to execute a new letter in the form of Exhibit D hereto reflecting such change. (ii) All dividends which are received by Pledgor contrary to the provisions of Section 4.1(b)(i) shall be received in trust for the benefit of Pledgee, shall be segregated from other property and funds of Pledgor and shall be forthwith paid over to Pledgee as Collateral in the same form as so received, with any necessary indorsement or assignment. Section 4.2. Power of Attorney. Pledgor hereby irrevocably appoints Pledgee as Pledgor's attorney-in-fact and proxy, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Pledgee's discretion, to take any action and to execute any instrument which Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation (a) to receive, endorse and collect all instruments made payable to Pledgor representing any dividend or other distribution with respect to the Collateral or any part thereof and to give full discharge for the same, (b) to file any reports or other filings with the Securities and Exchange Commission or any other governmental authority or regulatory body that may be substituted therefor, to the extent such reports or other filings are required by applicable law in order for Pledgee to exercise its rights under this Agreement or any other Obligation Document, (c) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or with respect to any of the Collateral, (d) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (c) of this Section 4.2, (e) to file any claims or take any action or institute any proceedings which Pledgee may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Pledgee with respect to any of the Collateral, and (f) to execute and file one or more financing or continuation statements, and amendments thereto, relating to the Collateral. Such appointment is coupled with an interest and shall be irrevocable from the date hereof and so long as any part of the Obligations or the Commitment is outstanding. Section 4.3. Performance by Pledgee. If Pledgor fails to perform any agreement or obligation contained herein, Pledgee may itself, at its option and in its sole discretion, perform, or cause performance of, such agreement or obligation, and the expenses of Pledgee incurred in connection therewith shall be payable by Pledgor under Section 7.4; provided, however, that nothing herein shall impose any obligation of any kind whatsoever on Pledgee to perform under any obligation or agreement of Pledgor. ARTICLE V EVENTS OF DEFAULT AND REMEDIES Section 5.1. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" hereunder: (a) Failure of Pledgor to pay any fee or other amount due Pledgee under this Agreement within 10 days after the date that any such payment is due; (b) Failure of Pledgor to perform or observe any covenant, agreement, indemnity, condition or provision in this Agreement and such failure shall continue for 30 days after written notice of such failure has been given to Pledgor; (c) Any of Pledgor's representations or warranties made in this Agreement or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any material respect as of the date made or deemed made; or (d) An "Event of Default" as defined in the Financing Agreement shall occur. Section 5.2. Remedies. Upon the occurrence of any Event of Default, or at any time thereafter, in addition to all other rights, powers and remedies herein conferred, conferred in the other Obligation Documents or conferred by operation of law, Pledgee may declare the Obligations immediately due, payable and performable, including all principal and interest remaining unpaid on the Notes and all other amounts secured hereby or thereby, all without demand, presentment or notice, all of which are hereby expressly waived; and from time to time in its discretion, without limitation and without notice except as expressly provided below Pledgee may: (a) Exercise with respect to the Collateral all the rights and remedies of a secured party on default under the Code (whether or not the Code applies to the affected Collateral); (b) Require Pledgor to, and Pledgor hereby agrees that it shall at its expense and upon request of Pledgee forthwith, assemble all or part of the Collateral as directed by Pledgee and make it available to Pledgee at a place to be designated by Pledgee which is reasonably convenient to both parties; (c) Reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest created hereby by any available judicial procedure; (d) Dispose of, at its office, on the premises of Pledgor or elsewhere, all or any part of the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale of any part of the Collateral shall not exhaust Pledgee's power of sale, but sales may be made from time to time, and at any time, until all of the Collateral has been sold or until the obligations have been paid and performed in full), and at any such sale it shall not be necessary to exhibit any of the Collateral; (e) Buy the Collateral, or any portion thereof, at any public sale; (f) Buy the Collateral, or any portion thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type that is the subject of widely distributed standard price quotations; (g) Apply by appropriate judicial proceedings for appointment of a receiver for the Collateral, or any part thereof, and Pledgor hereby consents to any such appointment; and (h) At its discretion, retain the Collateral in satisfaction of the Obligations whenever the circumstances are such that Pledgee is entitled to do so under the Code or otherwise. Pledgor agrees that, to the extent notice of sale shall be required by law, five days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Pledgee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Section 5.3. Sale of Securities. Pledgor recognizes that Pledgee may be unable to effect a public sale of any or all of the portions of Collateral that constitute securities by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, but may be compelled to resort to one or more private sales thereof to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. Pledgee shall be under no obligation to delay a sale of any of such securities for the period of time necessary to permit Pledgor to register such securities for public sale under the Securities Act or under applicable state securities laws. Section 5.4. Application of Proceeds. Upon the occurrence of any Event of Default, or at any time thereafter, Pledgee may in its discretion apply any cash held by Pledgee as Collateral, and any cash proceeds received by Pledgee with respect to any sale of, collection from, or other realization upon all or any part of the Collateral, to any or all of the following in such order as Pledgee may elect: (a) To the repayment of the out-of-pocket costs and expenses, including attorneys' fees and legal expenses, incurred by Pledgee in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (iii) the exercise or enforcement of any of the rights of Pledgee hereunder; or (iv) the failure of Pledgor to perform or observe any of the provisions hereof; (b) To the payment or other satisfaction of any liens and other encumbrances upon any of the Collateral; (c) To the reimbursement of Pledgee for the amount of any obligations of Pledgor or any Other Liable Party paid or discharged by Pledgee pursuant to the provisions of this Agreement or the other Obligation Documents, and of any expenses of Pledgee payable by Pledgor hereunder or under the other Obligation Documents; (d) To the satisfaction of any other Obligations or any other indebtedness of Pledgor to Pledgee; (e) By holding the same as Collateral; (f) To the payment of any other amounts required by applicable law (including without limitation, Section 9-504(1)(c) of the Code or any successor or similar, applicable statutory provision); and (g) By delivery to Pledgor or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction shall direct. Section 5.5. Deficiency. In the event that the proceeds of any sale, collection or realization of or upon the Collateral by Pledgee are insufficient to pay all amounts to which Pledgee is legally entitled, Pledgor shall be liable for the deficiency, together with interest thereon as provided in the governing Obligation Documents or (if no interest is so provided) at such other rate as shall be fixed by applicable law, together with the costs of collection and the fees and expenses of any attorneys employed by Pledgee to collect such deficiency. Section 5.6. Non-Judicial Remedies. In granting to Pledgee the power to enforce its rights hereunder without prior judicial process or judicial hearing, Pledgor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Pledgee to enforce its rights by judicial process. In so providing for non-judicial remedies, Pledgor recognizes and concedes that such remedies are consistent with the usage of trade, are responsive to commercial necessity, and are the result of a bargain at arm's length. Nothing herein is intended to prevent Pledgee or Pledgor from resorting to judicial process at either party's option. Section 5.7. Other Recourse. Pledgor waives any right to require Pledgee to proceed against any other Person, exhaust any Collateral or other security for the Obligations, or to have any Other Liable Party joined with Pledgor in any suit arising out of the Obligations or this Agreement, or pursue any other remedy in Pledgee's power. Pledgor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension for any period of any of the Obligations of any Other Liable Party from time to time. Pledgor further waives any defense arising by reason of any disability or other defense of any Other Liable Party or by reason of the cessation from any cause whatsoever of the liability of any other Liable Party. Until all of the Obligations shall have been paid in full and the Commitment has terminated or expired, Pledgor shall have no right to subrogation and Pledgor waives the right to enforce any remedy which Pledgee has or may hereafter have against any Other Liable Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Pledgee. No action which Pledgee may take or omit to take in connection with any of the Obligation Documents or any of the Obligations shall release or diminish Pledgor's obligations, liabilities, duties or agreements hereunder, including without limitation, from time to time: (a) taking or holding any other property of any type from any other Person as security for the obligations, and exchanging, enforcing, waiving and releasing any or all of such other property, (b) applying the Collateral or such other property and directing the order or manner of sale thereof as Pledgee may in its discretion determine which is not inconsistent with the Obligation Documents, (c) renewing, extending for any period, accelerating, modifying, compromising, settling or releasing any of the obligations of any Other Liable Party with respect to any or all of the obligations or other security for the obligations, (d) waive, enforce, modify, amend or supplement any of the provisions of any Obligation Document with any Person other than Pledgor, and (e) release or substitute any Other Liable Party. Section 5.8. Remedies Not Exclusive. All rights, powers and remedies herein conferred are cumulative, and not exclusive, of (a) any and all other rights and remedies herein conferred or provided for, (b) any and all other rights, powers and remedies conferred or provided for in the Obligation Documents, and (c) any and all rights, powers and remedies conferred, provided for or existing at law or in equity, and Pledgee shall, in addition to the rights, powers and remedies herein conferred or provided for, be entitled to avail itself of all such other rights, powers and remedies as may now or hereafter exist at law or in equity for the collection of and enforcement of the Obligations and the enforcement of the warranties, representations, covenants, indemnities and other agreements contained in this Agreement and the Obligation Documents. Each and every such right, power and remedy may be exercised from time to time and as often and in such order as may be deemed expedient by Pledgee and the exercise of any such right, power or remedy shall not be deemed a waiver of the right to exercise, at the same time or thereafter, any other right, power or remedy. No delay or omission by Pledgee or other person in the exercise of any right, power or remedy will impair any such right, power or remedy or operate as a waiver thereof or of any other right, power or remedy then or thereafter existing. ARTICLE VI ENVIRONMENTAL INDEMNITY Pledgor agrees to indemnify, defend, and hold harmless Pledgee, its affiliates and related parties, and their respective directors, officers, shareholders, partners, members, employees, consultants and agents (individually, an "Indemnified Party," and collectively, "Indemnified Parties") from and against, and shall reimburse and pay Indemnified Parties with respect to, any and all claims, demands, liabilities, losses, damages (including without limitation actual, consequential, exemplary and punitive damages), causes of action, judgments, penalties, fees, costs and expenses (including without limitation attorneys' fees, court costs and legal expenses and consultant's and expert's fees and expenses) of any and every kind or character, known or unknown, fixed or contingent, that may be imposed upon, asserted against, or incurred or paid by or on behalf of any Indemnified Party on account of, in connection with, or arising out of (a) the breach of any representation or warranty of Pledgor relating to Environmental Laws or Hazardous Materials or any matter that would, but for the disclosure of such matter to Pledgee in writing in accordance with Section 3.1(j), constitute or give rise to the breach of any representation or warranty of Pledgor relating to Environmental Laws or Hazardous Materials, (b) the failure of Borrowers to perform any agreement, covenant or obligation required to be performed by Borrowers relating to Environmental Laws or Hazardous Materials, (c) any act or omission by Cowboy or Crown with respect to any of the Cowboy Properties that, if taken or omitted by Pledgor or Cowboy with respect to any of the Cowboy/Foreland Properties, would constitute a failure of Pledgor to perform any agreement, covenant or obligation of Pledgor under Section 3.2(q), (d) any violation of or failure to comply with any Environmental Law now existing or hereafter occurring, (e) the removal of Hazardous Materials from the Cowboy Properties or the Other Collateral (or if removal is prohibited by law, the taking of whatever action is required by law), (f) any act, omission, event or circumstance existing or occurring or resulting from or in connection with the ownership, construction, occupancy, operation, use or maintenance of the Cowboy Properties or the Other Collateral, regardless of whether the act, omission, event or circumstance constituted a violation of or failure to comply with any Environmental Law at the time of its existence or occurrence, and (g) any and all claims or proceedings (whether brought by private party or governmental agency) for bodily injury, property damage, abatement or remediation, environmental damage, or impairment or any other injury or damage resulting from or relating to any Hazardous Material located upon or migrating into, on, from or through the Cowboy Properties or the Other Collateral (whether or not any or all of the foregoing was caused by Cowboy, Borrowers, a prior owner of the Cowboy Properties or the Other Collateral, an operator or prior operator of the Cowboy Properties or the Other Collateral, their respective tenants or subtenants, or any third party and whether or not the alleged liability is attributable to the handling, storage, use, treatment, processing, distribution, manufacture, generation, discharge, transportation or disposal of such Hazardous Material or the mere presence of such Hazardous Material on the Cowboy Properties or the Other Collateral). Without limiting the generality of the foregoing, it is the intention of Pledgor and Pledgor agrees that the foregoing indemnities shall apply to each Indemnified Party with respect to claims, demands, liabilities, losses, damages (including without limitation actual, consequential, exemplary and punitive damages), causes of action, judgments, penalties, fees, costs, court costs and legal expenses and consultant's and expert's fees and expenses, of any kind or character, known or unknown, fixed or contingent, that in whole or in part are caused by or arise out of the negligence of such Indemnified Party; however, such indemnities shall not apply to any Indemnified Party to the extent the subject of the indemnification is caused by or arises out of the gross negligence or willful misconduct of such Indemnified Party. Any amount to be paid hereunder by Pledgor to Pledgee or for which Pledgor has indemnified an Indemnified Party shall be a demand obligation owing by Pledgor to Pledgee and shall bear interest at the Default Rate until paid, and shall constitute a part of the Obligations and shall be indebtedness secured and evidenced by this Agreement. The foregoing agreements shall be perpetual and shall survive the payment or satisfaction of the Obligations and the release of this Agreement and the foreclosure or other termination of the liens and security interests created by this Agreement. ARTICLE VII MISCELLANEOUS Section 7.1. Notices. Any notice or communication required or permitted hereunder shall be given as provided in the Financing Agreement. Section 7.2. Entire Agreement. This Agreement (including the Exhibits hereto) and the Obligation Documents constitutes the entire understanding between the parties with respect to the subject matter hereof and supersedes all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. Section 7.3. Indemnity. Pledgor agrees to indemnify, defend and hold harmless Pledgee, upon request, from and against any and all claims, losses and liabilities (whether or not caused by Pledgee's negligence) growing out of or resulting from this Agreement (including without limitation, enforcement of this Agreement); provided, however, that Pledgor shall not be required to indemnify Pledgee for that portion of any such claims, losses or liabilities which are proximately caused by Pledgee's gross negligence or willful misconduct. If any Person (including, without limitation, any Related Person) ever alleges such gross negligence or willful misconduct by Pledgee, the indemnification provided for in this section shall nonetheless be paid upon demand, subject to later adjustment or reimbursement, until such time as a court of competent jurisdiction enters a final judgment as to the extent and effect of the alleged gross negligence or willful misconduct. Section 7.4. Costs and Expenses. Pledgor shall upon demand pay to Pledgee the amount of any and all costs and expenses, including the fees and disbursements of Pledgee's counsel and of any experts and agents, which Pledgee may incur in connection with (a) the transactions which give rise to this Agreement, (b) the preparation of this Agreement and the perfection and preservation of the security interest created under this Agreement, (c) the administration of this Agreement, (d) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (e) the exercise or enforcement of any of the rights of Pledgee hereunder, or (f) the failure by Pledgor to perform or observe any of the provisions hereof, except expenses resulting from Pledgee's gross negligence or willful misconduct. Section 7.5. Amendments. No amendment of any provision of this Agreement shall be effective unless it is in writing and signed by Pledgor and Pledgee, and no waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall be effective unless it is in writing and signed by Pledgee, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given and to the extent specified in such writing. Section 7.6. Preservation of Rights. No failure on the part of Pledgee to exercise, and no delay in exercising, any right hereunder or under any other Obligation Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. Neither the execution nor the delivery of this Agreement shall in any manner impair or affect any other security for the Obligations. The rights of Pledgee under any Obligation Document against any party thereto are not conditional or contingent on any attempt by Pledgee to exercise any of its rights under any other Obligation Document against such party or against any other Person. Section 7.7. Unenforceability. All rights, powers and remedies hereunder conferred shall be exercisable by Pledgee only to the extent not prohibited by applicable law; and all waivers or relinquishments of rights and similar matters shall only be effective to the extent such waiver or relinquishments are not prohibited by applicable law. If any provision of this Agreement or of any of the Obligation Documents is invalid or unenforceable in any jurisdiction, such provision shall be fully and severable from this Agreement and the other provisions hereof and the Obligation Documents shall remain in full force and effect in such jurisdiction and the remaining provisions hereof shall be liberally construed in favor of Pledgee in order to carry out the provisions and intent hereof. The invalidity of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of any such provision in any other jurisdiction. Section 7.8. Survival of Agreements. All representations and warranties of Pledgor herein, and all covenants and agreements herein shall survive the execution and delivery of this Agreement, the execution and delivery of the other Obligation Documents and the creation of the Obligations. Section 7.9. Other Liable Party. Neither this Agreement nor the exercise by Pledgee or the failure of Pledgee to exercise any right, power or remedy conferred herein or by law shall be construed as relieving any Other Liable Party from liability on the Obligations or any deficiency thereon. This Agreement shall continue irrespective of the fact that the liability of any Other Liable Party may have ceased or irrespective of the validity or enforceability of any other Obligation Document to which Pledgor or any Other Liable Party may be a party, and notwithstanding the reorganization, death, incapacity or bankruptcy of any Other Liable Party, and notwithstanding the reorganization or bankruptcy or other event or proceeding affecting any Other Liable Party. Section 7.10. Binding Effect and Assignment. This Agreement creates a continuing security interest in the Collateral and (a) shall be binding on Pledgor and its successors and permitted assigns, and (b) shall inure, together with all rights and remedies of Pledgee hereunder, to the benefit of Pledgee and its successors, transferees and assigns. Without limiting the generality of the foregoing, Pledgee may assign or otherwise transfer its rights under any Obligation Document to any other Person, and such other Person shall thereupon become vested with all of the benefits with respect thereto granted to Pledgee, herein or otherwise. None of the rights or obligations of Pledgor hereunder may be assigned or otherwise transferred without the prior written consent of Pledgee. Section 7.11. Termination. It is contemplated by the parties hereto that there may be times when no Obligations are outstanding, but notwithstanding such occurrences, this Agreement shall remain valid and shall be in full force and effect as to subsequent outstanding obligations. Upon the satisfaction in full of the Obligations, upon the termination or expiration of the Commitment and any other commitment of Pledgee to extend credit to Pledgor, and upon written request delivered by Pledgor to Pledgee, the security interest created by this Agreement shall terminate and all rights to the Collateral shall revert to Pledgor. Upon such event, Pledgee shall, upon Pledgor's request and at Pledgor's expense (a) return to Pledgor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof, and (b) execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. The termination of the security interests created by this Agreement, shall not terminate or otherwise affect Pledgee's right or ability to exercise any right, power or remedy on account of any claim for breach of warranty or representation, for failure to perform any covenant or other agreement, under any indemnity or for fraud, deceit or other misrepresentation or omission. Section 7.12. Financing Statement. This Agreement shall be deemed to be and may be enforced from time to time as an assignment, contract, financing statement, pledge agreement or security agreement, and from time to time as one or more thereof is appropriate under applicable state law. A carbon, photographic or other reproduction of this Agreement or of any financing statement in connection herewith shall be sufficient as a financing statement for any and all purposes and may be filed in any jurisdiction Pledgee may deem appropriate. Section 7.13. Rate of Interest. All interest required hereunder and under the Obligations shall be calculated on the basis of a year of 360 days. Section 7.14. Execution in Counterparts. This Agreement may be executed in one or more original counterparts. Each counterpart shall be deemed to be an original for all purposes, and all counterparts shall together constitute but one and the same instrument. Section 7.15. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. PLEDGOR HEREBY: (A) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS AND INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS OR ANY TRANSACTION PROVIDED FOR THEREIN OR ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY; (B) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (C) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE NOTES, THE FINANCING AGREEMENT AND ANY OTHER DOCUMENTS AND INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS AND THE TRANSACTIONS PROVIDED FOR HEREIN AND THEREIN, BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. Section 7.16. USURY SAVINGS. IT IS THE INTENTION OF THE PARTIES HERETO TO COMPLY WITH ALL APPLICABLE USURY LAWS; ACCORDINGLY, IT IS AGREED THAT NOTWITHSTANDING ANY PROVISIONS TO THE CONTRARY IN THIS INSTRUMENT, THE NOTES, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING, SECURING OR OTHERWISE RELATING TO THE OBLIGATIONS, IN NO EVENT SHALL SUCH DOCUMENTS OR INSTRUMENTS REQUIRE THE PAYMENT OR PERMIT THE COLLECTION OF INTEREST (WHICH TERM, FOR PURPOSES HEREOF, SHALL INCLUDE ANY AMOUNT WHICH, UNDER APPLICABLE LAW, IS DEEMED TO BE INTEREST, WHETHER OR NOT SUCH AMOUNT IS CHARACTERIZED BY THE PARTIES AS INTEREST) IN EXCESS OF THE MAXIMUM AMOUNT PERMITTED BY SUCH LAWS. IF ANY EXCESS INTEREST IS UNINTENTIONALLY CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THE TERMS OF THIS INSTRUMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS, OR IN THE EVENT THE MATURITY OF THE INDEBTEDNESS EVIDENCED BY THE NOTES IS ACCELERATED IN WHOLE OR IN PART, OR IN THE EVENT THAT ALL OR PART OF THE PRINCIPAL OR INTEREST OF THE NOTES SHALL BE PREPAID, SO THAT THE AMOUNT OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE AMOUNT OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THIS INSTRUMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS, ON THE AMOUNT OF PRINCIPAL ACTUALLY OUTSTANDING FROM TIME TO TIME UNDER THE NOTES SHALL EXCEED THE MAXIMUM AMOUNT OF INTEREST PERMITTED BY THE APPLICABLE USURY LAWS, THEN IN ANY SUCH EVENT (A) THE PROVISIONS OF THIS SECTION SHALL GOVERN AND CONTROL, (B) NEITHER PLEDGOR OR THE OTHER BORROWERS NOR ANY OTHER PERSON OR ENTITY NOW OR HEREAFTER LIABLE FOR THE PAYMENT THEREOF, SHALL BE OBLIGATED TO PAY THE AMOUNT OF SUCH INTEREST TO THE EXTENT THAT IT IS IN EXCESS OF THE MAXIMUM AMOUNT OF INTEREST PERMITTED BY SUCH APPLICABLE USURY LAWS, (C) ANY SUCH EXCESS WHICH MAY HAVE BEEN COLLECTED SHALL BE EITHER APPLIED AS A CREDIT AGAINST THE THEN UNPAID PRINCIPAL AMOUNT THEREOF OR REFUNDED TO BORROWERS AT PLEDGEE'S OPTION, AND (D) THE EFFECTIVE RATE OF INTEREST SHALL BE AUTOMATICALLY REDUCED TO THE MAXIMUM LAWFUL RATE OF INTEREST ALLOWED UNDER THE APPLICABLE USURY LAWS AS NOW OR HEREAFTER CONSTRUED BY THE COURTS HAVING JURISDICTION THEREOF. IT IS FURTHER AGREED THAT WITHOUT LIMITATION OF THE FOREGOING, ALL CALCULATIONS OF THE RATE OF INTEREST CONTRACTED FOR, CHARGED OR RECEIVED UNDER THE NOTES OR UNDER THIS AGREEMENT, THE FINANCING AGREEMENT OR ANY OTHER DOCUMENTS OR INSTRUMENTS EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS WHICH ARE MADE FOR THE PURPOSE OF DETERMINING WHETHER SUCH RATE EXCEEDS THE MAXIMUM LAWFUL RATE OF INTEREST, SHALL BE MADE, TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAWS, BY AMORTIZING, PRORATING, ALLOCATING AND SPREADING IN EQUAL PARTS DURING THE PERIOD OF THE FULL STATED TERM OF THE OBLIGATIONS EVIDENCED THEREBY, ALL INTEREST AT ANY TIME CONTRACTED FOR, CHARGED OR RECEIVED FROM BORROWERS OR OTHERWISE BY PLEDGEE IN CONNECTION WITH THE OBLIGATIONS. Section 7.17. GOVERNING LAW. THIS INSTRUMENT AND ALL MATTERS ARISING UNDER OR GROWING OUT HEREOF SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAWS, AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT TO THE EXTENT THAT PROCEDURAL AND SUBSTANTIVE MATTERS RELATING ONLY TO THE VALIDITY, CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS, SECURITY INTERESTS AND OTHER RIGHTS AND REMEDIES OF THIS AGREEMENT GRANTED HEREIN ARE PURSUANT TO APPLICABLE LAW GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS. EXCEPT AS TO THE VALIDITY, CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED HEREBY, PLEDGOR AND PLEDGEE AGREE THAT THE TRANSACTIONS PROVIDED FOR HEREIN BEAR A REASONABLE RELATIONSHIP TO THE COMMONWEALTH OF MASSACHUSETTS AND THAT THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS GOVERNS (A) ISSUES RELATING TO THE TRANSACTIONS PROVIDED FOR HEREIN, INCLUDING THE VALIDITY AND ENFORCEABILITY OF AN AGREEMENT RELATING TO SUCH TRANSACTIONS OR A PROVISION OF AN AGREEMENT, AND (B) THE INTERPRETATION OR CONSTRUCTION OF AN AGREEMENT RELATING TO SUCH TRANSACTIONS OR A PROVISION OF AN AGREEMENT. This Agreement is executed and delivered as of the date first above written. PLEDGOR: FORELAND ASPHALT CORPORATION, a Utah corporation By:/s/ Bruce C. Decker Title: President Taxpayer I.D. No. 84-1669800 PLEDGEE: ENERGY INCOME FUND, L.P., a Delaware limited partnership By: EIF GENERAL PARTNER, L.L.C., a Delaware limited liability company, its General Partner By: Robert D. Gershen, a Managing Director Taxpayer I.D. No. 04-3309082 EX-10 10 April 14, 1999 Foreland Corporation 143 Union Boulevard Suite 200 Lakewood, CO 80228 Re: Deferral of Principal Payment; Forbearance Gentlemen: You ("Borrowers") and we ("EIF") are parties to a Financing Agreement dated January 6, 1998, as amended by First Amendment to Financing Agreement dated August 10, 1998, and as further amended by Second Amendment to Financing Agreement dated February 4, 1999 (as amended, the "Financing Agreement"), providing that we will make certain loans to you under the conditions and subject to the terms set forth in the Financing Agreement. Payment Default. Borrowers have failed to make the principal payments due on April 1, 1999 under the Refinancing Loan, the Acquisition Loan and the Development Loan in the aggregate amount of $338,095.53. Borrowers have requested that EIF defer this payment. EIF is willing to agree to this request, subject to the conditions set forth in this letter. Borrowers shall make the regularly scheduled payments as set forth in the new amortization schedule attached to this letter as Exhibit A. Borrowers and EIF acknowledge that this new amortization schedule reflects the changes set forth in this letter, and that Borrowers have accepted the new schedule in substitution for the existing schedules that are currently attached to the Notes. Covenant Defaults. (i) The financial covenants set forth in Sections 7.23(a), 7.23(b), 7.23(c) and 7.23(d) and (ii) the collateral/indebtedness ratio covenant set forth in Section 2.14 of the Financing Agreement require Borrowers to maintain certain ratios and percentages as to equity, current assets to current liabilities, net income to total debt service expense and collateral value to debt by April 1, 1999, but Borrowers were not in compliance with these covenants as of that date. EIF agrees to waive compliance until May 15, 1999. EIF further agrees to waive Borrowers' compliance with Section 7.39(c) of the Financing Agreement regarding consummation of a Qualified Offering until May 15, 1999. Release. To induce EIF to execute this letter and to agree to the forbearance described in this letter, Borrowers represent and warrant that no Borrower has any claims, counterclaims, setoffs, actions or causes of action of any kind or nature whatsoever against EIF, its directors, officers, partners, employees, agents, attorneys, legal representatives, successors or assigns, directly or indirectly, arising out of, based upon or in any manner connected with any "Prior Related Event" (as hereinbelow defined), and hereby releases, discharges and forever waives and relinquishes any and all such claims, counterclaims, setoffs, actions and causes of action against EIF, whether known or unknown, asserted or unasserted, established or unestablished, determined or undetermined, proven or unproven, absolute or inchoate or contingent, held individually or jointly, arising directly, indirectly, derivatively or in any other manner, from the beginning of the world to the date hereof. As used herein the term "Prior Related Event" means any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, whether known or unknown, which occurred, existed, was taken, permitted or begun, prior to the date hereof, and occurred, existed, was taken, was permitted or begun in accordance with, pursuant to, or by virtue of, any of the terms of any of the Loan Documents, or which was related or connected in any manner, directly or indirectly, to the Loans or any of the Loan Documents. Nothing contained herein shall be construed to release EIF from liability for any acts after the date of execution of this release. Neither the offer of this release by Borrowers nor its acceptance by EIF shall constitute an acknowledgment of or admission by EIF of liability for any matter or a precedent upon which any liability may be asserted. Any waivers by EIF are limited to the circumstances described in this letter and will not be deemed to be a waiver of any other provision of the Financing Agreement, except as expressly set forth herein. Borrowers hereby expressly acknowledge that failure by EIF to enforce its rights under these sections of the Financing Agreement in the past does not entitle Borrowers to any such forbearance under these or any other sections of the Financing Agreement in the future. Borrowers further agree that it shall be an Event of Default (as that term is defined in the Financing Agreement) if Borrowers fail to comply with the conditions set forth above, and that EIF shall be entitled to exercise any and all remedies available to it upon the happening of an Event of Default. All capitalized terms used in this letter that are not otherwise defined herein shall have the meanings ascribed to them in the Financing Agreement. If the foregoing accurately reflects your understanding of our agreement, please execute a copy of this letter and return it to us. Sincerely yours, ENERGY INCOME FUND, L.P. By: EIF General Partner, L.L.C., its General Partner By /s/ Steven P. McDonald Vice President ACKNOWLEDGED AND AGREED: FORELAND CORPORATION By /s/ N. Thomas Steele President EAGLE SPRINGS PRODUCTION LIMITED-LIABILITY COMPANY By /s/ N. Thomas Steele Manager FORELAND REFINING CORPORATION By /s/ Bruce C. Decker President FORELAND ASPHALT CORPORATION By /s/ Bruce C. Decker President FORELAND ASSET CORPORATION By /s/ Bruce C. Decker President FORELAND TRANSPORTATION, INC. By /s/Bruce C. Decker President
Foreland Corporation Combined Loan Amortization Schedule January 9, 1998 Beginning Ending |------------Payments---------------------| Days Date Principal Principal Interest Principal Total 9-Jan-98 - 5,425,279.34 - - - 23 1-Feb-98 5,425,279.34 5,925,279.34 41,593.80 - 41,593.80 28 1-Mar-98 5,925,279.34 5,925,279.34 54,969.27 - 54,969.27 31 1-Apr-98 5,925,279.34 5,925,279.34 61,227.89 - 61,227.89 30 1-May-98 5,925,279.34 5,925,279.34 59,252.79 - 59,252.79 31 1-Jun-98 5,925,279.34 5,925,279.34 61,227.89 - 61,227.89 30 1-Jul-98 5,925,279.34 5,925,279.34 59,252.79 - 59,252.79 31 1-Aug-98 5,925,279.34 12,375,279.34 61,227.89 - 61,227.89 31 1-Sep-98 12,375,279.34 12,375,279.34 104,227.89 - 104,227.89 30 1-Oct-98 12,375,279.34 12,375,279.34 123,752.79 - 123,752.79 31 1-Nov-98 12,375,279.34 12,375,279.34 127,877.89 - 127,877.89 30 1-Dec-98 12,375,279.34 12,375,279.34 123,752.79 - 123,752.79 31 1-Jan-99 12,375,279.34 12,375,279.34 127,877.89 - 127,877.89 31 1-Feb-99 12,375,279.34 12,375,279.34 127,877.89 - 127,877.89 28 1-Mar-99 12,375,279.34 12,575,279.34 115,502.61 - 115,502.61 31 1-Apr-99 12,575,279.34 12,575,279.34 129,744.56 - 129,744.56 30 1-May-99 12,575,279.34 12,227,842.72 125,752.79 347,436.62 473,189.41 31 1-Jun-99 12,227,842.72 11,880,406.10 126,354.38 347,436.62 473,791.00 30 1-Jul-99 11,880,406.10 11,532,969.48 118,804.06 347,436.62 466,240.68 31 1-Aug-99 11,532,969.48 11,185,532.86 119,174.02 347,436.62 466,610.64 31 1-Sep-99 11,185,532.86 10,838,096.24 115,583.84 347,436.62 463,020.46 30 1-Oct-99 10,838,096.24 10,490,659.62 108,380.97 347,436.62 455,817.59 31 1-Nov-99 10,490,659.62 10,143,223.00 108,403.47 347,436.62 455,840.09 30 1-Dec-99 10,143,223.00 9,795,786.38 101,432.23 347,436.62 448,868.85 31 1-Jan-00 9,795,786.38 9,488,438.61 101,223.14 307,347.77 408,570.91 31 1-Feb-00 9,488,438.61 9,181,090.84 98,047.20 307,347.77 405,394.97 29 1-Mar-00 9,181,090.84 8,873,743.07 88,750.55 307,347.77 396,098.32 31 1-Apr-00 8,873,743.07 8,566,395.30 91,695.34 307,347.77 399,043.11 30 1-May-00 8,566,395.30 8,259,047.53 85,663.96 307,347.77 393,011.73 31 1-Jun-00 8,259,047.53 7,951,699.76 85,343.48 307,347.77 392,691.25 30 1-Jul-00 7,951,699.76 7,644,351.99 79,517.01 307,347.77 386,864.78 31 1-Aug-00 7,644,351.99 7,337,004.22 78,991.64 307,347.77 386,339.41 31 1-Sep-00 7,337,004.22 7,029,656.45 75,815.70 307,347.77 383,163.47 30 1-Oct-00 7,029,656.45 6,722,308.68 70,296.56 307,347.77 377,644.33 31 1-Nov-00 6,722,308.68 6,414,960.91 69,463.85 307,347.77 376,811.62 30 1-Dec-00 6,414,960.91 6,107,613.14 64,149.62 307,347.77 371,497.39 31 1-Jan-01 6,107,613.14 5,853,717.16 63,112.00 253,895.98 317,007.98 31 1-Feb-01 5,853,717.16 5,599,821.18 60,488.41 253,895.98 314,384.39 28 1-Mar-01 5,599,821.18 5,345,925.20 52,264.99 253,895.98 306,160.97 31 1-Apr-01 5,345,925.20 5,092,029.22 55,241.23 253,895.98 309,137.21 30 1-May-01 5,092,029.22 4,838,133.24 50,920.31 253,895.98 304,816.29 31 1-Jun-01 4,838,133.24 4,584,237.26 49,994.05 253,895.98 303,890.03 30 1-Jul-01 4,584,237.26 4,330,341.28 45,842.38 253,895.98 299,738.36 31 1-Aug-01 4,330,341.28 4,076,445.30 44,746.86 253,895.98 298,642.84 31 1-Sep-01 4,076,445.30 3,822,549.32 42,123.27 253,895.98 296,019.25 30 1-Oct-01 3,822,549.32 3,568,653.34 38,225.50 253,895.98 292,121.48 31 1-Nov-01 3,568,653.34 3,314,757.36 36,876.08 253,895.98 290,772.06 30 1-Dec-01 3,314,757.36 3,060,861.38 33,147.58 253,895.98 287,043.56 31 1-Jan-02 3,060,861.38 0.00 31,628.90 3,060,861.38 3,092,490.28 $3,896,822.00 $12,575,279.34 $16,472,101.34
EX-21 11 Schedule of Subsidiaries Exhibit 21.01 State of Name Incorporation EAGLE SPRINGS PRODUCTION LIMITED LIABILITY COMPANY NEVADA FORELAND REFINING CORPORATION TEXAS FORELAND ASSET CORPORATION NEVADA FORELAND ASPHALT CORPORATION UTAH FORELAND TRANSPORATION UTAH COWBOY ASPHALT TERMINAL, LLC UTAH KRUTEX ENERGY UTAH EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1998, AND STATEMENTS OF OPERATIONS FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS Dec-31-1998 Jan-01-1998 Dec-31-1998 1,849,782 700,000 2,771,085 0 1,166,361 6,652,149 20,206,375 (13,115,997) 14,642,687 15,204,774 0 9,673 0 524 (572,284) 14,642,687 10,532,289 10,542,237 6,864,301 972,886 16,804,911 0 1,865,920 (12,154,089) 0 (12,154,089) 0 (36,822) 0 (13,909,133) (1.57) (1.48)
EX-23 13 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 10, 1999, on our audits of the consolidated financial statements of Foreland Corporation as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. /s/ HEIN + ASSOCIATES LLP Denver, Colorado April 14, 1999 EX-23 14 MALKEWICZ HUENI ASSOCIATES April 13, 1999 Kruse, Landa & Maycock, L.L.C. 50 West Broadway 8th Floor Salt Lake City, Utah 84101-2034 We consent to the use of our report respecting Foreland Corporation's (the "Company"), properties and the discussion of such report as contained in the Company's annual report on Form 10-K for the year ended December 31, 1998 and to the incorporation by reference of such report as it is referred to in the Company's annual report to the Registration Statements on Form S-3, SEC File Nos. 333-19063 and 333-03779 and 333-49471 and the Registration Statement on Form S-8, SEC File Nos. 333-45025. Sincerely, Malkewicz Hueni Associates, Inc. /s/ Gregory B. Hueni Vice President 14142 Denver West Parkway, Suite 190 Golden, Colorado 80401 U.S.A. (303) 277-0270 Fax: (303) 277-0267 -----END PRIVACY-ENHANCED MESSAGE-----