-----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, AA+4RwYL8oVz38TneWYF0H4Bv8o4TAp8kZpDDJB2m2xEadk6idlZ16JG6Uorhfg8 c9TNUNWSzgkyabAPK7Ijtw== 0000914233-99-000076.txt : 19991122 0000914233-99-000076.hdr.sgml : 19991122 ACCESSION NUMBER: 0000914233-99-000076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991119 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-Q SEC ACT: SEC FILE NUMBER: 000-14096 FILM NUMBER: 99761425 BUSINESS ADDRESS: STREET 1: 143 UNION BOULEVARD STREET 2: SUITE 210 CITY: LAKEWOOD STATE: CO ZIP: 80228 BUSINESS PHONE: 3039883122 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 FORELAND CORPORATION (Exact name of registrant as specified in its charter) Nevada 87-0422812 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 143 Union Boulevard, Suite 210 Lakewood, Colorado 80228 (Address of principal executive offices) (Zip Code) (303) 988-3122 (Registrant's Telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. As of November 11, 1999, Foreland had outstanding 9,723,206 shares of its common stock, par value $0.001 per share. PART I FINANCIAL INFORMATION - ------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The consolidated condensed financial statements included herein have been prepared by Foreland Corporation without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. However, in the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the periods presented have been made. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Foreland's annual report on Form 10-K for the period ended December 31, 1998. Certain reclassifications have been made to conform the 1998 financial statements to the presentations of the 1999 financial statements. The reclassifications had no effect on net income. The financial statements do not reflect Foreland's agreement on November 15, 1999, to surrender voluntarily the assets securing its principal indebtedness. FORELAND CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS Sept 30, 1999 Dec 31, 1998 ------------- ------------ Current assets: Cash and cash equivalents $ 584,657 $ 1,849,782 Accounts receivable - trade (net of reserves) 2,914,147 2,771,085 Inventory 1,750,750 1,166,361 Marketable securities - 700,000 Prepaid expenses and other 399,960 164,921 ----------- ------------ Total current assets 5,649,514 6,652,149 Property and equipment, at cost: Oil and gas properties, under the successful efforts method 13,574,841 13,566,505 Refineries and building 6,733,879 4,845,472 Transportation and other equipment 1,304,745 1,007,571 Office furniture and equipment 398,554 419,317 Construction in progress 34,003 367,509 ----------- ------------ 22,046,022 20,206,374 Less accumulated depreciation, depletion, and amortization (13,728,816) (13,115,997) ----------- ------------ Total property and equipment 8,317,206 7,090,377 Other assets: Debt issuance costs, net of accumulated amortization 479,237 576,190 Investment in Cowboy Asphalt Terminal 163,023 172,177 Deposits and other 364,673 151,794 ----------- ------------ Total other assets 1,006,933 900,161 ----------- ------------ Total assets $ 14,973,653 $ 14,642,687 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt, in default, net of discount of $772,870 in 1999 and $1,219,786 in 1998 $ 12,360,885 $ 11,168,213 Current maturities of long term debt (refining) 48,251 - Line of credit facility - - Accounts payable and accrued expenses 2,882,053 2,378,274 Officers' salaries payable 428,651 434,813 Accrued expenses and other debt 1,216,331 1,223,474 ----------- ------------ Total current liabilities 16,936,171 15,204,774 Long-term debt (refining), less current maturities 600,558 - Stockholders' Equity (Deficit): Preferred Stock, $0001 par value, 5,000,000 shares authorized; 524,243 shares issued and outstanding in 1998 (liquidation preference of $2,891,757), 437,243 shares issued and outstanding in 1999 (liquidation preference of $2,940,843) 437 524 Common Stock, $0001 par value, 50,000,000 shares authorized;9,723,206 and 9,673,191 shares issued and outstanding, respectively 9,723 9,673 Additional paid-in capital 39,625,574 39,366,477 Less note and stock subscriptions receivable (336,435) (338,921) Accumulated deficit (41,862,375) (39,599,840) ----------- ------------ Total stockholders' equity (2,563,076) (562,087) Total liabilities and stockholders' equity $ 14,973,653 $ 14,642,687 ============= ============
See accompanying notes to these consolidated financial statements FORELAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ----------------------------- 1999 1998 1999 1998 ---------- ----------- ------------ ------------ REVENUES: Refining and transportation $8,425,018 $ 4,204,027 $ 20,300,107 $ 4,204,027 Oil and gas sales - 346,906 - 1,077,212 Other income, net 7,063 393 12,819 1,497 ---------- ----------- ------------ ------------ Total revenues 8,432,081 4,551,326 20,312,926 5,282,736 EXPENSES: Refinery and transportation Cost of goods sold 6,160,235 3,054,757 14,558,368 3,054,757 Repairs and maintenance 234,542 - 674,624 - Other 856,564 557,960 2,291,179 557,960 Oil production costs: Lease production and operations - 186,806 - 706,932 Enhanced oil recovery project - 151,610 - 525,573 Oil exploration costs: Dry hole, abandonment and impairment costs (12,404) 672,805 (222,200) 1,163,270 Other 113,469 238,912 532,265 715,179 General and administrative costs: Shareholder-investor services 63,527 33,811 160,657 104,790 Stock-based compensation - Employees - 6,180 - 18,524 Other 497,631 312,668 1,811,355 682,562 Depreciation, depletion, and amortization 239,852 416,113 653,252 795,393 ---------- ----------- ------------ ------------ Total expenses 8,153,416 5,631,622 20,459,500 8,324,940 ---------- ----------- ------------ ------------ OPERATING INCOME (LOSS) $ 278,665 $(1,080,296) $ (146,574) $ (3,042,204) OTHER INCOME (EXPENSE) Gain (Loss) on sale of asset - 11,723 5,751 15,183 Interest income 10,193 18,037 51,526 100,025 Interest expense (745,677) (421,970) (2,173,238) (1,072,491) ---------- ----------- ------------ ------------ NET LOSS $ (456,819) $(1,472,506) $ (2,262,535) $ (3,999,487) Preferred stock dividends: Accrued (60,000) - (180,000) - Imputed - - - - ---------- ----------- ------------ ------------ Net loss applicable to common shareholders $ (516,819) $(1,472,506) $ (2,442,535) $ (3,999,487) ---------- ----------- ------------ ------------ NET LOSS PER COMMON SHARE $ (0.05) $ (0.16) $ (0.25) $ (0.46) ========== =========== ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,721,300 9,019,000 9,700,000 8,680,700 ========== =========== ============ ============
See accompanying notes to these consolidated financial statements FORELAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ------------------------------- 1999 1998 ------------ ------------ Cash flow from operating activities: Net loss $ (2,262,535) $ (3,999,487) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion, and amortization 653,252 795,393 Dry hole, abandonment and impairment costs 4,177 1,163,270 Issuance of stock for services 25,000 18,150 Issuance of stock for interest 235,781 - Accrued note receivable interest income (20,158) (19,652) Amortization of loan origination fee 446,926 477,603 Forgiveness of debt for services 20,923 18,524 Gain on sale of other properties (5,751) (15,183) Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (158,062) (488,608) Bad debt reserve 15,000 - Inventory (584,389) 414,398 Prepaids and other 464,961 (457,018) Increase (decrease) in: Accounts payable and accrued expenses 230,865 757,138 Salaries payable 30,849 54,155 ------------ ------------ Net cash used in operating activities (903,161) (1,281,317) Cash flows from investing activities: Capital expenditures for property and equipment (1,872,277) (3,983,013) Investment in Cowboy Asphalt Terminal 17,290 - Proceeds from sale of assets 9,556 23,250 Other Assets 88,912 (92,386) ------------ ------------ Net cash (used in) provided by investing activities (1,756,519) (4,052,149) Cash flows from financial activities: Proceeds from exercise of warrants and options - 32,000 Proceeds from borrowing long-term debt 1,403,166 7,375,279 Payment of long-term debt (8,611) (679,384) ------------ ------------ Net cash provided by financing activities 1,394,555 6,727,895 ------------ ------------ Increase (decrease) in cash and cash equivalents (1,265,125) 1,394,429 Cash and cash equivalents, beginning of year 1,849,782 40,631 ------------ ------------ Cash and cash equivalents, end of period $ 584,657 $ 1,435,060 ============ ============ Supplemental disclosures of cash flow information: Cash paid for interest $ 572,903 $ 306,804 ============ ============ Non-cash investing and financing activities $ 20,158 $ 19,652 ============ ============
See accompanying notes to these consolidated financial statements. 1. OIL AND GAS PROPERTIES: Foreland Corporation was incorporated under the laws of the state of Nevada in 1985 to engage in oil exploration, development, and production. Since August 1998, Foreland has been engaged in refining and transportation operations utilizing assets and equipment acquired from a third-party. The acquisition of such assets was financed through a credit facility with Energy Income Fund, L.P. ("EIF"). Since the fourth quarter of 1998, Foreland has been in default on the terms of such indebtedness. On October 15, 1999, Foreland agreed to surrender voluntarily the assets securing its principal indebtedness, which assets consisted substantially of all of Foreland's operating assets. 2. ISSUANCE OF SECURITIES, COMMON STOCK OPTIONS, AND PURCHASE WARRANTS: During the first quarter of 1999, Foreland engaged an investment banker to assist it in identifying potential sources for an investment, strategic alliance, and/or sale or merger of some or all of Foreland's lines of business. In connection with such engagement, Foreland issued to the investment banker 23,055 shares of Common Stock and granted the consultant warrants to purchase 30,000 shares of Common Stock at an exercise price of $1.08. 3. LONG TERM DEBT: Foreland entered into a financing arrangement with "EIF" in January 1998, which was amended in August 1998 and February 1999. Through September 30, 1999, Foreland had drawn $12,575,279 under the financing arrangement and further loan commitments are now terminated. Foreland has not made any required principal amortization payments under the loan, which payments were originally to commence in November 1998 and subsequently deferred until May 1, 1999. Foreland has not complied with certain financial covenants relating to minimum collateral-to-indebtedness ratio, cash flow, equity requirements, current ratio, debt service ratio, and general and administrative expense ratios and has not paid all interest due under the loan. Foreland and EIF continued to discuss restructuring of the indebtedness throughout much of 1999. On November 15, 1999, Foreland agreed to voluntarily surrender the collateral pledged to secure the indebtedness. (See "Subsequent Events" below.) During the first quarter of 1999, Foreland entered into a line-of-credit agreement with a bank. The line provides for borrowings up to $2,000,000, has an interest rate of 8.75%, and has a maturity date of February 15, 2000. Borrowings under the line-of-credit are collateralized by accounts receivable and inventories of Foreland Refining. 4. RELATED PARTY TRANSACTIONS: Foreland owed $428,651 in salaries and interest to two current officers and directors, and a former officer and director, at September 30, 1999. Foreland also had outstanding loans to one current officer and director and two former officers and directors in the amount of $336,437 as of such date. Effective September 2, 1997, Foreland entered into new executive employment agreements with its executive officers in order to provide a prospective lender assurances that key management personnel would have a strong incentive to remain in their positions during the term of the loan. Under the agreements, during 1998, N. Thomas Steele, and Bruce C. Decker received base salaries of $125,000, and $119,000, respectively. Each employment agreement is for a 36-month term and is automatically renewed each month for a new 36-month term. The employment agreements contain covenants not to compete for two years after termination of employment, restrictions on the disclosure of confidential information, provisions for reimbursement of expenses and payment of major medical insurance coverage, and an agreement of Foreland to register securities of Foreland held by such persons at the request of the employees. In connection with the agreements, N. Thomas Steele and Bruce C. Decker received ten-year options to purchase 200,000 shares of Common Stock at a price of $2.50 per share. Additionally, each executive received ten-year options to purchase 100,000 shares of Common Stock at an exercise price of $5.00 per share. Such options are now 75% vested and vest in equal increments on the next two anniversary dates. In the event of termination of employment resulting from a change in control not approved by the board of directors, each executive will receive payment, in cash or Common Stock, at the executive's option, in an amount equal to the executive's base salary for the remaining term of his respective employment agreement plus any incentive compensation previously earned. In addition, all options held by the executive shall immediately become vested and exercisable and the executive shall receive payment equal to the fair market value of the options granted under the employment agreement times the number of unexercised options in consideration of the cancellation of such options. 5. INCOME TAXES: Foreland adopted the liability method of accounting for income taxes as prescribed by Statement of Financial Accounting Standards No. 109 (SFAS 109) effective January 1993. Financial statements of prior years have not been restated to apply the new method retroactively. The change in accounting method had no effect on the net loss for 1993 or prior years. Foreland has had no taxable income under federal and state tax laws due to operating losses since its inception; therefore, no provision for income taxes has been made. At December 31, 1998, Foreland had unused net operating loss carry-forwards of approximately $43 million. This carry-forward expires in varying amounts from 1999 to 2018. A portion of this net operating loss carry- forward may be subject to reduction or limitation of use as a result of changes in ownership or certain consolidated return filing regulations. 6. REPORTING BY SEGMENTS: Through July 1998, Foreland's operations were concentrated in oil and gas producing activities. Beginning in August 1998, Foreland also became engaged in the refining and transportation segment. Sales from the oil and gas producing segment to refining are based on prices paid to unrelated parties. Foreland evaluates performance based on net income or loss. Presented below is a summary of results of operations for each segment for the nine months ended September 30, 1999. Oil & Gas Refining and Consolidation Producing Transportation Entries Consolidated Revenues: External customers 1,057 $20,343,801 $ ( 31,932) $20,312,926 Inter-segment 1,124,765 - (1,124,765) Interest Income 29,583 21,943 - 51,526 Total revenues 1,155,405 20,365,744 (1,156,697) 20,364,452 Costs & expenses: Refinery/transport cost of goods - 15,144,439 (586,071) 14,558,368 Repairs & maintenance - 674,624 - 674,624 Other - 2,291,179 - 2,291,179 Oil & gas production 570,626 - (570,626) - Oil & gas exploration 532,265 - - 532,265 General & administrative 965,443 1,006,568 - 1,972,011 Dry hole costs (222,200) - - (222,200) Depreciation, depletion, & amortization 93,304 559,949 - 653,253 Interest & other, net 1,659,538 507,949 - 2,167,487 ---------- ----------- ----------- ----------- Total expenses $3,598,976 $20,184,708 $(1,156,697) $22,626,987 ========== =========== =========== =========== Net Income(Loss) $(2,443,571) $ 181,036 $ - $(2,262,535) =========== =========== =========== =========== Total assets for each segment as of September 30, 1999 are as follows: $ 2,318,597 $12,652,679 $ 2,377 $14,973,653 =========== =========== =========== =========== 7. SUBSEQUENT EVENTS: Foreland agreed to surrender voluntarily the assets securing the principal indebtedness with a current outstanding balance of approximately $13.5 million. The assets to be conveyed consist of Foreland's Eagle Springs Field and other producing properties, Foreland's refining and marketing operations, its transportation company, and a principal exploration prospect and related database. Foreland will retain the balance of its Nevada oil exploration database that it has accumulated during the past approximately 15 years and other exploration prospects. In addition, Foreland has retained for six months the right to participate at a 50% interest in drilling ventures on the principal exploration prospect surrendered to EIF, in agreed circumstances. - ------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Caution Respecting Forward-Looking Information This report contains certain forward-looking statements and information relating to Foreland that are based on the beliefs of management as well as assumptions made by and information currently available to management. When used in the document, the words "anticipate," "believe," "estimate," "expect," and "intend" and similar expressions, as they relate to Foreland or its management, are intended to identify forward-looking statements. Such statements reflect the current view of Foreland respecting future events and are subject to certain risks, uncertainties, and assumptions, including the risks and uncertainties noted. Should one or more of these risk or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated expected or intended. Overview This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Conditions and Results of Operations in Foreland's annual report on Form 10-K for the year ended December 31, 1998. Since its organization in June 1985, Foreland has been engaged principally in oil exploration in the Great Basin and Range of Nevada, an area that management believes has potential for the discovery of major oil reserves. In an effort to increase the financial return to Foreland from its crude oil productions and expand its operations, Foreland acquired the Eagle Spring Refinery and Tonopah Refinery assets and trucking fleet from Petro Source in August 1998 and began crude oil refining and marketing of petroleum products. The assets were acquired utilizing funds provided under the financing arrangement with Energy Income Fund, L.P. ("EIF"). Foreland initiated and was successful in implementing programs to reduce costs, acquire oil production from other sources, increase refinery margins, and reduce overhead and general administrative expenses. However, commencing in the fourth quarter of 1998 and continuing throughout 1999, Foreland was unable to generate sufficient cash flow to commence required principal payments due under the EIF loan. In addition, Foreland has not complied with certain financial covenants relating to minimum collateral-to-indebtedness ratio, cash flow, equity requirements, current ratio, debt service ratio, and general administrative expense ratios, and has not paid all interest due under the loan. Foreland's efforts to increase income and cash flow were further hampered by the extremely low oil prices at the end of 1998 and continuing into 1999. These prices resulted in less exploration being undertaken in Nevada, which such exploration could possibly have provided additional sources of throughput for Foreland's refineries. During most of 1999, Foreland and EIF continued to have discussions respecting the restructuring of the principal indebtedness. These discussions ultimately ceased on November 4, 1999, and on November 15, 1999, Foreland agreed to surrender voluntarily the assets securing the principal indebtedness, which had a current outstanding balance at such time of approximately $13.5 million. The assets to be conveyed consist of Foreland's Eagle Springs Field and other producing properties, Foreland's refining and marketing operations, its transportation company, and a principal exploration prospect and related database. Foreland will retain the balance of its Nevada oil exploration database that it has accumulated during the past approximately 15 years and other exploration prospects. In addition, Foreland has retained for six months the right to participate at a 50% interest in drilling ventures on the principal exploration prospect surrendered to EIF, in agreed circumstances. In 1999, Foreland Refining Corporation, a subsidiary of Foreland, established a line of credit with First Security Bank for $2,000,000 at 8.75% which is collateralized by accounts receivable and inventory. Foreland's Current Precarious Financial Condition Foreland is suffering from extreme shortages of working capital, defaults on major indebtedness and due or past due current liabilities and the need for substantial amounts of additional investment, strategic alliances, or a sale, merger, or reorganization involving all or portions of its business and operations. . Foreland has a Significant Working Capital Deficit. Although Foreland is surrendering substantially all of its assets in satisfaction of the principal indebtedness of EIF, there remains approximately $516,000 in trade accounts payable, relating primarily to exploration costs incurred by the oil and gas production segment, that are over 90 days past due. Foreland has been sued by a number of such trade creditors in their collection efforts, and there can be no assurance that Foreland will be able to reach any agreement with such creditors respecting amounts owed to them. Upon surrendering its assets used in operations, Foreland will not generate cash flows to meet its working capital requirements. . Foreland's Audit Report for the Year Ended December 31, 1998, Contains a Going Concern Explanatory Paragraph. Foreland's independent auditor's report on the December 31, 1998, financial statements, as for preceding fiscal years, contains an explanatory paragraph which indicates there is substantial doubt as to Foreland's ability to continue as a going concern. As of September 30, 1999, Foreland had losses of $13.9 million for the year ended December 31, 1998, and $2.3 million for the first nine months of 1999, and expects its losses to continue. Foreland is delinquent in payments to trade creditors and others. There can be no assurance that Foreland's efforts to obtain forbearance from such trade creditors and others will enable Foreland to continue. . Foreland Will Need Additional Investment, Strategic Alliance or Sale/Merger. In order for Foreland to continue, it will need to seek additional capital in order to satisfy obligations to trade creditors (excluding EIF), meet ongoing general administrative expenses, and continue its Nevada exploration program on its retained prospects. Because of Foreland's substantial indebtedness to trade creditors and its extreme shortage of working capital, Foreland may not be able to find parties willing to engage in exploration activities with Foreland. . Foreland May be Required to Issue Substantial Stock. The refinery and assets purchased in August 1998 were purchased from Petro Source Corporation. As a result of such transaction, Foreland may be required to issue substantial additional shares to Petro Source. Such issuance might result in change of control of Foreland. Liquidity and Capital Resources The following discussion of Foreland's cash flow activities during 1998 and 1999 are not indicative of future periods, as Foreland has agreed to surrender substantially all of its assets and producing properties which generate cash from operations. Foreland's operations during the first nine months of 1999 used cash of $903,100 when Foreland reported a net loss from operations of $2,262,500. Non- cash charges against Foreland's revenues included $653,200 in depreciation, depletion, and amortization, $235,800 of stock issued for interest expense, and $446,900 in amortization of debt discount and issuance costs. Changes in working capital components (current assets and current liabilities) used $800 in cash. Operating activities used approximately $248,500 less cash than the corresponding period in 1998. During the first nine months of 1999, investing activities used net cash of $1,756,500 due to $1,872,300 in additions to refineries , transportation and oil and gas properties. During the corresponding period in 1998, investing activities used net cash of $4,052,100 for additions to plant and equipment and other property. Financing activities provided $1,394,600 during the first nine months of 1999, $644,700 debt associated with the purchase of the Cowboy Asphalt Terminal, $200,000 borrowing from EIF and $558,500 in unpaid interest. During the corresponding period in 1998 financing activities provided $7,375,000, consisting primarily of borrowing and refinancing of the existing bank debt. In January 1998, Foreland completed the debt financing arrangement with EIF, which was subsequently amended in August 1998 and February 1999. Foreland drew an aggregate of approximately $12.6 million under this facility to fund certain of its cash requirements. Foreland made monthly interest payments during the first quarter of 1999; however, during the second and third quarters of 1999, Foreland made only partial payments of interest. Foreland has not been able to commence required monthly principal amortization payments (originally scheduled to begin in November 1998 and deferred to May 1999). Additionally, Foreland has not been in compliance with certain financial covenants relating to minimum cash flow, equity requirements, current ratio, debt service ratio, and general administrative expense percentages. Although Foreland implemented cost measures and restructured its resources to commence required payments and comply with the financial covenants, it was ultimately unable to do so. As discussed above, in November 1999, Foreland and EIF ceased negotiations respecting restructuring of the principal indebtedness and, on November 15, 1999, Foreland agreed to surrender voluntarily substantially all of its assets, which were pledged to secure the principal indebtedness. Although the assets are being surrendered to EIF in satisfaction of Foreland's obligations under the loan arrangement, Foreland continues to owe obligations of approximately $516,000 to trade creditors and others, which it must meet. Foreland is currently seeking additional capital in order to satisfy obligations to such creditors, meet ongoing general and administrative expenses, and continue its Nevada exploration program on its retained prospects. There can be no assurance that Foreland will be able to obtain such capital, or that it will be able to join in agreements with drilling partners to explore any of its prospects. If Foreland is unsuccessful in obtaining such capital, it likely will not continue. Results of Operations (see Note 7, Reporting by Segments) The following is a discussion of Foreland's operations and results of operations for the three month and nine month period ended September 30, 1999. This information is historical and provides no basis for expected operations of Foreland in the future, as Foreland has agreed to surrender substantially all of its assets in satisfaction of the obligations owed to EIF. Therefore, persons should not rely on such information in evaluating the business and operating prospects of Foreland in the future. Refining & Transportation Activities Three months Ended September 30, 1999 and 1999 Budget For the three month period ending September 30, 1999, refined product and transportation revenues were $8,463,700, based on sales volume of 287,800 barrels. Since this business was purchased in August 1998, there is no comparable data for the same period in 1998. Revenue for the period was 12%, or $912,300 more than Budget. This level of revenue represents a 21%, or $1,471,900 increase over second quarter revenue of $6,991,800 based on sales volume of 273,300 barrels. The increase in sales volume, 14,000 barrels, is attributable to seasonal increase in demand. While more volume was sold in the third quarter, most of the revenue increase is a result of higher crude oil and finished product prices. Costs of sales for this period were $6,528,900, which represents an increase of 29%, or $1,465,500 over the $5,063,400 experienced in the second quarter. This is primarily due to higher crude oil prices. Compared to Budget of $4,883,700, actual costs for the third quarter were unfavorable by 34%, or $1,645,200. This is primarily due to the higher crude costs offset by the delay in commencing roofing plant operations. In May 1999, a marketing agreement was executed with Owens-Corning, an asphalt and building products company. Operating expenses for this period were $1,091,100 which represents an increase of 9%, or $94,600 over the $996,500 experienced in the second quarter. This is primarily due to higher fuel costs at both refineries and roofing plant operating expense. Actual expenses for this period were 9% or $ 104,100 less than budgeted expenses primarily attributable to the delayed start-up of the roofing operations. General and administrative expenses for this period were $322,200, which represents a decrease of 3% or $10,600 from the $332,800 experienced in the second quarter. The primary sources of this decrease were a reduction in contract help and professional services. Compared to Budgeted general and administrative expense of $376,000, actual expenses for the second quarter were favorable 14% or $53,800. Most of the variance is attributable to the delay in commencing roofing operations. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is a measure of cash flow generated by this business. During this period, EBITDA was $521,7000, which represents an decrease of 13% or $77,300 from the $599,000 experienced in the second quarter. The high crude price caused deteriorating gross margins at the Eagle Springs refinery. Compared to Budgeted EBITDA of $1,096,500, actual results were unfavorable by 52% or $574,800. Most of the variance is attributable to the delay in commencing roofing operations. The balance is a result of lower gross margins. Depreciation for this period was $198,000, which represents an increase of 5%, or $9,000 over the $189,000 experienced in the second quarter. The primary source of this increase was the depreciation associated with the roofing operations. Compared to Budgeted depreciation of $161,300, actual results were unfavorable 23% or $36,700. The variance is attributable to the roofing operations and purchase of trucks. Interest expense for this period was $173,000, which represents an increase of 4% or $7,000 over the $166,000 experienced in the first quarter. The primary sources of this increase were payments to First Security Bank for borrowing on the line of credit and interest associated with the purchase of land in the Cowboy Asphalt Terminal. Compared to Budgeted interest of $158,000, actual results were unfavorable 9% or $15,000. The variance is attributable to payments to First Security Bank for borrowing on the line of credit. Nine months Ended September 30, 1999 and 1999, Budget For the nine month period ending September 30, 1999, refined product and transportation revenues were $20,365,700, on sales volume of 805,600 barrels. Since this business was purchased in August 1998, there is no comparable data for the same period in 1998. Revenue for the period was 10%, or $1,844,400 more than Budget revenue of $18,521,400 based on budgeted sales volume of 814,900 barrels. The 9,300 barrel decrease in volume is attributable to the delay in commencing roofing operations. Most of the revenue increase is a result of higher crude oil and finished product prices. Costs of sales for this period were $15,144,400, which represents an increase of 24%, or $2,954,800 over the $12,189,600 contained in the Budget. This is primarily due to higher crude oil prices. Operating expenses for the nine months were $2,965,800, which represents a decrease of 19%, or $680,300 less than Budget cost of $3,646,100 expected for this period. Most the favorable variance is attributable to the delay in commencing roofing operations. Additionally, the Tonopah refinery and Transportation operating groups experienced less cost than Budgeted. General and administrative expenses for this period were $1,006,600, which represents a decrease of 11%, or $121,400 under the $1,128,000 expected for this period. Most of the variance is attributable to the delay in commencing roofing operations. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is a measure of cash flow generated by this business. During this period, EBITDA was $1,248,900, which represents a decrease of 20%, or $308,800 from the $1,557,800 expected for this period. The delay in the commencement of the roofing operations is the majority of the variance. Better gross margins at the refineries and better than anticipated Transportation activity in the first quarter also contributed to this variance. Depreciation for the nine months ended was $560,000, which represents an increase of 16%, or $76,000 over the $484,000 expected for this period. The primary source of this increase was the depreciation associated with the purchase of 15 highway transport trucks and the roofing operations. Interest expense for this period was $508,000, which represents an increase of 8%, or $37,600 over the $470,400 expected for this period. The primary sources of this increase were payments to First Security Bank for borrowing on the line of credit and interest associated with the purchase of land in the Cowboy Asphalt Terminal. Exploration and production activities Three Months Ended September 30, 1999 and 1998 For the third quarter ending September 30, 1999, oil sales increased 21.8% to $511,500 as compared to $346,900 in the same period in 1998. The increase in the third quarter of 1999 was the result of a 38.8% increase in price offset by a 8.06% decrease in the barrels sold as compared to the same period in 1998. Foreland's production expenses for the third quarter of 1999 decreased $163,500, or 48.3% to $174,900. The discontinuance of the Eagle Springs fields enhanced oil recovery project expenses accounted for $151,600 of the decrease with the balance attributable to a reduction in field personnel cost. Oil and gas exploration expenses increased $125,400 or 52.5% to $113,500 for the third quarter of 1999 when compared to the same period in 1998. Dry hole, abandonment, and impairment costs were a credit of $12,400, primarily as a result of settlements with several vendors. General and administrative expenses increased $37,300 to $239,000 for the three-month period ended September 30, 1999, when compared to the same period in 1998. The primary factor was an increase in shareholder and investor service costs due to the engagement of an investment banker to assist in seeking potential investors. Depreciation, depletion, and amortization decreased for the three-month period ended September 30, 1999 by $263,800 as a result of a decrease in depreciable capitalized costs. Interest income decreased $8,200 to $9,800 for the third quarter 1999, when compared to the same period in 1998. Interest expense increased $134,700 to $556,700, primarily due to interest on outstanding long-term debt, of which $33,700 was non-cash amortized issuance costs associated with the debt financing. Nine Months Ended September 30, 1999 and 1998 For the nine months ending September 30, 1999, oil sales increased 2.0% to $1,124,800 as compared to $1,077,200 for the same period in 1998. This was attributable to an increase in crude prices offset in part by a decrease in number of barrels sold. Foreland's production expenses for the first nine months of 1999 decreased $661,900, or 53.7% to $570,600. The Eagle Springs fields enhanced oil recovery project expenses was discontinued which accounted for $525,600 of the decrease. The balance of the decrease was attributable to a reduction of field personnel and lower workover cost. Oil and gas exploration expenses decreased $182,900 or 25.6% to $532,300 for the nine months of 1999 when compared to the same period in 1998. This is primarily due to decreased personnel cost, lease and vehicle costs. General and administrative expenses increased $310,500 to $965,400 for the nine months ended September 30, 1999, when compared to the same period in 1998. The primary contributors were increases of $120,100 in personnel cost associated with the severance of in the Denver office and the cost of temporary labor to assist in the transition, $15,900 in office rental , $82,200 in professional fees, and $44,400 in travel costs. Shareholder and investor services increased $55,900 due to an increase in financial public relations and the retention of an investment banker. Depreciation, depletion, and amortization decreased for the nine months ended September 30, 1999, by $552,800 to $93,300 primarily as a result of a decrease in depreciable capitalized cost. Interest income decreased $70,400 to $29,600 for the first nine months of 1999, when compared to the same period in 1998. Interest expense increased $612,100 to $1,665,300, primarily due to interest on outstanding long-term debt, of which $255,900 was non-cash amortized issuance cost associated with the debt financing. Accounting Treatment of Certain Capitalized Costs Foreland follows the "successful efforts" method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory and development wells that find proven reserves, are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. Foreland's accounting policy requires it to assess the carrying cost of long-lived assets whenever events or changes of circumstances indicate that the carrying value of long lived assets may not be recoverable. When an assessment for impairment of oil and gas properties is performed, Foreland is required to compare the net carrying value of proved oil and gas properties on a lease by lease basis (the lowest level at which cash flows can be determined on a consistent basis) to the related estimates of undiscounted future net cash flows for such properties. If the carrying value exceeds the net cash flows, then impairment is recognized to reduce the carrying value to the estimated fair value. Foreland expects that from time to time capitalized costs will be charged to expense based on management's evaluation of specific wells or properties or the disposition, through sales or conveyances of fractional interests in connection with industry sharing arrangements, of property interests. As part of Foreland's evaluation of its oil and gas reserves in connection with the preparation of Foreland's annual financial statements, Foreland completes an engineering evaluation of its properties based on current engineering information, oil and gas prices, and production costs, which may result in material changes in the total undiscounted net present value of Foreland's oil and gas reserves resulting in an impairment allowance as discussed above. The costs of exploring, drilling, producing, and transporting are higher in the geological province targeted by management than they would be in a more fully developed oil producing area. Access roads to drilling targets over relatively long distances frequently have to be completed and drilling equipment and services typically must be brought in from considerable distances. Impact of the Year 2000 Issue Many existing computer programs use only two digits, rather than four, to define a year within the date field in order to conserve memory resources. Such programs were designed and developed without considering the potential impact of the upcoming change of the century. After December 31, 1999, any of the computer programs used by Foreland that contain date-sensitive computer codes that are not "year 2000 compliant," may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, such computer applications could fail or create erroneous results. Foreland uses computers principally for processing and analyzing geological and geophysical data, map-making, and administrative functions, including word- processing, accounting, electronic mail and other applications. Its refining operations principally do not use computer systems. Foreland has implemented an ongoing program to ensure that its computer systems are year 2000 compliant. Foreland has contacted its vendors, which have represented that the systems and software used by Foreland are year 2000 compliant. Foreland will also require future vendors to make such representation. There can be no assurance that such programs are actually year 2000 compliant. Foreland also interacts with the computer systems of others. There can be no assurance that such computer systems are year 2000 compliant. Foreland believes that it will not incur material expenditures in connection with this issue, but there can be no assurance that Foreland has anticipated every circumstance where Foreland's operations may be impacted. Although Foreland believes its own internal systems will be year 2000 compliant, no assurance can be given that the systems of vendors, telephone and utility providers, customers, and other third parties with which Foreland has a material relationship will be year 2000 compliant. Foreland does not believe it can develop contingency plans to adequately deal with major external infrastructure failures such as in communications, transportation or utilities. However, such failures would likely not impact Foreland worse than they would any other business. Foreland was previously notified by the vendor of its accounting software that the software was not year 2000 compliant and that there was a problem that caused it to generate errors in the general ledger. The vendor has since shipped to Foreland its software that it represents to be year 2000 compliant. Foreland has installed the software. PART II.--OTHER INFORMATION - ------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS - ------------------------------------------------------------------------------- In August 1998, Foreland acquired certain assets and operations from Petro Source Corporation, including the outstanding common stock of Petrosource Transportation, Inc. (n/k/a Foreland Transportation, Inc.) ("Transportation"). Transportation was a party to an equipment lease agreement with Semi Service, Inc. Transportation elected to exercise a purchase option contained in the lease to acquire the trailers covered by the lease. Semi Service, Inc., refused to allow Transportation to exercise that purchase option. During the first quarter of 1999, Transportation filed suit against Semi Service, Inc., in the Third Judicial District Court of Salt Lake County, State of Utah, alleging breach of contract and the covenant of good faith and fair dealing and seeking equitable relief and damages in an amount to be determined at trial. Semi Service has filed an answer and counterclaim alleging breach of contract and seeking damages in an amount to be determined at trial. Foreland filed an amended complaint and there has been no answer. There is no prediction of the outcome of this litigation. Subsequent to June 30, 1999, several trade creditors initiated action against Foreland seeking collection of amounts due for services or material. Foreland has no legal defense against such suits. A description of such actions is specifically set forth below: (a) Spidle Sales and Service, Inc. v. Foreland Corporation, Civil No. 990900393. A summary judgment will be entered against Foreland of approximately $17,000. (b) Vector Seismic Data Processing Services, Inc. v. Foreland Corporation, Civil No. 99CV2012, Division 7. This case has been settled and all amounts due from Foreland have been paid. (c) Grant Geophysical Corp. v. Foreland Corporation, Civil No. H-99-2425. Suit for amounts owed for completion of 3D seismic survey for the amount of $340,000. (d) Halliburton Energy Services, Inc. v. Foreland Corporation. Suit was filed September 30, 1999 in Colorado for the amount of approximately $52,000. - ------------------------------------------------------------------------------- ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - ------------------------------------------------------------------------------- Effective with the close of business on September 9, 1999, Foreland's common stock was delisted from the Nasdaq SmallCap Market. Following such delisting, the common stock has continued to be quoted and traded on the Nasdaq Over-the-Counter Bulletin Board System under the same symbol. Foreland was delisted because it did not meet the minimum net tangible assets/market capitalization/net income/bid price requirements for a continued listing. - ------------------------------------------------------------------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ------------------------------------------------------------------------------- Since the fourth quarter of 1998, Foreland has been in default on its indebtedness in the principal amount of approximately $12.6 million to Energy Income Fund, L.P. Foreland has not been able to commence required monthly principal amortization payments (originally scheduled to begin in November 1998, and deferred to May 1999). Additionally, Foreland has not been in compliance with certain financial covenants and has not paid all interest due under the loan. Throughout 1999, Foreland and EIF continued to have discussions respecting the restructuring of such indebtedness. In November 1999, Foreland and EIF ceased negotiations respecting such restructuring and, on November 15, 1999, Foreland agreed to surrender voluntarily substantially all of its assets which were pledged to secure the principal indebtedness. - ------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------------------------- There were no matters submitted for the consideration of Foreland's shareholders during the third quarter of 1999. - ------------------------------------------------------------------------------- ITEM 5. OTHER INFORMATION - ------------------------------------------------------------------------------- None. - ------------------------------------------------------------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------------- (a) Exhibits. Item 10. Material Contracts - ------------------------------------------------------------------------------- 10.01 10 Voluntary Surrender Agreement Incorporated by Reference(1) Item 27. Financial Data Schedule - ------------------------------------------------------------------------------- 27.01 27 Financial Data Schedule This Filing ____ (1) Incorporated by reference from Foreland's current report on Form 8-k dated November 16, 1999. (b) Reports on Form 8-K. During the quarter ended September 30, 1999, Foreland filed a report on Form 8-K dated September 10, 1999, reporting its delisting from Nasdaq. - ------------------------------------------------------------------------------- SIGNATURES - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FORELAND CORPORATION (Registrant) Dated: November 19, 1999 By /s/ --------------------------------------- N. Thomas Steel, President Dated: November 19, 1999 By /s/ --------------------------------------- Bruce Decker, Chief Financial Officer EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF JUNE 30, 1999, AND STATEMENTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 584,657 0 2,914,147 0 1,750,750 5,649,514 22,046,022 13,728,816 14,973,653 16,936,171 0 9,723 0 437 (2,573,236) 14,973,653 20,300,107 20,312,926 14,558,368 20,459,500 57,277 0 2,173,238 (2,442,535) 0 (2,442,535) 0 0 0 (2,442,535) (0.25) (0.25)
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