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 JUNE 30, 1996
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.)
12596 W. BAYAUD AVENUE
SUITE 300, 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 July 31, 1996, the Company had outstanding 6,358,040 shares of its
common stock, par value $0.001 per share.
PART I
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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The consolidated condensed financial statements included herein have been
prepared by Foreland Corporation (the "Company"), 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 the
Company's annual report on Form 10-K for the year ended December 31, 1995.
During the quarter ended June 30, 1996, the Company effected, as of June
15, 1996, a 3-for-1 reverse stock split of its common stock, par value $0.001
per share (the "Common Stock"). Unless otherwise indicated, all share and per
share amounts relating to the Common Stock have been adjusted to give effect to
the reverse stock split.
Certain reclassifications have been made to conform the 1995 financial
statements to the presentations of the 1996 financial statements. The
reclassifications had no effect on net income.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1996 DEC. 31, 1995
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 39,293 30,490
Accounts receivable - trade................. 280,383 438,058
Advances to officer......................... 1,081 7,212
Stock subscriptions receivable.............. 2,539,125 --
Inventory................................... 60,183 81,382
Prepaid expenses and other.................. 618 2,586
----------- -----------
Total current assets.................. 2,920,683 559,728
Property and equipment, at cost:
Oil and gas properties, under the successful
efforts method.............................. 7,148,139 6,874,635
Other property and equipment................ 299,374 299,161
----------- -----------
7,447,513 7,173,796
Less accumulated depreciation, depletion,
and amortization............................ (3,182,606) (2,363,211)
----------- -----------
Total property and equipment 4,264,907 4,810,585
Other assets................................... 169,216 230,785
----------- -----------
Total assets................................... $7,354,806 $5,601,098
=========== ===========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1996 DEC. 31, 1995
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....... $ 970,225 $1,642,537
Officers' salaries payable.................. 406,590 392,462
Oil and gas sales payable................... 54,221 125,899
Current portion of long-term debt.......... 4,530 404,237
----------- -----------
Total current liabilities............. 1,435,566 2,565,135
Long-term debt................................. 20,769 23,091
Stockholders' Equity:
Preferred Stock, $0.001 par value,
5, 000,000 shares authorized.
1991 Convertible Preferred Stock,
40,000 and 40,000 shares issued
and outstanding, respectively, liquidation
preference $1.25 per share........... 40 40
1994 Convertible Preferred Stock,
244,640 and 433,686 shares issued and
outstanding, respectively, liquidation
preference $2.00 per share........... 245 434
1995 Convertible Preferred Stock, 993,334
and 1,015,334 shares issued and outstanding,
respectively, liquidation preference
$1.50 per share ....................... 993 1,015
1996 Convertible 6% Preferred Stock, 525
and -0- shares issued and outstanding,
respectively, liquidation preference
$1,000 per share ..................... 1 --
1996 -2 Convertible 6% Preferred Stock,
1,700 and -0-shares issued and
outstanding, respectively,
liquidation preference
$1,000 per share ...................... 2 --
1996 -3 Convertible 8% Preferred Stock,
2,775 and -0- shares issued and outstanding,
respectively, liquidation preference
$1,000 per share ...................... 3 --
Common Stock, $0.001 par value, 50,000,000 shares
authorized; 4,891,803 and 4,828,786 shares
issued and outstanding, respectively..... 4,892 4,829
Additional paid-in capital.................. 27,562,518 23,311,518
Less note and stock subscriptions receivable-
collateralized by
salaries payable......................... (260,069) (247,470)
stock held by Company ................... (879,356) (845,152)
Accumulated deficit......................... (20,530,798) (19,212,342)
----------- -----------
Total stockholders' equity............ 5,898,471 3,012,872
----------- -----------
Total liabilities and stockholders' equity..... $7,354,806 $5,601,098
=========== ===========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------- -------- -------- --------
REVENUES:
Oil and gas sales....... $364,055 $227,005 $664,750 $475,981
Operator and well
service income....... 12,778 20,685 24,191 28,273
Other income, net....... 25 1,722 3,625 1,857
----------- ----------- ----------- -----------
Total revenues.... 376,858 249,412 692,566 506,111
EXPENSES:
Oil and gas production.. 128,884 99,590 229,891 202,575
Oil and gas exploration. 150,173 171,671 322,981 334,646
Well service costs...... 637 446 803 590
Dry hole and abandonment
costs................ -- 132,657 443,830 227,406
General and
administrative....... 120,239 119,911 248,506 256,531
Shareholder-investor
services............. 300,242 63,991 308,449 188,631
Depreciation, depletion,
and amortization..... 163,563 94,876 389,495 215,212
----------- ----------- ----------- -----------
Total expenses.... 863,738 683,142 1,943,955 1,425,591
----------- ----------- ----------- -----------
OPERATING LOSS............. $(486,880) $(433,730) $(1,251,389) $(919,480)
OTHER INCOME (EXPENSE)
Interest income......... 26,842 37,470 55,422 68,831
Interest expense........ (48,847) (31,858) (122,491) (60,611)
----------- ----------- ----------- -----------
NET LOSS ................. $(508,885) $ (428,118) $(1,318,458) $(911,260)
----------- ----------- ----------- -----------
Preferred stock dividends:
Imputed ................(1,099,146) -- (1,099,146) --
Accrued ................ (24,933) -- (24,933) --
----------- ----------- ----------- -----------
Total preferred stock
dividend............ (1,124,079) -- (1,124,079) --
----------- ----------- ----------- -----------
Net loss applicable to common
shareholders...........$(1,632,964) $ (428,118) $(2,442,537) $(911,260)
=========== =========== =========== ===========
NET LOSS PER COMMON
SHARE................. $ (0.33) $ (0.09) $ (0.50) $ (0.19)
============ =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............. 4,891,803 4,778,486 4,890,286 4,702,926
============ =========== =========== ===========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1995
--------- ---------
Cash flow from operating activities:
Net loss....................................... $(1,318,458) $ (911,260)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation, depletion, and amortization...... 389,495 215,212
Dry hole, abandonment and impairment costs..... 443,830 227,406
Issuance of stock for services................. -- 82,188
Accrued note receivable interest income........ (50,402) (63,648)
Amortization of loan origination fee........... 6,146 21,875
Below market stock options..................... -- --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable...................... 157,675 430,977
Advances to officer...................... 6,131 231
Inventory...................................... 21,199 (20,277)
Prepaids and other....................... 59,388 (7,262)
Increase (decrease) in:
Accounts payable......................... (743,990) (125,397)
Salaries payable......................... 14,128 18,436
----------- -----------
Net cash used in operating activities. (1,014,858) (131,519)
Cash flows from investing activities:
Proceeds from sale of marketable securities.... 195,851 --
Purchase of marketable securities ............. (200,000) --
Additions to oil and gas properties............ (273,504) (281,125)
Purchase of other property..................... (213) (6,905)
----------- ----------
Net cash (used in)
provided by investing activities...... (277,866) (288,030)
Cash flows from financing activities:
Proceeds from sale of stock, net............... 1,699,956 736,193
Receipt of note receivable for stock........... 3,600 --
Payment of long-term debt...................... (402,029) --
----------- ----------
Net cash provided by
financing activities.................. 1,301,527 736,193
----------- ---------
Increase (decrease) in cash and cash equivalents.. 8,803 (316,644)
Cash and cash equivalents, beginning of year...... 30,490 93,715
----------- ----------
Cash and cash equivalents, end of year............ $ 39,293 $ 410,359
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest......................... $ 24,263 $ 20,300
=========== =========
Non-cash investing and financing activities.... $ 50,402 $ 63,648
=========== =========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OIL AND GAS PROPERTIES:
With the Company's continuous leasing program since 1986, it has
established what management believes is one of the best property positions in
Nevada. The Company's leasing program is coordinated with prospect generation
and explorations results. As areas of interest are identified, the Company
attempts to acquire leases or other exploration rights on what preliminarily
appears to be the most promising prospect areas in order to establish a
preemptive lease position prior to generating a specific drilling prospect. As
specific prospect evaluation advances, the Company may seek leases on additional
areas or relinquish leases on areas that appear less promising, thereby reducing
leasehold costs. The Company currently has approximately 179,600 gross acres
under lease in addition to the exclusive rights to develop and market prospects
on approximately 434,000 gross acres of mineral lands owned by Parker and
Parsley.
2. ISSUANCE OF SECURITIES, COMMON STOCK OPTIONS, AND PURCHASE WARRANTS.
On June 7, 1996 the Company announced a 3-for-1 reverse split of its Common
Stock effective June 15, 1996. Unless otherwise indicated, all share and per
share amounts relating to the Common Stock have been adjusted to give effect to
the reverse stock split.
During the first half of 1996, the holders of 189,046 shares of the
Company's 1994 Preferred Stock converted such preferred stock into 63,017 shares
of Common Stock. The conversion of these shares, together with previously
converted shares through December 31, 1995, reduced the number of shares of 1994
Preferred Stock issued and outstanding from 1,242,210 originally issued to
244,640 (convertible into approximately 81,547 shares of Common Stock) as of
June 30, 1996.
Also during the first half of 1996, holders of 22,000 shares of the
Company's 1995 Preferred Stock converted such shares into 7,333 shares of Common
Stock. The conversion of these shares reduced the number of shares of 1995
Preferred Stock issued and outstanding from 1,015,334 originally issued to
993,334 (convertible into approximately 331,111 shares of Common Stock) as of
June 30, 1996.
In March 1996, the Company issued 500 shares of 1996 Series 6% Convertible
Preferred Stock ("1996 Preferred Stock") for net proceeds of $447,771. The 1996
Preferred Stock became convertible 60 days after issuance into that number of
shares of Common Stock as determined by dividing $1,000 plus all accrued but
unpaid dividends on such a share by the lesser of $4.50 or 75% of the closing
bid price of the Common Stock as reported by the Nasdaq Small Cap Market
("Nasdaq") for the trading date immediately preceding the date of conversion.
The 1996 Preferred Stock has a liquidation preference of $1,000 per share.
Holders of 1996 Preferred Stock are entitled to receive a cumulative 6% per
annum dividend payable in cash in the event the 1996 Preferred Stock is redeemed
or in shares of Common Stock if the 1996 Preferred Stock is converted. The
placement agent for the 1996 Preferred Stock received 25 shares of 1996
Preferred Stock and warrants to purchase 18,333 shares of Common Stock at an
exercise price of $4.50 per share, subject to adjustment in certain
circumstances, based on the market price of the Common Stock at the time of
exercise. During July and August 1996, the holders of the 1996 Preferred Stock
converted 500 shares into 195,727 shares of Common Stock. Such shareholders are
entitled to receive an aggregate of 2,218 shares of Common Stock as dividends on
such converted 1996-1 Preferred Stock.
In May 1996, the Company issued 1,700 shares of 1996-2 Series 6%
Convertible Preferred Stock ("1996-2 Preferred Stock") in a private placement
for net proceeds of $1,252,186. The 1996-2 Preferred Stock is convertible at any
time after the issuance thereof into that number of shares of Common Stock equal
to $1,000 divided by the lesser of $2.73 or 65% of the average closing bid price
of Common Stock as reported by Nasdaq for the five days preceding the date of
conversion. The 1996-2 Preferred Stock carries a liquidation preference of
$1,000 per share. The holders of the 1996-2 Preferred Stock are entitled to a
6% dividend payable in cash in the event the 1996-2 Preferred Stock is redeemed
or in additional shares of Common Stock upon the conversion of the 1996-2
Preferred Stock. The holders of the 1996-2 Preferred Stock converted all 1,700
shares subsequent to June 30, 1996, into 703,598 shares of Common Stock and are
entitled to receive an aggregate of 4,992 shares of Common Stock as dividends on
such 1996-2 Preferred Stock.
In May 1996, the Company issued to Corporate Relations Group, Inc. ("CRG"),
an unrelated third party retained by the Company to perform shareholder and
investor relations services, options to purchase an aggregate of 166,667 shares
(after giving effect to the 3-for-1 reverse stock split) of Common Stock at
prices ranging from $3.45 per share to $6.90 per share. Subsequent to June 30,
1996, the Company issued options to CRG to purchase an additional 266,667 shares
of Common Stock at prices ranging from $4.14 per share to $6.90 per share. CRG
has exercised options to purchase 33,333 shares of Common Stock at $3.45 per
share and 100,000 shares of Common Stock at $4.14 per share.
In June 1996, the Company offered for sale 2,775 shares of 1996-3 Series
8% Convertible Preferred Stock ("1996-3 Preferred Stock"). Subscription
documents for these shares were executed on June 28, 1996, and the Company
recorded in its financial statements Stock Subscriptions Receivable to reflect
such subscriptions (see Consolidated Balance Sheet - Current Assets).
Subsequent to the end of the second quarter, the Company received net proceeds
of $2,539,125, without deducting all offering costs related to the 1996-3
Preferred Stock placement. Each share of the 1996-3 Preferred Stock may be
converted at any time after forty-five (45) days following its issuance, and all
of the 1996-3 Convertible Preferred stock shall be automatically converted
without any further action by any person on the date that is two years from the
initial issuance, into that number of shares of Common Stock equal to $1,000
divided by the lesser of $3.55, or 70% of the average closing bid price of the
Common Stock as reported by Nasdaq, or such other inter-dealer quotation system
as may then list the Common Stock, for the five (5) trading days immediately
preceding the date of conversion. The 1996-3 Preferred Stock carries a
liquidation preference of $1,000 per share. The holders of the 1996-3 Preferred
Stock are entitled to an 8% dividend payable in additional shares of Common
Stock upon the conversion of the 1996-3 Preferred Stock.
As of June 30, 1996, the Company, in its earnings per shares calculations
of the consolidated statement of operations, calculated a preferred stock
dividend of $24,933 and an imputed stock dividend of $1,099,146 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 and are
not recorded in the Company's financial statements.
3. NOTE PAYABLE:
On April 30, 1994, the Company borrowed $400,000 from an unrelated third
party to provide interim financing to proceed with the Company's drilling
program in its Eagle Springs Field and to pay ongoing general and administrative
expenses. In connection with the loan, the Company granted the lender warrants
to purchase 66,667 shares of Common Stock at $6.00 per share (giving effect to
the 3-for-1 reverse stock split) at any time prior to the earlier of April 30,
1996 or 60 days subsequent to the repayment of the loan. The loan originally
provided for interest at 8.4% per annum, payable quarterly, and was due on April
30, 1995.
In May 1995, the Company negotiated the extension of the due date of this
loan to April 30, 1996, and in connection with such extension, the interest rate
was increased to 10%, the Company reduced the exercise price of the warrants
previously granted to $4.50 per share, and the Company granted new warrants to
purchase Common Stock at $6.00 per share through the earlier of April 30, 1997,
or 60 days subsequent to the repayment of the loan. On May 3, 1996, the Company
repaid the $400,000 note and paid all accrued interest to that date. All
warrants granted to the lender in connection with the foregoing have now
expired.
4. RELATED PARTY TRANSACTIONS:
The Company owed $406,590 in salaries and interest to its officers and
directors at June 30, 1996. The Company also had outstanding loans to a present
and a former officer in the amount of $260,069 as of such date.
In June 1991, the Company loaned an officer and director, and a former
officer and director, an aggregate of $124,321, repayable with interest at the
prime rate and collateralized by a pledge of the obligation of the Company to
such persons for the accrued but unpaid back salaries of approximately $156,720.
A portion of the proceeds from these loans was used to purchase $100,000 in
preferred stock and warrants and to pay $23,421 in interest and principal on the
notes due a Company subsidiary on the purchase from it of the Company's Common
Stock. The notes were originally due in June 1992, but the Company has agreed
not to seek payment of $260,069 (including additional advances and accrued
interest) of the notes until back salaries owed these individuals (totaling
$271,843 at June 30, 1996) are paid. At June 30, 1996, $260,069, including
accrued interest, was due under the notes (which are included as a reduction of
stockholders equity in the accompanying financial statements).
During 1994, outstanding options were exercised to purchase Common Stock as
follows (after giving effect to the 3-for-1 reverse stock split): Grant Steele,
66,667 shares at $4.50; N. Thomas Steele, 66,667 shares at $4.50; Kenneth L.
Ransom, 66,667 shares at $4.50; Bruce C. Decker, 8,334 shares at $6.75; and
Dennis J. Gustafson, 8,334 shares at $6.75. 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 a the time of payment. In connection with
the issuance of shares on the exercise of such options, Grant Steele, N. Thomas
Steele, and Kenneth L. Ransom each returned 8,040 shares, for an aggregate of
24,120 shares, of Common Stock to satisfy withholding obligations of the
Company, as provided for in the terms of the options exercised. Also pursuant
to the terms of the options exercised, the Company automatically granted new
five-year options (giving effect to the 3-for-1 reverse stock split) to purchase
Common Stock at $6.375, the market price (as adjusted) for the Common Stock at
the time of exercise, as follows: Grant Steele 66,677 shares, N. Thomas Steele,
66,667 shares; Kenneth L. Ransom, 66,667 shares; Bruce C. Decker, 8,334 shares;
and Dennis J. Gustafson, 8,334.
The first payment for the above referenced notes became due in September
1995. Grant Steele, N. Thomas Steele, and Kenneth Ransom each returned 16,936
shares (after giving effect to the 3-for-1 reverse stock split) of Common Stock
in satisfaction of the first installment of the principal and interest on their
$300,000 notes, while Bruce Decker and Dennis Gustafson each returned 3,176
shares in satisfaction of the first installment of principal and interest on
their $56,250 notes.
5. INCOME TAXES:
The Company 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.
The Company 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, 1995, the Company has unused net operating
loss carry-forwards of approximately $19,700,000.
6. SUBSEQUENT EVENTS:
During July and August 1996 the holders of 500 shares of the 1996 Series 6%
Convertible Preferred Stock and all 1,700 shares of the 1996-2 Series 6%
Convertible Preferred Stock converted such shares into 195,727 shares and
703,598 shares, respectively, of the Company's Common Stock.
All warrants associated with the $400,000 loan from an unrelated third
party in April 1994, as renegotiated in April 1995, expired according to their
terms, as of July 3, 1996.
During July 1996, the Company received payment in full of stock
subscriptions receivable for net proceeds of $2,539,215 for the 2,775 shares of
1996-3 Preferred Stock, which were subscribed for in late June 1996. Currently
there are charges associated with this placement that have not been received,
and accordingly were not recorded as of June 30, 1996.
On July 18, 1996, the Company issued to Corporate Relations Group, Inc.
("CRG"), an unrelated third party retained by the Company to perform shareholder
and investor relations services, options to purchase an aggregate of 266,667
shares of Common Stock at prices ranging from $4.14 per share to $6.90 per
share. On July 30, 1996, CRG exercised options to purchase 33,333 shares of
Common Stock at $3.45 per share which had been granted in May 1996. On August
12, 1996, CRG exercised options to purchase 100,000 shares of Common Stock at
$4.14 per share, 33,333 of which had been granted in May 1996, and 66,667 of
which had been granted in July 1996.
In July 1996, the Company granted to its executive officers and certain
employees options to purchase shares of Common Stock at an exercise price of
$4.00 per share, the market price for the Common Stock at the time of grant, as
follows: 100,000 shares each to Grant Steele, N. Thomas Steele, Kenneth L.
Ransom, and Bruce C. Decker, and 6,000 each to nine employees. The options
granted to the executive officers are exercisable immediately and expire five
years from the date of grant. The options granted to the other employees vest
one-third immediately and one-third on each of the two following anniversary
dates of the date of grant and expire five years from the date of the original
grant.
The board of directors has approved the principle terms of employment
agreements for the executive officers of the Company to be entered into as soon
as reasonably practicable. Among other things, such agreements will provide for
a continuation of the reduced salaries of the executive officers until the
Company reaches sustained production of oil of 500 barrels per day and will
provide for a $48,000 increase in each executive officer's annual salary at
such time as sustained oil production reaches 1,000 barrels per day. The board
has also approved the payment of $2,000 per month to each of the Company's
directors, whether or not such director is also then an employee of the Company.
In July 1996, the unit warrant issued to the underwriter in connection with
the Company's sale of Common Stock in 1991 was modified pursuant to its terms to
entitle the holders to purchase an aggregate of 87,600 shares of Common Stock,
together with A Warrants and B Warrants, for $2.52 per share. During July and
August 1996, holders of unit warrants exercised warrants to purchase 20,685
shares of Common Stock at $2.52 per share. Pursuant to the terms of the unit
warrant, the Company also issued A Warrants and B Warrants entitling the holders
to purchase an aggregate of 20,685 shares of Common Stock at $6.75 per share and
20,685 shares of Common Stock at $11.70 per share, expiring on October 29, 1996.
- - -------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
OVERVIEW
This discussion should be read in conjunction with Management's Discussion
and Analysis of Financial Conditions and Results of Operations in the Company's
annual report on Form 10-K for the year ended December 31, 1995.
Foreland Corporation was organized in June 1985 to advance an exploration
project in the Great Basin and Range geologic province in Nevada that had been
initiated by Gulf Oil Corporation. To date, the Company has funded its
exploration program principally from the sale of its equity securities. The
Company also benefits from capital provided by oil industry participants for
drilling and other exploration of certain oil prospects through joint
arrangements typical in the oil industry.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during the first six months of 1996 used cash of
$1,014,900 when the Company reported a net loss of $1,318,458, which resulted in
part to non-cash charges against the Company's revenues, including $389,500 in
depreciation, depletion, and amortization and $443,800 in dry hole, abandonment
and impairment costs, of which $429,900 relates to the write down of the
undepleted book value of the North Willow Creek #6-27 well to the value of its
reserves. Operating activities used approximately $883,300 more cash than the
corresponding period in 1995.
During the first half of 1996, investing activities used net cash of
$277,900, principally due to $273,500 used for additions to oil and gas
properties. During the corresponding period in 1995, investing activities used
net cash of $288,000, consisting almost entirely of cash used for additions to
oil and gas properties.
The cash required for investing activities during the first half of 1996
was provided by financing activities, which provided net cash of $1,301,500
during the six-months ended June 30, 1996, consisting principally of $1,700,000
in cash proceeds received from the sale of the Company's equity securities
offset by the repayment of the long-term note payable of $400,000. During the
corresponding period in 1995, the Company received $736,200 in cash from the
sale of equity securities.
Subsequent to June 30, 1996, the Company received net proceeds of
$2,539,125 from stock subscriptions receivable. There are additional costs
payable in connection with such private placement that have not yet been charged
to the Company. The Company intends to use a portion of the remaining proceeds,
after costs of the placement have been paid, to reduce current liabilities and
to initiate the Company's 1996 drilling program as it is currently being
reviewed in light of the July 25, 1996, announcement of drilling and subsequent
recovery of oil from a drill stem test at the Company's Ghost Ranch #48-35 well.
The Company requires cash for general and administrative expenses, for
maintaining its properties, and for other items that are required in order for
the Company to continue, as distinguished from costs to advance its ongoing
exploration program in Nevada.
Based on June 1996 production levels and prices, the Company estimates that
it is able to meet fixed and recurring operating costs, excluding unusually
large expenditures for financial public relations such as those incurred during
the second quarter of 1996. However, there can be no assurance that production
levels will not decline or that current prices for oil will not decline, in
which case the Company would require funds from external sources for operating
deficiencies. Any improved operating margins resulting from increased
production and reduced operating expenses or price increases would benefit the
Company. There can be no assurance that Eagle Springs development will result
in material additional production or that the Company will be able to obtain
funds from other sources, in which case the Company would be required to
implement cost-cutting measures and curtail drilling and most other exploration
activity in order to continue. Any additional revenues from placing the Ghost
Ranch #48-35 well, now being tested, into production would be available for
operating shortages as well as to contribute to drilling activities.
As of June 30, 1996, the Company had a working capital of $1,485,117,
which, together with other financial resources, if any, that may be available,
will be utilized to cover operating requirements and the Company's exploration
and development drilling activities during the balance of 1996.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995
For the second quarter period ending June 30, 1996, oil sales increased
60.4% to $364,100 as compared to $227,000 in the same period in 1995,
attributable principally to increased production from the Eagle Springs field.
This increase in the second quarter of 1996 was the result of both a 31.3%
increase in barrels sold and a 19.3% increase in price as compared to the same
period in 1995. Well service and well operator income decreased $7,900 for the
second quarter of 1996, when compared to the same period in 1995, primarily due
to a decrease of $8,700 in operator income and an increase of $800 in well
service revenue.
The Company's production expenses for the second quarter of 1996 increased
$29,300, with the Eagle Springs field production expenses increasing $43,700,
while such expenses related to the Company's remaining properties decreased
$14,400 for the same period in 1995.
Oil and gas exploration expenses decreased $21,500 for the second quarter
of 1996 when compared to the same period in 1995. This is primarily due to
decreased cost in lease rentals of $16,500.
Shareholder-investor service expense increased $236,300 to $300,200 for the
second quarter ended June 30, 1996, when compared to the same period in 1995.
These expenses relate to financial public relations information dissemination
within the investment community.
Depreciation, depletion, and amortization for the three-month period ended
June 30, 1996, increased by $68,700 to $163,600 when compared to the same period
in 1995. The Eagle Springs field contributed $89,900 of the increase in the
second quarter of 1996 when compared to the same period in 1995.
Interest income was reduced $10,600 to $26,800 for the second quarter 1996,
when compared to the same period in 1995. Reduced outstanding notes receivable
balances reduced accrued interest income $6,900. Interest expense increased
$17,000 to $48,800 primarily due to interest on salaries payable, and interest
charges on vendor invoices.
During the three months ended June 30, 1996, the Company, in its earnings
per shares calculations of the consolidated statement of operations, calculated
a preferred stock dividend of $24,933 and an imputed stock dividend of
$1,099,146 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 and are not recorded in the Company's financial statements.
Six Months Ended June 30, 1996 and 1995
For the six month period ending June 30, 1996, oil sales increase 39.7% to
$664,800 as compared to $476,000 in the same period in 1995, attributable
principally to increased production from the Eagle Springs field contributing
approximately $204,100 to such increase. This increase in the first and second
quarters of 1996 was the result of both a 20.6% increase in barrels sold and a
14.9% increase in price as compared to the same six-month period in 1995. Well
service and well operator income decreased $4,100 for the first and second
quarter of 1996, when compared to the same period in 1995, primarily due to an
increase of $3,400 in operator income and a reduction of $700 in well service
revenue due to lack of third party water disposal fees.
The Company's production expenses for the six-month period ended June
30,1996, increased $27,300, with the Eagle Springs field production expense
increasing $36,600.
Oil and gas exploration expenses decreased $11,700 for the first and second
quarters of 1996 when compared to the same period in 1995. This is primarily
due to increased cost in preparation of the reserve report by an unaffiliated
engineering Company, and a decrease of leasehold rentals of $27,500. Dry hole,
abandonment, and impairment costs were $443,800 for the six months ended June
30, 1996. This is an increase of $216,400 when compared to the same period in
1995. During the first quarter of 1996, the Company was required by the
Financial Accounting Standards Board, in their new statement titled "Accounting
for Long-Lived Assets," to impair undepleted book value of the North Willow no.
6-27 well to the value of its reserves. This resulted in an impairment of
$429,900. Additionally, the Company wrote off a surrendered and abandoned lease
of $12,800 during the first six months of 1996. Dry hole costs were $1,100 for
the first and second quarters of 1996, which was a decrease of $236,600 for the
same period in 1995.
General and administrative expenses decreased $8,000 to $248,500 for the
six-month period ended June 30, 1996, when compared to the same period in 1995,
principally due to decreased expenses of $4,500 related to professional services
and $6,500 in salaries. Shareholder-investor service expense increased $119,800
to $308,500 for the six-month period ended June 30, 1996, when compared to the
same period in 1995. Such expenses relate to financial public relations
information dissemination within the investment community. Depreciation,
depletion, and amortization for the six-month period ended June 30, 1996,
increased by $174,300 to $389,500 when compared to the same period in 1995. The
Eagle Springs field contributed $194,400 of the increase of the first and second
quarters of 1996 when compared to the same period in 1995, while the Company's
remaining properties' depreciation, depletion and amortization decreased
$23,600.
Interest income was reduced $13,400 to $55,400 for the six-month period
ended June 30, 1996, when compared to the same period in 1995. Reduced
outstanding notes receivable balances reduced accrued interest income $13,200.
Interest expense increased $61,900 to $122,500 primarily due to interest rate
increase associated with the $400,000 note payable due on April 30,1996, and
interest charges on vendor invoices.
During the six months ended June 30, 1996, the Company, in its earnings per
shares calculations of the consolidated statement of operations, calculated a
preferred stock dividend of $24,933 and an imputed stock dividend of $1,099,146
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 and are not recorded in the Company's financial statements.
Accounting Treatment of Certain Capitalized Costs
Included in oil and gas properties on the Company's balance sheets are
costs of wells in progress. Such costs are capitalized until a decision is made
to plug and abandon or, if the well is still being evaluated, until one year
after reaching total depth, at which time such costs are charged to expense,
even though the well may subsequently be placed into production. The Company
also charges to expense the amount by which the total capitalized cost of proved
oil and gas properties exceeds the total undiscounted net present value of
related reserves. As a result of the foregoing policies, the Company 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 for consideration in amounts that
have the effect of reducing the Company's total undiscounted net present value
of oil and gas reserves below the total capitalized cost of proved oil and gas
properties. As part of the Company's evaluation of its oil and gas reserves in
connection with the preparation of the Company's annual financial statements,
the Company obtains 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 the
Company's oil and gas reserves. The Company would be required to charge to
expense the amount by which the total capitalized cost of proved oil and gas
properties exceeds the amount of such undiscounted net present value of the
Company's oil and gas reserves.
The Financial Accounting Standards Board (FASB) issued a new Statement
titled "Accounting for Impairment of Long-Lived Assets." This new standard is
effective for years beginning after December 15, 1995. In March 1995, the
effect of the new standard on the Company's financial statements required
impairment expense in the first quarter of 1996 of $429,900, the undepleted
value of the North Willow Creek well no. 6-27, less the value of the reserves
associated with that well.
Operating Costs
Overall operating costs are a combination of costs associated with
each well and costs associated with operation of the entire field. As
additional wells are added to the production system, the field operating costs
will be spread among additional wells, lowering the impact of such costs on each
well and per barrel produced. Because of the foregoing, the Company expects
that production costs per barrel will continue to be higher than industry
standards, unless and until the amount of production increases sufficiently to
obtain economies of scale and dilute the impact of high fixed operating costs.
In addition, operating costs may continue to vary materially due to the costs of
ongoing treatment or reworking of existing wells and other factors.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
During the quarter ended June 30, 1995, the Company did not file any report
on Form 8-K.
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SIGNATURES
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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: August 14, 1995 By: /s/ N. Thomas Steele
-------------------------------------
N. Thomas Steele, President
Dated: August 14, 1995 By: /s/ Don W. Treece
-------------------------------------
Don W. Treece, Controller (Chief
Financial Officer)