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, 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 November 11, 1996, the Company had outstanding 7,238,177 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 (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 $0.001
per share (the "Common Stock"). Unless otherwise indicated, all share and per
share amounts relating to the Common Stock have been adjusted to give effect to
the reverse stock split.
Certain reclassifications have been made to conform the 1995 financial
statements to the presentations of the 1996 financial statements. The
reclassifications had no effect on net income.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Sept. 30, 1996 Dec. 31, 1995
-------------- -------------
ASSETS
Current assets:
Cash .......................................$ 476,371 $ 30,490
Short-term cash investments................. 1,846,225 --
Accounts receivable - trade................. 525,857 438,058
Advances to officer......................... 469 7,212
Inventory................................... 90,821 81,382
Prepaid expenses and other.................. -- 2,586
--------- ---------
Total current assets.................. 2,939,743 559,728
Property and equipment, at cost:
Oil and gas properties, under the
successful efforts method................ 8,311,055 6,874,635
Other property and equipment................ 319,121 299,161
--------- ---------
8,630,176 7,173,796
Less accumulated depreciation,
depletion, and amortization.............. (3,367,793) (2,363,211)
--------- ----------
Total property and equipment 5,262,383 4,810,585
Other assets................................... 130,874 230,785
--------- ---------
Total assets................................... $8,333,000 $5,601,098
========== =========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Sept. 30, 1996 Dec. 31, 1995
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....... $ 968,407 $ 1,642,537
Officers' salaries payable.................. 414,239 392,462
Oil and gas sales payable................... 88,778 125,899
Current portion of long-term debt.......... 4,684 404,237
--------- ---------
Total current liabilities............. 1,476,108 2,565,135
Long-term debt................................. 19,539 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,
177,140 and 433,686 shares issued
and outstanding, respectively,
liquidation preference $2.00
per share............................. 177 434
1995 Convertible Preferred Stock,
713,334 and 1,015,334 shares issued
and outstanding, respectively,
liquidation preference $1.50
per share ............................. 713 1,015
1996 Series 6% Convertible Preferred Stock,
25 and 25 shares issued
and outstanding, respectively,
liquidation preference $1,000
per share............................ -- --
Common Stock, $0.001 par value,
50,000,000 shares authorized;
7,003,055 and 4,828,786 shares issued
and outstanding, respectively........ 7,003 4,829
Additional paid-in capital.................. 28,673,875 23,311,518
Less note and stock subscriptions receivable-
collateralized by
salaries payable......................... (266,679) (247,470)
stock held by Company ................... (877,755) (845,152)
Accumulated deficit........................ (20,700,021) (19,212,342)
--------- ---------
Total stockholders' equity............ 6,837,353 3,012,872
--------- ---------
Total liabilities and stockholders' equity..... $8,333,000 $5,601,098
========== ==========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------------ --------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
REVENUES:
Oil and gas sales....... $531,981 $243,042 $ 1,196,732 $719,024
Operator and well
service income....... 20,084 20,516 43,495 48,789
Other income, net....... 3,474 7,474 7,880 9,330
----------- ----------- ------------ ------------
Total revenues.... 555,539 271,032 1,248,107 777,143
EXPENSES:
Oil and gas production.. 139,755 111,856 369,646 314,431
Oil and gas exploration. 194,643 150,659 517,624 485,364
Well service costs...... 2,079 2,451 2,882 3,041
Dry hole and abandonment
costs................ -- 15,807 443,830 243,213
General and
administrative....... 119,284 182,103 367,789 438,574
Shareholder-investor
services............. 52,741 8,993 361,190 197,625
Compensation, below market
options............ 5,500 -- 5,500 --
Depreciation, depletion,
and amortization..... 185,186 107,610 574,681 322,822
----------- ----------- ------------ ------------
Total expenses.... 699,188 579,479 2,643,142 2,005,070
----------- ----------- ------------ ------------
OPERATING LOSS............. $(143,649) $ (308,447) $(1,395,035) $(1,227,927)
OTHER INCOME (EXPENSE)
Interest income......... 46,802 41,103 102,224 109,935
Interest expense........ (11,242) (30,418) (133,733) (91,029)
----------- ----------- ------------ ------------
NET LOSS .................$ (108,089) $ (297,762) $(1,426,544) $(1,209,021)
----------- ----------- ------------ ------------
Preferred stock dividends:
Declared................ (61,137) -- (61,137) --
Accrued ................ 24,136 -- (797) --
Imputed ................ (69,196) -- (1,168,432) --
----------- ----------- ------------ ------------
Total preferred stock
dividend............. (106,197) -- (1,230,366) --
----------- ----------- ------------ ------------
Net loss applicable to common
shareholders............ $(214,286) $ (297,762) $(2,656,910) $(1,209,021)
=========== =========== ============ ============
NET LOSS PER COMMON
SHARE................... $ (0.04) $ (0.06) $ (0.50) $ (0.26)
=========== =========== ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............. 5,999,699 4,746,040 5,265,225 4,717,455
=========== =========== ============ ============
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Sept. 30,
1996 1995
----------- -----------
Cash flow from operating activities:
Net loss....................................... $(1,426,544) $(1,209,021)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation, depletion, and amortization...... 574,681 322,822
Dry hole, abandonment and impairment costs..... 443,830 243,213
Issuance of stock for services................. -- 82,188
Accrued note receivable interest income........ (76,847) (94,057)
Amortization of loan origination fee........... 24,583 32,792
Below market stock options..................... 5,500 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable...................... (87,799) 537,122
Advances to officer...................... 6,742 (484)
Inventory...................................... (9,439) 10,174
Prepaids and other....................... 54,989 (72,748)
Increase (decrease) in:
Accounts payable......................... (711,251) 486,596
Salaries payable......................... 21,777 27,819
----------- -----------
Net cash (used in) provided by operating
activities............................ (1,179,778) 366,416
Cash flows from investing activities:
Proceeds from sale of marketable securities.... 196,700 --
Purchase of marketable securities ............. (2,020,000) --
Additions to oil and gas properties............ (1,415,433) (1,370,703)
Purchase of other property..................... (19,960) (7,566)
----------- -----------
Net cash (used in) provided by
investing activities.................. (3,258,693) (1,378,269)
Cash flows from financing activities:
Proceeds from sale of stock, net............... 4,203,508 1,383,554
Proceeds from exercise of warrants and options. 1,080,349 --
Receipt of note receivable for stock........... 3,600 --
Payment of long-term debt...................... (403,105) --
----------- -----------
Net cash provided by
financing activities............... 4,884,352 1,383,554
----------- -----------
Increase (decrease) in cash and cash equivalents.. 445,881 (371,701)
Cash and cash equivalents, beginning of year...... 30,490 93,715
----------- -----------
Cash and cash equivalents, end of period.......... $ 476,371 $ 465,416
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest......................... $ 42,766 $ 20,599
=========== ===========
Non-cash investing and financing activities.... $ 76,890 $ 94,057
=========== ===========
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 preliminary
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 144,100 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 three quarters ended September 30, 1996, the holders of 256,546
shares of the Company's 1994 Preferred Stock converted such preferred stock into
85,517 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 177,140 (convertible into approximately 59,047 shares of Common Stock)
as of September 30, 1996.
Also during the three quarters ended September 30, 1996, holders of 302,000
shares of the Company's 1995 Preferred Stock converted such shares into 100,667
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 713,334 (convertible into approximately 237,778 shares of Common
Stock) as of September 30, 1996.
During the quarter ended March 31, 1996, the Company received aggregate net
proceeds of approximately $448,000 from the issuance of preferred stock which,
with accrued dividends, was converted during the quarter ended September 30,
1996, into an aggregate of 197,945 shares of Common Stock, for an equivalent
weighted average price of $2.20 per share of Common Stock. The 12.5 shares of
such preferred stock remaining outstanding, with an aggregate liquidation
preference of $12,500, are convertible into Common Stock at a price per share
that is the lesser of $4.50 or 75% of the Common Stock trading price per share
at the time of conversion.
During the quarter ended June 30, 1996, the Company received aggregate net
proceeds of approximately $1,252,000 from the issuance of preferred stock which,
with accrued dividends, was converted during the quarter ended September 30,
1996, into an aggregate of 708,590 shares of Common Stock, for an equivalent
weighted average price of $1.77 per shares of Common Stock. During the second
quarter, the Company issued to an unaffiliated company engaged to provide
shareholder and investor relations services options to purchase an aggregate of
166,667 shares of Common Stock at prices ranging from $3.45 per share to $6.90
per share.
During the quarter ended September 30, 1996, the Company received aggregate
net proceeds of approximately $2,509,000 from the issuance of preferred stock
which, with accrued dividends, was converted during the quarter into an
aggregate of 815,936 shares of Common Stock, for an equivalent weighted average
price of $3.07 per share of Common Stock. During the third quarter, the Company
issued to an unaffiliated investor relations advisor additional options to
purchase an aggregate of 266,667 shares of Common Stock at prices ranging from
$4.14 to $6.90 per share. Also during the third quarter, the Company received
net proceeds of approximately $1,012,000 from the exercise of outstanding
options held by an investor relations advisor to purchase an aggregate of
233,000 shares of Common Stock for a weighted average exercise price per share
of $4.34.
For the three and nine month periods ending September 30, 1996, the
Company, in its earnings per shares calculations of the consolidated statement
of operations, calculated accrued and declared preferred stock dividends of
$37,001 and $61,934, respectively, and imputed stock dividends of $69,196 and
$1,168,432 respectively, 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.
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 the quarter ended September 30, 1996, the Company granted to its
executive officers and certain employees options to purchase an aggregate of
488,000 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 8,000 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-quarter immediately
and one-quarter on each of the three following anniversary dates of the date of
grant and expire seven years from the date of the vesting.
In September 1996, the Company entered into executive employment agreements
with its executive officers (see "Note 3. Related Party Transactions"), which
provide for the grant to each executive officer additional options to purchase
200,000 shares of Common Stock at an exercise price of $5.00 per share, the
market price for the Common Stock at the time of grant. Such options vest one-
quarter immediately and one-quarter on each of the three following anniversary
dates of the date of the agreements and expire seven years from the date of
vesting.
During the third quarter, the Company received $68,000 from the exercise of
outstanding warrants to purchase 27,123 shares of Common Stock and related
warrants, which subsequently expired, for an effective price of $2.52 per share,
without ascribing any value to the expired warrants.
3. RELATED PARTY TRANSACTIONS:
The Company owed $414,239 in salaries and interest to its officers and
directors at September 30, 1996.
At September 30, 1996, $266,679, including accrued interest, was due under
notes from one present and one former officer to provide funds to purchase
Common Stock from the Company (which are included as a reduction of stockholders
equity in the accompanying financial statements). The Company has agreed not to
seek payment of such notes until back salaries owed these individuals (totaling
$278,695 at September 30, 1996) are paid.
Pursuant to the recently executed employment agreements with Grant Steele,
N. Thomas Steele, Kenneth L. Ransom ($300,000 each) and Bruce C. Decker
($56,000), the second and third installments due under promissory notes
delivered in September 1994 in connection with the exercise of stock purchase
options were each deferred for one year to September 1997 and September 1998.
In September 1996, Dennis Gustafson returned 3,118 shares of his stock in
satisfaction of an installment of principal and interest on his $56,250 note.
In September 1996, the Company entered into executive employment agreements
with its executive officers. Among other things, such agreements 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. These agreements also
provide for the grant of options, as discussed above in Note 2. 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.
4. 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.
5. SUBSEQUENT EVENTS:
Subsequent to September 30, 1996, the Company received $817,000 from the
exercise of outstanding options and warrants to purchase 185,477 shares of
Common Stock and related warrants to purchase 60,477 shares of Common Stock,
which subsequently expired, for a weighted average effective price of $4.40 per
share, without ascribing any value to the expired warrants.
Subsequent to September 30, 1996, the holders of 12,000 shares of the
Company's 1994 Preferred Stock converted such preferred stock into 4,000 shares
of Common Stock and holders of 100,000 shares of the Company's 1995 Preferred
Stock converted such shares into 33,333 shares of Common Stock. Also subsequent
to September 30, 1996, the holders of 12.5 shares of 1996 Preferred Stock
converted such preferred stock into 3,137 shares of Common Stock and received 58
shares of Common Stock as dividends on such converted 1996 Preferred Stock.
In October 1996, First Geneva Holdings, Inc., exercised warrants it had
received in connection with the offer of the 1996 Preferred Stock to purchase
9,117 shares of Common Stock at $4.50 per share.
In November 1996, the Company established a credit facility with Colorado
National Bank, Denver, Colorado for a total loan amount of $10,000,000, with the
committment amount (the maximum amount that can be outstanding at any one time)
determined twice yearly by the bank based on its analysis of the Company's cash
flows and proved producing reserves. The initial commitment amount is
$2,000,000. Amounts due under this credit facility are secured by the Company's
Eagle Springs field.
In November 1996, the Company purchased from Plains Petroleum Operating
Company, a wholly-owned subsidiary of Barrett Resources, their 40% working
interest in the Eagle Springs field as of August 1, 1996, for $2,500,000 with
adjustments for oil sales, oil inventory, operating expenses, and accrued unpaid
property and production taxes after that date. Expected closing will be in mid
November 1996.
In November 1996, the Company offered a minimum of 200 and a maximum of 500
shares of 1996-4 Series Preferred Stock ("1996-4 Preferred Stock"). As of the
date hereof, the Company has issued 230 shares of 1996-4 Preferred Stock for net
proceeds of $2,097,600. The 1996 Preferred Stock becomes convertible beginning
four months after the last closing date and continuing at the rate of 15% of the
aggregate number of shares issued each month thereafter; provided, that, until
the date that is 10 months after the last closing date, no more than 20% of the
aggregate number of shares may be converted during any 30-day period. Subject
to the Company's right to redeem the 1996-4 Preferred Stock, each share of 1996-
4 Preferred Stock is convertible into that number of shares of Common Stock as
determined by dividing $10,000, plus an accretion at 8% per annum, by the lesser
of $7.50 or a percentage of the average closing bid price of the Common Stock as
reported by the Nasdaq Small Cap Market ("Nasdaq") for the five trading days
immediately preceding the date of conversion. The percentage to be applied to
the average closing bid price is 90% if the conversion occurs more than four
months but less than six months after the last closing, 85% if the conversion
occurs more than six months but less than twelve months after the last closing,
and 82.5% if the conversion occurs more than twelve months after the last
closing. Each share of 1996-4 Preferred Stock shall be automatically converted
into shares of Common Stock on the date that is two years after the last closing
date. The Company will issue to each holder of 1996-4 Preferred Stock who
converts his or her shares more than twelve months after the last closing date a
warrant to purchase the number of shares of Common Stock determined by dividing
the liquidation preference of the shares converted by the warrant exercise
price, which shall be $9.00 on the date that is twelve months after the last
closing date and shall decrease ratably to $7.50 on the date that is 24 months
after the last closing date. The 1996-4 Preferred Stock has a liquidation
preference of $10,000 per share. The placement agent for the 1996-4 Preferred
Stock will receive warrants to purchase up to 46,667 shares of Common Stock,
depending on the aggregate number of shares of 1996-4 Preferred Stock sold, at
an exercise price of $7.50 per share, subject to adjustment in certain
circumstances based on the market price of the Common Stock at each anniversary
date of the date of issuance of the warrants. The Company has agreed to file a
registration statement on or before December 31, 1996, to register the resale of
the Common Stock issuable on conversion of the 1996-4 Preferred Stock, the
Common Stock issuable on exercise of the warrants issuable on such conversion,
and the Common Stock issuable to the placement agent on exercise of the
placement agent warrants, and is subject to certain penalties if the
registration statement is not effective on or before the date that is four
months after the last closing date.
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 the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When
used in this document, the words "anticipate," believe," "estimate," expect,"
and "intend" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of the Company respecting future events and
are subject to certain risks, uncertainties, and assumptions, including the
risks and uncertainties noted. Should one or more of these risks 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 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 nine months of 1996 used cash of
$1,179,800 when the Company reported a net loss of $1,426,000, which resulted in
part to non-cash charges against the Company's revenues, including $574,700 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 $1,546,200 more cash than the
corresponding period in 1995, when the Company had small non-cash expenses of
depreciation, depletion, and amortization due to less production and
substantially increased accounts payable due to limited working capital.
During the first nine months of 1996, investing activities used net cash of
$3,258,700, principally due to $1,415,400 used for additions to oil and gas
properties and $2,020,000 used to purchase short-term liquid marketable
securities. During the corresponding period in 1995, investing activities used
net cash of $1,378,300, consisting almost entirely of cash used for additions to
oil and gas properties.
The cash provided from financing activities during the first nine months of
1996 was $4,884,400, consisting principally of $5,284,000 in cash proceeds
received from the sale of the Company's equity securities, including the
exercise of options and warrants, offset by the repayment of the long-term note
and leases payable of $403,100. During the corresponding period in 1995, the
Company received $1,383,600 in cash from the sale of equity securities.
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 current 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 or Ghost Ranch field
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. Newly established production
from the Ghost Ranch field began late in the third quarter and should make a
larger contribution to revenues in the future. Any additional revenues from
expanded production from further development would be available for operating
shortages as well as to contribute to drilling activities.
As of September 30, 1996, the Company had a working capital of $1,463,635,
which, together with the Company's recently established credit facility, the
sale of additional equity securities, and 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 September 30, 1996 and 1995
For the third quarter period ending September 30, 1996, oil sales increased
119.9% to $532,000 as compared to $243,000 in the same period in 1995,
attributable principally to increased production of $219,100 from the Eagle
Springs field, as a result of development wells drilled during the year. This
increase in the third quarter of 1996 was the result of both a 25.1% increase in
barrels sold and a 42.1% increase in price per barrel as compared to the same
period in 1995.
The Company's production expenses for the third quarter of 1996 increased
$27,900, or 25%, with the Eagle Springs field production expenses increasing
$45,700, while such expenses related to the Company's remaining properties
decreased $17,800 for the same period in 1995. The 25% increase in production
expense is approximately equivalent to the increase in barrels sold as noted
above, suggesting that the Company has not yet begun to realize economies in per
barrel production costs from recently placing the Ghost Ranch well into full
production.
Oil and gas exploration expenses increased $44,000 for the third quarter of
1996 when compared to the same period in 1995. This is primarily due to an
increase in geological and geophysical costs of $25,800 and an increased cost in
lease rentals of $9,200.
Shareholder-investor service expense increased $43,700 to $52,700 for the
third quarter ended September 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
September 30, 1996, increased by $77,600 to $185,200 when compared to the same
period in 1995. The Eagle Springs field contributed $133,000 of the depletion,
depreciation, and amortization costs in the third quarter of 1996 when compared
to the same period in 1995, as a result of significantly increased production.
Interest income increased $5,700 to $46,800 for the third quarter 1996,
when compared to the same period in 1995. Reduced outstanding notes receivable
balances reduced accrued interest income $17,200, this was offset by $9,600
interest earned on short-term liquid investments. Interest expense decreased
$17,000 to $48,800 primarily due to interest on salaries payable and interest
charges on vendor invoices.
During the three months ended September 30, 1996, the Company, in its
earnings per shares calculations of the consolidated statement of operations,
calculated an accrued and declared preferred stock dividend of $37,000 and an
imputed stock dividend of $69,200 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.
Nine Months Ended September 30, 1996 and 1995
For the nine month period ending September 30, 1996, oil sales increase
66.5% to $1,196,700 as compared to $719,000 in the same period in 1995,
attributable principally to a $423,200 increase in production from the Eagle
Springs field as a result of development drilling during 1996. This increase in
the first and third quarters of 1996 was the result of both a 22.3% increase in
barrels sold and a 24.4% increase in price per barrel as compared to the same
nine-month period in 1995. Well service and well operator income decreased
$5,300 for the nine month period ending September 30, 1996, when compared to the
same period in 1995, primarily due to an increase of $3,800 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 nine-month period ended September
30, 1996, increased $55,200, with the Eagle Springs field production expense
increasing $91,300, due in significant part to increased operating costs
associated with new development wells commending production.
Oil and gas exploration expenses increased $32,300 for the nine-month
period ended September 30, 1996, when compared to the same period in 1995. This
is primarily due to increases in geophysical and geological cost of $29,000,
employee salaries and benefits of $19,600, and cost in preparation of the
reserve report by an unaffiliated engineering Company. These increases were
offset by a decrease of leasehold rentals of $11,300. Dry hole, abandonment,
and impairment costs were $443,800 for the nine-months ended September 30, 1996.
This is an increase of $200,600 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 nine months of 1996. Dry hole costs were $1,100 for the first
nine months of 1996, which was a decrease of $242,100 for the same period in
1995.
General and administrative expenses decreased $70,800 to $367,800 for the
nine-month period ended September 30, 1996, when compared to the same period in
1995, principally due to decreased expenses for professional services and
employee salaries and benefits. Shareholder-investor service expense increased
$163,600 to $361,200 for the nine-month period ended September 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 nine-month period ended
September 30, 1996, increased by $251,900 to $574,700 when compared to the same
period in 1995. The Eagle Springs field contributed $327,800 of the increase of
the first nine months of 1996 when compared to the same period in 1995, as field
production increased, while the Company's remaining properties' depreciation,
depletion and amortization expenses decreased $81,800 primarily due to the
requirements of the Financial Accounting Standards Board in their statement
titled "Accounting for Long-Lived Assets." With the write down of $429,900 of
undepleted book value of the North Willow no 6-27 in the first quarter of 1996,
the depreciable base was lowered to the value of its reserves and results in
lower depreciation during the quarter.
Interest income was reduced $7,700 to $102,200 for the nine-month period
ended September 30, 1996, when compared to the same period in 1995. Reduced
outstanding notes receivable balances reduced accrued interest income $17,200,
while interest income received from short-term investments increased $9,000.
Interest expense increased $42,700 to $133,700 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 nine months ended September 30, 1996, the Company, in its
earnings per shares calculations of the consolidated statement of operations,
calculated an accrued and declared preferred stock dividends of $61,934 and an
imputed stock dividend of $1,168,432 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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are included with this report
SEC Reference
Exhibit No.
Number Title of Exhibit
4.01 4 Certificate of Designation of 1996-4 Series
Preferred Stock
10.01 10 Form of Warrant to placement agent and assigns
relating to offer of 1996-4 Series Preferred
Stock, with related schedule
10.02 10 Form of Revised Executive Employment Agreement
between the Company and executive officers, with
related schedule**
10.03 10 Form of Nonqualified Stock Options granted to
executive officers dated July 18, 1996, with
related schedule**
10.04 10 Form of Nonqualified Stock Options granted to
executive officers in connection with employment
agreements, with related schedule**
10.05 10 Form of Nonqualified Stock Options granted to
employees in connection with employment
agreements, with related schedule
10.06 10 Form of Registration Rights Agreement relating to
offer of 1996-4 Series Preferred Stock, with
related schedule
(b) Reports on Form 8-K. During the quarter ended September 30, 1996,
the Company did not file any report on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORELAND CORPORATION
(Registrant)
Dated: November 14, 1996 By /s/ N. Thomas Steele
N. Thomas Steele, President
Dated: November 14, 1996 By /s/ Don W. Treece
Don W. Treece, Controller (Chief
Financial Officer)