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, 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 August 11, 1999, Foreland had outstanding 9,694,206 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.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, 1999 DEC. 31, 1998
Current assets: ------------- -------------
Cash and cash equivalents................... $ 160,277 $ 1,849,782
Accounts receivable - trade................. 3,158,347 2,771,085
Inventory................................... 1,956,788 1,166,361
Marketable securities....................... - 700,000
Prepaid expenses and other.................. 342,234 164,921
----------- -----------
Total current assets..................... 5,617,646 6,652,149
Property and equipment, at cost:
Oil and gas properties, under the successful
efforts method............................. 13,569,317 13,566,505
Refineries and building..................... 6,733,879 4,845,472
Transportation and other equipment.......... 1,270,745 1,007,571
Office furniture and equipment.............. 412,598 419,317
Construction in progress.................... 34,003 367,509
----------- -----------
22,020,542 20,206,374
Less accumulated depreciation, depletion,
and amortization........................... (13,503,006) (13,115,997)
----------- -----------
Total property and equipment ..... 8,517,536 7,090,377
Other assets:
Debt issuance costs, net of accumulated amortization 546,516
576,190
Investment in Cowboy Asphalt Terminal....... 163,023 172,177
Deposits and other.......................... 171,110 151,794
----------- -----------
Total other assets............ 880,649 900,161
----------- -----------
Total assets................................... $15,015,831 $14,642,687
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ,in default,
net of discount of $910,605 in 1999
and $1,219,786 in 1998.................. $ 11,890,265 $11,168,213
Current maturities of long term debt (refining) 47,181
-
Line of credit facility..................... 542,958 -
Accounts payable and accrued expenses....... 2,624,617 2,378,274
Officers' salaries payable.................. 453,884 434,813
Accrued expenses and other debt............. 1,028,263 1,223,474
----------- -----------
Total current liabilities............. 16,587,168 15,204,774
Long-term debt (refining),
less current maturities....................... 608,965 -
Stockholders' Equity (Deficit):
Preferred Stock, $0.001 par value, 5,000,000
shares authorized; 524,243 shares issued
and outstanding in 1998 (liquidation
preference of $2,891,757), 524,243 shares
issued and outstanding in 1999 (liquidation
preference of $2,891,757).................. 524 524
Common Stock, $0.001 par value, 50,000,000
shares authorized; 9,694,206 and 9,673,191
shares issued and outstanding,
respectively............................... 9,694 9,673
Additional paid-in capital.................. 39,544,592 39,366,477
Less note and stock subscriptions
receivable................................. (329,557) (338,921)
Accumulated deficit......................... (41,405,555) (39,599,840)
----------- -----------
Total stockholders' equity............ (2,180,302) (562,087)
----------- -----------
Total liabilities and stockholders' equity..... $15,015,831 $14,642,687
=========== ===========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------
JUNE 30, ENDED JUNE 30,
---------------------- ---------------------
1999 1998 1999 1998
---------- -------- -------- -------
REVENUES:
Refining and
transportation.........$ 6,989,384 $ - $11,875,089 $ -
Oil and gas sales ...... - 317,554 - 730,306
Other income, net....... 3,150 1,045 5,756 1,104
----------- --------- ----------- --------
Total revenues.... 6,992,534 318,599 11,880,845 731,410
EXPENSES:
Refining and transportation:
Cost of goods sold... 5,210,890 - 8,398,133 -
Repairs and maintenance 250,678 - 440,082 -
Other................ 401,213 - 1,434,615 -
Oil production costs:
Lease production and
operations.......... - 270,968 - 520,126
Enhanced recovery project - 175,626 - 373,963
Oil exploration costs:
Dry hole, abandonment and
impairment costs.... (209,796) 417,892 (209,796) 490,465
Other................ 214,618 218,222 418,796 476,267
General and administrative costs:
Shareholder-investor
services............ 15,809 30,361 97,130 70,979
Stock-based compensation -
employees.......... - 6,180 - 12,344
Other................ 646,792 162,855 1,313,724 369,894
Depreciation, depletion, and
amortization......... 199,737 222,502 413,400 379,280
----------- --------- ----------- --------
Total expenses.... 6,729,941 1,504,606 12,306,084 2,693,318
----------- --------- ----------- --------
OPERATING LOSS............ $ 262,593 $(1,186,007) $ (425,239) $(1,961,908)
OTHER INCOME (EXPENSE)
Gain (Loss) on sale of asset 5,751 - 5,751 3,460
Interest income......... 12,146 35,064 41,333 81,988
Interest expense........ (687,643) (358,537) (1,427,561) (650,521)
----------- --------- ----------- --------
NET LOSS ................. $ (407,153) $(1,509,480) $(1,805,716) $(2,526,981)
Preferred stock dividends:
Accrued ................ (60,000) - (120,000) -
Imputed ................ - - - -
----------- --------- ----------- --------
Net loss applicable to common
shareholders............ $(467,153) $(1,509,480) $(1,925,716) $(2,526,981)
=========== =========== =========== ===========
NET LOSS PER COMMON
SHARE................... $ (0.05) $ (0.18) $ (0.20) $ (0.30)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 9,696,000 8,538,600 9,689,300 8,508,800
=========== =========== =========== ===========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------------ ------------
Cash flow from operating activities:
Net loss....................................... $(1,805,716) $(2,526,981)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation, depletion, and amortization...... 413,400 379,279
Dry hole, abandonment and impairment costs..... 3,997 490,465
Issuance of stock for services................. 25,000 18,150
Issuance of stock for interest................. 154,857 --
Accrued note receivable interest income........ (13,279) (12,912)
Amortization of loan origination fee........... 309,200 326,063
Forgiveness of debt for services............... 20,923 12,344
Gain on sale of other properties............... (5,751) (3,460)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable...................... (387,284) 97,647
Inventory................................ (790,427) (79,755)
Prepaids and other....................... 522,708 (395,584)
Increase (decrease) in:
Accounts payable and accrued expenses.... (145,232) 138,770
Salaries payable......................... 19,071 44,614
--------- ---------
Net cash used in operating activities. (1,678,533) (1,511,360)
Cash flows from investing activities:
Capital expenditures for property and equipment (1,619,764) (2,512,329)
Investment in Cowboy Asphalt Terminal.......... 17,290 --
Proceeds from sale of assets................... 9,556 --
Purchase of other property..................... (15,207) (7,546)
--------- ---------
Net cash (used in) provided by
investing activities.................... (1,611,957) (2,519,875)
Cash flows from financing activities:
Proceeds from exercise of warrants and options. -- 32,000
Proceeds from borrowing long-term debt......... 1,619,764 5,925,279
Payment of long-term debt...................... (7,807) (652,681)
--------- ---------
Net cash provided by
financing activities................. 1,611,957 5,308,598
Increase (decrease) in cash and cash equivalents.. (1,689,505) (1,401,597)
Cash and cash equivalents, beginning of year...... 1,849,782 40,631
--------- ---------
Cash and cash equivalents, end of period.......... $ 160,277 $1,317,994
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest......................... $ 590,901 $ 306,804
========== ==========
Non-cash investing and financing activities.... $ 13,279 $ 12,912
========== ==========
See accompanying notes to these consolidated financial statements.
FORELAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OIL AND GAS PROPERTIES:
With Foreland's continuous leasing program since 1986, it has established
what management believes is one of the best property positions in Nevada.
Foreland's leasing program is coordinated with prospect generation and
exploration results. As areas of interest are identified, Foreland 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, Foreland may seek leases on additional areas or relinquish
leases on areas that appear less promising, thereby reducing leasehold cost.
Foreland currently has approximately 143,500 gross acres under lease.
2. ISSUANCE OF SECURITIES, COMMON STOCK OPTIONS, AND PURCHASE WARRANTS:
During the first quarter of 1999, Foreland engaged an investment banker to
assist 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 Energy Income Fund L.P.
("EIF") in January 1998, which was amended in August 1998 and February 1999.
Amounts due under the financing arrangement are collateralized by substantially
all of Foreland's property and equipment, excluding its database and
nonproducing properties and Foreland Refining's accounts receivable and
inventory, and Foreland is required to maintain certain financial ratios and
comply with other terms and conditions while any balance of indebtedness remains
outstanding. Through June 30, 1999, Foreland had drawn $12,575,279 under the
financing arrangement, and further loan commitments are now terminated.
Foreland did not commence required principal amortization payments in
November 1998 and was not in compliance with certain financial covenants
relating to minimum collateral-to-indebtedness ratio, cash flow, equity
requirements, current ratio, debt service ratio, and general and administrative
expense ratios. Ultimately, EIF agreed to reschedule the principal amortization
payments to commence May 1, 1999, and extend certain financial covenants and
waive its exercise of remedies upon default until May 15, 1999. Foreland did
not make the first required monthly payment of principal on May 1, 1999, and has
not yet commenced such payments. Presently, Foreland does not have the
ability to comply with the amended financial covenants and ratios. In addition,
Foreland has not been able to pay the entire interest payments due EIF on the
loan but has continued to make partial interest payments of approximately
$50,000 each month while Foreland investigates refinancing, merger, and
acquisition opportunities. The amount of unpaid interest has been accrued and
is included in current liabilities. As a result of the foregoing, the entire
balance due EIF is included in current liabilities in Foreland's financial
statements. Despite this presentation, management continues to negotiate a
payment plan with EIF and is hopeful that EIF will continue to make concessions
to prevent acceleration of the entire principal balance and the exercise of
EIF's remedies upon default.
During the first quarter of 1999, Foreland Refining 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 $418,111 in salaries and interest to two current officers
and directors, and a former officer and director, at June 30, 1999. Foreland
also had outstanding loans to one current officer and director and two former
officers and directors in the amount of $329,560 as of such date.
Commencing the second quarter of 1999, Messrs. N. Thomas Steele and Bruce
C. Decker agreed to reduce their compensation by approximately 30% while
Foreland continues to investigate financing alternatives
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. SUBSEQUENT EVENTS:
Foreland has implemented various measures to reduce overhead and operating
costs. As part of these measures, Foreland has consolidated many of its
administrative operations into its Woods Cross, Utah, location and has reduced
its Colorado workforce by more than half. Foreland is presently seeking to
sublease the unused portions of its Lakewood, Colorado, facilities to further
reduce costs.
In July 1999 three owners of the 1995 Preferred Stock converted their
87,000 preferred shares to 29,000 shares of the Company's Common Stock.
In July 1999 the Company was notified by the Nasdaq Stock Market that
Foreland is not in compliance with the rules that require standards for net
tangible assets, market capitalization, and net income requirements for
continued listing on The Nasdaq SmallCap Market. Foreland has been granted a
hearing on September 9, 1999 by the Nasdaq Stock Market to consider the request
for an extension of time within which to satisfy the maintenance requirements.
7. 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 year ended June 30, 1999.
Refining
Oil & Gas and Trans- Consolidation
Producing portation Entries Consolidated
---------- --------- ------------- ------------
Revenues:
External customers...... $ - $11,880,845 $ - $11,880,845
Inter-segment........... 613,290 - (613,290) -
Interest Income......... 19,751 21,582 - 41,333
-------- ----------- -------- -----------
Total revenues.... 633,041 11,902,427 (613,290) 11,922,178
Costs and expenses:
Refinery/transport cost
of goods............... - 8,615,684 (217,551) 8,398,133
Repairs and maintenance. - 440,082 - 440,082
Other................... - 1,434,615 - 1,434,615
Oil and gas production.. 395,739 - (395,739) -
Oil and gas exploration. 418,796 - - 418,796
General and
administrative......... 726,456 684,398 - 1,410,854
Dry hole costs.......... (209,796) - - (209,796)
Depreciation, depletion, and
amortization......... 51,480 361,920 - 413,400
Interest and other, net. 1,087,028 334,782 - 1,421,810
--------- ----------- -------- -----------
Total expenses....$2,469,703 $11,871,481 $(613,290) $13,727,894
========== =========== ========= ===========
Net Income(Loss).$(1,836,662) $ 30,946 $ - $(1,805,716)
========== =========== ========= ===========
Total assets for each segment
as of June 30, 1999
are as follows:...........$2,458,903 $12,298,712 $(258,216) $15,015,831
========== =========== ========= ===========
8. DISCLOSURE ABOUT OIL AND GAS PRODUCING ACTIVITIES:
Due to the low oil prices at December 31, 1998 of approximately $5.80 per
barrel, the Company recognized substantial downward revisions in oil reserve
quantities, the standardized measure, and net capitalized costs due to
impairment on its financial statements. In addition to the adverse impact on
current operating results, low oil prices tend to dramatically reduce estimates
of future oil reserve quantities since the wells become uneconomic at an earlier
date. During the year ended December 31, 1998, Foreland recognized
impairment of its producing wells of $3,617,900 as a result of the foregoing.
Since December 31, 1998, oil prices have increased. The following pro forma
information illustrates the sensitivity of reserve quantities and the
standardized measure to changes in oil prices as prepared for the Company's
lender by an independent petroleum engineering firm:
Pro Forma
--------------------------
Quantity Standardized
Oil Price (bbls) Measure
----------- -------------
$ 9.75 1,716,000 $2,198,000
$ 12.50 2,039,000 $4,126,000
As of June 30, 1999, applicable oil prices were approximately $14.16 per
barrel.
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, and quarterly
report on Form 10-Q for the quarter ended March 31, 1999.
Since its organization in June 1985, Foreland has been engaged principally
in oil exploration in the Great Basin and Range of Nevada, an area that
management believes has potential for the discovery of major oil reserves. In
continuing to advance this exploration, Foreland's strategy is to generate
exploration prospects with the most recent generally available scientific
techniques, expand and improve Foreland's strategic land position, and establish
arrangements with other oil exploration firms active in Nevada to obtain
additional scientific data, leases, and funding. In an effort to increase the
financial return to Foreland from its crude oil production 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. Foreland has entered into
agreement to refine all of the crude oil presently produced in Nevada and is
seeking additional sources of throughput for its refineries. In May 1999,
Foreland completed construction and initiated operation of a roofing asphalt
plant near Salt Lake City, Utah. This plant will process premium quality
asphalt from Foreland's refineries in Nevada.
Foreland's production from the Eagle Springs, Ghost Ranch, Kate Springs
and Sand Dune fields in Nevada comprises approximately one fifth of the
throughput currently refined by Foreland.
Through 1996, Foreland funded its exploration program principally from the
sale of common and preferred stock. In November 1996, Foreland established a
bank credit facility, now repaid. In early 1998, Foreland entered into a
financing arrangement with Energy Income Fund, L.P. ("EIF") to fund certain
activities. Through June 30, 1999, Foreland borrowed approximately $12.6
million from EIF and further loan commitments have now been terminated. Foreland
is now in default on the EIF loan, which is classified as a short-term liability
on Foreland's financial statements as of December 31, 1998 and June 30, 1999.
In 1999, Foreland Refining Corporation, a subsidiary of Foreland,
established a line of credit with a 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 HAD A WORKING CAPITAL DEFICIT OF $11.8 MILLION (DISREGARDING
$910,000 IN NON-CASH ACCRUED DISCOUNT FOR DEBT ISSUANCE) AS OF JUNE 30, 1999,
AND FACES EXTREME WORKING CAPITAL REQUIREMENTS. Based on current oil
production and prices, refinery throughput, and finished goods sales
and margins, Foreland does not generate sufficient revenues to satisfy its
cash requirements for general and administrative expenses, dividends on
preferred stock, interest and principal payments on debt, and other payments
to trade creditors and others respecting approximately $16.0 million in
short-term liabilities as of June 30, 1999, including $12.6 million resulting
from reclassification of Foreland's long-term debt arrangement with EIF.
Approximately $805,000 in trade accounts payable relating primarily to
exploration costs incurred by the oil and gas production segment are over 90
days past due, and Foreland expects that such trade creditors will continue
to intensify their collection efforts if adequate partial payment or
forbearance arrangements are not agreed to. Similarly, Foreland has
insufficient cash to undertake material oil and gas exploration on its own.
- --FORELAND HAS INSUFFICIENT CASH TO PAY $12.6 MILLION IN SECURED INDEBTEDNESS.
Foreland has not yet commenced monthly principal payment of $347,437 due
initially on May 1, 1999, on $12.6 million indebtedness due EIF, did not make
earlier payments that were subsequently deferred, and has not been in
compliance with certain financial covenants relating to minimum collateral to
indebtedness ratio, cash flow, equity requirements, current ratio, debt
service ratio, and general and administrative expense percentages. In the
second quarter of 1999 Foreland was not able to pay all the interest that was
accruing on the EIF debt. The unpaid interest has been accrued and is
reflected with the note payable to EIF as current maturities. All of
Foreland's assets and operations used in its refinery, transportation and
marketing activities and its producing properties are encumbered as security
for this obligation. Foreland has implemented cost cutting measures and is
seeking to restructure its resources in order to be able to commence
principal payments and comply with the financial covenants, but Foreland
cannot assure it will be able to do so. EIF currently has the legal right to
implement its remedies on default, initiate foreclosure and seek to take
possession of substantially all of Foreland's assets, except for database and
nonproducing properties and Foreland Refining's accounts receivable and
inventory. There can be no assurance that EIF will agree to any further
extensions or modifications or continue to forbear from exercising its
remedies.
- --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 June 30,
1999, Foreland had a working capital deficit of $11.8 million (disregarding
the $910,000 non-cash accrued discount for debt issuance) and an accumulated
deficit of $41.4 million since its inception in 1985. Foreland had losses of
$13.9 million for the year ended December 31, 1998, and $1.8 million for the
first half 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 EIF, trade
creditors, or others; implement cost cutting measures; severely restrict
activities; or take other measures will enable Foreland to continue.
- --FORELAND WILL NEED ADDITIONAL INVESTMENT, STRATEGIC ALLIANCE OR SALE/MERGER.
In order for Foreland to continue, it will need to capitalize on its market
position, technical capabilities, management, assets and identified business
opportunities by either raising additional capital, creating a strategic
alliance with another company, or selling or merging some or all of its lines
of business. Foreland has engaged an investment banker to assist in these
efforts.
LIQUIDITY AND CAPITAL RESOURCES
Foreland's operations during the first six months of 1999 used cash of
$1,759,900 when Foreland reported a net loss from operations of $1,805,700.
Non-cash charges against Foreland's revenues included $413,400 in depreciation,
depletion, and amortization, $154,900 of stock issued for interest expense, and
$227,900 in amortization of debt discount and issuance costs. Changes in working
capital components (current assets and current liabilities) used $781,200 in
cash. Operating activities used approximately $248,500 more cash than the
corresponding period in 1998.
During the second quarter of 1999, investing activities used net cash of
$1,622,900 due to $1,634,600 in additions to refineries , transportation and oil
and gas properties, principally related to the construction of Foreland's
roofing asphalt plant near Salt Lake City, Utah. During the corresponding period
in 1998, investing activities used net cash of $2,519,800 for additions to plant
and equipment and other property.
Financing activities provided $1,693,300 during the second quarter of 1999,
consisting of $543,000 of borrowing against a line of credit, $656,100 debt
associated with the purchase of the Cowboy Asphalt Terminal, $200,000 borrowing
from EIF and $227,900 in unpaid interest. During the corresponding period in
1998 financing activities provided $5,308,600, 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. To date,
Foreland has drawn an aggregate of $12,575,300 under this facility to fund most
of its cash requirements, including the purchase of the refinery and
transportation assets from Petro Source. Amounts due under the financing
arrangement are collateralized by oil and gas properties and Foreland is
required to maintain certain financial ratios and comply with other terms and
conditions while any balance of indebtedness remains outstanding.
Foreland made monthly interest payments during the first quarter of 1999,
however during the second quarter of 1999 the Company made only partial payment
of the interest that was due. The remaining interest has been accrued and is
reflected in the current maturities of long-term debt. Foreland has not
commenced monthly principal amortization payments (originally scheduled to begin
in November 1998 and deferred to May 1999). Additionally, Foreland is not in
compliance with certain financial covenants relating to minimum cash flow,
equity requirements, current ratio, debt service ratio, and general
administrative expense percentages. Foreland has implemented cost cutting
measures and is restructuring its resources in order to commence the required
principal payments and comply with the financial covenants, but there is no
assurance it will be able to do so. EIF presently has the legal right to
implement its remedies on default, initiate foreclosure and seek to take
possession of substantially all of Foreland's assets. There can be no assurance
that EIF will agree to any further extensions or modifications or continue to
forbear from exercising its remedies. It may be impossible for Foreland to
continue if EIF were to foreclose on essentially all of Foreland's oil
producing, refining, and transportation assets.
Foreland requires cash for payments on indebtedness, general and
administrative expenses, maintaining its properties, and other items that are
required in order for Foreland to continue, as distinguished from costs to
advance its ongoing exploration program in Nevada. Based on August 1999
production levels and prices and Foreland's current operating capital, Foreland
is not able to meet cash requirements for fixed and recurring operating costs,
including principal and interest payments to EIF and payments to other
creditors. Foreland does not have sufficient capital to undertake further
exploration activities. Foreland has implemented certain cost-cutting measures,
consolidated its administrative operations to its Woods Cross, Utah, facility,
and reduced its Colorado workforce by over half, and is in the process of
attempting to sublease a portion of its facilities to reduce operating costs.
There can be no assurance that any such measures will be successful to reduce
operating costs sufficiently to allow Foreland to continue.
As of June 30, 1999, Foreland had a working capital deficit of $11.8
million (disregarding $910,000 treated as an accrued discount for debt
issuance), as compared to a deficit of $500,000 for the same period in 1998.
Included in such is the $12.6 million indebtedness classified as a current
liability due to Foreland's default on such indebtedness.
RESULTS OF OPERATIONS (SEE NOTE 7, REPORTING BY SEGMENTS)
REFINING & TRANSPORTATION ACTIVITIES
Three months Ended June 30, 1999 and 1999 Budget
For the three months ending June 30, 1999, refined product and
transportation revenues were $6,991,800, based on sales volume of 273,800
barrels. Since this business was purchased in August 1998, there is no
comparable data for the same period in 1998. Revenue for the three months
ended June 30, 1999, was 1%, or $72,179, less than budgeted. This level of
revenue represents a 43%, or $2,103,500, increase over first quarter revenue of
$4,888,300 based on sales volume of 250,300 barrels. The increase in sales
volume, 23,500 barrels, is attributable to seasonal increase in demand. While
more volume was sold in the second quarter, most of the revenue increase is a
result of higher crude oil and finished product prices.
Costs of sales for the three months ended June 30, 1999, were $5,063,400,
which represents an increase of 42%, or $1,511,000, over the $3,552,400
experienced in the first quarter. This is primarily due to higher crude oil
prices. Compared to anticipated cost of sales of $4,591,000, actual costs for
the second quarter were favorable by 10% or $472,400, primarily due to the delay
in commencing roofing plant operations. In May 1999, a marketing agreement was
executed with Owens-Corning, an asphalt and building products company. As a
result, the roofing operating group should approach expected performance levels
in the third quarter.
Operating expenses for the three months ended June 30, 1999, were
$996,500, which represents an increase of 13%, or $118,400, over the $878,100
experienced in the first quarter. This is primarily due to higher fuel costs
at both refineries and roofing plant operating expense. Actual expenses for the
second quarter were 27% less than expected, attributable principally 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 the three months ended June 30,
1999, were $332,800, which represents a decrease of 5%, or $18,700, under the
$351,500 experienced in the first quarter. The primary sources of this decrease
were a reduction in contract help and professional services. Actual expenses for
the second quarter were less than budgeted general and administrative expense by
11%, or $43,200, due principally 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 the three months
ended June 30, 1999, EBITDA was $599,000, which represents an increase of 463%,
or $492,700, over the $106,300 experienced in the first quarter. Better gross
margins at both refineries were the primary sources of this increase. Compared
to budgeted EBITDA of $739,400, actual results were unfavorable by 19% or
$140,400. Most of the variance is attributable to the delay in commencing
roofing operations.
Depreciation for the three months ended June 30, 1999, was $189,000, which
represents an increase of 9%, or $16,200, over the $172,800 experienced in the
first quarter. The primary source of this increase was the depreciation
associated with the exercise of a purchase option for 15 highway transport
trucks. Compared to budgeted depreciation of $161,300, actual results were
unfavorable 17%, or $27,700. The variance is attributable to the purchase of
the above referenced trucks.
Interest expense for the three months ended June 30, 1999, was $166,000,
which represents an increase of 13%, or $19,000, over the $147,000 experienced
in the first quarter. The primary sources of this increase were payments to a
bank for borrowing on the line of credit and interest associated with the
purchase of land in the Cowboy Asphalt Terminal.
Six months Ended June 30, 1999 and 1999 Budget
For the six months ending June 30, 1999, refined product and
transportation revenues were $11,902,400, on sales volume of 524,100 barrels.
Since this business was purchased in August 1998, there is no comparable data
for the same period in 1998. Revenue for the six months ended June 30, 1999,
was 8%, or $932,400, more than budgeted revenue of $10,970,000. Based on
expected sales volume of 510,000 barrels. The 14,100 barrels increase in
sales volume, is attributable to seasonal increase in demand. While more
volume was sold than budgeted, most of the revenue increase is a result of
higher crude oil and finished product prices.
Costs of sales for the six months ended June 30, 1999, were $8,615,700,
which represents an increase of 18%, or $1,309,000, over the budgeted amount,
primarily due to higher crude oil prices..
Operating expenses for the six months ended June 30, 1999, were $1,874,700
which represents a decrease of 24%, or $576,200, less than anticipated cost of
$2,450,900 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
expected.
General and administrative expenses for the six months ended June 30,
1999, were $684,400, which represents a decrease of 9%, or $67,600, under the
$752,000 expected for this period. Most of the variance is attributable to
the delay in commencing roofing operations.
During the six months ended June 30, 1999, EBITDA was $727,000, which
represents an increase of 58%, or $265,700, over the $461,300 expected for this
period. Better gross margins at both refineries were the primary sources of
this increase. Better than anticipated transportation activity in the first
quarter also contributed to this variance.
Depreciation for this period was $362,000, which represents an increase of
12%, or $39,400, over the $322,600 expected for this period. The primary source
of this increase was the depreciation associated with the exercise of a purchase
option for 15 highway transport trucks.
Interest expense for this period was $344,800, which represents an increase
of 7%, or $22,300, over the $312,500 expected for this period. The primary
sources of this increase were payments to a 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 June 30, 1999 and 1998
For the second quarter ended June 30, 1999, oil sales increased 21.8% to
$386,700 as compared to $317,600 in the same period in 1998. The increase in
the second quarter of 1999 was the result of a 4.8% increase in barrels sold and
a 27.4% increase in price as compared to the same period in 1998.
The Company's production expenses for the second quarter of 1999
decreased $229,800, or 48.3%, to $214,600, with the discontinuance of the Eagle
Springs field's enhanced oil recovery project expenses contributing $173,400 of
the decrease, and a reduction of field personnel also contributing to the
decrease.
Oil and gas exploration expenses increased $3,600, or 1.7%, to $214,600
for the second quarter of 1999 when compared to the same period in 1998. Dry
hole, abandonment, and impairment costs were a credit of $209,800, primarily
due to reduced cost attributable to a settlement with a vendor.
General and administrative expenses increased $149,800 to $312,700 for the
three-months ended June 30, 1999, when compared to the same period in 1998. The
primary contributors were increases of $79,100 in personnel cost associated
with the severance of six employees in the Denver office, $26,500 in
professional fees, $13,100 in travel costs, and $12,500 office supplies.
Shareholder and investor services increased $33,100 due to a increase in
financial public relations and information dissemination within the investment
community. Depreciation, depletion, and amortization decreased for the three-
months ended June 30, 1999, by $40.800 to $10,600 primarily as a result of a
decrease in depreciable capitalized costs.
Interest income decreased $27,700 to $7,400 for the second quarter 1999,
when compared to the same period in 1998. Interest expense increased $151,500
to $511,800, primarily due to interest on outstanding long-term debt, of which
$182,000 was non-cash amortized issuance costs associated with the debt
financing.
Six Months Ended June 30, 1999 and 1998
For the six months ending June 30, 1999, oil sales decreased 16.0% to
$613,300 as compared to $730,300 in the same period in 1998, attributable to
decreased production. This decrease in the first six months of 1999 was the
result of a 20.2% decrease in barrels sold and a 2.4% decrease in price as
compared to the same six months in 1998.
The Company's production expenses for the first six months of 1999
decreased $472,800, or 53.0%, to $418,900, with the discontinuance of the Eagle
Springs field's enhanced oil recovery project expenses contributing $374,700 of
the decrease, a reduction of field personnel and lower workover cost also
contributing to the decrease.
Oil and gas exploration expenses decreased $57,500, or 13.7%, to $418,800
for the first and second quarters of 1999 when compared to the same period in
1998. This is primarily due to decreased personnel cost of approximately
$40,300, increased office rental of $11,500, decreased vehicle cost of $21,300,
decreased lease rental cost of $24,900, and increased geological and geophysical
cost of $33,300.
General and administrative expenses increased $259,400 to $629,300 for the
six months ended June 30, 1999, when compared to the same period in 1998. The
primary contributors were increases of $79,100 in personnel cost associated with
the severance of six employees in the Denver office, 11,600 in office rental ,
$26,500 in professional fees, $12,500 office supplies and $13,400 in travel
costs. Shareholder and investor services increased $33,100 due to a increase in
financial public relations and information dissemination within the investment
community. Depreciation, depletion, and amortization decreased for the six
months ended June 30, 1999, by $327,800 to $51,500 primarily as a result of a
decrease in depreciable capitalized cost.
Interest income decreased $62,200 to $19,800 for the first six months of
1999, when compared to the same period in 1998. Interest expense increased
$436,500 to $1,087,000, primarily due to interest on outstanding long-term debt,
of which $309,200 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
proved reserves, are capitalized. Costs to drill exploratory wells that do not
find proved reserves, geological and geophysical costs, and costs of carrying
and retaining unproved properties are expensed.
Foreland's accounting policy requires it to assess the carrying cost of
long-lived assets whenever events or changes of circumstances indicate that the
carrying value of long lived assets may not be recoverable. When an assessment
for impairment of oil and gas properties is performed, Foreland is required to
compare the net carrying value of proved oil and gas properties on a lease by
lease basis (the lowest level at which cash flows can be determined on a
consistent basis) to the related estimates of undiscounted future net cash flows
for such properties. If the carrying value exceeds the net cash flows, then
impairment is recognized to reduce the carrying value to the estimated fair
value. 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. There is no prediction
of the outcome of this litigation.
Subsequent to June 30, 1999, two trade creditors initiated actions against
Foreland seeking collection of an aggregate of approximately $50,000 plus costs,
fees, and interest. Foreland intends to assert available defenses or seek
extended payments terms for amounts claimed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 a 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. These
securities were issued without registration under the Securities Act in reliance
on the exemption from registration and prospectus delivery requirements of the
Securities Act provided in S 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Foreland is in default on its indebtedness of $12,575,279 due Energy Income
Fund, L.P. Foreland did not make the first required monthly principal payment
of $346,437 due May 1, 1999. Originally, monthly payments were due to commence
in November 1998, but these payments were subsequently deferred. Additionally,
Foreland is not in compliance with financial covenants under the loan related to
minimum collateral-to-indebtedness ratio, cash flow, equity requirements,
current ratio, debt service ratio, and general and administrative expense
ratios. EIF currently has the right to implement its remedies on default,
initiate foreclosure and seek to take possession of substantially all of
Foreland's assets.
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 second 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 Letter/deferral/waiver/release agreement Incorporated
dated April 14, 1999, between Energy by
Income Fund, L.P. and Foreland Reference(1)
Corporation and subsidiaries.
ITEM 27. FINANCIAL DATA SCHEDULE
27.01 27 Financial Data Schedule This Filing
(1)Incorporated by reference from Foreland's annual report on Form 10-K for the
fiscal year ended December 31, 1998.
(B) REPORTS ON FORM 8-K.
During the quarter ended March 31, 1999, Foreland filed no reports 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: August 16, 1999 By: /s/ N. Thomas Steele,
President
Dated: August 16, 1999 By: /s/ Bruce C. Decker,
Chief Financial Officer