SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 30, 2001
Commission File Number 0-14096
Foreland Corporation
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0422812
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2561 South 1560 West
Woods Cross, Utah 84087
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(Address of principal executive offices) (Zip Code)
(801) 298-9886
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(Issuer's telephone number)
n/a
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(Former name, former address and former fiscal year,
if changed since last report)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of August 14, 2001, issuer had
9,742,323 shares of issued and outstanding common stock, par value $0.001.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORELAND CORPORATION
Balance Sheets
ASSETS
June 30, December 31,
2001 2000
------------------ ------------------
(Unaudited)
CURRENT ASSETS
Cash $ 4,198 $ 98,298
Inventory - pipe 53,004 53,004
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Total Current Assets 57,202 151,302
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LONG-TERM ASSETS
Office equipment, net 15,559 18,078
Unproved oil and gas properties 188,177 188,177
Deposits 75,000 75,000
------------------ ------------------
Total Long-Term Assets 278,736 281,255
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Total Assets $ 335,938 $ 432,557
================== ==================
The accompanying notes are an integral part of these
financial statements.
2
FORELAND CORPORATION
Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, December 31,
2001 2000
------------------ ------------------
(Unaudited)
CURRENT LIABILITIES
Amount due to seller of acquired business (Note 5) $ 628,500 $ 600,000
Accounts payable 550,133 557,149
Accrued liabilities - 79,300
Officers' salaries - related parties 36,692 583,939
Current portion of note payable 10,000 -
------------------ ------------------
Total Current Liabilities 1,225,325 1,820,388
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COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDER'S EQUITY (DEFICIT)
Convertible preferred stock, $0.001 par value, 5,000,000
shares authorized; 407,243 shares issued and outstanding
in 2000 (liquidation preference of $3,229,000) 407 407
Common stock, $0.01 par value, 50,000,000 shares
authorized; 9,742,323 shares issued and outstanding 9,742 9,742
Additional paid-in capital 39,322,689 39,126,440
Less stock subscriptions receivable - (350,488) )
Accumulated deficit (40,222,225) (40,173,932)
------------------ ------------------
Total Stockholders' Equity (Deficit) (889,387) (1,387,831)
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 335,938 $ 432,557
================== ==================
The accompanying notes are an integral part of these
financial statements.
3
FORELAND CORPORATION
Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- ---------------- ---------------
REVENUE $ 6,840 $ 103,718 $ 117,280 $ 103,718
--------------- --------------- ---------------- ---------------
EXPENSES
Oil exploration 30,524 27,824 63,156 27,824
General and administrative 26,415 97,326 73,194 97,326
Depreciation and amortization 1,260 504 2,520 504
--------------- --------------- ---------------- ---------------
Total Expenses from Operations 58,199 125,654 138,870 125,654
--------------- --------------- ---------------- ---------------
INCOME (LOSS) BEFORE OTHER EXPENSE (51,359) (21,936) (21,590) (21,936)
--------------- --------------- ---------------- ---------------
OTHER INCOME (EXPENSE)
Interest income 555 1,149 1,171 1,149
Interest expense (14,250) (63,520) (28,500) (63,520)
--------------- --------------- ---------------- ---------------
Total Other Income (Expense) (13,695) (62,371) (27,329) (62,371)
--------------- --------------- ---------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX,
EXTRAORDINARY ITEM AND DISCONTINUED OPERATIONS (65,054) (84,307) (48,919) (84,307)
Income taxes - - - -
--------------- --------------- ---------------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM AND DISCONTINUED OPERATIONS (65,054) (84,307) (48,919) (84,307)
Gain on foreclosure of assets and liabilities - - - 4,469,006
LOSS FROM DISCONTINUED OPERATIONS - NET
OF ZERO TAX EFFECT - - - (1,125,862)
--------------- --------------- ---------------- ---------------
NET INCOME (LOSS) (65,054) (84,307) (48,919) 3,258,837
Preferred stock dividend (68,250) (68,250) (68,250) (68,250)
--------------- --------------- ---------------- ---------------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS $ (133,304) $ (152,557) $ (117,169) $ 3,190,587
=============== =============== ================ ===============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 9,742,323 9,733,206 9,742,323 9,733,206
=============== =============== ================ ===============
The accompanying notes are an integral part of these
financial statements.
4
FORELAND CORPORATION
Statements of Cash Flows
For the Six Months
Ended June 30,
--------------------------------------
2001 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (65,054) $ 3,258,837
Depreciation and amortization 1,260 504
Gain on foreclosure - (4,469,006)
Discontinued operations - 1,125,862
Changes in operating assets and liabilities (40,306) 82,803
------------------ ------------------
Net Cash (Used in) Provided by Operations (104,100) (1,000)
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CASH FLOWS FROM INVESTING ACTIVITIES - -
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 10,000 -
------------------ ------------------
Net Cash Provided by Financing Activities 10,000 -
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (94,100) (1,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 98,298 1,000
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,198 $ -
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ -
Cash paid for income taxes $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Options for debt $ - $ -
The accompanying notes are an integral part of these
financial statements.
5
FORELAND CORPORATION
Notes to the Financial Statements
June 30, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Nature of Operations
Foreland Corporation (Foreland) was incorporated in Nevada in 1985
to engage in oil exploration, development, and production.
Activities to date have focused primarily in north-central Nevada.
As discussed in Note 3, the Company acquired certain refineries
and transportation equipment from Petro Source Corporation in
August 1998. The refineries produce diesel fuel, residual fuel
oil, asphalts, and other petroleum products.
The Company entered a voluntary surrender agreement with its
largest creditor in November 1999. At March 31, 2000, the
foreclosure agreement was completed and the related assets and
liabilities were transferred. All operations from January 1, 2000,
through March 31, 2000, were recorded as discontinued operations.
The Company reported a gain from the foreclosure of $4,469,006.
After the foreclosure, the Company is only engaged in oil
exploration.
b. Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
c. Other Property and Equipment
Depreciation is calculated using the straight-line method over the
following estimated useful lives:
Years
------------
Refineries and building 3-15
Transportation and other equipment 3-7
Office furniture and equipment 3-10
The cost of normal maintenance and repairs is charged to operating
expenses as incurred. Material expenditures that increase the life
of an asset are capitalized and depreciated over the estimated
remaining useful life of the asset. The cost of properties sold,
or otherwise disposed of, and the related accumulated depreciation
or amortization are removed from the accounts, and any gains or
losses are reflected in current operations. Depreciation expense
related to other property and equipment amounted to $2,520 and
$504 for the six months ended June 30, 2001 and 2000,
respectively.
6
FORELAND CORPORATION
Notes to the Financial Statements
June 30, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Impairment of Long-Lived Assets
The Company assesses impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable. When an assessment for impairment of
proved oil and gas properties is performed, the Company is
required to compare the net carrying value of proved oil and gas
properties on a field-by-field basis (the lowest level at which
cash flows can be determined on a consistent basis) to the related
estimates of undiscounted future net cash flows for such
properties. If the net carrying value exceeds the net cash flows,
then impairment is recognized to reduce the carrying value to the
estimated fair value.
Unproved oil and gas properties are periodically assessed for
impairment of value, and a loss is recognized at the time of
impairment by providing an impairment allowance.
e. Inventories
Inventories are carried at the lower of cost or market. For
refined petroleum products, cost is generally determined using the
first-in, first-out method. For other inventories, cost is
determined using the average cost method or specific
identification where possible.
f. Revenue Recognition
The Company recognizes sales of refined petroleum products and
crude oil upon delivery to the purchaser. Transportation revenues
are recognized as the services are performed.
g. Net Earnings (Loss) Per Common Share
The computation of basic earnings (loss) per share of common stock
is based on the weighted average number of shares outstanding
during the period of the financial statements.
For the Six Months Ended
June 30,
--------------------------------------
2001 2000
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Basic earnings (loss) per share:
Income (loss) from operations $ (0.01) $ (0.01)
Income from extraordinary items - 0.46
(Loss) from discontinued operations - (0.12)
------------------ ------------------
Net income (loss) $ (0.01) $ 0.33
================== ==================
Diluted earnings (loss) per share:
Income (loss) from operations $ (0.01) $ -
Income from extraordinary items - 0.38
(Loss) from discontinued operations - (0.10)
------------------ ------------------
Net income (loss) $ (0.01) $ 0.28
================== ==================
7
FORELAND CORPORATION
Notes to the Financial Statements
June 30, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Net Earnings (Loss) Per Common Share (Continued)
Shares issuable upon exercise of stock options were not included
in computing the diluted per-share data for the periods ended
March 31 and June 30, 2001, because to do so would have resulted
in reducing the loss per share data as compared to the amounts
reported for the basic per-share data.
h. Stock Based Compensation
The Company accounts for stock-based compensation issued to
employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly,
compensation cost for stock options granted to employees is
measured as the excess, if any, of the quoted market price of the
Company's common stock at the measurement date (generally, the
date of grant) over the amount an employee must pay to acquire the
stock.
The Company accounts for options, warrants, and similar
instruments that are granted to nonemployees for goods and
services at fair value on the grant date, as required by SFAS No.
123, Accounting for Stock-Based Compensation. Fair value is
generally determined under an option pricing model using the
criteria set forth in SFAS No. 123. The Company did not adopt SFAS
No. 123 to account for stock-based compensation for employees but
is subject to the pro forma disclosure requirements.
i. Accounting Estimates
The use of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 - GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern,
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. However, the Company
does not have significant cash or other material assets, nor does
it have an established source of revenues sufficient to cover its
operating costs and to allow it to continue as a going concern. It
is the intent of management to strongly pursue its oil exploration
through funding by outside investors.
8
FORELAND CORPORATION
Notes to the Financial Statements
June 30, 2001 and 2000
NOTE 3 - PURCHASE OF REFINING AND TRANSPORTATION ASSETS
On August 12, 1998, the Company completed the purchase from an
unrelated firm of a crude oil processing refinery in Eagle
Springs, Nevada, a hydrocarbon processing facility in Tonopah,
Nevada, and trucks and related equipment used to gather crude oil
and distribute products. The purchase price was $8,688,000, which
consisted of $520,000 in common stock issued by the Company in
December 1997, $5,000,000 in cash, the issuance of 863,602 shares
of common stock with a fair value of approximately $3,023,000, and
other costs related to the acquisition of $145,000. The
acquisition was accounted for using the purchase method of
accounting for business combinations.
The purchase agreement required the Company to register the shares
issued for the acquired assets. If the proceeds from liquidation
of 763,602 shares were less than $2,676,000 (plus interest at 10%
per annum), the agreement required the Company to issue additional
shares or pay cash for the deficiency. Based on the trading price
of the Company's common stock at December 31, 1999, the fair value
of the shares was approximately $150,000 and a sale of these
shares into the market would likely depress the stock price
further, reducing the fair value of the shares. During the year,
the seller initiated litigation asserting a claim of $2.9 million,
plus punitive damages, attorneys' fees and other costs, against
the Company. As discussed in Note 5, the litigation initiated by
the seller has been settled.
NOTE 4 - INVENTORIES
Inventories consist of the following at June 30, 2001:
Oil field equipment and other $ 53,004
------------------
Total $ 53,004
==================
NOTE 5 - DEBT
Debt at June 30, 2001, consists of the following:
Note payable to Petro Source Corporation, interest at prime plus 2%,
due September 1, 2001. $ 628,500
------------------
Total $ 628,500
==================
The promissory note is secured by 4,000,000 shares of the
Company's common stock. In addition, Petro Source has a first
priority lien on 80% of the Company's share of any production on
properties in Nevada.
9
FORELAND CORPORATION
Notes to the Financial Statements
June 30, 2001 and 2000
NOTE 5 - DEBT (Continued)
After the execution of the voluntary surrender agreement, Petro
Source, the company from whom the original purchase of the assets
was made, initiated an action against the Company claiming it had
a security interest in the assets that were surrendered to Energy
Income Fund. The lawsuit, which sought compensatory damages of
$2,869,087 and other damages, was filed on February 18, 2000.
In April 2001, this lawsuit was settled under an agreement in
which the Company agreed to immediately pay $600,000 through its
insurance provider and issue a promissory note in the amount of
$600,000. The note will accrue interest at a rate of prime plus
two percentage points, and is payable in full with interest on
September 1, 2001. The note is secured by 80% of the Company's
share of production of hydrocarbons for all the working interests
that the Company has or may have in the state of Nevada.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Environmental - The Company is subject to extensive federal, state
and local environmental laws and regulations. These laws, which
are constantly changing, regulate the discharge of materials into
the environment and may require the Company to remove or mitigate
the environmental effects of the disposal or release of petroleum
or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future
economic benefit. Expenditures that relate to an existing
condition caused by past operations and that have no future
economic benefits are expensed. Liabilities for expenditures of a
noncapital nature are recorded when environmental assessment
and/or remediation is probable, and the costs can be reasonably
estimated. The seller of the refineries agreed to indemnify the
Company for certain environmental obligations.
Contingencies - The Company may from time to time be involved in
various claims, lawsuits, disputes with third parties, actions
involving allegations of discrimination, or breach of contract
incidental to the operations of its business. The Company is not
currently involved in any such incidental litigation that it
believes could have materially adverse effect on its financial
conditions or results of operations. Three creditors have obtained
judgments against the Company totaling approximately $458,000.
These amounts are included in accounts payable.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
Foreland is 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. Currently, Foreland's assets consist of exploration prospects in
northeastern Nevada, an approximately 30,000 acre lease position, and the
associated geological and geophysical database accumulated by Foreland over the
preceding approximately 16 years.
During 2000, Foreland entered into an exploration agreement with
Farakel Company of Houston, Texas, covering four of Foreland's Nevada prospects,
requiring that one prospect be drilled and the other three option prospects be
drilled or have significant geophysical work commenced on their acreage. The
first well was drilled in the first quarter of 2001 and was unsuccessful.
In the first quarter of 2000, Foreland Corporation completed the
surrender of its producing properties, refining and marketing operations, its
transportation company and a principal exploration prospect with its related
database. The surrender was in accordance with the terms of a Voluntary
Surrender Agreement between Foreland and its principal creditor, Energy Income
Fund, L.P., ("E.I.F."). As a result of the surrender, indebtedness of
approximately $12.6 million was cancelled.
Foreland, one of its former directors, and E.I.F. were named in a
lawsuit filed by Petro Source Corporation claiming damages in excess of $3.5
million in connection with the purchase of refinery inventory and receivables to
be paid for in Foreland common stock. Foreland settled the lawsuit on behalf of
itself and its director in the first quarter of 2001 for $1.2 million in cash
and a note.
This report should be read in conjunction with Foreland's annual report
on Form 10-KSB for the year ended December 31, 2000. Foreland's results of
operations for any interim period are not necessarily indicative of its results
of operations for a longer period or for any time in the future.
Foreland has reviewed all recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on our results
of operations or financial position, and based on that review, we believe that
none of these pronouncements will have a significant effect on current or future
earnings or operations.
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,"
"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 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.
11
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.
o Foreland Has Substantial Working Capital and Stockholders' Deficits. As
of June 30, 2001, Foreland had current liabilities of $1,225,325, with
current assets of only $57,202, for a working capital deficit of
$1,168,123. Current liabilities include an aggregate of $458,000 due on
judgments obtained by creditors and $628,500 due on a note to Petro
Source on September 1, 2001, as part of the settlement of its lawsuit.
As of June 30, 2001, Foreland had an accumulated deficit of $40.2
million.
o Many of Foreland's Obligations Are Substantially Past Due. Of
Foreland's $1,225,325 in current liabilities as of June 30, 2001,
$596,825 of which was substantially past due. The $628,500 balance is
due September 1, 2001, under a note to the seller of an acquired
business in settlement of a lawsuit in the first quarter of 2001. Three
creditors with claims aggregating $458,000 at December 31, 2000, have
obtained judgments against Foreland.
o Foreland Has No Revenue or Cash. Foreland has no cash or other
financial resources and no revenue from operations or other activities,
but must rely on raising additional capital to meet its ongoing
obligations for general and administrative expenses, lease payments,
payments to creditors, and other costs.
o Foreland Has Very Limited Assets on which To Base a Financial Recovery.
As a result of the voluntary surrender of the collateral securing its
indebtedness, Foreland's remaining assets consist of only other
exploration prospects on approximately 30,000 gross acres of
nonproducing leases and the associated geological and geophysical
database accumulated by Foreland over the preceding approximately 16
years. In addition, Foreland earned a 16.6% interest in approximately
5,000 acres known as the Hay Ranch prospect as the result of drilling
the Pine Valley Federal 42-16 wildcat well in the first quarter of
2001.
o Foreland Has No Liquidity or Cash with which To Reactivate. As a result
of the voluntary surrender of the collateral securing its indebtedness,
Foreland has no present ability to generate revenues. With the
exception of leases covered under the Company's Nevada Exploration
Agreement with Farakel Company, Foreland has insufficient cash to
maintain its exploration leaseholds, pay its personnel, satisfy claims
of creditors, or undertake oil and gas exploration.
o Foreland's Audit Report for the Year Ended December 31, 2000, Contains
a Going Concern Explanatory Paragraph. Foreland's independent auditor's
report on the December 31, 2000 financial statements, as for preceding
fiscal years, contains an explanatory paragraph that indicates there is
substantial doubt as to Foreland's ability to continue as a going
concern.
o Possible Inability To Continue. As a result of all of the foregoing,
Foreland urgently needs additional capital, but because of its
precarious condition and limited assets, may be unable to attract any
capital or sufficient capital to continue.
Operations Overview
Foreland began drilling the Hay Ranch Prospect in Pine Valley, Nevada,
in January 2001, as operator, with the participation of Farakel Company of
Houston, Texas, and Mirage Energy L.L.C. of Minnesota. The 3-D defined well
tested two targets and encountered shows of oil in two drill-stem tests. The
well was drilled to a depth of 7,700 feet and was plugged and abandoned on
February 24, 2001.
12
Farakel Company has the right under its Nevada Exploration Agreement to
undertake additional geophysical work or drill three additional Foreland
prospects by electing to do so by August 1, 2001. Foreland is currently
discussing the prospects with other industry partners that may wish to join
Farakel in defining and drilling the prospects. The Company is also evaluating
the acquisition of additional acreage in Nevada to enhance and expand its lease
positions. These acquisitions as well as funds for the payment of existing lease
rentals would be funded through a combination of debt and an earned interest in
the acreage.
During January 2001, N. Thomas Steele, president and a director of
Foreland resigned. Alex Nazarenko, a principal with 2N Company was appointed
director, and Bruce Decker, formerly vice-president of Foreland, was appointed
president. 2N Company acquired Foreland common and preferred stock and warrants
formerly owned by E.I.F.
As an inducement for Petro Source Corporation to enter into a
settlement agreement with Foreland, officers and directors agreed to cancel all
existing options and warrants. Petro Source subsequently agreed to the issuance
of options for accrued salaries payable, with the provision that such options
not be exercised until the Petro Source note is paid.
Results of Operations
Note that in view of the voluntary surrender of Foreland's production,
refinery, transportation, marketing and certain exploration assets in March and
April 2000, the following discussion should not be considered indicative of its
future results of operation.
During the quarter and six months ended June 30, 2001, Foreland's
revenue consisted of payments under the Nevada Exploration Agreement. Foreland's
expenses during the period were associated with drilling and an exploratory test
well on the Hay Ranch Prospect in Nevada under the Nevada Exploration Agreement
and general and administrative costs, resulting in loss before other expense of
$51,359 and $21,590, respectively. Other expense of $13,695 and $27,329 for the
quarter and six months ended June 30, 2001, respectively, was principally
associated with interest accrued on the promissory note due Petro Source on
September 1, 2001, resulting in net loss of $65,054 and $48,919 for the quarter
and six months ended June 30, 2001, respectively.
During both the quarter and six months ended June 30, 2000, Foreland
received revenue of $103,718 from transition payments from EIF and incurred
operating expenses of $125,654 related to continuing operations, for a loss of
$21,936 for both periods. In addition, in the six months ended June 30, 2000,
Foreland recognized net income of $3,343,000, resulting from a $4,469,000 gain
on the foreclosure of assets and liabilities, less loss from discontinued
operations associated with the voluntary surrender of the Company's oil
production, refining, and transportation assets to EIF, its secured lender,
under a Voluntary Surrender Agreement.
Liquidity and Capital Resources
Six Months Ended June 30, 2001
Foreland's operating activities used net cash of $104,100 in the six
months ending June 30, 2001, to fund $65,054 in net loss and $40,306 in
operating liabilities. Investing activities had no impact on cash flows for the
six months ended June 30, 2001. For financing activities, proceeds of $10,000
were received from issuance of a note payable during the six months ended
June 30, 2001.
13
Current and Future Requirements
As of June 30, 2001, Foreland had current liabilities of $1,225,325,
$596,825 of which was currently or substantially past due, with current assets
of only $57,202, for a working capital deficit of $1,168,123. Current
liabilities include an aggregate of $458,000 due on judgments obtained by
creditors and $628,500 due on a note to Petro Source on September 1, 2001, as
part of the settlement of its lawsuit. Foreland will seek to negotiate the
continued forbearance, compromise, partial forgiveness, extension or other
resolution of all or a portion of the above claims. Nevertheless, Foreland
expects that a significant amount of cash will be required to reach any
accommodation with these creditors. Foreland cannot assure that it will be
successful in its efforts to reach a satisfactory resolution of these claims or
raise the cash required to pay any amounts that may be agreed to.
In some instances, Foreland may seek to satisfy creditors' claims by
issuing securities, which would dilute the interests of existing stockholders.
In addition to the capital required to meet its past due obligations,
Foreland needs funds for its remaining continuing operations following the
voluntary surrender of assets in March and April 2000. As a result of this
surrender and the resulting cost-cutting measures associated with the
elimination of Foreland's revenues, Foreland's continuing operations require
cash principally for lease payments on retained Nevada leases, salaries for
continuing employees, professional fees for assistance in meeting regulatory
requirements and dealing with creditors and others, and other general and
administrative expenses. The aggregate amount of these items varies, but
generally approximates from $50,000 to $75,000 per quarter. Foreland requires
additional funds to meet costs for these items, but cannot assure that it will
obtain such amount from any source.
Foreland participated in exploration of the Hay Ranch prospect, which
it conveyed to E.I.F. in the voluntary surrender of assets, by obtaining a
farmout from E.I.F. and then finding drilling partners to fund an exploratory
well. Foreland formed a drilling venture with a Houston oil investor to
undertake a multiple well drilling project on the Hay Ranch prospect under a
farmout from E.I.F., including drilling options on three other exploration
prospects on Foreland's retained acreage. The venture provided payments to
Foreland of $36,000 per month for five months to cover overhead and lease
rentals and an 8.3% carried interest in the Hay Ranch prospect. An additional
investor purchased a 25% interest in the prospect under terms that provided an
additional 8.3% carried interest in exchange for the right to retire a $600,000
note held by Petro Source Corporation and thereby obtain four million shares of
Foreland common stock securing such note. The well, drilled in January and
February 2001, was plugged and abandoned.
Foreland's Houston participants in the Nevada Exploration Agreement
have the right to commit to drill or undertake additional geophysical work by
August 2001 on the three option prospects. If the participants decline to
continue, Foreland may seek additional drilling partners for its remaining
prospects and funds for the development of new prospects. Under such an
arrangement, Foreland would attempt to negotiate for its share of costs to be
paid by the other participants, retaining a minority interest in the venture.
Alternatively, Foreland may seek to raise funds through the sale of equity or
debt securities to provide its share of drilling funds and for other corporate
purposes. Foreland does not expect that it will be able to obtain any additional
financing from any source unless and until it is able to reach agreements
acceptable to investors with its various creditors so that substantially all new
money invested will be available for Nevada exploration and not exposed to
claims of current creditors. Foreland cannot predict the amount of money that
may be required to obtain the forbearance or compromise of the claims of its
existing creditors with claims aggregating approximately $1,225,325. There is no
assurance that Foreland will be successful in accomplishing these tasks.
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Because of its financial condition and the nature and amount of its
creditors' claims, Foreland may be susceptible to an involuntary petition under
the Bankruptcy Act seeking Foreland's liquidation. In addition, if Foreland is
unable to reach satisfactory accommodations with its creditors or immediately
obtain urgently required capital, it may be forced to seek protection under
Chapter 11 of the Bankruptcy Act while it seeks to reorganize its assets and
liabilities.
Inflation
Foreland's activities have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices in general.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the purchase of the refineries during 1998, Foreland
agreed to acquire inventory and accounts receivable from Petro Source
Corporation for approximately $2.7 million through the registration and issuance
of shares of Foreland common stock. The shares were to be sold monthly into the
market by Petro Source Corporation until the $2.7 million plus interest was
recouped. Foreland issued approximately 865,000 shares of common stock, but did
not register the shares. The trading price for Foreland's common stock plummeted
during 1998 and 1999, rendering the sale of more shares into the market
unfeasible. In March 2000, Petro Source Corporation filed a complaint against
Foreland and other defendants seeking $2.9 million actual damages plus punitive
damages, costs, attorneys' fees, and interest. This action has been removed to
United States District Court for the District of Utah, Central Division.
Foreland has admitted that it incurred the $2.7 million obligation to Petro
Source but denied the remaining substantive allegations of the complaint. On
January 15, 2001, Foreland reached an agreement with Petro Source Corporation
and Chubb Executive Risk, its insurance carrier, to settle the litigation on its
behalf and behalf of its director for $1.2 million, with $600,000 to be paid to
Petro Source by Chubb and the issuance of a note for $600,000 by Foreland. The
note, which carries interest at 2% over prime, is secured by four million shares
of Foreland common stock and 80% of any production Foreland develops in Nevada
and is due September 1, 2001. If the note is retired, Petro Source will return
the four million shares issued as collateral as well as 863,000 additional
shares of Foreland currently held by Petro Source.
Three trade creditors have judgments against Foreland for services and
materials provided in connection with its Nevada exploration and drilling
activities as follows: Halliburton Energy Services, Inc. by the District Court,
Jefferson County, Colorado, in the amount of $53,000; Grant Geophysical Corp. by
the United States District Court for the Southern District of Texas, Houston
Division, in the amount of $375,000; and Spidle Sales and Service, Inc., by the
Eighth Judicial District Court, Uintah County, Utah, in the amount of $17,000.
The judgments accrue post judgment interest.
A former employee of Foreland Refining Corporation, a former
subsidiary, filed suit against it and Foreland Corporation for breach of his
employment agreement with such subsidiary, claiming the company owes
approximately one year's pay. William Adair v. Foreland Corporation, et al.,
case no. CV0012192, in the Seventh Judicial District Court of Nevada for White
Pine County. The suit is deemed frivolous because the employee was terminated by
the subsidiary after all of the stock of such subsidiary was surrendered to
E.I.F.
Other than the matters set forth above, Foreland is not a party to any
material proceeding, and none has been threatened by or, to the best of
Foreland's knowledge, against Foreland.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Cumulative dividends on 200,000 preferred shares, payable at 12% per
year, if, as, and when declared by the board of directors, have not been paid.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K. During the quarter ended June 30, 2001, the
Company did not file any reports on Form 8-K.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FORELAND CORPORATION
Date: August 15, 2001 By /s/ Bruce C. Decker
--------------------------------------
Bruce C. Decker, President (Principal
Executive and Financial Officer)
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