ITEM 1. BUSINESS.
Toreador Royalty Corporation, a Delaware corporation (the "Company" or "Toreador"), is engaged in oil and gas exploration, development and production activities. The Company conducts its business primarily through its ownership of perpetual oil and gas mineral and royalty interests in approximately 870,000 gross (530,000 net) acres in four geologic provinces located in the Texas Panhandle and West Texas. The properties and mineral interests owned by the Company are set forth under Item 2
ITEM 2. PROPERTIES.
NORTHERN RANCH MINERALS
SOUTHERN DALHART BASIN. The southern Dalhart Basin, where Toreador owns mineral interests under approximately 400,000 gross acres located in Oldham and Hartley Counties, Texas, is a moderate depth depression that formed in early Pennsylvanian time. Commercial oil has been established in Pennsylvanian and Permian age reservoirs in this basin. Porous reservoir rocks are present in granite washes, carbonate banks and dolomites, which provide multiple drilling targets. In the central part of the basin, source rocks are buried at depths sufficient to generate oil. Wrench fault tectonism across the basin formed early structural features capable of trapping later migrating oil. Oil accumulations in several formations between 4,000 feet and 8,000 feet have been found through exploratory drilling. Most of this drilling has been concentrated in east-central Oldham County, Texas. There have been relatively few exploratory wells in wide expanses of the basin west of the main producing area and many of these were drilled prior to 1970. Much of this lightly explored area includes Toreador acreage, a majority of which is located on the west flank of the basin updip from the main concentration of production to the east. Most of the reserves in the basin have been discovered in granite wash reservoirs trapped on fault associated structural closures.
Oil accumulations in the basin have been found on structural highs. Therefore, defining structural uplifts is the prime objective in exploring for new reserves in the southern Dalhart Basin. In recent years, the oil and gas industry's increasingly widespread use of 3-D seismic technology has enhanced its ability to find and delineate structural prospects. Toreador, with other parties, introduced 3-D seismic exploration to the southern Dalhart Basin in July 1993 with an 18,000 acre project on the Company's acreage. The three wells drilled on this project, while dry, proved that porous reservoirs exist within the area and that 3-D seismic data could correctly image structures and reef/bank anomalies.
In April 1994, Toreador acquired an oil and gas lease on the 95,000 acre Fulton Ranch under which it already holds 75% of the mineral rights. Toreador has approximately 300 miles of 2-D seismic coverage on the ranch, and using this data, has generated several prospects and geologic leads which justify more detailed 3-D seismic surveys. The P.D. Walker Field, which encompasses 120 acres under which Toreador has a 15% royalty interest, is also located on the ranch, but is not included in this lease.
In the third quarter of 1995, Toreador acquired in the aggregate an 18.93% working interest in the four-well Proctor Ranch Field located in Hartley County, Texas. In addition to this acquisition, Toreador holds an 18.75% royalty interest in this property. Under the terms of the acquisition agreement, Toreador invested $90,600, adding an estimated 21,100 net Bbls to its reserves at an acquisition cost of $4.29 per Bbl.
In August 1996, Toreador entered into two exploratory agreements covering in excess of 50,000 acres in the Dalhart Basin. The first was an 8,935 acre option-farmout agreement, being a portion of Toreador's 47,600 acre lease on the Smith (formerly Proctor) Ranch located in Oldham and Hartley Counties, Texas. Under the terms of the agreement, the operator elected to drill a well earning a 75% working interest in the initial prospect. This well, in which Toreador was carried for a 25% working interest, resulted in a dry hole, and the operator allowed this option to expire in January 1997. Toreador finalized a second agreement in December 1996, with the same operator covering a contiguous 41,900 acre block, under which the operator elected to allow the option to expire in December 1997 without conducting any 3-D geophysical surveys.
In January 1995, the Company leased approximately 13,000 acres on the Smith Ranch (formerly the Proctor Ranch) in Hartley County, Texas with the intent of accelerating third party interest in various projects generated by the Company. In January 1997, Toreador entered into a farmout agreement with Corlena Oil Company (the operator) covering approximately 1,900 acres of the Toreador leasehold. In March 1997, the Company participated for a 25% working interest in drilling the first well to test Pennsylvanian age Granite Wash reservoirs. This initial exploratory well
was plugged and abandoned after testing water and non-commercial quantities of oil. The operator then conducted a 3-D seismic survey covering approximately 2,700 acres of Toreador's 13,000 acre leasehold. In January 1998, the operator drilled a new oil field discovery well, the #2-A Smith Ranch, to open the Pedarosa (Granite Wash) Field at approximately 5,500 feet. At completion this well was initially pumping at a daily rate of 167 Bbls of oil and no water. In addition to its working interest, the Company has a 15% net royalty interest. As of March 17, 1998, a third well was drilling on this lease.
SOUTHERN RANCH MINERALS
PALO DURO BASIN. The Palo Duro Basin, where Toreador owns mineral interests under approximately 195,000 gross acres located in Motley and Cottle Counties, Texas, is a moderate depth depression between the Matador Arch on the south and the Amarillo uplift complex to the north. Limited exploration to date has resulted in discovery of three Canyon age reef fields. In the past five years, several companies have conducted 3-D seismic surveys along these reef trends.
MATADOR ARCH. The Matador Arch, where Toreador owns mineral interests under approximately 90,000 gross acres, is a prominent east-west structural positive traversing North Texas and southern Oklahoma. It is bounded on the north and south by large vertical faults that have an orientation characteristic of regional scale wrench faulting. Between the faults, basement blocks have been uplifted and folded into a complex of structural highs that fostered reef growth from Middle Pennsylvanian age into the Permian Wolfcamp section.
Toreador's acreage covers part of the Matador Arch trending through Motley County, Texas. Nearby Wolfcamp Reef production in the Roaring Springs Fields complex has recovered approximately nine million Bbls of oil from a depth of 4,200 feet. For the period of June 1994 through February 1998, Toreador has participated in ten Wolfcamp test wells of which six have been successfully completed.
In October 1995, Toreador acquired an additional 12.5% working interest in the five-well Matador Field located in Motley County, Texas. Prior to this acquisition, Toreador held a 25% working interest as well as a 15% royalty interest in this property. Under the terms of the acquisition agreement, Toreador invested $225,700, adding an estimated 46,100 net Bbls to its reserves at an acquisition cost of $4.90 per Bbl.
In March 1997, Toreador entered into an exploration agreement with Apache Corporation covering approximately 22,500 acres located on the Matador Arch north and east of three fields, commonly referred to as the Roaring Springs Fields complex. Apache serves as the operator in this joint venture and has a 56.25% working interest in the acreage. Toreador has retained a 43.75% working interest. In May 1997, Apache conducted a 3-D seismic survey covering approximately 9,500 acres, which also encompassed the five-well Matador Field. After conducting this seismic survey, Apache selected a lease covering approximately 650 acres, all of which surrounds the existing Matador Field. Apache allowed the option covering the remaining 13,000 acres under the exploration agreement to expire without conducting any additional seismic surveys. In January 1998, the initial development well drilled by Apache to test the Wolfcamp Reef reservoir was successful. At completion this well was pumping at a daily rate of 36 Bbls of oil and three Bbls of water. As of March 17, 1998, Apache was drilling a second development well on their lease. In addition to its working interest, the Company has a 15% net royalty interest.
EASTERN SHELF. The Eastern Shelf of the Midland Basin, where Toreador owns mineral interests under approximately 185,000 gross acres located primarily in Dickens County, Texas, is prospective for shallow Permian age oil accumulations in the Tannehill Sand and possible deeper objectives in the Pennsylvanian section. Seven Tannehill fields have been discovered on Toreador minerals since 1986, the largest field in terms of cumulative oil production as of December 31, 1997 contained as many as nine producing wells. The 21 wells currently producing from these seven fields averaged daily production of 24 Bbls of oil per well in December 1997.
In 1994, Toreador entered into an option agreement with an industry partner covering approximately 11,000 acres on the Pitchfork Ranch located in Dickens County. Tannehill production near this block has recovered over 2.5 million Bbls of oil from a cluster of three fields located directly to the west of this block and over 1.5 million Bbls of oil from another field located two miles to the east. The industry partner conducted a 3-D seismic survey across this acreage
block during 1995 and Toreador was carried for a 25% working interest through the seismic acquisition, processing and interpretation phase of the project. Following the interpretative phase of the project, the operator selected 2,000 acres for lease. Toreador also owns a 46.9% mineral interest under 1,800 acres. The first well was drilled on this acreage in March 1996, and was abandoned as a dry hole. A second well, in which Toreador elected not to participate as a working interest partner, was also dry. In April 1997, the operator drilled a third well offsetting Toreador acreage, in which Toreador also elected not to participate as a working interest partner. The well was dry and the operator allowed the leases on Toreador's acreage to expire in July 1997.
In September 1996, Toreador entered into an exploration agreement with Louis Dreyfus Natural Gas Corporation ("LDNG") covering approximately 37,000 acres located on the Eastern Shelf of the Midland Basin, comprising all of Toreador's mineral interest under the Pitchfork Ranch that is not currently held by production nor under lease or option. Under the terms of the agreement, Toreador is carried for a 10.5% working interest through the 3-D seismic acquisition, processing and interpretation phases of the project. In July 1997, LDNG completed a 20,000 acre 3-D seismic survey over the south half of Toreador's Pitchfork Ranch mineral acreage. In the survey area, approximately 6,600 acres were leased under 10 separate leases.
In September 1997, LDNG embarked on a seven well drilling program based upon the results of the 3-D seismic survey. Toreador participated in drilling all seven wells whereby four wells were successfully completed in the Tannehill Sand at approximately 4,200 feet resulting in two new oil fields and three wells were dry. Toreador participated with a working interest ranging from 10.5% to 10.9%, in addition to its 9.4% net royalty interest. Three of the four producers were completed for an average daily pump rate of 128 Bbls of oil each, while the fourth well was completed for a daily rate of 15 Bbls of oil. In addition to the Tannehill Sand objective, the first well drilled by LDNG, in which Toreador had a carried working interest, was drilled below 6,900 feet to test Pennsylvanian objectives. While dry in the deeper section, this well was plugged back to the Tannehill Sand as a new oil field discovery. In January 1998, those four wells combined had an average daily production of 282 Bbls of oil per day. In January 1998, LDNG commenced a new seven-well drilling program for the Tannehill Sand. As of March 17, 1998, LDNG has drilled five wells, of which two were successful and three were dry. Two of the five wells were development wells in the Tannehill Sand where the first well was completed and pumping at a daily rate of 128 Bbls of oil. The second well was awaiting the installation of pumping equipment after a positive swab test. LDNG has indicated to Toreador, that it plans to commence in May 1998 a second 3-D seismic project covering 17,600 acres. This 3-D seismic survey affects 2,200 acres of Toreador's mineral holdings and the balance of the survey is located to the east of those mineral holdings.
NATURE OF PROPERTY INTEREST
On the Northern and Southern Ranches, the Company generally owns fee interests in the minerals that include rights to receive portions of lease bonuses, delay rentals and royalties, but generally not the executive rights -- the rights to sign leases -- which are typically held by surface owners. Therefore, the Company must rely on the owners of the executive rights to execute leases of the acreage. In situations in which the Company has acquired working interests in acreage in which it has mineral rights, it has acquired those interests through the signing of leases by holders of the executive rights. The majority of the owners of executive rights work closely with the Company; however, each acts independently of the Company in deciding to execute leases.
GEOLOGIC DATABASE
Under the terms of a typical lease granted on its minerals, Toreador is entitled to receive copies of all data, including seismic lines, well logs, cores and tests. The Company has approximately 65,000 acres of 3-D seismic data and approximately 1,500 miles of 2-D seismic data relating to the Northern and Southern Ranches.
Toreador uses its database to generate specific drilling prospects and geologic leads to encourage further exploration on its mineral acreage. In particular, geologic leads based on 2-D seismic data are important in marketing large 3-D seismic surveys. The Company makes its database available to third parties interested in generating exploration projects on its acreage. Management estimates that it would be costly to duplicate this data, which is carried at no cost on its balance sheet.
OTHER PROPERTIES AND ACQUISITIONS
In 1996 and 1997, a number of significant events occurred in areas where the Company owns working interests and royalty interests outside of the Company's Northern and Southern Ranch minerals. In December 1996, the Company which owned a 50% working interest acquired the remaining 50% working interest and became operator of a well located in the Welch field of Dawson County, Texas. Average daily production from this well was 15 gross (12 net) Bbls of oil in 1997. In July 1996, the Company participated with a 22.1% working interest in the drilling of a successful infill well in the Hrubetz (Tannehill) field waterflood, Taylor County, Texas, which increased average daily unit production from 10 gross (1.6 net) Bbls of oil in June 1996 to a peak of 199 gross (32 net) Bbls of oil in June 1997. In Caddo County, Oklahoma, the Company owns approximately a 1.2% royalty interest in a gas well that was restimulated in the later part of 1996 which resulted in daily gas production increasing from an average of 667 Mcf gross (8 net) in February 1996 to a peak of 5,300 Mcf gross (62 net) in December 1997. Cumulative gross production from this well since 1982 has been over 12.7 Bcf of natural gas.
During the period May 1996 through February 1997, the Company acquired a combination of royalty and overriding royalty interests totaling approximately 0.03% and approximately a 0.25% working interest in the SACROC Unit of the Kelly-Snyder field in Scurry County, Texas. This unit is a large, tertiary CO2 (carbon dioxide) flood which averaged approximately 6,900 gross (14 net) Bbls of oil per day in December 1997. The operator continues to enhance flood performance through improved reservoir management and reducing operating costs. In 1997, the operator negotiated a more favorable gas processing agreement for the unit whereby handling CO2 is more cost efficient and processing capacity is improved.
In 1997, the Company acquired a combination of working, royalty and overriding royalty interests totaling 358 MMcfe. The majority of the value belongs to those working interest properties located in Panola County, Texas. The Company owns approximately 2.7% working interest in the Emma Eddy Gas Unit of the Carthage (Cotton Valley) Field.
From 1988 until December 31, 1997 Toreador has spent approximately $3.9 million to acquire producing, mineral and overriding royalty interests totaling 6.7 Bcfe for a consolidated acquisition cost of approximately $0.58/Mcfc.
OIL AND GAS RESERVES
In January 1998, the Company retained the independent petroleum consulting firm, Netherland, Sewell & Associates, Inc. to prepare estimates of its oil and gas reserves for the producing mineral interests owned by the Company as of December 31, 1997. Utilizing current available data, these estimates of proved reserves were made using geological and engineering methods generally accepted in the petroleum industry. At December 31, 1997 the Company's net proved developed producing reserves were estimated to be 450,646 Bbls of oil and 2,487,574 Mcf of natural gas. Additional information concerning the Company's estimated proved oil and gas reserves is included in Item 8. - Financial Statements and Supplementary Data. No estimates of total proved net oil or gas results have been filed with or included in reports to any federal authority or agency prior to this Report on Form 10-K.
Petroleum engineering is not an exact science and involves estimates based upon numerous factors, many of which are inherently variable and uncertain. Consequently, reserve estimates are imprecise and are subject to change as additional information becomes available. Estimates based upon short periods of production may not be as reliable as those based upon longer production histories. Further, estimates of oil and gas reserves, of necessity, are projections based on engineering data. As a result of the uncertainties inherent in the interpretation of such data, there can be no assurance that the Company's estimated oil and gas reserves will ultimately be developed. Estimates of the reserves and future net revenues involve projecting future results under current operating and economic conditions. Actual production, revenues, taxes, development expenditures and operating expenses may not occur as estimated. Product prices vary over time due to market forces which are beyond the Company's control.
VOLUMES, PRICES AND COSTS
The following table sets forth certain information regarding volumes of the Company's production of oil and natural gas, the Company's average sales price per Bbl of crude oil and average sales price per Mcf of natural gas, together with the Company's average production cost per BOE for the three years ended December 31, 1997 from producing interests:
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(1) A BOE means one barrel of oil equivalent using the ratio of one barrel of oil to six Mcf of gas.
WELLS DRILLED ON THE COMPANY'S MINERALS
The following table sets forth for each of the last three years the number of net exploratory and development wells drilled by or on behalf of the Company. An exploratory well is a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. A development well is a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. The number of wells drilled refers to the number of wells completed at any time during the respective year, regardless of when drilling was initiated; and "completion" refers to the installation of permanent equipment for the production of oil or gas, or, in the case of a dry hole, to the reporting of the plugging date to the appropriate state regulatory agency.
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(1) A productive well is an exploratory or a development well that is not a dry hole.
(2) A dry hole is an exploratory or development well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.
(3) One (1) gross (0.25 net) exploratory well, which was a producer, was drilled in December 1997 but completed in January 1998.
(4) One (1) gross (0.44 net) development well, which was a producer, was drilled in December 1997 but completed in January 1998.
PRODUCING WELLS AND ACREAGE
The following table sets forth the gross and net producing oil and gas wells in which the Company owned an interest and the developed and undeveloped gross and net leasehold acreage held by the Company as of December 31, 1997. A "gross" well or acre is a well or acre in which the Company has a working interest. The number of gross wells is the total number of wells in which a working interest is owned. A "net" well or acre is deemed to exist when the sum of fractional ownership working interests and/or royalty interests in a gross well or acre equals one. The number of net wells or acres is the sum of the fractional working interests and/or royalty interests owned in gross wells or acres expressed as whole numbers and fractions thereof. A "royalty interest" is a share of production, free of expenses of production. A "working interest" is the operating interest under an oil and gas lease.
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(1) Excludes wells or acres in which the Company owns less than a 1% working or royalty interest.
(2) Undeveloped acreage is considered to be those leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether or not the acreage contains proved reserves.
PRESENT ACTIVITIES
From January 1, 1998 through March 17, 1998, the Company participated in drilling four gross (0.57 net) exploratory wells and four gross (0.76 net) development wells on the Company's mineral holdings. Two of the four exploratory wells were dry and two were drilling as of March 17, 1998. Two of the four development wells were producers, one was dry and one was drilling as of March 17, 1998. Five wells had an objective at approximately 4,200 feet for the Tannehill Sand in Dickens County, Texas, one well had an objective at 3,500 feet for the Lower Wolfcamp Reef in Motley County, Texas and one had an objective at 5,600 feet for the Granite Wash Sand in Hartley County, Texas. Estimated dry hole costs to the Company are approximately $15,000 for wells testing the Tannehill Sand, $61,000 for wells testing the Lower Wolfcamp Reef and $50,000 for wells testing the Granite Wash. All eight wells were drilled on behalf of the Company.
The Company also participated in drilling one gross (0.03 net) development well not on its mineral holdings. As of March 17, 1998, this 11,300 foot Cotton Valley Sand well located in Gregg County, Texas was drilling. The Company's proportionate share of the estimated dry hole costs and completed well costs are approximately $12,600 and $23,700, respectively.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject of, any legal proceedings, actual or threatened, which would have a material adverse effect on the business and affairs of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year ended December 31, 1997 to a vote of the Company's security holders, through solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $.15625 per share, is traded in the Nasdaq National Market under the trading symbol "TRGL." The table below sets forth the high and low sales prices per share for the periods indicated as reported by the National Market.
The approximate number of record holders of the Common Stock as of March 17, 1998, was 526.
Dividends on the Common Stock may be declared and paid out of funds legally available when and as determined by the Company's Board of Directors. No cash dividends have been paid on the Company's Common Stock to date. Management plans to continue its policy of holding and investing corporate funds on a conservative basis. In addition, under the terms of the credit facility described in "Management's Discussion and Analysis of Financial Condition and Result of Operations -- Liquidity and Capital Resources," the Company is prohibited from paying dividends on the Common Stock (other than dividends payable in shares of Common Stock).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data with respect to the Company's financial condition and results of operations for the periods indicated. The selected financial data should be read in conjunction with the financial statements and related notes set forth in Item 8 of this Part II.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-K, including, without limitation, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under "Business and Properties" regarding estimated proved reserves, the Company's financial position, business strategy, plans and objectives of management of the Company for future operations, and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Any forward-looking statements herein are subject to certain risks and uncertainties inherent in petroleum exploration, development and production, including, but not limited to the risk that no commercially productive oil and gas reservoirs will be encountered; inconclusive results from 3-D seismic projects; delays or cancellation of drilling operations as a result of a variety of factors; volatility of oil and gas prices due to economic and other conditions; intense competition in the oil and gas industry; operational risks (e.g., fires, explosions, blowouts, cratering and loss of production); insurance coverage limitations and requirements; and potential liability imposed by intense governmental regulation of oil and gas production; all of which are beyond the control of the Company. Any one or more of these factors could cause actual results to differ materially from those expressed in any forward-looking statement. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements disclosed in this paragraph and otherwise in this report.
LIQUIDITY AND CAPITAL RESOURCES
Historically, most of the exploration activity on the Company's acreage has been funded and conducted by other oil companies. Exploration activity typically generates lease bonus and option income to the Company. If drilling is successful, the Company receives royalty income from the oil or gas production but bears none of the capital or operating costs. In order to accelerate the evaluation of its acreage as well as increase its ownership in any reserves discovered, the Company has increased and intends to further increase its level of participation in exploring its acreage by acquiring working interests. The extent to which the Company may acquire working interests will depend on the availability of outside capital and cash flow from operations. Currently, the primary sources of capital for the financing of the Company's operations are cash flows from operations. In November 1997, the Company obtained a $10 million credit facility from Compass Bank with an initial availability of $4 million which it may use to fund acquisition and development of oil and gas properties. The Company has not drawn any amounts under the facility. In addition, the Company may reinvest proceeds from option and lease bonuses by taking a working interest in 3-D seismic projects or in wells. To the extent cash flow from operations does not significantly increase and external sources of capital are limited or unavailable, the Company's ability to make the capital investment to participate in 3-D seismic surveys and increase its interest in projects on its acreage will be limited. Future funds are expected to be provided through production from existing producing properties and new producing properties that may be discovered through exploration of the Company's acreage by third parties or by the Company itself. Funds may also be provided through external financing in the form of debt or equity. There can be no assurance as to the extent and availability of these sources of funding.
Subsequent to year end, the price of NYMEX light sweet crude oil declined from $17.64 per Bbl at December 31, 1997 to a low of approximately $13.00 per Bbl during the first quarter of 1998. The Company expects that this decline in oil prices will have a negative effect on the Company's earnings and cash flows in the first quarter of 1998.
In September 1997, the Company engaged Dain Rauscher (formerly Rauscher Pierce Refsnes, Inc.) as its financial advisor in evaluating strategic alternatives available to the Company, including a sale of the Company, a merger with another company and other forms of business combinations. The consummation of any such transaction could result in a material increase or decrease in the Company's liquidity, depending on the structure of the transaction. As of the date of this Report, the Company is not aware of any demands, commitments or events which will result in its liquidity increasing or decreasing in a material way. The Company presently has no debt and maintains its excess cash funds in interest-bearing deposits. From time to time, the Company may receive lease bonuses which cannot be anticipated, and when funds are available, the Company may elect to participate in exploratory ventures. The Company also may acquire producing oil and gas assets which could require the use of debt.
Management believes that sufficient funds are available internally to meet anticipated capital requirements for fiscal 1998.
The Company has used $1,042,696 of its cash reserves to purchase 402,700 shares of its Common Stock as of December 31, 1997. These purchases were made pursuant to a stock repurchase programs authorized by the Board of Directors on October 10, 1995, of up to 100,000 shares of Common Stock, a second stock repurchase program on April 22, 1996, of up to 150,000 shares of Common Stock and a third stock repurchase program on April 21, 1997 of up to 300,000 shares. As of March 17, 1998, the Company has purchased an aggregate of 182,700 shares at a purchase price of $506,918 under the third repurchase program. The repurchases of the Company's shares of Common Stock were made in unsolicited open-market purchases, at market (not premium) prices, without fixed terms and not contingent upon the tender of a fixed minimum number of shares or in response to a third party bid and otherwise in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Total revenues for 1997 were $2,788,764 compared with $3,114,085 in 1996. Revenues from oil and gas sales increased slightly to $2,325,148 in 1997 from $2,306,791 in 1996. This 0.8% increase reflects an 11.4% increase in volume on a BOE basis offset by a 9.6% decrease on a price per BOE basis. The Company's net oil production increased 2.3% to 69,903 Bbls in 1997 from 68,318 Bbls in 1996. Net natural gas production increased 22.2% to 425,854 Mcf in 1997 from 348,539 Mcf in 1996. Lease bonuses and rentals were $287,604 in 1997, up from $118,430 in 1996.
Interest income was $147,237 in 1997 versus $138,720 in 1996. A gain resulting from the sale of marketable securities decreased from $516,867 in 1996 to none in 1997. This reflects the Company's sale of 100% of its units in the San Juan Basin Royalty Trust which was completed in August 1996.
Total costs and expenses were $2,924,391 in 1997 as compared with $2,124,235 in 1996 representing a 37.7% increase. The largest increase came from geological and geophysical expenses where expenses increased 140% to $546,634 in 1997 versus $227,744 in 1996. This reflects the Company's increased level of participation in 3-D seismic surveys conducted on its mineral holdings in 1997. Depreciation, depletion and amortization increased 97.5% to $539,346 from $273,026 reflecting a downward revision to the proved developed reserves created by a combination of some underperforming properties and lower oil and gas prices. Dry holes and abandonments increased 27.6% to $166,710 in 1997 from $130,647 in 1996, reflecting the Company's increased level of participation in drilling exploratory and development wells on its mineral holdings. Lease operating expenses increased 18.7% to $695,007 in 1997 versus $585,732 in 1996, as a result of the Company acquiring more working interest properties in 1996 and 1997. The Company's general and administrative expenses decreased $104,363 or 11.5% to $802,723 in 1997 from $907,086 in 1996, of which $114,277 reflects a reduction in salary to its former chairman and chief executive officer of the Company. During 1997, the Company incurred a loss of $173,971 which has been recorded as a loss on settlement of benefit plans. This loss consists of a 100% settlement of the pension benefit for $87,654 and a payment of $88,617 for settlement of the supplemental executive retirement plan. There were no losses on settlement of benefit plans in 1996.
Total net loss for 1997 was $51,366 or $0.01 per share compared to net income of $726,750 or $0.14 per share in 1996. Included in 1996 total net income is a $386,607 after tax gain from the sale of marketable securities and other assets or $0.07 per share.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Total revenues for 1996 were $3,114,085 compared with $1,730,658 in 1995. Revenues from oil and gas sales increased to $2,306,791 in 1996 from $1,378,390 in 1995. This 67.4% increase reflects increased oil and gas volumes from recent acquisitions, new well completions and higher oil and gas prices. The Company's net oil production rose 11% to 68,318 Bbls in 1996 from 61,537 Bbls in 1995. Net natural gas production increased 26% to 348,539 Mcf from 277,621 Mcf in 1995. On an oil equivalent basis, net production increased 17% to 126 MBOE in 1996 from 108 MBOE in 1995. Lease bonuses and delay rentals were $118,430 in 1996, down from $138,804 in 1995.
Reflecting lower rates, interest income from investments was $138,720 in 1996 versus $183,106 in 1995. Distributions from marketable securities decreased to $12,253 in 1996 from $30,358 in 1995. This 59.6% decrease reflects the Company's sale of 100% of its units in the San Juan Basin Royalty Trust which was completed in August 1996. The Company recognized pretax gains from the sale of all units in the San Juan Basin Royalty Trust of $516,867 and a $9,700 sale of other assets. In the absence of such gains, net income in 1996 would have been $340,143. Distributions from and sales of marketable securities will no longer be a source of funds in 1997 or beyond.
Total costs and expenses were $2,124,235 in 1996 as compared with $2,348,025 in 1995 representing a 9.5% decrease. The largest percentage decrease came in dry hole and abandonments, where expenses decreased 63.5% to $130,647 in 1996 versus $358,210 in 1995, reflecting the reduced number of dry holes in which in which the Company participated. Geological and geophysical expenses decreased 23.3% to $227,744 in 1996 versus $297,047 in 1995. The Company's general and administrative expenses decreased $171,085 or 15.9 % to $907,086 in 1996 from $1,078,171 in 1995, approximately $200,000 of which were incurred in connection with a proxy contest in May 1995. Lease operating expenses increased 53.8% to $585,732 in 1996 versus $380,888 in 1995, as a result of acquiring more working
interest properties. In 1996 depreciation, depletion and amortization increased to $273,026 compared to $233,709 in 1995 reflecting more property owned by the Company.
Net income was $726,750 or $0.14 per share in 1996 as compared to a net loss of $410,431 or $0.08 per share in 1995. Included in 1996 total net income is a $386,607 after tax gain or $0.07 per share from the sale of securities and other assets. There were no sale of securities in 1995 and the 1995 results included approximately $200,000 in expenses related to a proxy contest.
ACCOUNTING CHANGES
INVESTMENTS IN MARKETABLE SECURITIES
In January 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 establishes standards of financial accounting and reporting for investments in equity securities that have readily determinable fair market values and for all investments in debt securities. The Company has designated its investment in the San Juan Basin Royalty Trust as "securities available for sale." At December 31, 1996, the Company no longer owned any marketable securities in the San Juan Basin Royalty Trust. The Company sold all of its units and reported a pre-tax gain of $516,867 in 1996. At December 31, 1995, the market value of these securities was $661,501, resulting in a gross unrealized gain in the amount of $535,243 and an unrealized gain, net of tax effects, of $353,268.
ENVIRONMENTAL MATTERS
No environmental liabilities are recorded at December 31, 1997 and 1996. Additionally, the Company is not aware of a material unrecorded liability for any expected environmental costs.
CAPITAL AND EXPLORATION EXPENDITURES
In 1997, the Company's geological and geophysical expenses increased to $546,634 compared to $227,744 in 1996. This reflects the Company's increased level of participation in 3-D seismic surveys conducted on its mineral holdings. Its expenditures on oil and gas property and equipment decreased to $717,481 in 1997 from $893,418 in 1996, reflecting smaller acquisitions of producing oil and gas properties. The Company's 1998 capital and exploratory budget, excluding any acquisitions the Company may make, could range from $700,000 to $1,000,000, depending on the timing of any new seismic surveys and drilling of exploratory and development wells in which the Company may hold a working interest position.
In 1996, the Company's geological and geophysical expenses were $227,744 as compared to $297,047 in 1995. Its expenditures on oil and gas property and equipment decreased to $893,418 from $1,048,757, reflecting decreased participation in the exploration and development activity on its mineral acreage.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". This Statement is effective for financial statements issued for periods ending after December 15, 1997. Earlier adoption is not permitted. SFAS 128 requires dual presentation of basic and diluted EPS for entities with complex capital structures. The impact of adopting this statement will not have a material effect on the Company's earnings per share calculation.
In June 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both Statements become effective for fiscal years beginning after December 15, 1997. These Statements require disclosure of certain components of changes in equity and certain information about operating segments and geographic areas of operation. These Statements will not have any effect on the results of operations or financial position of the Company.
YEAR 2000 ISSUE
The Company has reviewed its current computer software and hardware systems, and is currently working to resolve the potential problems associated with the Year 2000 and the processing of date sensitive information by such systems. Based on preliminary information, the Company believes that it will be able to implement successfully the systems and programming changes necessary to address the Year 2000 issues, and does not expect the cost of such changes to have a material impact on the Company's financial position, results of operations or cash flows in future periods.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants and Consolidated Financial Statements are set forth on pages through of this Report and are incorporated herein.
The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes to the Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the Company's directors, nominees for directors and executive officers is set forth under the heading "Election of Directors" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 21, 1998, which will be filed with the Securities and Exchange Commission on or about April 24, 1998, and which is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is set forth under the heading "Executive Compensation and Other Transactions" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 21, 1998, which will be filed with the Securities and Exchange Commission on or about April 24, 1998, and which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial owners and management is set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 21, 1998, which will be filed with the Securities and Exchange Commission on or about April 24, 1998, and which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions is set forth under the heading "Executive Compensation and Other Transactions" in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 21, 1998, which will be filed with the Securities and Exchange Commission on or about April 24, 1998, and which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Index Report of Independent Accountants Consolidated Balance Sheet as of December 31, 1997 and 1996 Consolidated Statement of Operations for the three years ended December 31, 1997
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1997 Consolidated Statement of Cash Flows for the three years ended December 31, 1997 Notes to Consolidated Financial Statements
2. The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Financial Statements or the Notes to Financial Statements.
3. Exhibits: No.
3.1 - Certificate of Incorporation of Toreador Royalty Corporation dated July 13, 1951, as amended March 16, 1981 and June 4, 1987 (previously filed as Exhibit 3.1 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).
3.2 - Certificate of Amendment of Certificate of Incorporation, as amended, of Toreador Royalty Corporation dated July 3, 1990 (previously filed as Exhibit 3.2 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference).
3.3 - Certificate of Amendment of Certificate of Incorporation, as amended, of Toreador Royalty Corporation dated August 13, 1992 (previously filed as Exhibit 3.3 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference).
3.4 - Certificate of Designations of Series A Junior Participating Preferred Stock of Toreador Royalty Corporation, dated April 3, 1995 (previously filed as Exhibit 3 to Toreador Royalty Corporation Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, and incorporated herein by reference).
3.5 - Amended and Restated Bylaws of Toreador Royalty Corporation (previously filed as Exhibit 3.3 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference).
3.6 - Amendment to Bylaws of Toreador Royalty Corporation (previously filed as Exhibit 3.5 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference).
3.7 - Amendment to Bylaws of Toreador Royalty Corporation.
4.1 - Rights Agreement dated as of April 3, 1995, between Toreador Royalty Corporation and Continental Stock Transfer & Trust Company (previously filed as Exhibit 1 to Toreador Royalty Corporation Current Report on Form 8-K dated April 3, 1995, and incorporated herein by reference).
10.1+ - Stock Option Agreement dated August 1, 1988 between Toreador Royalty Corporation and Peter R. Vig (previously filed as Exhibit 10.B to Toreador Royalty Corporation Current Report on Form 8-K dated August 11, 1988, and incorporated herein by reference).
10.2+ - Stock Grant Agreement dated August 1, 1988 between Toreador Royalty Corporation and Peter R. Vig (previously filed as Exhibit 10.C to Toreador Royalty Corporation Current Report on Form 8-K dated August 11, 1988, and incorporated herein by reference).
10.3+ - Form of Stock Option Agreement by and between Toreador Royalty Corporation and Donald E. August, John V. Ballard, J.W. Bullion, John Mark McLaughlin, and Jack L. Woods (previously filed as Exhibit
4.6 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and incorporated herein by reference).
10.4+ - Stock Option Agreement dated February 17, 1994, by and between Toreador Royalty Corporation and Thomas P. Kellogg, Jr. (previously filed as Exhibit 4.7 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and incorporated herein by reference).
10.5 - Form of Stock Option Agreement by and between Toreador Royalty Corporation and Edward C. Marhanka and Earl V. Tessem, as amended (previously filed as Exhibit 4.8 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and incorporated herein by reference).
10.6+ - Non-qualified Stock Option Agreement dated as of May 17, 1997 by and between Toreador Royalty Corporation and Jack L. Woods (previously filed as Exhibit 10.1 to Toreador Royalty Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference).
10.7+ - Incentive Stock Option Agreement dated as of May 15, 1997 by and between Toreador Royalty Corporation and John Mark McLaughlin (previously filed as Exhibit 10.2 to Toreador Royalty Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference).
10.8+ - Incentive Stock Option dated as of May 15, 1997 by and between Toreador Royalty Corporation and Edward C. Marhanka (previously filed as Exhibit 10.4 to Toreador Royalty Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference).
10.9+ - Employment Agreement dated as of May 1, 1997 by and between Toreador Royalty Corporation and Edward C. Marhanka (previously filed as Exhibit 10.5 to Toreador Royalty Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference).
10.10+ - Consulting Agreement dated as of May 1, 1997 by and between Toreador Royalty Corporation and Jack L. Woods (previously filed as Exhibit 10.3 to Toreador Royalty Corporation Quarterly Report on Form 10- Q for the quarter ended June 30, 1997 and incorporated herein by reference).
10.11 - Employment Agreement dated February 9, 1989, as amended by Agreement dated February 28, 1990, between Toreador Royalty Corporation and James S. Blair (previously filed as Exhibit 4.5 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and incorporated herein by reference).
10.12 - Joint Venture Agreement dated March 1, 1989, among Toreador Royalty Corporation, Bandera Petroleum, et al. (previously filed as Exhibit 10.9 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).
10.13+ - Toreador Royalty Corporation 1990 Stock Option Plan (previously filed as Exhibit 10.7 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference).
10.14+ - Amendment to Toreador Royalty Corporation 1990 Stock Option Plan, effective as of May 15, 1997.
10.15+ - Toreador Royalty Corporation 1994 Non-Employee Director Stock Option Plan, as amended (previously filed as Exhibit 10.12 to Toreador Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference).
10.16 - Warrant for the Purchase of Shares of Common Stock issued to Petrie Parkman & Co. dated May 23, 1994 (previously filed as Exhibit 10.1 to Toreador Royalty Corporation Registration on Form S-3, and incorporated herein by reference (No. 33-80572) filed with the Securities and Exchange Commission on June 22, 1994, and incorporated herein by reference).
10.17+ - Form of Indemnification Agreement dated as of April 25, 1995 between Toreador Royalty Corporation and each of the members of its Board of Directors (previously filed as Exhibit 10 to Toreador Royalty Corporation Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, and incorporated herein by reference).
10.18 - Severance Agreement by and between Toreador Royalty Corporation and James S. Blair dated March 2, 1996 (previously filed as Exhibit 10.16 to Toreador Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference).
21.1 - Subsidiary of Toreador Royalty Corporation.
23.1 - Consent of Price Waterhouse LLP.
23.2 - Consent of Netherland, Sewell & Associates, Inc.
27.1 - Financial Data Schedule
- ----------------
+ Management contract or compensatory plan
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TOREADOR ROYALTY CORPORATION Date: March 26, 1998
By /s/ JOHN MARK McLAUGHLIN -------------------------------------------- John Mark McLaughlin, Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
TOREADOR ROYALTY CORPORATION
ITEM 14(a)(1) and (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as all required information has been included in the consolidated financial statements and notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Toreador Royalty Corporation
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Toreador Royalty Corporation and its subsidiary at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas March 23, 1998
TOREADOR ROYALTY CORPORATION
CONSOLIDATED BALANCE SHEET
The company uses successful efforts method of accounting for its oil and gas producing activities.
See accompanying notes to the consolidated financial statements.
TOREADOR ROYALTY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
See accompanying notes to the consolidated financial statements.
TOREADOR ROYALTY CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements
TOREADOR ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the consolidated financial statements.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Toreador Royalty Corporation (the "Company") explores for and produces oil and gas reserves principally in the southwestern part of the United States. The Company owns in excess of 535,000 net mineral acres located primarily in the Texas Panhandle and West Texas. In addition, the Company owns working or royalty interests in Texas, New Mexico, Oklahoma, Arkansas, and Louisiana. The Company's business activities are with industry partners located within the United States.
PERVASIVENESS OF ESTIMATES
The preparation 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.
CONSOLIDATION
The consolidated financial statements include the accounts of Toreador Royalty Corporation and its wholly-owned subsidiary, Toreador Exploration & Production Inc. All intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks and all highly liquid investments with original maturities of three months or less. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for oil and gas exploration and development expenditures. Under this method, costs of successful exploratory wells and all development wells are capitalized. Costs to drill exploratory wells which do not find proved reserves are expensed. Acquisition costs of mineral interests in oil and gas properties remain capitalized until they are impaired or a determination has been made to discontinue exploration of the lease, at which time all related costs are charged to expense. Impairment of unproved properties is assessed and recorded on a property-by-property basis. Upon sale or abandonment of units of property or the disposition of miscellaneous equipment, the cost is removed from the asset account, the related reserves relieved of the accumulated depreciation or depletion and the gain or loss is credited to or charged against operations. Maintenance and repairs are charged to expense; betterments of property are capitalized and depreciated as described below.
REVENUE RECOGNITION
Oil and natural gas revenues are accounted for using the sales method. Under this method, sales are recorded on all production sold by the Company regardless of the Company's ownership interest in the respective property. Imbalances result when sales differ from the seller's net revenue interest in the particular property's reserves and are tracked to reflect the Company's balancing position. At December 31, 1997 and 1996, the imbalance and related value were immaterial.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASE BONUSES
The Company defers bonuses received from leasing minerals in which unrecovered costs remain by recording the bonuses as a reduction of the unrecovered costs. Bonuses received from leasing mineral interests previously expensed are taken into income. For federal income tax purposes, lease bonuses are regarded as advance royalties (ordinary income).
DEPRECIATION, DEPLETION AND AMORTIZATION
The Company provides for depreciation, depletion and amortization of its investment in producing oil and gas properties on the unit-of-production method, based upon independent reserve engineers' estimates of recoverable oil and gas reserves from the property. Depreciation expense for fixed assets is generally calculated on a straight-line basis based upon estimated useful lives of five years.
IMPAIRMENT OF ASSETS
The Company evaluates the carrying value of its long-lived assets, consisting primarily of oil and gas properties, when events or changes in circumstances indicate that the carrying value of such assets may be impaired. The determination of impairment is based upon expectations of undiscounted future cash flows of the related asset.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate fair value, unless otherwise stated, as of December 31, 1997 and 1996.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company's assets and liabilities using enacted tax rates in effect at year end. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.
STOCK-BASED EMPLOYEE COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," in 1996. Under the provisions of SFAS No. 123, the Company has elected to continue using the intrinsic value method of accounting for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value method, if the exercise price of the Company's stock options equals the market value of the underlying stock on the date of grant, no compensation expense is recognized. See Note 11 for the required disclosure of pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," which establishes new requirements for computing and presenting earnings per share information. The Company, as required, adopted this statement in the fourth quarter of 1997. Accordingly, all earnings per share and weighted average common shares outstanding information presented in these financial statements and footnotes have been restated to conform to the new statement. For each of the three years in the period ended December 31, 1997, there were no adjustments to net income for purposes of calculating basic and diluted earnings per share and there were no differences in the weighted average common shares used in the basic and diluted earnings per share computations due to antidilution.
2. MARKETABLE SECURITIES
Marketable securities were comprised of 105,840 shares in the San Juan Basin Royalty Trust at December 31, 1995. The Company's cost in this royalty trust was $126,258. During 1996, the Company sold all shares in the San Juan Basin Royalty Trust for proceeds of $643,125 resulting in a gain of $516,867.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
Accounts receivable consist primarily of amounts arising from oil and gas sales. Receivables are due from companies engaged principally in oil and gas activities, with payment terms on a short-term basis and in accordance with industry standards.
As all ownership interests were for sale in a property in which the Company owned a 50% interest, the Company purchased a 100% interest in the property in December 1996. In February 1997, the Company was refunded its original interest in the property equivalent to $183,227.
4. PROPERTIES AND EQUIPMENT
Properties include mineral fee interests acquired by the Company during 1951 and 1958. These interests totaled approximately 535,000 net mineral acres underlying approximately 882,000 surface acres in the Texas Panhandle, West Texas, Montana and Colorado. It is recognized that the ultimate realization of the investment in these properties is dependent upon future exploration and development operations which are dependent upon satisfactory leasing and drilling arrangements with others.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Properties and equipment consist of the following:
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
6. INTEREST AND OTHER INCOME
Interest and other income consists of:
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses incurred by the Company are as follows:
8 INCOME TAXES
The Company's provision (benefit) for income taxes was comprised of the following:
The primary reasons for the difference between tax expense at the statutory federal income tax rate and the Company's provision for income taxes were:
In 1995, the net operating loss for tax purposes totaled $698,357, of which $182,293 was carried back and utilized against prior year taxable income. The remaining $516,064 was carried forward and used in 1996.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1997 and 1996 were as follows:
Of the change in deferred taxes, $181,982 was credited to net unrealized gain on marketable securities classified in stockholders' equity for 1996. The tax credit carryforwards and depletion carryforwards are available indefinitely.
9. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which covers all Company employees. The benefits are based on years of service and the employee's compensation. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
In 1996, the Company established a Supplemental Executive Retirement Plan ("SERP") covering certain key employees. The SERP provides for incremental pension payments from the Company's funds so that retirement benefit payments are equal to amounts that would have been payable from the Company's principal pension plan if it were not for limitations on those payments imposed by income tax regulations.
During 1997 the Company settled its benefit plan obligations with certain employees resulting in a loss of $173,971 which has been recorded as a loss on settlement of benefit plans in the consolidated statement of operations. The loss consists of a 100% settlement of the pension benefit for $87,654 and a payment of $88,617 for settlement of the SERP. The loss is primarily attributable to the settlement of benefit plans upon the resignation of the then Chairman and Chief Executive Officer of the Company.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic pension expense includes the following components:
The assumptions used to develop the net periodic pension expense were as follows:
The following table sets forth the funded status of the plan and the related asset and liability amounts for the plan as of December 31, 1997, 1996 and 1995:
At December 31, 1996, the Company recognized a minimum pension liability for its underfunded plan. The minimum liability is equal to the excess of the accumulated benefit obligation over the fair value of plan assets. This amount plus any deferred pension asset was recognized as a reduction to stockholders' equity of $88,543 at December 31, 1996.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEASE AND OTHER COMMITMENTS
In November 1993, the Company signed a lease agreement to lease new office space for a period of sixty-three months, beginning January 6, 1994 and ending March 31, 1999. Minimum annual rentals at December 31, 1997 are as follows:
In November 1997, the Company obtained a $10 million credit facility with an initial availability of $4 million which it may use to fund acquisition and development of oil and gas properties. The Company has not drawn any amounts under the facility.
In September 1997, the Company engaged a financial advisor in evaluating strategic alternatives available to the Company, including a sale of the Company, a merger with another company and other forms of business combinations.
11. STOCK COMPENSATION PLANS
At December 31, 1997 the Company has granted stock options to key employees, directors and certain consultants of the Company which are described below.
In May 1990, the Company adopted the 1990 Stock Option Plan ("the Plan"). The aggregate number of shares of common stock issuable under the Plan is 225,000. The Plan provides for the granting of stock options at exercise prices equal to the market price of the stock at the date of the grant.
In September 1994, the Company adopted the 1994 Nonemployee Director Stock Option Plan ("Nonemployee Director Plan"). The number of shares of common stock issuable under the Nonemployee Director Plan is 200,000 shares in the aggregate. The Nonemployee Director Plan provides for the granting of stock options at exercise prices equal to the market price of the stock at the grant date.
Options under the Plan and the Nonemployee Director Plan are granted periodically throughout the year and are generally exercisable in equal increments over a three-year period and have a maximum term of 10 years.
Pursuant to SFAS No. 123, the Company recorded an expense of $44,011 during 1997 with respect to stock options granted to certain consultants to the Company.
A summary of stock option transactions are as follows:
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the fixed price stock options outstanding at December 31, 1997:
At December 31, 1997, 162,500 shares were available for grant under the Plan and 150,000 shares were available for grant as options under the Nonemployee Director Plan.
The Company applied APB Opinion No. 25 in accounting for its stock options and accordingly, no compensation cost has been recognized for stock options in the financial statements. Had compensation costs for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates under those plans consistent with the method prescribed by SFAS No. 123, the Company's pro forma net income and earnings per share would have been reduced to the pro forma amounts listed below:
There were no options granted during 1996 and 1995. The fair value of each option granted during 1997 is estimated on the date of grant using the Black-Scholes Option-Pricing model with the following assumptions respectively: dividend yield of $0/share for all years: expected volatility of 39%; risk-free interest rate of 6.4%; and expected lives of 5 years.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. CAPITAL
On May 23, 1994, the Company privately placed 809,071 shares of common stock for an aggregate consideration of $2,831,749. In its private placement agreement with the purchasers, the Company granted such purchasers registration rights, pursuant to which a registration statement on Form S-3 covering all the shares was filed on June 22, 1994. The registration statement was declared effective July 11, 1994 and the Company was obligated to maintain such effectiveness until May 23, 1996. The Company filed an amendment to the registration statement on Form S-3 deregistering 439,642 shares of common stock that remained unsold on May 23, 1996. In connection with the private placement, the Company's placement agent received a five-year warrant to purchase 106,867 shares of common stock at a price of $4.375 per share.
The placement agent has rights to participate in registered offerings of common stock by the Company. The net proceeds to the Company from the private placement (after deducting the placement agent's fee of $141,112 and expenses of approximately $75,000) were approximately $2,616,000.
The Company adopted a stockholder rights plan on April 3, 1995 designed to assure that the Company's stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers and other abusive takeover tactics to gain control of the Company without paying all stockholders a fair price. Under the rights plan, the Company declared a dividend of one right ("Right") on each share of Company common stock. Each Right will entitle the holder to purchase one one-hundredth of a share of a new Series A Junior Participating Preferred Stock, par value $1.00 per share, at an exercise price of $12.00. The Rights are not currently exercisable and will become exercisable only in the event a person or group acquires beneficial ownership of 20 percent or more of Toreador's outstanding common stock or announces a tender offer or exchange offer to acquire such ownership level. The Rights are subject to redemption by the Company for $.01 per Right at any time prior to the tenth day after the first public announcement of the acquisition by any person or group of beneficial ownership of 20 percent or more of Company common stock. The dividend distribution was made on April 13, 1995 to stockholders of record at the close of business on that date. The rights will expire on April 13, 2005.
In October 1995, the Company's Board of Directors authorized the repurchase of up to 100,000 shares of the Company's common stock. This repurchase was completed in April 1996. In April 1996, the Company's Board of Directors authorized the repurchase of an additional 150,000 shares of the Company's common stock. This repurchase was completed in April 1997.
In April 1997, the Company's Board of Directors authorized the repurchase of an additional 300,000 shares of the Company's common stock. As of December 31, 1997, the Company had repurchased 152,700 shares of its common stock from the third repurchase program. Management anticipates that any future repurchases of the Company's common stock will be funded from the Company's cash flow from operations and working capital.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. UNAUDITED QUARTERLY FINANCIAL INFORMATION
A summary of unaudited quarterly consolidated financial information for 1997 is as follows:
The 1997 first, second and third quarter results have been restated to reflect the pension settlement during the first, second and third quarters. Income (loss) from operations and net income (loss) as previously reported for the first, second and third quarter were $272,082, ($85,201) and $38,867, and $184,205, ($59,360) and $35,142, respectively.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. OIL AND GAS INFORMATION (UNAUDITED)
The following information is presented pursuant to SFAS No. 69, Disclosures about Oil and Gas Producing Activities:
RESULTS OF OPERATIONS
Results of operations from oil and gas producing activities were as follows:
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES:
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND DEVELOPMENT ACTIVITIES:
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND GAS RESERVES
The following table identifies the Company's net interest in estimated quantities of proved oil and gas reserves and changes in such estimated quantities. Reserve estimates were prepared by independent petroleum engineers and such estimates were reviewed and adjusted by Company management. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. Estimated proved developed and undeveloped oil and gas reserves at December 31, 1997, 1996 and 1995 are tabulated below. Crude oil includes condensate and natural gas liquids and is stated in barrels (bbl). Natural gas is stated in thousands of cubic feet (mcf).
There were no proved undeveloped reserves at December 31, 1996 or 1995.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS REVENUES
Pursuant to SFAS No. 69, the Company has developed the following information titled "Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Quantities" (Standardized Measure). Accordingly, the Standardized Measure has been prepared assuming year-end selling prices adjusted for future fixed and determinable contractual price changes, year-end development and production costs, year-end statutory tax rates adjusted for future tax rates already legislated and a 10% annual discount rate. The Standardized Measure does not purport to be an estimate of the fair market value of the Company's reserves. An estimate of fair value would also have taken into account, among other things, the expected recovery of reserves in excess of proved reserves, anticipated changes in future prices and costs and a discount factor representative of the time value of money and risks inherent in producing oil and gas.
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The average oil and gas prices used to calculate future net cash inflows at December 31, 1997 were $15.87 per barrel and $2.25 per mcf, respectively. At December 31, 1997 and March 17, 1998, respectively, the NYMEX price for oil was $17.64 per barrel and $13.21 per barrel and the NYMEX price for gas was $2.264 per MMBtu and $2.155 per MMBtu.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH RELATING TO PROVED OIL AND GAS RESERVES
The following are the principal sources of change in the standardized measure:
INDEX TO EXHIBITS
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* Filed herewith.