UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
<TABLE>
<CAPTION>
<S><C>
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________ .
Commission File Number 1-6336
PETROMINERALS CORPORATION
(Name of small business issuer in its charter)
Delaware 95-2573652
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or arganization
915 WESTMINSTER AVENUE, ALHAMBRA, CALIFORNIA 91803
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(Address of principal executive offices)
Issuer's telephone number: (818) 284-8842
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(G) of the Act:
COMMON STOCK, PAR VALUE $.10
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(Title of Class)
</TABLE>
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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.
[X] yes [ ] no
Check if there is no disclosure of delinquent filers in response to Item 405
of Registration S-B is not contained in this form and no disclosure be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $1,269,000.
----------
Check whether the Issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
[ ] yes [ ] no
Transitional small business disclosure format. [ ] yes [X] no
The number of shares of Registrant's common stock outstanding was 8,475,336 as
of February 21, 1997.
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant was approximately $2,128,834 as of February
21, 1997.
The total number of pages in this Form 10-KSB are 63.
The Index of Exhibits included in this Form 10-KSB is located at page 60.
<PAGE>
PETROMINERALS CORPORATION
PART I
ITEM 1 - BUSINESS
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A. GENERAL DESCRIPTION OF BUSINESS
----------------------------------
INTRODUCTION
Petrominerals Corporation (Petrominerals or the Company) which was
incorporated under the laws of the State of Delaware in 1966, is engaged in
the production of on-shore domestic crude oil and natural gas in Los Angeles
County, California, and oilfield services through its well servicing division,
Hydro-Test International, Inc. (Hydro-Test), which is currently doing business
as Texas Tubing Testers. The Company's wholly owned subsidiary, Hydro-Test, a
New Mexico corporation acquired in 1993, provides tubular testing services
including hydro-static testing of tubing, pipelines and valve assemblies in
the oil and gas industry, both on-shore and offshore. The Company sells the
oil it produces at the well site and does not refine any of its production or
market any other petroleum products.
BUSINESS STRATEGY
The Company plans to continue operating its existing oil and gas wells in the
Santa Clarita Valley and maximizing cash flows from this operation. A well
stimulation program that began in 1995 will continue to show its benefit in
the current year, as management continues efforts to maximize efficiency.
Additionally, a new well was drilled by Petrominerals 96-1, which is a related
party limited partnership. This new well was completed on December 20, 1996,
and began production on January 20, 1997. The Company also continues to
evaluate purchase or merger offers.
DISPOSITION AND BANKRUPTCY OF HYDRO-TEST INTERNATIONAL, INC.
In March 1995, the Company adopted a formal plan to liquidate and dispose of
the assets of Hydro-Test, due to a downturn in the oilfield service industry
in the first quarter of 1995. Through August 1995, the Company proceeded with
this liquidation plan by selling the equipment and inventory of several
locations operated by Hydro-Test. On September 1, 1995, management abandoned
the liquidation plan and commenced its voluntary reorganization case with the
filing of a petition under Chapter 11 of the United States Bankruptcy Code.
This case was filed as a Chapter 11 case to protect the Hydro-Test assets from
seizure and to pay creditor claims in a greater amount than could be obtained
in an immediate Chapter 7 liquidation case.
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
A. GENERAL DESCRIPTION OF BUSINESS (Continued)
----------------------------------
DISPOSITION AND BANKRUPTCY OF HYDRO-TEST INTERNATIONAL, INC. (Continued)
On May 16, 1996, the plan of reorganization was accepted by the creditors and
confirmed by the United States Bankruptcy Courts for the Southern District of
Texas, Houston Division. On August 14, 1996, a final hearing took place to
approve the payment of professional fees and order final payment. As such,
Hydro-Test is no longer in bankruptcy.
All of the creditors that had the option, elected to receive 50% of their
claim over 60 months rather than 25% over 90 days. Hydro-Test has not yet paid
any of these claims. Management will review the financial condition of
Hydro-Test on the first anniversary of the plan and determine when payments to
creditors will be made.
REAL PROPERTY HOLDINGS
The Company owns 140 acres of unimproved land in the Hasley Canyon field,
Santa Clarita Valley, Los Angeles County, California, which is the Company's
primary location of oil production. Six of the Company's wells and a tank
battery are located on land owned by the Company, and the remaining wells are
located on leased property.
The Company entered into a lease and option to purchase agreement with an
unrelated entity effective December 30, 1996, in an effort to raise additional
capital by selling most of the 140 acres mentioned above. Under the terms of
the agreement, the lessee has an option to purchase the property at any time
during a ten year period. The lessee is required to make various monthly lease
payments and can withdraw from the lease at any time.
In January 1995, the Company sold 29 acres of real property located in
Bakersfield, Kern County, California, for total consideration of $850,000. The
purchaser paid $350,000 in cash and the balance of $500,000 is secured by a
Promissory Note and First Deed of Trust payable monthly for a term of fifteen
years, with a balloon payment due in eight years. The Note bears interest at
the rate of 8.5 percent per annum.
In May 1995, the Company sold its interest in the Pointe Coupee Parish,
Louisiana, oilfields for $155,000 in cash. In August 1995, the Company sold
its oil and gas interests in the Santa Barbara County, California, oilfields
for $150,000 in cash. Both properties were sold to separate unrelated parties.
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
B. FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS
------------------------------------------------------
Petrominerals principally operates in two industry segments: (1) providing
tubular testing and complimentary services through its oilfield services
subsidiary, Hydro-Test; and (2) the production and sale of crude oil. During
the past three years, revenues were derived from the oilfield services
operations and the production and sale of produced crude oil and natural gas.
The following table shows the Industry Segment Percentage Revenues derived by
Petrominerals for the past three years:
Industry Segment Percentage Revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Oilfield services 1.0% 36.3% 76.3%
Oil and gas sales 94.0% 57.6% 22.9%
Other 5.0% 6.1% .8%
</TABLE>
See Note 10 to the Consolidated Financial Statements in Item 7 hereof for
information regarding amount of revenue, operating profit, and identifiable
assets attributable to Petrominerals' industry segments for the fiscal years
indicated above.
C. DESCRIPTION OF BUSINESS
-------------------------
OILFIELD SERVICES
Hydro-Test operates one remaining facility near Houston, Texas. Hydro-Test
previously operated two offices in California, three offices in Texas, one
office in New Mexico, and through its franchisees, licensed an additional four
offices in the United States and other countries. All operations were
consolidated into the remaining Texas operation during 1995 in anticipation of
reorganization. Hydro-Test is engaged in the hydro-static testing of tubular
pipe, pipelines and valve assemblies in the oil and gas industry, both
on-shore and offshore. Hydro-Test has been in the tubular testing business
since 1945.
The Company closed its well servicing division, Lunn Production Service, due
to the loss of the contract with Chevron, U.S.A., Inc. On July 6, 1994, the
Company auctioned Lunn's equipment and operating assets. The Company then sold
the remaining property, 29 acres of real property in Bakersfield, California,
in January 1995.
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
C. DESCRIPTION OF BUSINESS (Continued)
-------------------------
Major Customers. The loss of several customers in 1995 significantly reduced
- ----------------
Hydro-Test's revenues. Under current operating conditions, the loss of any one
customer would not have a material adverse effect upon Hydro-Test's revenues.
OIL AND GAS SALES
The Company currently owns and operates oil wells in Los Angeles County,
California. Specifically, the Hasley Canyon and Castaic Hills fields are
located in the Santa Clarita Valley, Los Angeles County. The Company's Gato
Ridge and Hancock fields, located in the Santa Maria Valley, Santa Barbara
County, California, were sold in August 1995. The Company's oil and gas
interests in Pointe Coupee Parish, Louisiana, were also sold in May 1995.
Development of Properties
- -----------------------------
The Company entered into a joint venture agreement with Petrominerals 96-1, a
limited partnership formed on December 3, 1996, to drill a well on a
designated site. The Company has a 1% interest as general partner in the
partnership, and the limited partners consist of three directors and two
unrelated parties. The Company contributed the drill site in exchange for
their interest in the partnership and serves as the well's operator.
Petrominerals contracts to sell the oil it produces to customers who either
refine the oil or resell it to refiners. The Company does not refine any of
its oil production and uses all of the gas produced to either generate
electricity for pumping units or to operate gas powered pumping units. Sales
of produced oil are generally made pursuant to contracts of 30 or 90 days
duration and fluctuate with differences in posted field prices based on the
quality of the oil produced. The price obtained for oil depends upon numerous
factors, including the extent of domestic production and foreign imports,
world events, market demand, hostilities in oil producing countries, and the
effect of governmental regulations. As a result of a combination of these
factors, oil prices are constantly fluctuating. Prices for California oil are
significantly lower than reported benchmark prices for similar oil in the
United States, due to the influx of Alaskan North Slope (ANS) crude into West
Coast markets, which is directly in competition with California's production.
Congress recently lifted the ban on the export of ANS crude which, combined
with other factors, has led to an improvement in prices.
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
C. DESCRIPTION OF BUSINESS (Continued)
-------------------------
OIL AND GAS SALES (Continued)
Development of Properties (Continued)
- -----------------------------
The average price the Company received for its crude oil during 1996 was
approximately $15.13 per barrel, which is approximately $3.00 per barrel
higher than the average price which the Company received for its crude in
1995. The Company incurred average production costs of $9.04 per barrel, and
produced 106,456 barrels of crude. Revenues decreased as a result of decreased
production, following the sale of the two properties noted above. The price
paid per barrel of oil produced in the remaining fields increased, although
there is no assurance that the Company will be able to continue to sell its
oil production at favorable prices.
Operating Hazards and Uninsured Risks. The Company's operations are subject to
- -------------------------------------
all of the operating hazards and risks associated with producing oil, such as
environmental pollution and personal injury. The Company carries general
liability insurance, however, it has not obtained insurance against
environmental pollution over and above the minimum amounts required by the
State of California.
Government Regulations. Federal, state and local governments impose numerous
- -----------------------
laws and regulations on the production and sale of oil and gas. In addition,
state and Federal regulations have been adopted which pertain to the spacing
of wells, prevention of waste of oil and gas, limiting rates of production,
proration of productions, handling of waste water and similar matters. All
such laws and regulations are subject to change at any time, and there is no
way to ascertain either the likelihood or potential effect of such future
changes.
Major Customers. The Company sold approximately 98% of its oil production to
- ----------------
Texaco Trading and Transportation, Inc. (Texaco) during 1996. The contract
with Texaco is for the period September 1, 1995 through March 1, 1996, and
continues month to month thereafter until the first month following either
party's sixty day advance written notice of termination.
Management believes that the loss of its contract with Texaco could have a
material adverse effect on Petrominerals, in the unlikely event that the
Company were unable to obtain new customers which were sufficient
replacements. See Note 10 to the Financial Statements included in Item 7
hereof which contains information regarding sales to major customers.
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
C. DESCRIPTION OF BUSINESS (Continued)
-------------------------
OIL AND GAS SALES (Continued)
Development of Properties (Continued)
- -----------------------------
Petrominerals' oil and gas segment faces competition from a large number of
companies and individuals both foreign and domestic, who are engaged in the
production of oil and gas. Most of the Company's competitors have
substantially more technical and financial resources available to them. The
Company competes on price only, and its ability to market its oil production
is directly affected by factors that are beyond the Company's control. These
factors include crude oil imports, actions by foreign oil producing nations,
the availability of adequate pipeline and other transportation facilities, the
availability of equipment and personnel, marketing of competitive fuels, the
effect of governmental regulations, and the fluctuation of supply and demand
with respect to oil and gas.
Environmental Matters. The Company has established procedures for the on-going
- ---------------------
evaluation of its operations to identify potential environmental exposures and
assure compliance with regulatory policies and procedures. Management monitors
these laws and regulations and periodically assesses the propriety of its
operational and accounting policies related to environmental issues. The
nature of the Company's business requires routine day-to-day compliance with
environmental laws and regulations. Additionally, the Company has been
identified as a potentially responsible party (PRP) by the Environmental
Protection Agency (see Item 3). Management is unable to determine what effect,
if any, this will have on the Company.
The Company is unable to predict whether its future operations will be
materially affected by these laws and regulations. It is believed that
legislation and regulations relating to environmental protection will not
materially affect the results of operations of the Company. Environmental
clean-up costs are incurred by the Company in the ordinary course of business.
In 1996 and 1995, the Company incurred approximately $973 and $0,
respectively, in environmental investigation, compliance and remediation
costs.
Employees. As of March 26, 1996, the Company employed a total of 12
- ---------
individuals, of which 5 were employed by Hydro-Test International, Inc.
<PAGE>
ITEM 2 - PROPERTIES
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GENERAL
The principal properties of the oil and gas segment consist of proved
developed oil and gas properties; equipment and wells related to proved
properties; proved undeveloped oil and gas properties; maps, geologic and
geophysical records related thereto; and real estate. The Company's interest
in oil and gas properties are principally in the form of direct and indirect
working interests in leases. The Company currently holds oil and gas
properties located in Los Angeles County, California. The Company previously
held an interest in properties located in Santa Barbara County, California,
and Pointe Coupee Parish, Louisiana, however, these were sold in 1995. The
Company does not sell the natural gas produced in their remaining fields, but
instead uses the gas to produce electricity for electric pumping units or uses
the gas to operate gas powered pumping units.
OIL AND GAS RESERVES AND PRODUCTION INFORMATION
The tables located in Note 13 of Item 7 located elsewhere herein set forth
information with respect to the engineering estimates of proved oil and gas
reserves owned by the Company. The reserves are shown in barrels (Bbl) of oil
and thousands of cubic feet (Mcf) of gas. All of the proved reserves currently
being produced and operated by the Company are located in Los Angeles County,
California. Except as set forth in this report, Petrominerals has not filed
any estimates of proved reserves with any federal authority or agency during
the last fiscal year. The Company's net interest in proved reserves and
related valuations for the years ended December 31, 1996 and 1995 have been
prepared by Babson & Sheppard, an independent petroleum engineering firm in
Long Beach, California.
Reserve estimates are based upon detailed engineering and geological studies.
Where an adequate production trend has been established, extrapolation of
production performance is used. If insufficient well data is available for
performance calculations, the initial gas or oil in place volumes are
estimated from geological interpretation of reservoirs, analysis of production
from wells in similar surrounding areas, or other techniques. Petroleum
engineering is not an exact science, and it involves estimates based upon
numerous factors, many of which are inherently variable and uncertain. Such
factors include the price of oil and gas and estimates of oil and gas
production and costs. Estimates of reserves and future net revenue costs
involve projecting future results by estimating future events. Therefore,
there are no assurances that actual productions, revenues, taxes, development
expenditures and operating expenses will occur as estimated.
<PAGE>
ITEM 2 - PROPERTIES (Continued)
----------
OIL AND GAS RESERVES AND PRODUCTION INFORMATION (Continued)
Oil and Gas Reserves Information
- ------------------------------------
Information regarding the Company's estimated net oil and gas reserves,
additions and revisions to estimated net reserves, estimated future cash
inflows and related costs and discounted future net cash flows for the years
ended December 31, 1996 and 1995, are contained in Note 13 to the Company's
consolidated financial statements in Item 7 hereof. The Company's reserve
report, from which the foregoing estimates were derived, is based upon prices
in effect at December 31, 1996.
The Company periodically evaluates its oil and gas properties for impairment
by determining if the carrying value of the properties exceeds the present
value of their estimated future net revenues, calculated at current prices
(i.e., the ceiling). Since March 1986, the Company has established impairment
reserves of $10,963,000 against its oil and gas properties, of which
$1,390,000 was recorded in 1993, due to the year-end average posting prices of
$7.05 per barrel. Current accounting standards do not allow the Company to
reinstate value for subsequent increases in the ceiling.
PRODUCTION
Net Annual Production
- -----------------------
The following table sets forth the Company's net production of oil and gas
interests for the periods indicated. Net production represents production
owned by Petrominerals and produced to its interest, less royalty and other
similar interests.
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
1996 1995
---- ----
<S> <C> <C> <C>
(in thousands)
Net annual production
Oil (Bbl) 106 126
Gas (Mcf) - 56
</TABLE>
<PAGE>
ITEM 2 - PROPERTIES (Continued)
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PRODUCTION (Continued)
Sales Prices and Production Costs
- -------------------------------------
The following table sets forth the average sales price and average production
(lifting) cost per unit of oil and gas produced by the Company for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------
1996 1995
------- ------
<S> <C> <C>
Average sales price
Oil (per Bbl) $ 15.13 $12.13
Gas (per Mcf) - 1.14
Average production cost per barrel(1) (2)9.04 7.61
<FN>
(1) Natural gas production is converted into its oil barrel equivalent
based on the relative energy content of each. Petrominerals sells the oil it
produces at the well site and does not refine any of its production.
(2) Petrominerals expensed the cost of deferred remedial work as incurred
during 1996, which increased production costs above historical levels. During
the three month period ended January 31, 1997, production costs averaged $6.65
per barrel.
</TABLE>
PRODUCTIVE WELLS AND DEVELOPED ACREAGE
Proved developed oil and gas properties are properties on which wells have
been drilled, and are capable of producing crude oil or natural gas in
commercial quantities. The Company's proved acreage and the number of
productive wells as of December 31, 1996, are set forth in the tables below:
Productive Wells
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The productive wells in which the Company owned interests consisted of the
following:
<TABLE>
<CAPTION>
Productive Wells(1)(2)(3)
--------------------------
Oil
---
Gross Wells Net Wells
----------- ---------
<S> <C>
36 28
<FN>
(1) "Gross Wells" represents the total number of wells in which
Petrominerals has a working interest; "Net Wells" represents the number of
gross wells, multiplied by the percentage of the working or royalty interests
therein owned by the Company.
(2) A productive well is a producing well or a well capable of production.
(3) None of the oil or natural gas wells in which Petrominerals has
working interests have multiple completions in the same bore hole.
</TABLE>
<PAGE>
ITEM 2 - PROPERTIES (Continued)
----------
PRODUCTIVE WELLS AND DEVELOPED ACREAGE (Continued)
Developed Acreage
- ------------------
The Company's working and royalty interests in developed acreage consists of
the following:
<TABLE>
<CAPTION>
Developed Acres(1)
-------------------
Gross Net
----- ---
<S> <C> <C> <C> <C>
Total Acreage 1,200 968
<FN>
(1) "Developed Acres" are defined as acres spaced or assignable to
productive wells. "Gross Acres" represents all developed acres in which the
Company has a working interest; "Net Acres" represents the aggregate of the
working interests of the Company in the gross developed acres.
</TABLE>
Drilling Activity
- ------------------
The Company entered into a joint venture during 1996 with Petrominerals 96-1,
a newly formed, limited partnership, to drill a well on a designated site in a
proven area. Under the terms of the agreement, the Company contributed the
drill site in exchange for a 1% interest in the partnership. Proceeds from the
working interest will pay at the rate of 10% to the Company and 90% to the
partnership until payout occurs. Following payout, when the partnership has
recovered their initial contribution, the Company will receive 70% of the
proceeds and the partnership will receive 30%. Payout is expected to occur
early in 1999. No other drilling projects are currently planned.
Delivery Commitments
- ---------------------
The Company is not obligated to provide a fixed and determinable quantity of
oil and gas in the future under existing contracts or agreements, however,
they do have an agreement to sell the oil produced.
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
------------------
The Company is not a party to nor is its property the subject of any material
legal proceedings other than ordinary routine litigation incidental to its
business, or which is covered by insurance, except as set forth below.
In December 1989, the Company was notified by the United States Environmental
Protection Agency (EPA) that, under the provisions of the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the
Company was considered a potentially responsible party (PRP) in the clean-up
of the Operating Industries, Inc. (OII) waste disposal site located in
Monterey Park, California. Century Oil Corporation, a predecessor of the
Company, disposed of drilling mud and water at the OII disposal site, at
various times from 1975 to 1977. The Company, along with several other similar
PRP's, contend that drilling mud and waste water do not constitute hazardous
substances within the meaning of CERCLA. Although the ultimate impact of the
resolution of this contingency is unknown, management believes that this
matter will not have a material adverse affect on the financial position of
the Company.
On September 1, 1995, the Company's subsidiary, Hydro-Test International, Inc.
(Hydro-Test), filed a petition under Chapter 11 of the United States
Bankruptcy Code. This case was filed as a Chapter 11 case to protect the
assets from seizure and pay creditor claims a greater amount than could be
obtained in an immediate Chapter 7 liquidation case. The case was presented
before the United States Bankruptcy Courts for the Southern District of Texas,
Houston Division. Under the plan, creditors had the option of receiving a 25%
cash payment of allowed claims within 90 days of the effective date or 50% of
allowed claims over a period of 60 months, with the exception of unsecured
creditors with claims in excess of $5,001. Creditors with claims in excess of
$5,001 will receive payments over 84 months. The parent Company also agreed to
pay $50,000 in cash for equipment repair and convert $500,000 of its unsecured
debt to equity at the rate of $100,000 per year for five years and defer
participation in cash distribution for 24 months. The new value of the parent
company's contribution was computed at $300,000.
On May 16, 1996, the plan of reorganization was accepted by the creditors and
confirmed by the United States Bankruptcy Courts for the Southern District of
Texas, Houston Division. On August 14, 1996, a final hearing took place to
approve the payment of professional fees and order final payment as such.
Hydro-Test is no longer in bankruptcy.
All of the creditors that had the option elected to receive 50% of their claim
over 60 months rather than 25% over 90 days. The Company has not yet paid any
of these claims.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
During the fourth quarter of 1996, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND
--------------------------------------------------
RELATED SECURITY HOLDER MATTERS
----------------------------------
The Company's common stock is currently traded in the Small Cap System under
the nasdaq symbol PTRO. The following table sets forth the range of high and
low sales prices on the nasdaq Small Cap System for the Company's common
stock, for the fiscal quarters indicated:
<TABLE>
<CAPTION>
Bid Prices
Fiscal Years Ended
December 31,
-------------
High Low
------ ------
<S> <C> <C>
1995
First quarter $11/32 $11/32
Second quarter 3/8 1/9
Third quarter 5/16 5/32
Fourth quarter 3/16 5/32
1996
First quarter $ 3/8 1/4
Second quarter 3/8 11/32
Third quarter 3/8 9/32
Fourth quarter 5/16 1/4
</TABLE>
The Company has 896 shareholders of record of its common stock as of February
21, 1997.
No regular dividends for Petrominerals' stock have been declared since 1986.
The Board of Directors has no current intention to declare or pay dividends in
the foreseeable future. The Board of Directors periodically reviews the
financial position of the Company and evaluates whether or not it will declare
dividends.
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
---------------------------------------
The following discussion should assist in an understanding of the Company's
financial position and results of operations for each of the two years in the
period ended December 31, 1996. The Notes to Consolidated Financial Statements
as of December 31, 1996, included elsewhere herein, contain detailed
information that should be referred to in conjunction with this discussion.
BUSINESS REVIEW
General
- -------
The current President and CEO of the Company served his first full term since
returning during 1996. He continued his original goals of cutting corporate
overhead and disposing of unproductive assets.
Oil and Gas Segment
- ----------------------
The Company's oil revenues are impacted by several factors, however, the
prevailing factor is the price of crude oil paid by the purchaser that holds
their contract. This prevailing price is consistent with prices paid by other
local purchasers. The price of oil has declined somewhat during the first two
months of 1997, but management feels that conditions will continue to be
favorable throughout the new year.
The Company's oil revenues were extremely volatile between 1990 and 1994,
however, the average price per barrel of oil sold has increased by
approximately $5.40 per barrel over the last two years. As such, the Company's
remaining properties have become more profitable and management found that it
was feasible to drill a new well in an existing field.
The Company entered into a joint venture agreement with Petrominerals 96-1, a
limited partnership formed on December 3, 1996, to drill a well on the
Company's Mabel Strawn oil lease. The Company assigned the drill site and
casing required for the well to the joint venture, and leased to the joint
venture the tangible equipment necessary for the well. The Company is
reviewing the prospects for drilling other wells in the area, but currently
does not have any other plans in place. The new well began producing on
January 20, 1997, and will most likely have a positive impact on future
profits.
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------
BUSINESS REVIEW (Continued)
Oil and Gas Segment (Continued)
- ----------------------
The Company also entered into a lease with an option to purchase agreement
with a real estate developer in an effort to dispose of the Company's 140 acre
parcel adjacent to their oil lease. The Company has received an initial
$10,000 payment, and the developer has opened an escrow account with $100,000.
The Company hopes to either utilize the developer's lease payments to expand
existing operations or use the proceeds from the sale for future expansions.
The purchase options under this agreement significantly exceed the Company's
$1.1 million book value of the property.
Oilfield Services Segment
- ---------------------------
The Company's wholly owned subsidiary, Hydro-Test International, Inc., emerged
from Chapter 11 bankruptcy on May 16, 1996, after their plan was confirmed by
the courts and accepted by the creditors. Management has continued to sell off
its remaining assets and operates the remaining facility near Houston, Texas,
on a limited basis. There are no current plans to expand the operations or
provide additional capital from the parent company.
Under the terms of the reorganization plan, creditors will receive 50% of
their allowed claim over a 24 month period from the date the plan was
accepted. No distributions have currently been made to the creditors, and it
is questionable whether current operations will create the cash flow necessary
to meet these obligations. The parent company has agreed to forgive their
intercompany loan in exchange for $300,000 in new equity over a five year
period. The existing shares have not yet been cancelled, and no new shares
have been issued.
1996 COMPARED WITH 1995
The Company had cash provided by operations of approximately $316,000 for the
year ended December 31, 1996, compared to cash used by operations of
approximately $183,000 for the year ended December 31, 1995. The increase in
cash flow was primarily due to the restructuring of Hydro-Test's debt and
increased oil prices.
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------
BUSINESS REVIEW (Continued)
1996 COMPARED WITH 1995 (Continued)
The Company is not currently servicing Hydro-Test's prepetition liabilities,
following the protection that the Company received from creditors during
Chapter 11 reorganization. If the Company does elect to begin making payments
in 1997, future cash flows will be negatively impacted. The Company would most
likely have to continue selling assets to service this debt, as it is unlikely
that Hydro-Test will provide enough cash from continuing operations. The
Company received approximately $66,000 from the sale of Hydro-Test's assets
and an additional $135,000 from the sale of Hydro-Test's inventory during
1996.
The Company had net income of $376,000 in 1996 compared to a net loss of
$1,655,000 in 1995. The primary reason for the Company's net income in the
current year was a one-time extraordinary gain on debt forgiven in bankruptcy
of $448,000. The Company incurred a loss before income tax and extraordinary
item of $72,000 in 1996.
Oilfield service revenues declined an additional 98% during 1996, due to the
further downsizing of Hydro-Test.
Expenses related to the oilfield service sector declined 85%, however,
expenses continue to far exceed revenues in this segment. The Company is
currently working to further reduce expenses and generate more revenues.
Depreciation, depletion and amortization expense decreased by approximately
35% due to the continued disposal of Hydro-Test's fixed assets during 1996.
Depreciation, depletion and amortization was 9% and 6% of fixed assets in 1996
and 1995, respectively.
General and administrative expense decreased by approximately 25%, as a result
of the continued cost cutting by the returning President and CEO. Management
expects this trend to continue in 1997.
The 95% decrease in interest expense and prior year $805,000 loss on disposal
of assets were both directly related to the Hydro-Test Chapter 11 bankruptcy.
The Company is currently not recording interest on the prepetition
liabilities, and the loss on disposal of assets was a one-time write down to
reflect the assets' net realizable value.
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------
BUSINESS REVIEW (Continued)
1995 COMPARED WITH 1994
The Company had a cash loss from operations of approximately $183,000 for the
year ended December 31, 1995, compared to cash provided from operations of
approximately $358,000 for 1994. The decrease in cash flow was primarily the
result of a significant operating loss in the oilfield services segment during
1995, as the result of the liquidation and bankruptcy of Hydro-Test.
Capital expenditures in 1995 were $106,000, compared to $288,000 in 1994. The
decrease was primarily the result of cash flow problems due to the poor
financial condition of the Company's subsidiary. The Company was, however,
able to reduce its outstanding debt by approximately $615,000 during 1995, due
primarily to the sale of the Hydro-Test assets and the sale of the
Bakersfield, California, property held for sale at December 31, 1994.
The Company had a net loss of $1,655,000 in 1995, due primarily to the poor
performance of the Company's subsidiary and loss on disposal of assets of
approximately $805,000. The loss on disposal is the net effect of a gain on
disposal of the oilfields that were sold and a loss on disposal of
Hydro-Test's assets. Net income from the oil and gas segment increased from
1994, but it was more than offset by the subsidiary's losses.
Oilfield service revenues decreased approximately 82% in 1995, which
significantly contributed to the Company's decision to put Hydro-Test in
Chapter 11 bankruptcy.
Oil and gas revenues decreased by approximately 10%, due primarily to the net
effect of a decrease in production as a result of the properties that were
sold, softened with an increase in the price of oil sold from the remaining
properties.
Other income increased approximately 260%, as a result of interest income
earned by the Company on the $500,000 note receivable from the sale of
property in Bakersfield, California, during 1994. This trend is not expected
to continue, as no similar seller-financed sales are contemplated.
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------
BUSINESS REVIEW (Continued)
1995 COMPARED WITH 1994 (Continued)
Expenses related to the oilfield services segment were 52% and 85% of revenues
for 1995 and 1994. This decrease is attributable to the significant cuts in
corporate overhead of Hydro-Test, as part of the downsizing and restructuring.
Future expenses related to oilfield services are expected to be minimal, but
should correspond with revenues at approximately the same ratio.
Expenses related to the production of oil and gas were 53% and 54% in 1995 and
1994, however, total expenses related to oil and gas production decreased
approximately 12%. This overall decrease is the result of decreased expenses
from properties sold mid-year.
Depreciation, depletion and amortization expense was 9% and 12% of fixed
assets in 1995 and 1994, although total depreciation, depletion and
amortization decreased by 57%. This decrease was the result of fixed assets
sold by Hydro-Test.
General and administrative expense decreased by approximately 56%, as a result
of cuts in corporate overhead implemented when the new President took office.
The Company significantly reduced costs by moving to a less expensive office
and cutting compensation to the President and Corporate Secretary, as well as
eliminating other positions and cutting discretionary expenses.
The significant loss on the sale of assets was due to the liquidation of
Hydro-Test assets for significantly less than the historical cost, net of
accumulated depreciation. Several of the larger pieces of equipment had
become inoperable, and other equipment had declined in value simply because
the services that the equipment performs is no longer in demand. The
remaining assets are not likely to continue their decline in value.
Most assets were sold to unrelated entities; however, the Company sold the
assets of their Long Beach facilities to two of the directors of the Company
for approximately $260,000. Management feels that the terms of this agreement
were at least as favorable as could be expected from an unrelated entity.
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Brown Armstrong Randall & Reyes,
Independent Auditor's Report. . . . . . . . . . . . . . 21-22
Consolidated Balance Sheets at December 31, 1996 and 1995 23-24
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 25
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996 and 1995 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 27
Notes to Consolidated Financial Statements 28-45
</TABLE>
<PAGE>
<PAGE>
REPORT OF BROWN ARMSTRONG RANDALL & REYES
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Petrominerals Corporation
We have audited the accompanying consolidated balance sheets of Petrominerals
Corporation (a Delaware corporation) and Subsidiary as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the two years then ended and the related December
31, 1996 and 1995 financial statement schedules as listed in the index at Item
13(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
<PAGE>
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Petrominerals Corporation and
consolidated subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
BROWN ARMSTRONG RANDALL & REYES
ACCOUNTANCY CORPORATION
Bakersfield, California
February 28, 1997
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(Dollars in thousands, except par value amounts)
ASSETS
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 614 $ 325
Accounts receivable, net 183 83
Inventories . . . . . . . . . . . . . 61 171
Prepaid expenses. . . . . . . . . . . 16 11
Other current assets 20 -
------ ------
Total Current Assets 894 590
------ ------
Restricted Cash 40 84
Property and Equipment, net (including
oil and gas properties accounted for
on the successful efforts method) 2,062 2,159
Notes Receivable and Other Assets 461 510
------ ------
Total Assets $3,457 $3,343
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Current Liabilities
Accounts payable $ 464 $ 218
Current portion of long-term debt 8 170
Accrued liabilities 87 86
Royalties payable 42 24
------ ------
Total Current Liabilities 601 498
Long-Term Debt, net of current portion 7 343
Prepetition Liabilities 521 -
Liabilities Subject to Compromise - 555
------ ------
Total Liabilities 1,129 1,396
------ ------
Shareholders' Equity
Preferred stock:
$.10 par value, 5,000,000 shares
authorized; no shares issued
and outstanding - -
Common stock:
$.10 par value, 20,000,000 shares
authorized; 8,475,336 and 8,460,336
shares issued and outstanding at
December 31, 1996 and 1995,
respectively 848 847
Capital in Excess of Par Value 563 558
Retained Earnings 917 542
------ ------
Total Shareholders' Equity 2,328 1,947
------ ------
Total Liabilities and Shareholders' Equity $3,457 $3,343
====== ======
</TABLE>
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Revenues
Oilfield services $ 14 $701
Oil and gas 1,185 1,112
Other income 70 118
------ ------
Total Revenues 1,269 1,931
------ ------
Costs and Expenses
Oilfield services 199 1,341
Oil and gas 561 588
Depreciation, depletion and amortization 127 193
General and administrative 418 555
Interest 3 53
Loss on disposal of assets - 805
Other expense 33 51
------ ------
Total Costs and Expenses 1,341 3,586
------ ------
Loss before extraordinary item (72) (1,655)
Extraordinary gain 448 -
------ ------
Net Income (Loss) $376 $(1,655)
====== ======
Per Share Amounts:
Net loss per share before extraordinary item $(.01) $(.20)
====== ======
Extraordinary item $ .05 $ -
====== ======
Net income (loss) per share $ .04 $(.20)
====== ======
Weighted average common shares
outstanding 8,470 8,455
====== ======
</TABLE>
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Dollars in thousands, except number of shares)
<TABLE>
<CAPTION>
Common Stock
-------------
Capital in
Number Excess of Retained
of Shares Amount par Value Earnings Total
--------- ------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1994 8,409,936 $ 841 $ 544 $ 2,196 $ 3,581
Issuance of shares
for Directors
Compensation 50,400 6 14 - 20
Net loss - - - (1,655) (1,655)
--------- ------------- ----------- ---------- --------
Balance,
December 31, 1995 8,460,336 847 558 541 1,946
Issuance of shares
for Officer's
Compensation 15,000 1 5 - 6
Net income - - - 376 376
--------- ------------- ----------- ---------- --------
Balance,
December 31, 1996 8,475,336 $ 848 $ 563 $ 917 $ 2,328
========= ============= =========== ========== ========
</TABLE>
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
------ --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 376 $(1,655)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation, depletion and amortization 127 193
Gain on extraordinary item (448) -
(Gain) loss on disposal of fixed assets (3) 805
Other - 20
Accounts receivable (100) 528
Other current assets (20) -
Inventories 110 199
Restricted cash 44 (84)
Accounts payable and accrued liabilities 246 (155)
Royalties payable . . . . . . . . . . . . . . . . . 18 (8)
Other long-term liabilities - (26)
Liabilities subject to compromise (555) -
Prepetition liabilities 521 -
------ --------
Net Cash Provided (Used) by Operating Activities 316 (183)
------ --------
Cash Flows from Investing Activities:
Purchases of property and equipment (102) (106)
Proceeds from sale of assets 66 1,429
Notes receivable 49 (436)
------ --------
Net Cash Provided by Investing Activities 13 887
------ --------
Cash Flows from Financing Activities:
Payments of bank debt (18) (330)
(Payments) of line of credit - (285)
Payments of prepetition liability (22) -
------ --------
Net Cash Used by Financing Activities (40) (615)
------ --------
Net increase in cash and cash equivalents 289 89
Cash and Cash Equivalents at beginning of year 325 236
------ --------
Cash and cash equivalents at end of year $ 614 $ 325
====== ========
SUPPLEMENTAL DISCLOSURES
Cash Paid During the Period for Interest $ 3 $ 53
====== ========
</TABLE>
<PAGE>
PETROMINERALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
Business
- --------
Petrominerals Corporation's (the Company's) principal business activities
consist of the production and sale of crude oil within the United States and
oilfield services, which include hydro-static well testing.
Basis of Presentation and Going Concern
- --------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Hydro-Test International, Inc. (Hydro-Test). All
material intercompany accounts and transactions have been eliminated.
GOING CONCERN
The consolidated financial statements are presented on a going concern basis.
This basis of accounting contemplates the realization of assets and
satisfaction of liabilities in the normal course of business operations. The
Company incurred net losses before income taxes and extraordinary item of
$72,000 and $1,655,000 for the years ended December 31, 1996 and 1995,
respectively.
Industry conditions caused a significant downturn in the Hydro-Test business
in the first quarter of 1995. Because of this downturn, combined with the
Company's inability to refinance its debt and obtain a working capital line,
the Company adopted a formal plan to liquidate its subsidiary, Hydro-Test
International, Inc., in March 1995. In September 1995, the Company abandoned
this plan and sought protection from creditors.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Basis of Presentation and Going Concern (Continued)
- --------------------------------------------
GOING CONCERN (Continued)
On September 1, 1995, Hydro-Test International, Inc. commenced its voluntary
reorganization case with the filing of a petition under Chapter 11 of the
United States Bankruptcy Code. This case was filed as a Chapter 11 case to
protect the Hydro-Test assets from seizure and pay creditor claims a greater
amount than could be obtained in an immediate Chapter 7 liquidation case. On
May 16, 1996, the plan of reorganization was accepted by the creditors and
confirmed by the United States Bankruptcy Courts for the Southern District of
Texas, Houston Division. On August 14, 1996, a final hearing took place to
approve the payment of professional fees and order final payment. As such,
Hydro-Test is no longer in bankruptcy, however, it is uncertain if Hydro-Test
will be able to satisfy the remaining debt with future cash flows.
Management believes that the Company should be able to continue as a going
concern due to several factors. The oil and gas operations should continue to
provide adequate cash flow to fund the continuing operations of the oil and
gas production segment of the Company. Increased oil prices, coupled with
significantly improved efficiencies in production costs, should favorably
impact future results. In addition, following approval of the Chapter 11 plan,
management believes the downsized operations should favorably impact future
results.
Use 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.
Material estimates that are particularly susceptible to significant change
relate to the determination of the depreciation, depletion and amortization
(DD&A) account balance and the amount of Hydro-Test's debt that is expected to
be forgiven as a result of the Chapter 11 proceedings. DD&A is based on units
of production, and the amount of debt expected to be forgiven is based on the
Chapter 11 bankruptcy plan.
Cash and Cash Equivalents
- ----------------------------
The Company considers all highly liquid investments purchased with an original
maturity of less than three months to be cash equivalents.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Restricted Cash
- ----------------
The Company has Certificates of Deposit (CD's) with a value of approximately
$40,000 and $84,000 at December 31, 1996 and 1995, respectively, that have
been recorded as restricted cash. Of the two CD's remaining at December 31,
1996, one has been pledged to the Bureau of Land Management to cover
environmental costs and the other is pledged as a deposit to a utility
company. The Company also had a CD securing an unused letter of credit at
December 31, 1995.
Accounts Receivable
- --------------------
Accounts receivable has been recorded net of a valuation allowance of
approximately $29,000 and $66,000 at December 31, 1996 and 1995, respectively.
Inventories
- -----------
The Company determines the cost of inventories on the first-in, first-out
(FIFO) method. Inventories of crude oil held under sales contracts are carried
at market value.
Property and Equipment
- ------------------------
The carrying value of oilfield service operations property and equipment is
stated at estimated realizable value.
Oil and gas properties are accounted for using the successful efforts method
of accounting. Costs of drilling and equipping successful exploratory and
developmental wells are capitalized. All other exploratory expenses are
charged to operations as incurred. The carrying value of oil and gas
properties is evaluated in relation to the estimated present value of the
future net revenues. Depletion, depreciation and amortization are calculated
using the unit-of-production method based on recoverable reserves.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Property and Equipment (Continued)
- ------------------------
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and/or Long-Lived Assets to be Disposed
of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. It establishes guidelines for determining
recoverability based on future net cash flows from the use of the asset and
for the measurement of the impairment loss. Impairment loss under SFAS No. 121
is calculated as the difference between the carrying amount of the asset and
its fair value. Any impairment loss is recorded in the current period in which
the recognition criteria are first applied and met. Under the successful
efforts method of accounting for oil and gas operations, the Company
periodically assesses its proved properties for impairments by comparing the
aggregate net book carrying amount of all proved properties with their
aggregate future net cash flows. The new statement requires that the
impairment review be performed on the lowest level of asset groupings for
which there are identifiable cash flows. In the case of the Company, this
results in an impairment review of the Santa Clarita, California, properties.
The Company adopted SFAS No. 121 in 1996. The impairment loss, if any, on the
oil and gas properties will be calculated as the difference between the asset
book carrying amounts and future undiscounted net cash flow projections,
giving consideration to recent prices, pricing trends and estimated reserve
quantities. These projections represent the Company's best estimate of fair
value based on the information available. The outcome of implementation did
not result in any additional impairments.
In addition to recognition of impairment under SFAS No. 121, management also
periodically assesses the value of significant proved and unproved properties
and charges estimated impairments of value to expense. A valuation allowance
expense of $1,390,000 was recorded in 1993, bringing the total valuation
provision for oil and gas properties to $10,963,000. The valuation allowance
has not increased since. The carrying value of fixed assets of the Company's
remaining subsidiary, Hydro-Test International, Inc., approximates net
realizable value following the disposal and abandonment losses that were
recorded in 1995.
Upon the sale of oil and gas reserves in place, costs less accumulated
amortization of such property are removed from the accounts and resulting gain
or loss on sale is reflected in operations. Upon abandonment of properties,
the reserves are deemed fully depleted and any unamortized costs are recorded
in the statement of operations under loss on leases.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Income Taxes
- -------------
The provision for income taxes is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of assets and
liabilities and the reported net amounts.
Per Share Computations
- ------------------------
Per share computations are based upon the weighted average number of common
shares outstanding during each year. Common stock equivalents are not included
in the computation since their effect would be anti-dilutive.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to
classifications followed for 1996. These reclassifications had no effect upon
reported net income.
NOTE 2 - PROPERTY AND EQUIPMENT
------------------------
Property and equipment, all of which is located in the United States, is
stated at cost or net realizable value and consists of the following at
December 31,:
<TABLE>
<CAPTION>
1996 1995
--------- ---------------
(in thousands)
<S> <C> <C>
At Cost:
Oil and gas properties, all proved, net of
valuation allowance of $10,963 $ 21,625 $ 21,404
Accumulated depletion and amortization (20,873) (20,767)
--------- ---------------
Net oil and gas properties 752 637
--------- ---------------
Other Property and Equipment:
Land and building 1,265 1,265
Oilfield service equipment - 22
Furniture, fixtures and equipment 337 341
Construction in process - 85
Accumulated depreciation related to
other property and equipment (443) (441)
--------- ---------------
Net other property and equipment 1,159 1,272
--------- ---------------
Net property and equipment, at cost 1,911 1,909
--------- ---------------
At Net Realizable Value:
Oilfield service equipment 151 250
--------- ---------------
Property and equipment, net $ 2,062 $ 2,159
========= ===============
</TABLE>
<PAGE>
NOTE 2 - PROPERTY AND EQUIPMENT (Continued)
------------------------
Depreciation, depletion and amortization for the years ended December 31, 1996
and 1995 was $26,736 and $192,897, respectively.
NOTE 3 - PREPETITION LIABILITIES/EXTRAORDINARY GAIN
--------------------------------------------
Liabilities subject to compromise were stated in the December 31, 1995
financial statements at the amount of the original claim and not at the
amounts for which the claims were settled. Certain claims were settled outside
of bankruptcy, however, most of the claims were settled at 50% of the original
prepetition liability. The Company has not accrued interest on these claims
since seeking protection on September 1, 1995.
The reorganization resulted in an extraordinary gain of $448,000 from the
retirement of prepetition liabilities. This event will not result in taxable
income to the Company because this gain did not exceed prepetition net
operating losses. As such, no provision for taxes has been recorded as a
result of this transaction.
The remaining prepetition liability of $521,000 has been recorded as long-term
as management does not intend to repay these liabilities within the next
operating cycle. Under the approved plan, the Company will repay these
liabilities with funds generated from the sale of assets or continuing
operations, within 60 months of the plan's approval on May 16, 1996.
NOTE 4 - LONG-TERM DEBT
---------------
Long-term debt at December 31, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C> <C>
Unsecured notes payable due in
monthly installments of $7,000,
including interest of 8.5% - 9.5% $ - $ 206
Capitalized lease secured by equipment,
monthly payments of $7,300 - 81
Term note payable to City of Deming,
New Mexico, due in monthly installments
of $2,000, including discounted interest
of 8.95% - 192
</TABLE>
<PAGE>
NOTE 4 - LONG-TERM DEBT (Continued)
---------------
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Other - 34
Bank term notes payable (secured by
various vehicles), due in monthly
installments of $604, plus interest
of 8.9% to 9.9% 15 -
----- -----
15 513
Less current portion 8 170
----- -----
$ 7 $ 343
===== =====
</TABLE>
Aggregate scheduled maturities of long-term debt at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Ended
- ----------
<S> <C>
1997 $ 8
1998 7
---
$15
===
</TABLE>
NOTE 5 - DISPOSITION OF ASSETS
-----------------------
In June 1995, the Company sold its interest in certain oilfields located in
the Livonia field of Pointe Coupee Parish, Louisiana, for total consideration
of $155,000. Following this disposal, the Company no longer operates any
oilfields outside the State of California. The proceeds of the sale were used
to fund continuing operations.
In August 1995, the Company sold its interest in oilfields located near Santa
Maria, California, for total consideration of $150,000. Following this
disposal, the Company no longer operates oilfields outside of the Santa
Clarita Valley in Los Angeles County, California. The proceeds of the sale
were used to fund continuing operations.
<PAGE>
NOTE 5 - DISPOSITION OF ASSETS (Continued)
-----------------------
Liquidation and Reorganization Sales
- ---------------------------------------
As a result of the Company's liquidation plan and its reorganization plan (see
Note 1), the Company sold certain assets of its subsidiary, Hydro-Test
International, Inc. (HTI). These sales are discussed below.
On May 16, 1995, HTI entered into an agreement with two directors of the
Company to purchase the assets of HTI's Long Beach location for $260,000. (See
Note 8 - Related Parties and Related Party Transactions).
On July 6, 1995, HTI sold certain vehicles, fixtures, and equipment to an
unrelated party for total consideration of $155,600.
During 1995, HTI also sold other inventory and equipment to various purchasers
for total consideration of approximately $240,000.
Sales and abandonments at December 31, 1995 resulting from HTI's
reorganization resulted in a net loss of approximately $938,000. This amount
is reflected in the accompanying consolidated financial statements as a loss
on disposal of assets.
On January 29, 1996, the Company sold all of the remaining assets of
Hydro-Test's manufacturing operations to an unrelated entity in Canada for
$135,000 in cash. This sale was approved by the Bankruptcy Court. Following
this sale, the Company continues to perform other oilfield services but no
longer manufactures products.
Hydro-Test sold five surplus trucks in two sales to an unrelated party on
August 23, and September 17, 1996, for total consideration of $10,700.
Additionally, two stationary testing units were sold to an unrelated party for
$50,000 on October 15, 1996.
NOTE 6 - INCOME TAXES
-------------
A reconciliation of the provision (benefit) for income taxes to the statutory
Federal income tax rate before extraordinary items is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1995
------ --------------------------
(in thousands)
<S> <C> <C>
Statutory Federal income tax (benefit) $ (15) $ (579)
Increase (decrease) in provision
resulting from losses without tax benefit 15 579
------ --------------------------
$ - $ -
====== ==========================
</TABLE>
<PAGE>
NOTE 6 - INCOME TAXES (Continued)
-------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The following table
summarizes the significant components of the Company's deferred tax assets and
liabilities as of December 31,:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Reserve for impaired assets $ - $ 473
Net operating loss carryforwards 1,917 2,318
Depletion carryovers - 478
State income taxes and other - 16
-------- --------
Total Deferred Tax Assets 1,917 3,285
Valuation reserve for deferred tax assets (1,906) (3,238)
-------- --------
Net Deferred Tax Assets $ 11 $ 47
======== ========
Deferred Tax Liabilities:
Tax over book depreciation,
amortization and depletion $ 11 $ 39
Accruals without tax benefit - 8
-------- --------
Total Deferred Tax Liabilities 11 47
-------- --------
Net Deferred Tax Liabilities $ - $ -
======== ========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $5,637 for Federal income tax purposes that will expire through
the year 2002. For financial reporting purposes, a valuation allowance of
$1,906 has been recorded to offset the deferred tax asset related primarily to
these carryforwards.
NOTE 7 - COMMON STOCK
-------------
On February 8, 1993, the Board of Directors adopted the 1993 Incentive Stock
Option Plan and the 1993 Non-Statutory Stock Option Plan (the Plans). The
Plans provide for the granting of options to purchase up to a maximum of
1,200,000 shares of the Company's common stock to officers, key employees and
directors who are not otherwise employed by the Company. Under the Plans,
options granted to non-employee directors are limited to a maximum of 60,000
shares of the Company's common stock. The Plans expire on February 8, 2003.
No shares were awarded under this plan in 1996.
<PAGE>
NOTE 7 - COMMON STOCK (Continued)
-------------
On February 8, 1993, the Board of Directors adopted the 1993 Stock Bonus Plan
(the Bonus Plan). The Bonus Plan provides for the award of up to 50,000 shares
of the Company's common stock to officers and key employees of the Company.
The Bonus Plan was approved by the shareholders at the Company's Annual
Meeting on May 23, 1993. The Bonus Plan expires on February 8, 1998. To date,
no shares have been awarded under the Bonus Plan.
On April 16, 1992, the Board of Directors adopted the Directors Stock
Compensation Plan (the Stock Compensation Plan). The Stock Compensation Plan
was adopted as part of the Company's cost containment program. The Stock
Compensation Plan provides for the granting of up to 150,000 shares of the
Company's common stock to non-employee directors. Under the Stock Compensation
Plan for the period May 1992 through September 1993, 99,600 shares were
granted to directors. On February 10, 1995, the balance of 50,400 shares of
the Company's common stock were granted to six non-employee directors under
the Stock Compensation Plan for the period October 1993 through June 1994.
The Stock Compensation Plan terminated on February 10, 1995, at which time all
of the shares issued under the Directors Stock Compensation Plan were
distributed to the six non-employee directors.
On October 24, 1995, the Board approved the issuance of 15,000 shares to a
former officer of the Company who was laid off due to downsizing in 1995 and
received the shares on April 19, 1996, as a portion of a severance package.
Management has valued this transaction as $5,625 in officer's compensation.
NOTE 8 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS
---------------------------------------------------
During the periods covered by the financial statements, the Company was
involved in various transactions with related parties. These related parties
consist primarily of corporations and joint ventures in which officers,
directors, and shareholders of the Company, directly and/or indirectly, own
varying ownership interest and/or are officers and directors thereof. Related
party transactions involving the purchase of property and equipment and
services were approximately $280,000 and $260,000 for 1996 and 1995,
respectively.
<PAGE>
NOTE 8 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS
---------------------------------------------------
(Continued)
On May 16, 1995, HTI entered into an agreement with two directors of the
Company to purchase the assets of HTI's Long Beach location for $260,000. The
first director is the Vice-President of HTI and the second director is
Assistant Secretary/Treasurer of Petrominerals. The purchaser paid $115,000
upon acceptance of the offer and $145,000 when title to the assets was
transferred.
On December 3, 1996, the Company became the general partner of Petrominerals
96-1, a newly formed limited partnership. The Company has a 1% interest as
general partner and 6 other entities, including 2 directors and a company
controlled by a director, own the remaining 99% interest. The partnership was
formed to enter into a joint venture agreement with the Company to drill a
well on the Company's Mabel Strawn lease. The Company received $280,000 from
the partnership under a turnkey drilling contract. Proceeds from the working
interest will be paid 90% to Petrominerals 96-1 and 10% to the Company until
payout, and thereafter 30% to Petrominerals 96-1 and 70% to the Company. The
Company estimates that payout will occur 24 months after completion of the
well. The Company completed the well on January 20, 1997, and began production
shortly thereafter (see subsequent events in Note 13).
NOTE 9 - UNAUDITED QUARTERLY FINANCIAL DATA
-------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- --------- -------- ------- -------
1996: (in thousands, except per share amounts)
- ---------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 272 $ 322 $ 316 $ 359 $1,269
Costs and expenses 364 362 311 304 1,341
Income (loss) before
extraordinary item (92) (40) 5 55 (72)
Extraordinary gain - (1)448 - - 448
Net income (loss) (92) 408 5 55 376
Income (loss) before
extraordinary item
per share (.01) - - - (.01)
Net income (loss)
per share (.01) .05 - - .04
(1) The estimated extraordinary gain reported in the second quarter for 10-QSB
was revised as a result of audit adjustments.
</TABLE>
<PAGE>
NOTE 9 - UNAUDITED QUARTERLY FINANCIAL DATA (Continued)
-------------------------------------
The Company recognized an extraordinary gain in the second quarter of 1996 for
debt forgiven in bankruptcy.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- --------- --------- ---------- --------
1995: (in thousands, except per share amounts)
- -------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 392 $ 542 $ 413 $ 584 $ 1,931
Costs and expenses 698 600 1,809 479 3,586
Net income (loss) (306) (58) (1,396) 105 (1,655)
Net income (loss)
per share (.04) (.01) (.16) .01 (.20)
</TABLE>
NOTE 10 - SEGMENT INFORMATION
--------------------
The Company's principal businesses are (1) the production and sale of crude
oil and natural gas, and (2) oilfield services. The following tables present
certain information regarding these industry segments for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Oil and Gas
Oilfield Production
Services and Sales
------------- ------------
1996:
- ---------------------------
<S> <C> <C>
Sales to outside customers $ 14 $ 1,273
Operating profit (loss) (210) 125
Gain on debt forgiven 448 -
Identifiable assets 231 3,226
Depreciation, depletion
and amortization 10 117
Capital expenditures - 102
1995:
- ---------------------------
Sales to outside customers $ 701 $ 1,112
Operating profit (loss) (1,861) 206
Identifiable assets 467 2,876
Depreciation, depletion
and amortization 66 127
Capital expenditures - 106
(a) Corporate revenues are primarily composed of interest income and royalty
interests.
Corporate(a) Total
--------------- --------
(in thousands)
1996:
- ---------------------------
<S> <C> <C>
Sales to outside customers $ 67 $ 1,354
Operating profit (loss) - (85)
Gain on debt forgiven - 448
Identifiable assets - 3,457
Depreciation, depletion
and amortization - 127
Capital expenditures - 102
1995:
- ---------------------------
Sales to outside customers $ 118 $ 1,931
Operating profit (loss) - (1,655)
Identifiable assets - 3,343
Depreciation, depletion
and amortization - 193
Capital expenditures - 106
(a)
</TABLE>
<PAGE>
NOTE 10 - SEGMENT INFORMATION (Continued)
--------------------
Sales to individual customers, including royalty interests of others,
exceeding 10 percent of revenues reported in the consolidated statements of
operations, are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995
----- --------------------
<S> <C> <C> <C>
Oil and gas segment (gross sales):
ENRON Oil & Gas
Trading, Inc. $ - $ 1,190
Texaco Trading &
Transportation, Inc. 1,161 354
</TABLE>
NOTE 11 - ENVIRONMENTAL MATTERS
----------------------
On December 6, 1989, the Company was notified by the United States
Environmental Protection Agency (EPA) that, under provisions of the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), the Company was considered a potentially responsible party (PRP) in
the clean-up of the Operating Industries, Inc. (OII) waste disposal site,
located in Monterey Park, California. The EPA has also contacted approximately
270 other PRPs who disposed of liquid waste at this site. The Company is in
the fourth tier of PRPs notified by the EPA, regarding this site.
Management continues to gather information related to this matter. Based upon
information available to it at this time, management believes that the Company
(through its predecessors, Century Oil Corporation) disposed of drilling mud
and water at the OII waste disposal site at various times from 1975 to 1977.
The Company contends that any drilling mud and waste water disposed of by the
Company do not contribute to the problem at the OII site. Although the
ultimate impact of the resolution of this contingency is unknown, management
believes that this matter will not have a material adverse effect on the
financial position of the Company.
NOTE 12 - CONTINGENCIES
-------------
The Company has certain contingent liabilities with respect to litigation,
claims, taxes, government regulations and contractual agreements arising from
the ordinary course of business. While there are always risks inherent in
resolution of any contingency, it is the opinion of management that such
contingent liabilities will not result in any loss which would have an adverse
material effect on the Company's financial position.
<PAGE>
NOTE 12 - CONTINGENCIES (Continued)
-------------
The Company is subject to other possible loss contingencies pursuant to
federal, state and local environmental laws and regulations. These include
existing and potential obligations to investigate the effects of the release
of certain hydro-carbons or other substances at various sites; to remediate or
restore these sites; and to compensate others for damages and to make other
payments as required by law or regulation. These obligations relate to sites
owned by the Company or others, and are associated with past and present oil
and gas operations. The amount of such obligations is indeterminate and will
depend on such factors as the unknown nature and extent of contamination, the
unknown timing, extent and method of remedial actions which may be required,
the determination of the Company's liability in proportion to other
responsible parties, and the state of the law.
NOTE 13 - SUPPLEMENTAL OIL AND GAS PROPERTIES AND RELATED
-----------------------------------------------------
RESERVES (UNAUDITED)
---------------------
Results of Operations
- -----------------------
Selected financial information for oil and gas operations accounted for under
the successful efforts methods is summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1995
------ --------------------------
(in thousands)
<S> <C> <C>
Produced oil and gas sales $1,185 $ 1,112
Less:
Operating expenses 561 588
Depreciation, depletion and amortization 116 127
------ --------------------------
Results of operations from oil and gas
producing activities, excluding corporate
overhead and interest costs $ 508 $ 397
====== ==========================
</TABLE>
No development or property acquisition costs were incurred in 1996 or 1995.
<PAGE>
NOTE 13 - SUPPLEMENTAL OIL AND GAS PROPERTIES AND RELATED
-----------------------------------------------------
RESERVES (UNAUDITED) (Continued)
---------------------
Estimated Quantities of Oil and Gas Reserves
- --------------------------------------------------
The following tables present the Company's estimates of its proved oil (in
thousands of barrels) and gas (in millions of cubic feet) reserves, which are
all located in the United States. All reserve estimates have been prepared by
independent petroleum engineers. The Company emphasizes that reserve estimates
are inherently imprecise and are expected to change as future information
becomes available.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
Oil Gas Oil Gas
------ ---- ------ ---------
<S> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of period 2,138 - 2,247 272
Revision of previous estimates (33) - 119 -
Sale of minerals in place - - (102) (216)
Production (106) - (126) (56)
------ ---- ------ -----------
End of period 1,999 - 2,138 -
Proved developed reserves:
Beginning of period 897 - 971 126
End of period 952 - 897 -
</TABLE>
Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
- ------------------------------------------------------------------------------
A standardized measure of discounted future net cash flows is presented below
for each of the years ended December 31, 1996 and 1995. Future cash inflows
are computed by applying year-end prices of oil and gas relating to the
Company's proved reserves to year-end quantities of those reserves.
Future development and production costs are computed by estimating the
expenditures to be incurred for developing and producing proved oil and gas
reserves, based on year-end costs and assuming continuation of existing
economic conditions.
Future income tax expense is computed by applying year-end statutory rates
(adjusted for permanent differences) to the future pretax net cash flows
relating to the Company's proved oil and gas reserves, less the tax basis at
each year-end of the properties involved.
A 10% annual discount rate is used to reflect the timing of future net cash
flows relating to proved oil and gas reserves.
<PAGE>
NOTE 13 - SUPPLEMENTAL OIL AND GAS PROPERTIES AND RELATED
-----------------------------------------------------
RESERVES (UNAUDITED) (Continued)
---------------------
Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
- ------------------------------------------------------------------------------
(Continued)
- -----
The projections should not be viewed as realistic estimates of future cash
flows, nor should the "standardized measure" be interpreted as representing
current value to the Company. Material revisions to estimates of proved
reserves may occur in the future; development and production of the reserves
may not occur in the periods assumed; and actual prices realized and actual
costs incurred may vary significantly from those used.
The following reserve estimates and resulting future net cash flows were
developed in accordance with Securities and Exchange Commission rules, using
selling prices in effect at the end of the years indicated. Both the quantity
estimates and "cash flow" of reserves are sensitive to sales prices in effect
at the year end quantification date. During periods of rapidly changing
prices, reserve information must be examined with this understanding.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
--------- -------------------------
(in thousands)
<S> <C> <C>
Future cash inflows $ 35,172 $ 27,440
Future production and development costs (17,738) (15,272)
Future income tax expense (5,928) (4,137)
--------- -------------------------
Future net cash flows 11,506 8,031
10% annual discount for estimated
timing of cash flows (5,862) (4,508)
--------- -------------------------
Standardized measure of discounted
future net cash flows $ 5,644 $ 3,523
========= =========================
</TABLE>
<PAGE>
NOTE 13 - SUPPLEMENTAL OIL AND GAS PROPERTIES AND RELATED
-----------------------------------------------------
RESERVES (UNAUDITED) (Continued)
---------------------
Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
- ------------------------------------------------------------------------------
(Continued)
- -----
Following are the principal sources of change in the standardized measure of
discounted future cash flows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
------- -------------------------
<S> <C> <C>
(in thousands)
Sales and transfers of oil and gas
produced, net of production cost $ (584) $ (517)
Net changes in prices and production
costs, based on beginning of year barrels 1,331 2,573
Net change in previous estimate of
future development costs (316) (1,064)
Revisions to previous estimates (188) 233
Accretion of discount 564 352
Net change in income taxes 1,791 (477)
Other (477) (477)
------- -------------------------
Net increase $2,121 $ 623
======= =========================
</TABLE>
NOTE 14 - SUBSEQUENT EVENTS
------------------
Related Party Transaction
- ---------------------------
On December 20, 1996, the Company completed drilling a producing well on its
Mabel Strawn lease in Hasley Canyon, Los Angeles County, California, on behalf
of Petrominerals 96-1, which was formed on December 3, 1996, and holds a 1%
partnership interest. The well began production on January 20, 1997. The
Company entered into a joint venture agreement with Petrominerals 96-1 to
drill the well on a designated drill site in a known producing area at the
Company's Mabel Strawn oil lease. Under the terms of the joint venture
agreement, the Company assigned the drillsite to the joint venture, and will
share the revenues produced and the expenses incurred. Payout occurs when
Petrominerals 96-1 has recouped the monies it contributed to the joint
venture. Proceeds from the working interest will be paid 90% to Petrominerals
96-1 and 10% to the Company until payout, and thereafter 30% to Petrominerals
96-1 and 70% to the Company. The Company estimates that payout will occur 24
months after completion of the well. Under the joint venture, the Company
furnished the drill site and all casing required for the well, and leased to
the joint venture the rods, tubing and downhole and surface pumps and all
other tangible equipment necessary to produce the well. Petrominerals 96-1
contributed the sum of $280,000 for the intangible costs of drilling the well.
<PAGE>
NOTE 14 - SUBSEQUENT EVENTS (Continued)
------------------
Three directors of the Company are limited partners in Petrominerals 96-1. The
respective percentage interests of the partners in Petrominerals 96-1 are as
follows:
<TABLE>
<CAPTION>
% Interest Capital Contribution
----------- ---------------------
General Partner:
<S> <C> <C>
Petrominerals Corporation 1.00% $ 2,800
Limited Partners:
Paul L. Howard (director) 23.21% $ 65,000
Morris L. Hodges (director) 17.86% $ 50,000
David G. Davidson (director) 17.86% $ 50,000
Unrelated parties 40.07% $ 112,200
</TABLE>
Under the terms of the agreement, the Company will receive a $350 monthly
management fee and a monthly rental fee for the tangible equipment. The rental
fee is $2,400 per month until payout and $400 per month thereafter. These
payments began in 1997.
Sale of Property and Equipment
- ----------------------------------
On February 12, 1997, the Company sold an additional testing truck for $16,000
cash, plus an additional $2,000 which is to be paid over a 12 month period in
monthly installments.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------------
ACCOUNTING ANDFINANCIAL DISCLOSURE
------------------------------------
None.
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION
-----------------------------------------------------------
16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------------
The Executive Officers of Petrominerals, together with the years in which such
Officers were named to their present offices are as follows:
<TABLE>
<CAPTION>
<S><C>
Year Named to
Name Position with Company Present Position
- -------------------------------- -------------------------- ----------------
Paul L. Howard(1) President, Chief Executive
Officer, Chief Financial
Officer and Director 1995
Phillip Mungiovino(2) Secretary 1995
Morris V. Hodges(3) Assistant Secretary and
Director 1995
Each of the Executive Officers serves at the pleasure of the Board of Directors.
<FN>
(1) Mr. Howard was reappointed President and Chief Executive
Officer on March 24, 1995.
(2) Mr. Mungiovino was appointed Secretary on March 24, 1995. Mr. Mungiovino
has held the position of accountant for the
Company since 1975.
(3) Mr. Hodges was appointed Assistant Secretary on March 24, 1995.
</TABLE>
Biographical Information
- -------------------------
The following table sets forth the name, principal occupation, age and the
year in which the individual first became a director, and business experience
during the last five years:
PAUL L. HOWARD - 71 Director 1975
- ----------------
Mr. Howard was reappointed President and Chief Executive Officer on March 24,
1995. He also served as President of the Company from November 1975 through
September 1987, and at various times during this period, served as Chairman
and Chief Executive Officer. For more than the past 10 years, Mr. Howard held
a controlling interest in and served as director and officer of Howard Oil
Company and California Petroleum Products, Inc. See "Certain Relationships
and Related Transactions."
<PAGE>
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION
-----------------------------------------------------------
16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (Continued)
---------------------------------------------------
DAVID G. DAVIDSON - 72 Director 1979
- -------------------
Mr. Davidson has been principally employed as President and Owner of OP&E
Company since 1984. Mr. Davidson serves as a director of Mieco, Inc., a
public company engaged in domestic and foreign petroleum trading.
EVERETT L. HODGES - 62 Director 1979
- -------------------
Mr. Everett L. Hodges served as President of the Company from September 1987
through February 1992. For more than the past ten years, Mr. Hodges has held
a controlling interest in and has served as a director and officer of Energy
Production & Sales Co., Inc.; California Oil Independents, Inc.; Costal
Petroleum Refiners, Inc.; California Tar Sands Development Corporation; and
has served as a director of St. James Oil Corporation since 1988. Mr. Hodges
has also served as the President of the Violence Research Foundation, a
non-profit foundation, since its inception in 1991. Certain of the foregoing
companies have been affiliated with the Company in various transactions. See
"Certain Relationships and Related Transactions." Everett L. Hodges and
Morris V. Hodges, as a group, may be deemed to be controlling persons.
MORRIS V. HODGES - 60 Director 1979
- ------------------
Mr. Morris V. Hodges was appointed Assistant Secretary on March 24, 1995. Mr.
Morris Hodges has held a controlling interest in and has served as a director
and officer of the following companies for more than the past ten years:
Hillcrest Beverly Oil Corporation; Century Resources Development; Kaymor
Petroleum Products, Inc.; Sunset Pipeline and Terminalling, Inc.; Costal
Petroleum Refiners, Inc.; and CPR Transportation. Mr. Hodges has also served
as a director of St. James Oil Corporation since 1988. Certain of the
foregoing companies have been affiliated with the Company in various
transactions. See "Certain Relationships and related Transactions." Morris V.
Hodges and Everett L. Hodges, as a group, may be deemed to be controlling
persons.
<PAGE>
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION
-----------------------------------------------------------
16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (Continued)
---------------------------------------------------
Standing Committees and Meetings of the Board of Directors
- ------------------------------------------------------------------
STANDING COMMITTEES
The Company has certain standing committees, each of which is described below:
Ad-Hoc Committee - This committee consists of Messrs. Morris Hodges, Paul
- -----------------
Howard and David Davidson. This committee evaluates proposed acquisitions,
mergers or other pertinent negotiations which may come before the Board. This
committee held no meetings during the last fiscal year.
Audit Committee - This committee consists of Messrs. Paul Howard and Morris
- ----------------
Hodges. Mr. Howard serves as Chairman of this committee. The Audit Committee
is responsible for reviewing the scope and procedures of internal auditing
work, the results of independent audits, the accounting policies of
management, and recommends to the Board the appointment of the Company's
outside auditors. This committee did not hold any meetings during the last
fiscal year.
Compensation Committee - This committee consists of Mr. David Davidson. This
- -----------------------
committee reviews and makes recommendations to the Board of Directors
regarding compensation for the Company's officers and key employees. In
addition to compensation matters, the committee determines, develops, and
makes recommendations to the Board regarding employee benefits packages, and
special stock option and stock bonus plans. This committee held no meeting
during the last fiscal year.
ATTENDANCE AT BOARD MEETINGS
During the last fiscal year, the Board of Directors of the Company held three
regular meetings and one special meeting. Attendance at such meetings of the
Board was 100%.
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
-----------------------
The following Summary Compensation Table sets forth all cash compensation
paid, distributed or accrued for services, including salary and bonus amounts
rendered in all capacities for the Company during the fiscal year ended
December 31, 1996, whose annual cash compensation exceeded $100,000 or served
as Chief Executive Officer. All other tables required to be reported have been
omitted as there has been no compensation awarded to, earned by or paid to any
of the Company's executives in any fiscal year covered by the table.
SUMMARY COMPENSATION TABLE
Name and Principal Annual Compensation
-------------------
Position Year Salary
- ----------------- ---- ------
Paul L. Howard,
President, Chief
Executive Officer and
Chief Financial Officer 1996 $ 92,000
Mr Howard was appointed Chairman, President, Chief Executive Officer, and
Chief Financial Officer of Petrominerals Corporation on March 24, 1995. His
compensation for the year ended December 31, 1995, was in the form of a
director's fee of $5,000 per month. At the March 1996 board meeting, the
directors increased Mr. Howard's salary to $7,500 per month, effective January
1, 1996. Mr. Howard now receives an annual salary of $90,000 per year.
OTHER COMPENSATION OF EXECUTIVE OFFICERS
The Company provided travel and entertainment expenses to its executive
officers and key employees. The aggregate amount of such compensation, as to
any executive officer or key employee, did not exceed the lesser of $25,000 or
10% of the cash compensation paid to such executive officer or key employee,
nor did the aggregate amount of such other compensation exceed 10% of the cash
compensation paid to all executive officers or key employees as a group.
TERMINATION AND CHANGE IN CONTROL ARRANGEMENTS
In July 1993, the Board of Directors adopted a severance plan for executive
officers providing that, in the event of termination of employment as a result
of a change in control of the corporation, that such executive officer would
receive severance in the amount of one year's base salary. The Plan does not
provide for any severance in the event of the resignation, retirement or
termination of any Executive Officer's employment with the Company for reasons
other than a change in control of the Company.
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION (Continued)
-----------------------
COMPENSATION OF DIRECTORS
Under the Directors Stock Compensation Plan in effect until May 31, 1994,
described in Item 12, each of the non-employee directors of the Company were
compensated in the amount of $700 per month, payable in lieu of cash, the
award of equivalent shares of common stock of the Company. In February 1994,
99,600 shares of common stock were distributed to each of the non-employee
directors for services rendered for the period May 1, 1992 through September
30, 1994. In February 1995, the balance of 50,400 shares were distributed to
each of the six non-employee directors for services rendered for the period
October 1993 through May 1994.
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
------------------------------------------------
MANAGEMENT
----------
The following table lists the beneficial ownership, as of February 27, 1997,
of the Company's common stock with respect to all directors and officers as a
group, to the extent that it is known to the Company, either through
Securities Exchange Act filings, Company records or information supplied by
the persons named in the table.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Ownership Percent of Class
- --------------------- ------------------------ -----------------
<S> <C> <C> <C>
David G. Davidson 28,000 (2) .33%
Paul L. Howard 692,595 (3) 8.17%
Everett L. Hodges 747,478 (2)(4) 8.78%
Morris V. Hodges 817,291 (2)(5) 9.65%
--------- -----------------
2,282,364 (1) 26.93%
========= =================
<FN>
(1) All directors and officers, as a group, including persons named above.
(2) Messrs. David G. Davidson, Everett L. Hodges and Morris V. Hodges were
each granted 16,600 and 8,400 shares of the Company stock under the Directors
Stock Compensation Plan on February 14, 1994 and February 19, 1995,
respectively. See "Executive Compensation - Compensation of Directors."
(3) The 692,595 shares beneficially held by Paul L. Howard are held in the
Howard Family Trust. See "Executive Compensation - Compensation of
Directors."
</TABLE>
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
------------------------------------------------
MANAGEMENT (Continued)
----------
(4) The 744,478 shares beneficially held by Everett L. Hodges include
587,896 shares held of record jointly in the Everett L. Hodges and Mary M.
Hodges Trust. This amount also includes 43,400 shares held directly by
Everett L. Hodges, 83,182 shares held of record by Energy Production & Sales
Co., Inc. (EPS), and 30,000 shares held by California Oil Independents, Inc.
The 744,478 shares do not include 80,416 shares held in trust for the children
and grandchild of Everett L. and Mary M. Hodges, as to which Mr. and Mrs.
Everett L. Hodges disclaim any beneficial ownership. Everett L. Hodges and
Morris V. Hodges, as a group, may be deemed to be a controlling person of
Petrominerals by virtue of their share ownership. See "Executive Compensation
- - Compensation of Directors." Everett L. Hodges and Morris V. Hodges, as a
group, may be deemed to be a controlling person of Petrominerals by virtue of
their share ownership.
(5) The 817,291 shares beneficially held by Morris V. Hodges include
734,109 shares held of record jointly in the Morris V. Hodges and Kathryn M.
Hodges Trust. This amount also includes 83,182 shares held of record by
Sunset Pipeline and Terminalling, Inc. The 817,291 shares beneficially held
by Morris V. Hodges do not include 149,235 shares held by adult children of
Morris V. Hodges and Kathryn M. Hodges, as to which Mr. and Mrs. Morris V.
Hodges disclaim any beneficial ownership. See "Executive Compensation -
Compensation of Directors." Everett L. Hodges and Morris V. Hodges, as a
group, may be deemed to be a controlling person of Petrominerals by virtue of
their share ownership.
COMPENSATION OF DIRECTORS
During the year ended December 31, 1996, each of the three non-employee
directors who held office the entire year were paid $350 per month for a total
of $4,200 each. Mr. Howard, who became President and Chief Executive Officer
on March 24, 1995, received a $7,500 per month fee (as previously noted) for
his services. In addition, the non-employee directors are reimbursed for
reasonable expenses incurred in connection with any meetings.
Under the Directors Stock Compensation Plan in effect until May 31, 1994,
described below, each of the non-employee directors of the Company were
compensated in the amount of $700 per month, payable in lieu of cash, the
award of equivalent shares of common stock of the Company. In February 1994,
99,600 shares of common stock were distributed to each of the non-employee
directors for services rendered for the period May 1, 1992 through September
30, 1994. In February 1995, the balance of 50,400 shares were distributed to
each of the six non-employee directors for services rendered for the period
October 1993 through May 1994, at which time the Plan terminated, as all of
the shares had been distributed. This Plan provided that each non-employee
director was compensated by an award of shares of the Company's common stock
valued at $700 per month, the actual number of shares to be calculated at the
average market price of the Company's common stock for the month preceding the
award or the net book value of the Company, expressed on a per-share basis,
whichever is greater. Under this Plan, the directors' compensation in shares
was in lieu of cash payments.
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
------------------------------------------------
MANAGEMENT (Continued)
----------
COMPENSATION OF DIRECTORS (Continued)
The Company did not pay any additional fees to directors for serving as
members of the Audit, Ad-Hoc or Compensation Committees during the last fiscal
year.
1993 INCENTIVE STOCK OPTION PLAN AND 1993 NON-STATUTORY STOCK OPTION PLAN
The Company has in effect two stock option plans - the 1993 Incentive Stock
Option Plan (the Incentive Plan) and the 1993 Non-Statutory Stock Option Plan
(the Non-Statutory Plan) (the Incentive Plan and the Non-Statutory Plan are
sometimes collectively referred to herein as the Plans), which were adopted by
the Board of Directors and approved by the shareholders of the Company in
1993. The Plans in the aggregate provide for the granting of options to
purchase a maximum of 1,200,000 shares of the Company's common stock to
employees and directors of the Company and its affiliates (as defined herein);
however, options which may be granted to non-employee directors are limited to
a maximum of 60,000 shares. The Plans expire on February 8, 2003.
Any of the Company's current or future employees who render, in the opinion of
the Board of Directors, the type of services which tend to contribute
materially to the success of the Company or an affiliate of the Company are
eligible to participate in the Incentive Plan. Any of the Company's current or
future employees or directors (whether or not otherwise employed by the
Company) who render, in the opinion of the Board of Directors, the type of
services which tend to contribute materially to the success of the Company or
an affiliate of the Company are eligible to participate in the Non-Statutory
Plan.
The Plans are administered by the Board of Directors of the Company which has
the authority to determine the employees and directors to whom options are to
be granted, the number of shares subject to each option price of outstanding
options (but not below the fair market value of the shares subject thereto),
to enter into agreements relating to the value of the option at the date of
grant, and to make all other determinations necessary or advisable to the
administration of the Plan. With the consent of the optionee, the Board of
Directors will also have the power to substitute options with different terms
for previously granted options, or to amend the terms of any option.
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
------------------------------------------------
MANAGEMENT (Continued)
----------
1993 INCENTIVE STOCK OPTION PLAN AND 1993 NON-STATUTORY STOCK OPTION PLAN
(Continued)
The Board of Directors may delegate administration of the Plan to a committee
composed of not less than three members of the Board of Directors.
Administration of the Plan with respect to committee members, however, just
remain vested in the Board. With respect to options granted to a director, the
Board of Directors shall take action by a vote sufficient without counting the
vote of the interested director. Interested directors may be counted in
determining the presence of quorum at a meeting of the Board of Directors
which authorized the granting of options to such directors.
On October 7, 1993, Mr. Butler was granted an option under the Non-Statutory
Stock Option Plan to purchase up to 500,000 shares of the common stock of the
Company at a price of $.70 per share. Mr. Butler has not exercised his option.
1993 STOCK BONUS PLAN
In February 1993, the Board of Directors adopted the Company's 1993 Stock
Bonus Plan (Bonus Plan). The Bonus Plan provides the awarding of up to 50,000
shares of the Company's common stock to officers and key employees of the
Company. The Plan is administered by the Board of Directors which has the
authority to determine the officers and key employees to whom stock bonuses
are to be awarded, the time or times at which stock bonuses will be awarded,
and, subject to the limits discussed below, the number of shares to be granted
under each award. The Board of Directors has the power to delegate the
administration of the Bonus Plan to a committee of the Board appointed in
accordance with the Company's Bylaws. The aggregate fair market value
(determined as of the date of grant) of the shares of common stock awarded to
any officer or key employee under the Bonus Plan in any one calendar year
cannot exceed one-sixth of the officer's or key employee's salary (excluding
bonuses and awards under other incentive plans maintained by the Company) for
such calendar year. The Bonus Plan terminates on February 8, 1998. No stock
bonus awards were made to officers or key employees of the Company during
1995.
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
------------------------------------------------
MANAGEMENT (Continued)
----------
DIRECTORS STOCK COMPENSATION PLAN
On April 16, 1992, as part of its cost containment program, the Board of
Directors of the Company adopted the Directors Stock Compensation Plan (the
Stock Compensation Plan). The Stock Compensation Plan provides for the
granting of stock to non-employee directors of the Company in lieu of paying
director's fees in cash. The purpose of the Stock Compensation Plan is to
minimize cash outflow from the Company by compensating non-employee directors
for their services to the Company in stock rather than in cash. The maximum
number of shares provides for the Stock Compensation Plan is 150,000. Only
non-employee directors of the Company are eligible to participate in the Stock
Compensation Plan. In February 1994 and February 1993, a distribution of
16,600 shares and 8,400 shares was made to each of the non-employee directors
under this Plan, respectively. This Plan terminated on February 10, 1995, at
which time all of the shares issued under this Plan were distributed to
non-employee directors.
The Stock Compensation Plan is administered by the disinterested members of
the Board, or, in the event there are none such, the President and Chief
Executive Officer and the Secretary of the Company. The granting of stock
under the Stock Compensation Plan is according to a pre-set formula. Directors
fees payable to non-employee directors of the Company under this plan were set
by the Board at $700 per month. Under the Stock Compensation Plan, the
eligible directors received stock at a value of $700 per month, determined by
the average trading price as quoted on the nasdaq Small Cap System for the
calendar month immediately preceding the month in which the directors fees is
earned; provided, however, that the valuation of the stock shall not be less
than the net book value of the Company expressed on a per share basis.
Certificates evidencing the shares shall be distributed to eligible directors
quarterly. These shares shall be restricted shares, subject to a two year
holding period.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The Company did not grant any stock options under the 1993 Incentive Stock
Option Plan, the 1993 Non-Statutory Stock Option Plan or the 1993 Stock Bonus
Plan during the last fiscal year.
REPORTABLE TRANSACTIONS
To the knowledge of the Company, as of February 26, 1996, all reporting
persons have properly filed the appropriate forms on all reportable
transactions and all forms were timely filed in compliance with Section 16(a)
of the Exchange Act.
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During the last fiscal year, the Company has been involved in various related
party transactions with certain Directors of the Company, or entities
controlled or affiliated with such individuals. The following table sets forth
the relationship, through ownership of securities, between Petrominerals and
the following individuals and entities:
<TABLE>
<CAPTION>
<S><C>
Name Beneficial Owner Percentage Owned
- ------------------- ---------------------- -----------------------
Petrominerals 96-1, General Partner:
a Limited Partnership Petrominerals 1.00%
Limited Partners:
Paul L. Howard 23.21%
Morris V. Hodges 17.86%
David G. Davidson 17.86%
Unrelated parties 40.07%
-------
TOTAL 100.00%
=======
Petrominerals 81-1, General Partner:
a Limited Partnership Petrominerals 6.78%
(Partnership) Limited Partners:
EPS 33.90%
Morris V. Hodges 2.26%
Paul L. Howard 2.26%
Unrelated parties 54.80%
-------
TOTAL 100.00%
=======
Terra-Therme II Petrominerals 19.13%
(formerly the Paul L. Howard 9.56%
Newberry Partnership), Unrelated parties 71.31%
-------
a general partnership
(Terra-Therme II) TOTAL 100.00%
=======
</TABLE>
Petrominerals 96-1 Limited Partnership
- -----------------------------------------
The Petrominerals 96-1 Limited Partnership was formed in December 1996, for
the purpose of drilling a well on the Company's Mabel Strawn oil lease. The
Company entered into a joint venture agreement with the partnership and
assigned the drill site to the joint venture.
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
(Continued)
Petrominerals 96-1 Limited Partnership (Continued)
- -----------------------------------------
The partnership contributed $280,000 to cover the intangible costs of drilling
the well and the Company provided the drill site and well casing under a
turnkey drilling contract. The Company also provided all of the other tangible
equipment needed to produce the well under a lease agreement, proceeds from
the working interest will be paid 90% to Petrominerals 96-1 and 10% to the
Company until payout, and thereafter 30% to Petrominerals 96-1 and 70% to the
Company. The Company will receive $2,400 per month for leased equipment until
payout and $400 thereafter. The Company will also receive a $350 per month
management fee as general partner. Payout is expected to occur in 24 months.
Petrominerals 81-1 Limited Partnership
- -----------------------------------------
The Petrominerals 81-1 Limited Partnership was formed in 1981 for the purpose
of drilling one development well on the Company's McGillivrae Lease, located
on the Hasley Canyon field, Santa Clarita Valley, Los Angeles County,
California, and two development wells on the Field Fee Lease, located on the
Cat Canyon field, Santa Barbara County, California. The Limited Partners were
granted options to participate in the drilling of one additional well on the
McGillivrae Lease and two additional wells on the Field Fee Lease.
Petrominerals, as General Partner, elected to exercise its option to purchase
the interest in the McGillivrae No. 3 well for a cash consideration of $8,161.
An Option Agreement for the purchase of the McGillivrae No. 3 well was
executed on July 1, 1988.
Petrominerals, as General Partner, has contributed $104,067 to the
Partnership, which represents approximately seven percent (7%) of the
aggregate contributions to the Partnership's capital, and the limited partners
have contributed $1,443,277 to the Partnership. Petrominerals will receive or
be charged with its proportionate share of each item of the Partnership's
income, gain, expense, deduction, loss or credit; provided, however, that
Petrominerals bears 100% of the losses incurred by the Partnership after the
loss exceeds the capital contributions of the limited partners. During 1993
and 1994, Petrominerals did not receive any income from the Partnership
options and realized $3,986 in overriding royalty interests.
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
(Continued)
Petrominerals 81-1 Limited Partnership (Continued)
- -----------------------------------------
The Partnership contributed the funds for the intangible costs of drilling the
wells. Until the Partnership received 110% of its investment in all ventures
(payout), the Partnership will receive 176% and 110% of the revenues
attributable to the working interest in the first and second McGillivrae
wells, respectively, and Petrominerals, as General Partner, receives a five
percent (5%) overriding royalty on the McGillivrae Lease. Petrominerals'
overriding royalty terminates after payout, at which time Petrominerals will
receive 65% of the net revenues attributable to the working interest, and the
Partnership will receive the remaining 35% of the net revenues attributable to
the working interest.
The McGillivrae No. 3 Partnership well was completed during 1982, and the
McGillivrae No. 2 well was completed during 1983. The Partnership redrilled
the McGillivrae No. 3 well during 1985.
Petrominerals has recognized a total of $1,197,000, in payment for its
services under the Partnership drilling contracts. In addition to income
derived from its overriding royalties, working interests and drilling fees,
Petrominerals received operator and equipment lease fees which totaled $7,800
during 1995.
Terra-Therme II
- ----------------
Terra-Therme II, a general partnership, was formed in November 1982, for the
purpose of acquiring and owning interests in geothermal leases located in the
Newberry Crater area of the Deschutes National Forest in Central Oregon. In
addition to their interest in Terra-Therme II, the Company and Paul L. Howard,
individually, held interests in lease options to acquire approximately 17,000
acres and 15,000 acres, respectively, of geothermal leases in the Newberry
Crater area.
In June 1991, Vulcan Power Company (Vulcan) entered into negotiations with
representatives of Petrominerals and Terra-Therme II Partnership with respect
to Vulcan purchasing certain rights in the Newberry Crater geothermal leases
formerly held by another party. Vulcan formed a new joint venture partnership
entity known as Vulcan Pacific, in which Vulcan acts as operator of the
interest it acquired.
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
(Continued)
TRANSACTIONS WITH MANAGEMENT AND OTHERS (Continued)
Terra-Therme II (Continued)
- ----------------
Vulcan purchased its interests in the Newberry Crater properties for a total
investment of less than $500,000, plus approximately 120,000 shares of Vulcan
Class A common stock. Petrominerals received $11,915 in cash and 44,943 shares
of Vulcan Class A common stock for a carried interest in the development of
this property. The Terra-Therme II Partnership retain a 1% net profit interest
in certain of the properties in the Newberry site. In addition, the
Terra-Therme Partnership retains a 0.6% overriding royalty interest on certain
remaining properties it acquired from Vulcan. The Company retains a 19.125%
interest and Mr. Howard retains a 9.563% interest in the Terra Therme II
Partnership.
Sale of Long Beach Facility
- -------------------------------
On May 16, 1995, Hydro-Test International (HTI), a wholly owned subsidiary of
Petrominerals, entered into an agreement with Everett L. Hodges and Morris V.
Hodges, two of the directors of Petrominerals, to purchase the assets of the
HTI Long Beach, California, location for $260,000. These directors then began
doing business with those assets as Hydro-Test Long Beach, LLC. Both, Everett
L. Hodges and Morris V. Hodges, are directors of the Company (see Item 10).
Several competitive bids were solicited by management before a final decision
was made to sell these assets to Everett L. and Morris V. Hodges. The Hodges'
bid was ultimately selected because it was the highest bid and was a cash
offer. Management feels that this sale represents an arm's length transaction.
Other than the transactions described above, no executive officer, director,
stockholder known to the Company to own, beneficially or of record, more than
5% of the Company's common stock, or any member of the immediate family of any
of those persons has engaged since the beginning of the Company's last fiscal
year or proposes to engage in the future, in any transaction or series of
similar transactions with the Company, directly through a separate entity, in
which the amount involved exceeded or will exceed $60,000.
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
(Continued)
INDEBTEDNESS OF MANAGEMENT
During the Company's last fiscal year, no executive officer, director, any
member of the immediate family or any of those persons, any corporation or
organization for which any of those persons serve as an executive officer or
partner or which they own directly or indirectly 10% or more of its equity
securities, or any trust or other estate in which any of the Company's
executive officers or directors have a substantial beneficial interest or for
which they serve as a trustee or in a similar capacity, has owed the Company
at any time since the beginning of its last fiscal year more than $60,000.
<PAGE>
PART IV
-------
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
--------------------------------------------------------
ON FORM 8-K
-------------
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C> <C>
A. LIST OF DOCUMENTS
-----------------
1. Consolidated Financial Statements
--------------------------------------------------------
The following consolidated financial statements of
Petrominerals are included in Part II, Item 7:
Report of Brown Armstrong Randall & Reyes,
Independent Auditor's Report 21-22
Consolidated Balance Sheet at December 31, 1996 and 1995 23-24
Consolidated Statements of Operations for the Years
Ended December 31, 1996 and 1995 25
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1996 and 1995 26
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996 and 1995 27
Notes to Consolidated Financial Statements 28-45
</TABLE>
2. Financial Statement Schedules
-------------------------------
The financial statement schedules of the Company filed herewith are
listed below. Schedules not included have been omitted because they are not
applicable or the required information as shown in the consolidated financial
statements and notes thereto.
Schedules for the Years Ended December 31, 1996 and 1995:
Schedule II - Valuation, Qualifying Accounts
and Reserves 62
<PAGE>
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
--------------------------------------------------------
ON FORM 8-K (Continued)
-------------
3. Reports on Form 8-K
----------------------
None.
4. Exhibits
--------
(2)(a) Order Approving Disclosure Statement and Fixing Time for
Filing Acceptances and Rejections of Plan and Fixing Date for Confirmation
Hearing for Hydro-Test International, Inc.(1)
(2)(b) Supplemental Hydro-Test International, Inc. Chapter 11
Disclosure Statement(1)
(2)(c) Supplemental Hydro-Test International, Inc. Chapter 11
Plan(1)
(3)(a) Certificate of Incorporation(2)
(3)(a)(i) Amendment of Certificate of Incorporation(3)
(3)(b) Bylaws, as Amended(3)
(10)(a) Petrominerals Corporation 1993 Incentive Stock Option
Plan and 1993 Non-Statutory Stock Option Plan Incorporation(4)
(10)(b) Form of Petrominerals Corporation Employee Stock Option
Agreement(4)
(10)(c) Petrominerals Corporation 1993 Employee Stock Bonus
Plan(5)
(10)(d) Petrominerals Corporation Directors Stock Compensation
Plan(6)
(21) Subsidiaries of the Registrant
(1) Incorporated herein by reference to Exhibit of same number in
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
(2) Incorporated herein by reference to Exhibit of same number in
Registrant's Annual Report on Form 10-K for the year ended December 31, 1981.
(3) Incorporated herein by reference to Exhibit of same number in
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987.
(4) Incorporated herein by reference to Form S-8 Registration No.
33-70690, as filed with the Securities and Exchange Commission on October 22,
1993.
(5) Incorporated herein by reference to Form S-8 Registration No.
33-70688, as filed with the Securities and Exchange Commission on October 22,
1993.
(6) Incorporated herein by reference to Form S-8 Registration No.
33-70692, as filed with the Securities and Exchange Commission on October 22,
1993.
<PAGE>
PETROMINERALS CORPORATION
SCHEDULE II - VALUATION, QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Additions
Balance at (Recoveries) Balance
Beginning Charged at End
of Period to Income of Period
------------- --------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Valuation allowance on oil
and gas properties
1996 $ 10,963 $ - $ 10,963
=========== ============= ===============
1995 $ 10,963 $ - $ 10,963
============ ============== ===============
</TABLE>
<TABLE>
<CAPTION>
(Additions)
Balance at Recoveries Balance
Beginning Posted at End
of Period to Income of Period
------------ --------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
receivable
1996 $ 66 $ 37 $ 29
=========== ============ ===============
1995 $ 25 $ (41) $ 66
=========== ============ ===============
</TABLE>
<PAGE>
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.
PETROMINERALS CORPORATION
(Registrant)
____________________, 1997 By:_______________________________________
Paul L. Howard,
President and Chief Executive Officer
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 included:
____________________, 1997 By:_______________________________________
Paul L. Howard,
President and Chief Executive Officer
____________________, 1997 By:_______________________________________
David G. Davidson, Director
____________________, 1997 By:________________________________________
Everett L. Hodges, Director
____________________, 1997 By:_______________________________________
Morris V. Hodges,
Assistant Secretary and Director
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
1. Hydro-Test International, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 614,000
<SECURITIES> 0
<RECEIVABLES> 212,000
<ALLOWANCES> (29,000)
<INVENTORY> 61,000
<CURRENT-ASSETS> 894,000
<PP&E> 23,378,000
<DEPRECIATION> (21,316,000)
<TOTAL-ASSETS> 3,457,000
<CURRENT-LIABILITIES> 601,000
<BONDS> 0
0
0
<COMMON> 848,000
<OTHER-SE> 563,000
<TOTAL-LIABILITY-AND-EQUITY> 3,457,000
<SALES> 1,199,000
<TOTAL-REVENUES> 1,269,000
<CGS> 0
<TOTAL-COSTS> 1,341,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> (72,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (72,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 448,000
<CHANGES> 0
<NET-INCOME> 376,000
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
