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, 1997
[ ] 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
- -------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
915 WESTMINSTER AVENUE, ALHAMBRA, CALIFORNIA 91803
- ------------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number: (626) 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 $.80
- -------------------------------------------------------------------------
(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 approximately
$1,407,000.
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 1,059,417 as
of March 16, 1998.
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant was approximately $2,880,401 as of March 20,
1998.
The total number of pages in this Form 10-KSB are 61.
The Index of Exhibits included in this Form 10-KSB is located at page 58.
Page 1
<PAGE>
PETROMINERALS CORPORATION
PART I
ITEM 1 - BUSINESS
--------
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). 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. 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. Hydro-Test is currently doing business
as Texas Tubing Testers.
BUSINESS STRATEGY
After completing a two year program of corporate downsizing and performing
remedial work, the Company engaged the services of an investment banking firm
to look for another Company to become a partner to a merger or acquisition.
During this process, the Company received an offer for the purchase of all of
the Company's oil and gas operations.
Management signed an agreement on February 4, 1998, with an unrelated entity
for the sale of all of the oil and gas producing property and related
infrastructure, including the 140 acres (see "Real Property Holdings") owned
by the Company, for $4,450,000 in cash and an installment note for $1,150,000.
The sale does not include the assets of Hydro-Test. The effective date of the
sale is March 31, 1998, and the cash proceeds of the sale should be received
by the Company shortly thereafter. Following this sale, the Company plans to
use the proceeds to either purchase other oil producing assets or merge with
another company. Management is currently considering various options.
Following this sale, the Company will no longer operate the oil and gas
segment of the business, unless other oil producing properties are acquired.
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 2
<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 continues to review the financial condition of
Hydro-Test on an ongoing basis and will determine when payments to creditors
will be made. Management is also considering a complete liquidation of this
subsidiary.
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 an 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 purchaser has an option to purchase the property at any time
during the next 31 months, subject to certain restrictions. The purchaser is
required to make various monthly payments and can withdraw at any time. If the
purchaser does withdraw, none of the option payments will be refunded. The
payments do not reduce the purchase price of the property. The Company will
dispose of these assets and transfer the purchase option as part of the sale
noted under "business strategy." Following this sale, the Company will no
longer have any real property holdings.
Page 3
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
B. FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS
------------------------------------------------------
Petrominerals principally operates in two industry segments: (1) the
production and sale of crude oil; and (2) providing tubular testing and
complimentary services through its oilfield services subsidiary, Hydro-Test.
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 for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Oilfield services 6.7% 1.0% 36.3%
Oil and gas sales 76.7% 94.0% 57.6%
Other 16.6% 5.0% 6.1%
</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
-----------------------
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.
Development of Properties
- -------------------------
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 natural gas powered pumping units
and tank heaters. 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.
Page 4
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ITEM 1 - BUSINESS (Continued)
--------
C. DESCRIPTION OF BUSINESS (Continued)
-----------------------
Development of Properties (Continued)
--------------------------
The average price the Company received for its crude oil during 1997 was
approximately $14.29 per barrel, which is approximately $0.84 per barrel lower
than the average price which the Company received for its crude in 1996. This
price had fallen to approximately $7.25 per barrel as of March 12, 1998. The
Company incurred average production costs of approximately $9.17 per barrel,
and produced approximately 118,689 barrels of crude.
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.
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 all of its oil production to Texaco Trading
and Transportation, Inc. (Texaco) during 1997. The contract with Texaco is for
the period September 1, 1995 through March 1, 1996, and continues on a
month-to-month basis 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 a major customer.
Page 5
<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 influenced 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, the Company incurred approximately $973 in environmental
investigation, compliance and remediation costs. The Company has not incurred
any environmental costs since 1996.
Employees. As of December 31, 1997, the Company employed a total of 12
individuals, of which 4 were employed by Hydro-Test International, Inc.
Page 6
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
C. DESCRIPTION OF BUSINESS (Continued)
-----------------------
OILFIELD SERVICES
Hydro-Test is engaged in the hydro-static testing of tubular pipe, pipelines
and valve assemblies in the oil and gas industry at one 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.
Major Customers. Under current operating conditions, the loss of any one
customer would not have a material adverse effect upon Hydro-Test's revenues.
ITEM 2 - PROPERTIES
----------
AGREEMENT FOR SALE OF PROPERTY
As noted in "Management's Discussion and Analysis" contained in Item 6 hereof,
the Company has agreed to sell all of its oil and gas producing assets to an
unrelated entity. All of the properties noted below will be included in this
sale.
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, located in Los Angeles County, California. 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 to
operate natural gas powered pumping units and tank heaters.
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.
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, 1997 and 1996 have been prepared by Babson &
Sheppard, an independent petroleum engineering firm in Long Beach, California.
Page 7
<PAGE>
ITEM 2 - PROPERTIES (Continued)
----------
OIL AND GAS RESERVES AND PRODUCTION INFORMATION (Continued)
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.
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, 1997 and 1996, 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 October 31, 1997.
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.
Page 8
<PAGE>
ITEM 2 - PROPERTIES (Continued)
----------
PRODUCTION
Net Annual Production
- --------------------
The following table sets forth the Company's net production of oil interests
for the years ended December 31 (in thousands). Net production represents
production owned by Petrominerals and produced to its interest, less royalty
and other similar interests.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net annual production
Oil (Bbl) 119 106
</TABLE>
Sales Prices and Production Costs
- ---------------------------------
The following table sets forth the average sales price and average production
(lifting) cost per unit of oil produced by the Company for the years ended
December 31,:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Average sales price of oil per barrel $14.29 $15.13
Average production cost per barrel 9.17 9.04
</TABLE>
Page 9
<PAGE>
ITEM 2 - PROPERTIES (Continued)
----------
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, 1997, are set forth in the tables below:
Productive Wells
- ----------------
The productive wells in which the Company owned interests consisted of the
following:
<TABLE>
<CAPTION>
Gross Wells Net Wells
- ----------- ---------
<S> <C>
36 28
</TABLE>
Developed Acreage
- -----------------
The Company's working and royalty interests in developed acreage consists of
the following:
<TABLE>
<CAPTION>
Gross Net
----- ---
<S> <C> <C>
Total Acreage 1,200 968
</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 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.
Payout occurs when Petrominerals 96-1 has recouped the monies it contributed
to the joint venture. The Company completed the well on January 20, 1997, and
began production shortly thereafter.
Page 10
<PAGE>
ITEM 2 - PROPERTIES (Continued)
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PRODUCTIVE WELLS AND DEVELOPED ACREAGE (Continued)
Delivery Commitments
- --------------------
The Company is not obligated to provide a fixed and determinable quantity of
oil in the future under existing contracts or agreements, however, they do
have an agreement to sell the oil produced.
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.
Page 11
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS (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. 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 1997, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
Page 12
<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 years ended December 31, by fiscal quarters as indicated:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1996
First quarter $ 3 $ 2
Second quarter 3 2 3/4
Third quarter 3 2 1/4
Fourth quarter 2 1/2 2
1997
First quarter $ 4 $2 1/2
Second quarter 3 1/2 3
Third quarter 3 1/2 2 3/4
Fourth quarter 6 3 1/4
</TABLE>
These stock prices have been retroactively adjusted to reflect the eight for
one reverse stock split that occurred on January 9, 1998 (see Item 7, Note 14
- - Subsequent Events).
The Company has 884 shareholders of record of its common stock as of March 16,
1998.
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 13
<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, 1997. The Notes to Consolidated Financial Statements
as of December 31, 1997, 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 second full term since
returning during 1995. He continued his original goals of cutting corporate
overhead, disposing of unproductive assets and performing previously deferred
remedial work. He began considering various merger and acquisition scenarios
that would assure future profitable growth and maximize shareholder value.
The Company engaged the services of an investment banking firm during 1997 to
assist in locating a merger or acquisition partner. During this process, the
Company received an offer from an unrelated entity for the purchase of all its
oil and gas producing assets. An agreement was signed on February 4, 1998,
that provides for $4,450,000 in cash to be paid at the closing, and an
additional reserved production payment of $1,150,000, to be paid in
installments in any month in which certain postings for crude oil exceed
$13.50 per barrel. The monthly payment will be equal to one-half of the
difference between the weighted average price and $13.50, multiplied by the
number of barrels produced. There is no stated interest associated with the
note. The purchase and sale of assets is expected to close not later than
March 31, 1998, and is contingent upon the purchaser's due diligence review.
Following this sale, the Company's oil and gas segment will be discontinued,
unless other properties are purchased or a merger with another producer takes
place.
Oil and Gas Segment
- -------------------
The Company's oil revenues are impacted by several factors that are beyond the
Company's control, however, the prevailing factor is the price of crude oil
paid by the purchaser that holds their current contract. This prevailing price
is consistent with prices paid by other local purchasers.
The Company's oil revenues were extremely volatile between 1990 and 1994,
however, the average price per barrel of oil sold was fairly stable from 1995
through 1997. Unfortunately, the price of oil has declined sharply during the
first quarter of 1998, which would have a significant negative impact on
future oil revenues if the Company should continue to operate their oil and
gas segment.
Page 14
<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 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 currently
does not have any plans in place to drill additional wells. The new well began
producing on January 20, 1997.
The Company also entered into 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 payment of
$100,000, and will begin receiving $10,000 monthly option payments in May
1998. These payments will increase to $20,000 per month in November 1998. The
purchase option under this agreement significantly exceeds 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 continues to operate the remaining facility near
Houston, Texas, on a limited basis. There are no current plans to expand the
operations or obtain additional capital from the parent company. Management is
also considering a complete liquidation as one of their options.
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 canceled, and no new shares have
been issued.
Page 15
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------
BUSINESS REVIEW (Continued)
1997 COMPARED WITH 1996
The Company had negative cash flows from operations of approximately $133,000
for the year ended December 31, 1997, as compared with a positive cash flow
from operations of $316,000 in the prior year. This decrease in cash was
primarily the result of the Company paying off their accounts payable and
accrued liability balances associated with the 96-1 drilling project. The cost
associated with the 96-1 drilling program was capitalized by the Company
during 1997.
The Company had a net loss of approximately $15,000, compared to net income of
$376,000 in the prior year. The prior year net income was primarily due to an
extra ordinary gain resulting from the Chapter 11 reorganization of
Hydro-Test. The current year loss is the net effect of continued net losses
from Hydro-Test of approximately $107,000 and net income of approximately
$92,000 from the Company's oil and gas operations.
The losses from Hydro-Test will most likely continue through 1998, unless the
Company is able to sell off the remaining assets. Any proceeds from the sale
of assets will be set aside to pay creditors under the Chapter 11 plan.
Revenues and expenses associated with the oilfield services segment should
remain consistent with prior year amounts during the first quarter of 1998.
Following the first quarter, the Company will report any revenues and expenses
associated with the oil and gas segment as discontinued operations.
The Company's other income increased significantly during 1997, due to one
time payments for options to purchase assets of the Company. This trend is not
expected to continue in 1998.
General and administrative expenses increased by approximately 12%, due to
additional professional fees incurred during negotiations to sell the
Company's assets. This trend will likely continue during 1998.
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.
The Company is not currently servicing Hydro-Test's prepetition liabilities,
following the protection that the Company received from creditors during
Chapter 11 reorganization. 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.
Page 16
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------
BUSINESS REVIEW (Continued)
1996 COMPARED WITH 1995
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.
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 17
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Brown Armstrong Randall & Reyes,
Independent Auditor's Report. . . . . . . . . . . . . . 19
Consolidated Balance Sheets at December 31, 1997 and 1996 20-21
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . 22
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997 and 1996. . . . . . . . . 23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . 24
Notes to Consolidated Financial Statements. . . . . . . . 25-44
</TABLE>
Page 18
<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, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the two years then ended and the related December
31, 1997 and 1996 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 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.
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, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As disclosed in Note 14 to the financial statements, on February 4, 1998, the
Company entered into negotiations to sell a major segment of its operations.
The segment represents a significant portion of the Company's total assets and
operations.
BROWN ARMSTRONG RANDALL & REYES
ACCOUNTANCY CORPORATION
Bakersfield, California
February 27, 1998
Page 19
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in thousands, except par value amounts)
ASSETS
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 235 $ 614
Accounts receivable, net 115 183
Inventories 50 61
Prepaid expenses 7 16
Other current assets 22 20
------ ------
Total Current Assets 429 894
Restricted Cash 40 40
Property and Equipment, net (including oil and
gas properties accounted for on the successful
efforts method) 2,198 2,062
Notes Receivable and Other Assets 445 461
------ ------
TOTAL ASSETS $3,112 $3,457
====== ======
</TABLE>
Page 20
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current Liabilities
Accounts payable $ 160 $ 464
Current portion of long-term debt 8 8
Accrued liabilities 83 87
Royalties payable 29 42
------ ------
Total Current Liabilities 280 601
Long-Term Debt, net of current portion 3 7
Prepetition Liabilities 516 521
------ ------
Total Liabilities 799 1,129
------ ------
Shareholders' Equity
Preferred stock:
$.10 par value, 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock:
$.80 par value, 20,000,000 shares authorized;
1,059,417 shares issued and outstanding at
December 31, 1997 and 1996 848 848
Capital in Excess of Par Value 563 563
Retained Earnings 902 917
------ ------
Total Shareholders' Equity 2,313 2,328
------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,112 $3,457
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 21
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Revenues
Oilfield services $ 95 $ 14
Oil and gas 1,080 1,185
Other income 232 70
------- -------
Total Revenues 1,407 1,269
------- -------
Costs and Expenses
Oilfield services 189 199
Oil and gas 601 561
Depreciation, depletion and amortization 123 127
General and administrative 475 418
Interest 3 3
Other expense 31 33
------- -------
Total Costs and Expenses 1,422 1,341
------- -------
Loss before extraordinary item (15) (72)
Extraordinary item - 448
------- -------
Net Income (Loss) $ (15) $ 376
======= =======
Per Share Amounts:
Net loss per share before extraordinary item $ (.01) $ (.07)
======= =======
Extraordinary item $ - $ .43
======= =======
Net income (loss) per share $ (.01) $ .36
======= =======
Weighted average common shares outstanding 1,059 1,056
======= =======
</TABLE>
(Per share amounts have been adjusted retroactively for the effects of a one
for eight reverse stock split on January 9, 1998. See Note 14 - Subsequent
Events).
The accompanying notes are an integral part of these financial statements.
Page 22
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Dollars in thousands, except number of shares)
<TABLE>
<CAPTION>
Number of Capital in
Common Excess of Retained
Shares Amount Par Value Earnings Total
--------- ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,057,542 $ 847 $ 558 $ 541 $1,946
Issuance of shares for Directors
Compensation 1,875 1 5 - 6
Net income - - - 376 376
--------- ------- ----------- ---------- -------
Balance, December 31, 1996 1,059,417 848 563 917 2,328
Net income - - - (15) (15)
--------- ------- ----------- ---------- -------
Balance, December 31, 1997 1,059,471 $ 848 $ 563 $ 902 $2,313
========= ======= =========== ========== =======
</TABLE>
(Per share amounts have been adjusted retroactively for the effects of a one
for eight reverse stock split on January 9, 1998. See Note 14 - Subsequent
Events).
The accompanying notes are an integral part of these financial statements.
Page 23
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (15) $ 376
Adjustment to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation, depletion and amortization 123 127
Gain on extraordinary item 1 (448)
(Gain) on disposal of fixed assets - (3)
Accounts receivable 68 (100)
Other current assets 7 (20)
Inventories 11 110
Restricted cash(308)44
Accounts payable and accrued liabilities- 246
Royalties payable(13)18
Liabilities subject to compromise- (555)
Prepetition liabilities (5) 521
- ----------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities (133) 316
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (276) (102)
Proceeds from sale of assets 18 66
Notes receivable 16 49
------ ------
Net Cash Provided (Used) by Investing Activities (242) 13
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of bank debt (4) (18)
Payments of prepetition liability - (22)
------ ------
Net Cash Used by Financing Activities (4) (40)
------ ------
Net increase (decrease) in cash and cash equivalents (379) 289
Cash and cash equivalents at beginning of year 614 325
------ ------
Cash and cash equivalents at end of year $ 235 $ 614
====== ======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest $ 3 $ 3
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 24
<PAGE>
PETROMINERALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
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
hydro-static well testing oilfield services.
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
$15,000 and $72,000 for the years ended December 31, 1997 and 1996,
respectively.
Industry conditions caused a significant downturn in the oilfield service
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 25
<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.
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 economic production, which fluctuates with changes in oil prices. The
amount of debt expected to be forgiven is based on the Chapter 11 bankruptcy
plan, and may fluctuate depending on the resources available for the Company
to service the debt.
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 26
<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 at December 31, 1997 and 1996, that have been recorded as restricted
cash. Of the two CD's remaining at December 31, 1997, 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.
Accounts Receivable
- --------------------
Accounts receivable has been recorded net of a valuation allowance of $0 and
approximately $29,000 at December 31, 1997 and 1996, 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 units-of-production method based on recoverable reserves. The
Company did not incur any exploratory costs during the years ended December
31, 1996 and 1997.
Page 27
<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 the review of long-lived assets for possible
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 the impairment review to 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 future 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. Management did not sell
or abandon any oil and gas properties during the years ended December 31, 1997
and 1996, however, a sale of the Company's oil producing assets is planned to
take place on March 31, 1998 (see Note 14 - Subsequent Events).
Page 28
<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 contained in the financial statements included herein
reflect the retroactive effect of a one for eight reverse stock split which
occurred on January 15, 1998 (see Note 14 - Subsequent Events).
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to
classifications followed for 1997. These reclassifications had no effect upon
reported net income.
New Accounting Pronouncements
- -------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), Reporting Comprehensive Income. This statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
will be adopted by the Company for the year ended December 31, 1998. Prior
period financial statements provided for comparative purposes will be
reclassified, as required. Upon adoption, the Company does not expect SFAS
130 to have a material effect upon the Company's financial condition or
results of operations.
In June 1997, the FASB issued Statements of Financial Accounting Standards No.
131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. The statement requires the Company to report income\loss,
revenue, expense and assets by business segment including information
regarding the revenues derived from specific products and services. The
Statement also requires that the Company report descriptive information about
the way that operating segments were determined, the products and services
provided by the operating segments, differences between the measurements used
in reporting segment information and those used in the Company's financial
statements, and changes in the measurement of segment amounts from period to
period. SFAS 131 will be adopted by the Company for the year ended December
31, 1998.
Page 29
<PAGE>
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, (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
At Cost
Oil and gas properties, all proved, net of
valuation allowance of $10,963 $ 21,882 $ 21,625
Accumulated depletion and amortization (20,974) (20,873)
--------- ---------
Net oil and gas properties 908 752
--------- ---------
Other Property and Equipment
Land and building 1,265 1,265
Furniture, fixtures and equipment 345 337
Accumulated depreciation related to other
property and equipment (443) (443)
--------- ---------
Net Other Property and Equipment 1,167 1,159
--------- ---------
Net Property and Equipment, at cost 2,075 1,911
At Net Realizable Value:
Oilfield service equipment 123 151
--------- ---------
Property and Equipment, net $ 2,198 $ 2,062
========= =========
</TABLE>
Depreciation, depletion and amortization for the years ended December 31, 1997
and 1996 was $123,000 and $127,000, 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 the claims
since seeking Chapter 11 protection on September 1, 1995.
The Chapter 11 reorganization resulted in an extraordinary gain of $448,000
from the retirement of prepetition liabilities at December 31, 1996. This
event did 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.
Page 30
<PAGE>
NOTE 3 - PREPETITION LIABILITIES/EXTRAORDINARY GAIN (Continued)
------------------------------------------
The remaining prepetition liability of $516,000 has been recorded as a
long-term liability 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)
(excluding prepetition liabilities):
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Bank term notes payable (secured by various
vehicles), due in monthly installments of $812,
including interest of 8.9% to 9.9%. $ 11 $ 15
Less: current portion 8 8
----- -----
$ 3 $ 7
===== =====
</TABLE>
Aggregate scheduled maturities of long-term debt at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
1997
-----
<S> <C>
Year Ended
- ----------
1998 $ 8
1999 3
-----
$ 11
=====
</TABLE>
Page 31
<PAGE>
NOTE 5 - DISPOSITION OF ASSETS
---------------------
Liquidation and Reorganization Sales
- ------------------------------------
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.
On February 12, 1997, Hydro-Test 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.
Option to Purchase Agreement
- ----------------------------
The Company entered into an option to purchase agreement with an unrelated
entity for the option to purchase the 140 acres owned by the Company in the
Hasley Canyon field, Santa Clarita Valley, Los Angeles County, California. The
agreement, dated September 16, 1996, has an effective date of October 22, 1996.
Under the terms of the agreement, the purchaser deposited a refundable good
faith deposit of $100,000 into an escrow account to be held during a
feasibility period lasting until December 30, 1996. This feasibility period
was extended to February 14, 1997, based on an amendment dated December 30,
1996. The purchaser extended this option by 270 days from the effective date
of October 22, 1996, by releasing $10,000 from the escrow account. The
purchaser subsequently authorized the release of the additional $90,000 from
the escrow account for a total of $100,000 in prepaid rent through the 18th
month following the effective date (April 1998).
The agreement calls for future payments of $10,000 per month beginning in May
1998, for a period of six months, $20,000 per month for the next 27 months.
The purchaser may terminate this agreement on October 22, 1998, under certain
conditions.
The purchaser may purchase the property at any time during the option period
for $20,000 per acre.
Page 32
<PAGE>
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>
1997 1996
------ ------
<S> <C> <C>
Statutory Federal income tax (benefit) $ 14 $ (15)
Increase (decrease) in provision resulting
from losses without tax benefit (14) 15
------ ------
$ - $ -
====== ======
</TABLE>
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>
1997 1996
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 1,903 $ 1,917
Valuation reserve for deferred tax assets (1,883) (1,906)
-------- --------
Net Deferred Tax Assets $ 20 $ 11
======== ========
Deferred Tax Liabilities:
Tax over book depreciation, amortization
and depletion $ 20 $ 11
-------- --------
Deferred Tax Liabilities, net of deferred
tax assets $ - $ -
======== ========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $5,597,000 for Federal income tax purposes that will expire
beginning in the year 2001. For financial reporting purposes, a valuation
allowance of $1,883,000 has been recorded to offset the deferred tax asset
related primarily to these carryforwards.
Page 33
<PAGE>
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
150,000 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 7,500
shares of the Company's common stock. The Plans expire on February 8, 2003.
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 6,250 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 expired on February 8, 1998.
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 18,750 shares of the
Company's common stock to non-employee directors. Under the Stock Compensation
Plan for the period May 1992 through September 1993, 12,450 shares were
granted to directors. On February 10, 1995, the balance of 6,300 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 1,875 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.
On March 6, 1997, the Board adopted a resolution granting stock options to
purchase up to 5,000 shares of common stock to the CEO, and up to 2,500 shares
of common stock to each of the three non-employee directors. Under the terms
of the resolution, the CEO and each of the directors can purchase shares of
common stock for the average price that the Company's stock was trading before
and after March 6, 1997. This average is $3.00 per share. The Company has not
yet issued these options.
No stock options were exercised during the years ended December 31, 1997 and
1996.
Page 34
<PAGE>
NOTE 7 - COMMON STOCK (Continued)
------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which is effective for the Company beginning December 31, 1997. SFAS
128 replaced the presentation of primary earnings per share with a
presentation of basic earnings per share based upon the weighted average
number of common shares for the period. It also requires dual presentation of
basic and diluted earnings per share for companies with complex capital
structures. Basic and diluted earnings per share for the twelve months ended
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
Weighted Net Weighted Net
Average Shares Income Per Average Shares Income Per
(in thousands) Share (in thousands) Share
--------------- ----------- --------------- ----------
<S> <C> <C> <C> <C>
Basic 1,059 (.01) 1,056 .36
Diluted 1,059 (.01) 1,056 .36
</TABLE>
(All share amounts have been adjusted retroactively for the effects of a one
for eight reverse stock split on January 9, 1998. See Note 14 - Subsequent
Events).
Basic and diluted earnings per share are the same, as any impact from the
exercise of stock options would be anti-dilutive.
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 by the
Company and payments to the Company for services were approximately $134,000
and $280,000 for 1997 and 1996, respectively.
Page 35
<PAGE>
NOTE 8 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS
----------------------------------------------
(Continued)
On December 3, 1996, the Company became the general partner of Petrominerals
96-1, a newly formed limited partnership. Under the terms of the joint venture
agreement, the Company assigned the drillsite to the joint venture 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.
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. Payout occurs when Petrominerals
96-1 has recouped the monies it contributed to the joint venture. The Company
completed the well on January 20, 1997, and began production shortly
thereafter.
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>
Capital
% Interest Contribution
----------- -------------
<S> <C> <C>
General Partner:
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>
The Company receives 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.
Page 36
<PAGE>
NOTE 9 - UNAUDITED QUARTERLY FINANCIAL DATA
----------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
1997
- -----------------------
Revenues 368 337 399 303 1,407
Costs and expenses 312 346 330 434 1,422
Income (loss) before 56 (9) 69 (131) (15)
extraordinary item
Net income (loss) 56 (9) 69 (131) (15)
Net income (loss) .05 (.01) .07 (.12) (.01)
per share
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
1996
- -----------------------
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 - *448 - - 448
Net income (loss) (92) 408 5 55 376
Income (loss) before
extraordinary item
per share (.08) (.04) - .05 (.07)
Net income (loss)
per share (.08) .39 - .05 .36
</TABLE>
The Company recognized an extraordinary gain in the second quarter of 1996 for
debt forgiven in bankruptcy.
* The estimated extraordinary gain reported in the second quarter for 10-QSB
was revised as a result of audit adjustments.
(Per share amounts have been adjusted retroactively for the effects of a one
for eight reverse stock split on January 9, 1998. See Note 14 - Subsequent
Events).
Page 37
<PAGE>
NOTE 10 - SEGMENT INFORMATION
-------------------
The Company's principal businesses are (1) the production and sale of crude
oil, and (2) oilfield services. The following tables present certain
information regarding these industry segments for the years ended December 31,
(in thousands):
<TABLE>
<CAPTION>
Oil
Oilfield Production
Services and Sales Corporate* Total
---------- ----------- ----------- -------
<S> <C> <C> <C> <C>
1997
- -------------------------------------------
Sales to outside customers $ 95 $ 1,080 $ 232 $1,407
Operating profit (loss) (107) 92 - (15)
Identifiable assets 197 2,917 - 3,114
Depreciation, depletion and amortization 10 113 - 123
Capital expenditures - 276 - 276
1996
- -------------------------------------------
Sales to outside customers $ 14 $ 1,273 $ 67 $1,354
Operating profit (loss) (210) 125 - (85)
Gain on debt forgiven 448 - - 448
Identifiable assets 231 3,226 - 3,457
Depreciation, depletion and amortization 10 117 - 127
Capital expenditures - 102 - 102
</TABLE>
* Corporate revenues are primarily composed of interest income, royalty
interests and lease payments.
Sales to individual customers, including royalty interests of others,
exceeding 10 percent of revenues reported in the consolidated statements of
operations, for the years ended December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Oil and gas segment (gross sales):
Texaco Trading & Transportation, Inc. $1,171 $1,161
</TABLE>
Page 38
<PAGE>
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 (or its predecessor) does 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.
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.
Page 39
<PAGE>
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 for the years ended December 31, is summarized
below (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Produced oil and gas sales $1,171 $1,185
Less:
Operating expenses 648 561
Depreciation, depletion and amortization 113 116
------ ------
Results of operations from oil and gas
producing activities, excluding corporate
overhead and interest costs $ 410 $ 508
====== ======
</TABLE>
No development or property acquisition costs were incurred in 1997 or 1996.
Page 40
<PAGE>
NOTE 13 - SUPPLEMENTAL OIL AND GAS PROPERTIES AND RELATED
-----------------------------------------------
RESERVES (UNAUDITED) (Continued)
--------------------
Estimated Quantities of Oil and Gas Reserves
- --------------------------------------------
The following table presents the Company's estimates of its proved oil (in
thousands of barrels) 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. Estimates of its
proved oil reserves for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Proved developed and undeveloped reserves:
Beginning of period 1,999 2,138
Revision of previous estimates 12 (33)
Production (119) (106)
------ ------
End of period 1,892 1,999
Proved developed reserves:
Beginning of period 952 897
End of period 871 952
</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, 1997 and 1996. 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 41
<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. Reserve
estimates and resulting future net cash flows for the years ended December 31,
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Future cash inflows $ 27,591 $ 35,172
Future production and development costs (16,522) (17,738)
Future income tax expense (3,763) (5,928)
--------- ---------
Future net cash flows 7,306 11,506
10% annual discount for estimated timing
of cash flows (2,469) (5,862)
--------- ---------
Standardized measure of discounted future
net cash flows $ 4,837 $ 5,644
========= =========
</TABLE>
Page 42
<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 for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Sales and transfers of oil and gas produced,
net of production cost $(455) $ (584)
Net changes in prices and production costs,
based on beginning of year barrels - 1,331
Net changes in previous estimate of future
development costs 410 (316)
Revisions to previous estimates 104 (188)
Accretion of discount 330 564
Net change in income taxes (719) 1,791
Other (477) (477)
------ -------
Net Increase (Decrease) $(807) $2,121
====== =======
</TABLE>
NOTE 14 - SUBSEQUENT EVENTS
- -----------------
Disposition of Assets
- ---------------------
On February 4, 1998, the Company entered into a contract for the sale of all
of the Company's oil and gas operating assets to an unrelated entity. These
operating assets include the Company's 140 acre real property holding in
Hasley Canyon, together with the oil and gas wells and leasehold interests and
related equipment. The purchase price is $4,450,000 in cash to be paid at
closing, and a production payment of $1,150,000, to be paid in installments in
any month in which certain postings for crude oil exceeds $13.50 per barrel.
The price per barrel is approximately $7.25 at March 12, 1998.
The monthly payment will be equal to one-half of the difference between the
posted price and $13.50, multiplied by the barrels produced. There is no
stated interest on the note.
The purchase and sale of assets is expected to close not later than March 31,
1998, and is contingent upon the purchaser's due diligence review.
Page 43
<PAGE>
NOTE 14 - SUBSEQUENT EVENTS (Continued)
-----------------
Stock Split
- -----------
On January 9, 1998, the Company's shareholders approved a one for eight
reverse split of the Company's common stock. Under the terms of the reverse
split, one share of $0.80 par value common stock will be issued for eight
shares of $0.10 par value common stock, effective as of January 25, 1998, for
shareholders of record on December 8, 1997. All fractional interests will be
rounded up to the next whole share. This stock split has been shown
retroactively in the audited financial statements as of December 31, 1997 and
1996 (see Note 7 - Common Stock).
Page 44
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING ANDFINANCIAL DISCLOSURE
----------------------------------
None.
Page 45
<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>
Position with Year Name to
Name Company Present Position
- ------------------------------ ------------------------ ----------------
<S> <C> <C>
Paul L. Howard* President, Chief
Executive Officer, Chief
Financial Officer and
Director 1995
Phillip Mungiovino** Secretary 1995
Morris V. Hodges*** Assistant Secretary and
Director 1995
</TABLE>
Each of the Executive Officers serves at the pleasure of the Board of
Directors.
* Mr. Howard was reappointed President and Chief Executive Officer on
March 24, 1995.
** Mr. Mungiovino was appointed Secretary on March 24, 1995. Mr.
Mungiovino has held the position of accountant for the Company since 1975.
*** Mr. Hodges was appointed Assistant Secretary on March 24, 1995.
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 - 72 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 46
<PAGE>
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION
------------------------------------------------------
16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (Continued)
--------------------------------------------
DAVID G. DAVIDSON - 73 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 - 63 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
Item 12 - "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 - 61 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.; Coastal
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 Item 12 - "Certain Relationships and Related Transactions."
Morris V. Hodges and Everett L. Hodges, as a group, may be deemed to be
controlling persons.
WILLIAM N. HAGLER - 65 Director 1998
-----------------
Mr William N. Hagler has been principally employed as President and owner of
Unico, Inc., which is listed on the NASDAQ exchange, and, until just recently,
served as a member of the Board of SABA Petroleum. He was appointed to the
Board on January 29, 1998, and currently sits on the audit committee. At the
time of his appointment, he did not own any stock in Petrominerals.
Page 47
<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. William Hagler and David
Davidson. 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 two
regular meetings and one special meeting. Attendance at such meetings of the
Board was 100%.
Page 48
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
- ----------------------
The following Summary Annual 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 ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
Year Salary
---- -------
<S> <C> <C>
Paul L. Howard, President, Chief Executive
Officer and Chief Financial Officer 1997 $90,000
</TABLE>
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 49
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION (Continued)
- ----------------------
COMPENSATION OF DIRECTORS
During the year ended December 31, 1997, 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.
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.
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
- -------------------------------------------
MANAGEMENT
- ----------
The following table lists the beneficial ownership, as of February 27, 1998,
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
of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------ --------------------- -----------------
<S> <C> <C>
William N. Hagler - -
David G. Davidson 3,750 .35%
Paul L. Howard 86,375 (2) 8.15%
Everett L. Hodges 93,060 (3) 8.78%
Morris V. Hodges 108,125 (4) 10.21%
--------------------- -----------------
291,310 (1) 27.49%
===================== =================
</TABLE>
(1) All directors and officers, as a group, including persons named above.
(2) The 86,375 shares beneficially held by Paul L. Howard are held in the
Howard Family Trust.
Page 50
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
------------------------------------------------
MANAGEMENT (Continued)
----------
(3) The 93,060 shares beneficially held by Everett L. Hodges include
73,487 shares held of record jointly in the Everett L. Hodges and Mary M.
Hodges Trust. This amount also includes 5,425 shares held directly by Everett
L. Hodges, 10,398 shares held of record by Energy Production & Sales Co., Inc.
(EPS), and 3,750 shares held by California Oil Independents, Inc. The 93,060
shares do not include 10,052 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.
(4) The 102,161 shares beneficially held by Morris V. Hodges include 714
shares held of record jointly in the Morris V. Hodges and Kathryn M. Hodges
Trust. This amount also includes 10,398 shares held of record by Sunset
Pipeline and Terminalling, Inc., a company controlled by Mr. Hodges, and
96,025 shares held by adult children of Morris V. Hodges and Kathryn M.
Hodges. 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.
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 150,000 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 7,500 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.
Page 51
<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 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.
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.
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 6,250
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 terminated on February 8, 1998.
Page 52
<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 18,750. 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 2,075
shares and 1,050 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. Any
shares issued under this plan shall be restricted shares, subject to a two
year holding period.
REPORTABLE TRANSACTIONS
To the knowledge of the Company, as of February 27, 1997, 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.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
On March 6, 1997, the Board adopted a resolution granting stock options to
purchase up to 5,000 shares of common stock to the CEO, and up to 2,500 shares
of common stock to each of the three non-employee directors. Under the terms
of the resolution, the CEO and each of the directors can purchase shares of
common stock for the average price that the Company's stock was trading before
and after March 6, 1997. This average is $3.00 per share. The Company has not
yet issued these options.
No stock options were exercised during the years ended December 31, 1996 and
1997.
Page 53
<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>
Percentage
Name Beneficial Owner Owned
- ----------------------------------- ----------------- -----------
<S> <C> <C>
Petrominerals 96-1, a Limited General Partner:
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, a Limited General Partner:
Partnership (Partnership) Petrominerals 6.78%
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 (formerly the Petrominerals 19.13%
Newberry Partnership), a general Paul L. Howard 9.56%
partnership (Terra-Therme II) Unrelated parties 71.31%
-----------
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 54
<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 receives $2,400 per month for leased equipment until
payout and $400 thereafter. The Company also receives a $350 per month
management fee as general partner.
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 55
<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.
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 1997.
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 56
<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 retains 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.
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.
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 57
<PAGE>
PART IV
-------
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
--------------------------------------------------------
ON FORM 8-K
-------------
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
A. LIST OF DOCUMENTS
- ----------------------------------------------------------------------------
1. Report of Brown Armstrong Randall & Reyes,
Independent Auditor's Report. . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheets at December 31, 1997 and 1996 . . . . 20-21
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997 and 1996. . . . . . . . . . . . . 23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . 24
Notes to Consolidated Financial Statements. . . . . . . . . . . . 25-44
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, 1997 and 1996:
Schedule II - Valuation, Qualifying Accounts and Reserves . . . . 60
</TABLE>
Pagr 58
<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.*
(2)(b) Supplemental Hydro-Test International, Inc. Chapter 11
Disclosure Statement*
(2)(c) Supplemental Hydro-Test International, Inc. Chapter 11
Plan*
(3)(a) Certificate of Incorporation**
(3)(a)(I) Amendment of Certificate of Incorporation***
(3)(b) Bylaws, as Amended***
(10)(a) Petrominerals Corporation 1993 Incentive Stock Option Plan
and 1993
Non-Statutory Stock Option Plan Incorporation****
(10)(b) Form of Petrominerals Corporation Employee Stock Option
Agreement****
(10)(c) Petrominerals Corporation 1993 Employee Stock Bonus
Plan*****
(10)(d) Petrominerals Corporation Directors Stock Compensation
Plan******
(21) Subsidiaries of the Registrant
* 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.
** 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.
*** 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.
**** Incorporated herein by reference to Form S-8 Registration No.
33-70690, as filed with the Securities and Exchange Commission on
October 22, 1993.
***** Incorporated herein by reference to Form S-8 Registration No.
33-70688, as filed with the Securities and Exchange Commission on
October 22, 1993.
****** 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 59
<PAGE>
PETROMINERALS CORPORATION
SCHEDULE II - VALUATION, QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1997 AND 1996
(In Thousands)
<TABLE>
<CAPTION>
Additions
Balance at (Recoveries) Balance at
Beginning Charged to End of
of Period Income Period
----------- ------------- -----------
<S> <C> <C> <C>
Valuation allowance on oil and
gas properties
1997 $ 10,963 $ - $ 10,963
=========== ============= ===========
1996 $ 10,963 $ - $ 10,963
=========== ============= ===========
Balance at (Additions) Balance at
Beginning Posted to End of
of Period Income Period
----------- ------------- -----------
Allowance for doubtful receivable
1997 $ 29 $ 29 $ -
=========== ============= ===========
1996 $ 66 $ 37 $ 29
=========== ============= ===========
</TABLE>
Page 60
<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)
Dated: February 27, 1998 By: /S/ Paul L. Howard
------------------
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:
Dated: February 27, 1998 By: /S/ Paul L. Howard
------------------
Paul L. Howard,
President and Chief
Executive Officer
Dated: February 27, 1998 By: /S/ David G. Davidson
---------------------
David G.Davidson,
Director
Dated: February 27, 1998 By: /S/ Everett L. Hodges
---------------------
Everett L. Hodges,
Director
Dated: February 27, 1998 By: /S/ Morris V. Hodges
--------------------
Morris V.Hodges,
Assistant Secretary
and Director
Dated: February 27, 1998 By: /S/ William N. Hagler
---------------------
William N. Hagler
Page 61
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
1. Hydro-Test International, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 235
<SECURITIES> 0
<RECEIVABLES> 115
<ALLOWANCES> 0
<INVENTORY> 50
<CURRENT-ASSETS> 429
<PP&E> 2198
<DEPRECIATION> 0
<TOTAL-ASSETS> 3112
<CURRENT-LIABILITIES> 280
<BONDS> 0
0
0
<COMMON> 848
<OTHER-SE> 563
<TOTAL-LIABILITY-AND-EQUITY> 3112
<SALES> 1080
<TOTAL-REVENUES> 1407
<CGS> 601
<TOTAL-COSTS> 1388
<OTHER-EXPENSES> 31
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (15)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
