UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(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, 1999
[ ] 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 incorporation or organization) (I.R.S. Employer
Identification No.)
27241 BURBANK, FOOTHILL RANCH, CALIFORNIA 92610-2500
----------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number: (949) 588-2645
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)
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
$353,000.
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 1,059,404 as
of March 24, 2000.
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant was approximately $2,340,326 as of March 24,
2000.
The total number of pages in this Form 10-KSB are 45.
The Index of Exhibits included in this Form 10-KSB is located at page 40.
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, was 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). Effective April 1, 1998, the
Company disposed of substantially all of its oil and gas properties in a sale to
an unrelated entity. The Company's wholly owned subsidiary, Hydro-Test, a New
Mexico corporation acquired in 1993, provided tubular testing services including
hydro-static testing of tubing, pipelines and valve assemblies in the oil and
gas industry, under the name Texas Tubing Testers. In July 1998, Hydro-Test
ceased commercial operations. On June 8, 1999, Hydro-Test filed a voluntary
petition for Chapter 7 Bankruptcy. In late September 1999, the remaining assets
of Hydro-Test were sold by the bankruptcy trustee for approximately $5,000 in
cash. As of March 24, 2000, the petition remains open. Also in late September
1999, the company completed an acquisition of gas properties in southwestern
Wyoming. The company currently has oil production in the Santa Clarita area of
southern California and gas production in the Sand Wash Basin of Wyoming.
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 $3,739,000 in cash and a production payment
receivable for $931,000. The sale did not include the assets of Hydro-Test. The
effective date of the sale was April 1, 1998.
The Company planned to use the proceeds to either purchase oil and gas producing
assets or merge with another company. On September 20, 1999, the Company
completed the acquisition of a 25% interest in the Smith Ranch natural gas field
located in southwest Wyoming for approximately $102,000 in cash. The company and
its partners also committed to drill two wells before May 2000. (see Note 7 to
the consolidated financial statements in Item 7 for detail) In addition to
reviewing merger alternatives, management is currently focusing its efforts on
utilizing its cash balance for the acquisition of additional oil and gas
producing properties. To assist with this goal, the company hired an officer to
coordinate its business development activities in September 1999 (see Change in
Officers, Item 6).
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. 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. 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. On June 8, 1999, Hydro-Test filed
a voluntary petition for Chapter 7 Bankruptcy. In late September 1999, the
remaining assets of Hydro-Test were sold by the bankruptcy trustee for
approximately $5,000 in cash. As of March 24, 2000, the petition remains open.
(see Item 3 - Legal Proceedings for details)
2
<PAGE>
ITEM 1 - BUSINESS (Continued)
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A. GENERAL DESCRIPTION OF BUSINESS (Continued)
----------------------------------
REAL PROPERTY HOLDINGS
Prior to the sale agreement effective April 1, 1998, the Company owned 140 acres
of unimproved land in the Hasley Canyon field, Santa Clarita Valley, Los Angeles
County, California, which was the Company's primary location of oil production.
Following the sale, the Company no longer had any significant real property
holdings. The remaining interests of the Company were fully impaired at December
31, 1998, based on the December 31, 1998 reserve report, which valued the
remaining reserves at $0. However, due to increases in crude oil prices, these
properties were estimated to have a standardized measure of discounted value of
$669,000 as a result of the December 31, 1999 engineering reserve report. Since
September 1999, the company also owns a 25% working interest in the Smith Ranch
field located in Carbon County, Wyoming. The standardized measure of discounted
value for these properties was $67,000 as a result of the December 31, 1999
engineering reserve report.
B. FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS
------------------------------------------------------
Prior to the sale of its oil and gas producing properties effective April 1,
1998, Petrominerals principally operated 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.
Subsequent to the sale and the discontinuation of Hydro-Test activities, the
Company's income was derived from primarily two industry segments: (1) the
production and sale of crude oil and natural gas; and (2) other income which is
primarily income from investments. 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>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Oilfield services 0.0% 14.5% 6.7%
Oil and gas sales 66.9% 54.5% 76.7%
Other . . . . . . 33.1% 31.0% 16.6%
</TABLE>
See Note 9 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
Until April 1998, the Company owned and operated 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. After April 1998, the
Castaic Hills field was the Company's only producing location until the
completion of the acquisition of the 25% interest in Smith Ranch field in
September 1999.
Development of Properties
- ---------------------------
Petrominerals contracted to sell the oil it produced to customers who either
refined the oil or resold it to refiners. The Company did not refine any of its
oil production and used 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 were 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 depended 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
3
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
C. DESCRIPTION OF BUSINESS (Continued)
-------------------------
OIL AND GAS SALES (Continued)
Development of Properties (Continued)
- ---------------------------
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.
Petrominerals contracted to sell its gas produced in Wyoming to Thorofare
Resources through the Joint Operating Agreement. Sales of produced gas were
generally made pursuant to contracts of 30 or 90 days duration and fluctuate
with differences in posted field prices based on the heating content of the gas
produced. The price obtained for gas depended upon numerous factors, including
the extent of domestic production, world events, market demand and the effect of
governmental regulations. As a result of a combination of these factors, gas
prices are constantly fluctuating. Prices for Wyoming gas are significantly
lower than reported benchmark prices for similar gas in the United States due to
the cost of transportation.
The average price the Company received for its crude oil during 1999 was
approximately $11.40 per barrel, which is approximately $2.94 per barrel higher
than the average price which the Company received for its crude in 1998. The
Company incurred average oil production costs of approximately $11.12 per
barrel, and produced approximately 19,114 barrels of crude.
The average price the Company received for its natural gas during 1999 was
approximately $1.90 per thousand cubic feet (mcf). The Company produced
approximately 11,000 mcf.
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. The Company bought out all
limited partners' interests in April 1998 and sold the partnership assets to an
unrelated third party thereafter. See Note 7 to the consolidated financial
statements in Item 7 herein for details.
The Company entered into a purchase and joint venture participation agreement
with Thorofare Resources, Inc. in the County of Sweetwater and the County of
Carbon in the southwestern part of Wyoming on September 20, 1999. Under this
contract, HAT, LLC, a Nevada Limited Liability Company, Nevadacor Energy, Inc.,
a Nevada corporation, and Petrominerals will purchase a fifty percent interest
in sixteen wells together with the accompanying lease acreage (Petrominerals'
Group). In addition, all parties would be committed to drill two new wells on
the acreage, which expands the prospect area. Thorofare would be carried by the
Petrominerals Group for of its participation (25% of 50%) in the two new wells
until drilling and completion or abandonment money had been recovered. (Also,
see Note 7 to the consolidated financial statements in Item 7 for detail).
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 and it has obtained insurance against environmental
pollution.
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.
4
<PAGE>
ITEM 1 - BUSINESS (Continued)
--------
C. DESCRIPTION OF BUSINESS (Continued)
-------------------------
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, 1999, the Company employed a total of 4
- ---------
individuals.
OILFIELD SERVICES
Until July 1998, when Hydro-Test ceased commercial operations, the subsidiary
was engaged in the hydrostatic 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
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.
ITEM 2 - PROPERTIES
----------
AGREEMENT FOR SALE OF PROPERTY
As noted in "Management's Discussion and Analysis" contained in Item 6 hereof,
the Company had sold substantially all of its oil and gas producing assets to an
unrelated entity.
GENERAL
The principal properties of the oil and gas segment consisted 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 and
Carbon County, Wyoming. The Company does not sell the natural gas produced in
their California fields, but instead uses the gas to produce electricity for
electric pumping units or to operate natural gas powered pumping units and tank
heaters. Concurrent to the 1998 sale of the properties, the Company retained
certain working interests in several of the properties. However, the Company had
fully impaired the carrying values of these interests to reflect its December
31, 1998 reserve report, which valued the remaining reserves at $0.
The company's production is concentrated in two areas.
Santa Clarita Area: As a result of the 1998 sale, the company retained a 53%
working interest in the Castaic Hills Unit, a 100% working interest in a nearby
oil well and an 83.3% working interest in 2 producing oil wells in the nearby
Hasley Canyon field. Current net production from the 11 active wells on these
leases is approximately 40 barrels per day (bopd).
5
<PAGE>
ITEM 2 - PROPERTIES (Continued)
----------
GENERAL (Continued)
Smith Ranch Area: As a result of the September 1999 purchase, the company owns a
25% working interest in this gas field located in Carbon County, Wyoming. There
are 2 active producers in the field with current net production of approximately
110 mcf per day (mcfd). The company participated in the drilling of a gas well
in the 3rd quarter of 1999 and completed that well in the Lewis sandstone in
November of 1999. Due to completion problems, the well is currently producing
at uneconomic rates. The operator has plans to recomplete this well in the 2nd
quarter of 2000. The company also plans to fulfill its obligation to
participate in the drilling of the second well in the 2nd quarter of 2000. The
company has also identified potential for development of coalbed methane gas
production in this field and is currently completing a study of the reserve
potential and discussing financing of a pilot project with third parties.
OIL AND GAS RESERVES AND PRODUCTION INFORMATION
The tables located in Note 14 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. As of December 31, 1998, all remaining interests
of the California property have been impaired. The remaining book value of these
interests is $0. The reserves are shown in barrels of oil equivalent (boe).
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 California properties for the years ended December 31, 1999 and 1998 have
been prepared by Babson & Sheppard, an independent petroleum engineering firm in
Long Beach, California. The Company's net interest in proved reserves and
related valuations for its Wyoming properties for the year ended December 31,
1999 have been prepared by McCartney Engineering, an independent petroleum
engineering firm in Denver, Colorado.
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, 1999 and 1998, are contained in Note 14 to the Company's
consolidated financial statements in Item 7 hereof. The Company's reserve
report, from which the foregoing estimates were derived, is based upon prices in
effect at December 31, 1999.
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. The entire reserve of
$10,963,000 was charged off in 1998 due to the sale of minerals in place and the
impairment of remaining interests due to depressed oil prices and recurring
losses from operations. Current accounting standards do not allow the Company to
reinstate value for subsequent increases in the ceiling.
6
<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>
1999 1998
---- ----
<S> <C> <C>
Net annual production Gas (Mmcf) 11 0
Net annual production Oil (MBbl) 19 47
</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>
1999 1998
------ ------
<S> <C> <C>
Average sales price of gas per Mcf. . . . . . $ 1.90 $ 0
Average sales price of oil per barrel . . . . $11.40 $ 8.44
Average production cost per barrel equivalent $11.25 $12.89
</TABLE>
PRODUCTIVE WELLS AND 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. Undeveloped oil and gas properties are properties on which wells
have not been drilled. The Company sold substantially all of its proven acreage
in 1998. Information on the retained properties and the Wyoming acquisition is
located below. See Note 1 to the consolidated financial statements located in
Item 7 herein for additional details.
<TABLE>
<CAPTION>
<S> <C> <C>
Gross Net
----- -----
Producing wells . . . . . . 13 7.4
Developed acreage (acres) . 860 346
Undeveloped acreage (acres) 7,150 1,300
</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 had a 1% interest as
general partner and 6 other entities, including 2 directors and a company
controlled by a director, owned 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 were 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 completed the well on January 20, 1997, and began production shortly
thereafter. In April 1998, the Company bought out all limited partners'
interests and sold the Petrominerals 96-1 partnership assets to an unrelated
third party. See Notes 4 and 7 to the consolidated financial statements in Item
7 for details.
7
<PAGE>
ITEM 2 - PROPERTIES (Continued)
----------
Drilling Activity (Continued)
- ------------------
The Company entered into a purchase and joint venture participation agreement
with Thorofare Resources, Inc. a Wyoming corporation during 1999. Under this
contract, HAT, LLC, a Nevada Limited Liability Company, Nevadacor Energy, Inc.,
a Nevada corporation, and Petrominerals will purchase a fifty percent interest
in sixteen wells together with the accompanying lease acreage (Petrominerals'
Group). In addition, all parties would be committed to drill two new wells on
the acreage, which expand the prospect area. Thorofare would be carried by the
Petrominerals Group for of its participation (25% to 50%) in the two new wells
until drilling completion or abandonment money had been recovered. (See Note 7
to the consolidated financial statements in Item 7 for detail). As of December
31, 1999, the Company has completed the first well of its two well commitment in
Carbon County, Wyoming. The second well is expected to be drilled in the 2nd
quarter of 2000.
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, contends
that drilling mud and wastewater do not constitute hazardous substances within
the meaning of CERCLA. Although the ultimate impact of the resolution of this
contingency is unknown, management now believes that this matter could have
potentially an 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 were to
receive payments over 84 months. The parent Company also agreed to pay $50,000
in cash for equipment repair and convert $500,000 of its unsecured debt to
equity at the rate of $100,000 per year for five years and defer participation
in cash distribution for 24 months. The new value of the parent company's
contribution was computed at $300,000.
On May 16, 1996, the plan of reorganization was accepted by the creditors and
confirmed by the United States Bankruptcy Courts for the Southern District of
Texas, Houston Division. On August 14, 1996, a final hearing took place to
approve the payment of professional fees and order final payment. As such,
Hydro-Test was 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, except for Federal payroll tax liabilities in the amount of
approximately $68,000.
On June 8, 1999, Hydro-Test filed a voluntary petition for Bankruptcy under
Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in the
Southern District of Texas. The creditor's meeting was held in July 1999. None
of Hydro-Test's creditors attended the meeting. In its Chapter 7 petition,
Hydro-Test indicated that it estimates funds will be available for distribution
to unsecured creditors.
8
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS (Continued)
------------------
In late September 1999, the remaining assets of Hydro-Test, whose carrying value
was approximately $121,000, were sold by the bankruptcy trustee for a total of
approximately $5,000 in cash. As of December 31, 1999, the bankruptcy
proceedings remain open. As a result, the remaining prepetition liability of
$448,000 has been kept on the Company's financial statements at December 31,
1999, until the bankruptcy proceedings complete.
On February 7, 2000, the Environmental Protection Agency (EPA) advised the
Company that it had been identified as having disposed of waste material at the
Casmalia Disposal site in Santa Barbara County, California, the site and that
the Company is potentially liable per certain costs associated with site
cleanup.
Records supplied by the EPA indicate that the Company disposed of allowable
non-hazardous drilling mud and other oil field fluids at the site at various
times between 1980 and 1985. Based on a preliminary analysis of the EPA records,
it appears that the Company's disposal activities as the site were conducted in
compliance with applicable EPA regulations.
The Company's financial exposure, if any, cannot be determined at this time.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
During the fourth quarter of 1999, no matter was submitted to a vote of security
holders through the solicitation of proxies or otherwise.
9
<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>
1998
First quarter. $4 3/4 $3 1/4
Second quarter 4 1/4 2 3/4
Third quarter. 3 1/2 2 1/4
Fourth quarter 3 1/8 2 1/4
1999
First quarter. $2 3/4 $2 1/4
Second quarter 2 1/2 2 1/8
Third quarter. 3 2 3/8
Fourth quarter 3 2 1/8
</TABLE>
These stock prices have been retroactively adjusted to reflect the one for eight
reverse stock split that occurred on January 9, 1998 (see Item 7, Note 7 -
Common Stock).
The Company has 842 shareholders of record of its common stock as of March 24,
2000.
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.
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, 1999. The Notes to Consolidated Financial Statements
as of December 31, 1999, 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 was appointed to his position on
December 30, 1998. His predecessor had served his third full term since
returning during 1995. During 1998 and up to his resignation, 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 current president will continue his efforts to
locate suitable acquisition and merger opportunities for the Company. With the
addition of the officer dedicated to business development, the company has also
reviewed multiple opportunities and remains actively involved in the process of
identifying and reviewing acquisition and merger candidates. The company has
also submitted several offers to purchase oil and gas properties that were
rejected. The primary goal of management remains to ensure future profitable
growth for the company and to create and maximize value for the shareholders.
10
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
---------------------------------------------------------------------
OF OPERATIONS (Continued)
--------------
BUSINESS REVIEW (Continued)
General (Continued)
- -------
The Company has two primary assets. First, as a result of the sale to the
unrelated of all its oil and gas producing assets, an agreement was signed on
February 4, 1998 that provided an additional reserved production payment of
$931,000. This payment is paid in installments in any month which certain
posted prices for oil produced exceeds $13.50 per barrel. The monthly payment
is 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. Revenue from this note is reflected in the
consolidated statements of cashflows as a reduction of Notes receivable. This
sale of substantially all the Company's oil and gas properties was effective
April 1, 1998.
Second, the company has ownership in oil and gas production. As noted in Item
2, the company retained an interest in several leases in California as part of
the April 1998 sale. In September of 1999, the Company entered into a purchase
and joint venture participation agreement with Thorofare Resources, Inc., a
Wyoming Corporation. Under this contract, HAT, LLC, a Nevada Limited Liability
Company, Nevadacor Energy, Inc., a Nevada corporation, and Petrominerals
purchased a fifty percent interest in sixteen wells together with the
accompanying lease acreage (Petrominerals' Group). In addition, all parties
would be committed to drill two new wells on the acreage, which expands the
prospect area.
Oilfield Services Segment
- ---------------------------
The Company's wholly owned subsidiary, Hydro-Test International, Inc.
(Hydro-Test), 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 continued to operate the
remaining facility near Houston, Texas, on a limited basis up until July 1998
when operations ceased. Hydro-Test filed a voluntary petition for Chapter 7
bankruptcy on June 8, 1999. In late September 1999, the remaining assets of
Hydro-Test were liquidated by the bankruptcy trustee for approximately $5,000 in
cash. As of March 24, 2000, the petition remains incomplete. (see Item -3 -
Legal Proceedings)
Change in Officers
- --------------------
On September 22, 1999, the Company announced that Daniel H. Silverman had joined
the company as Executive Vice President of Business Development and Chief
Operating Officer. He is responsible for managing all of Petrominerals'
acquisition, corporate finance and operating activities.
1999 COMPARED WITH 1998
The Company had negative cash flows from operations of approximately $429,000
for the year ended December 31, 1999, as compared with a negative cash flow from
operations of $616,000 in the prior year. The decrease in cash flow from
operating activities was primarily the result of the net operating loss due to
administrative expenses associated with professional fees incurred during
merger/sale negotiations as well as during Chapter 7 bankruptcy filing and
liquidation of Hydro-Test International, Inc.
The Company had net loss of approximately $(513,000), compared to net income of
$595,000 in the prior year. Current year net loss was primarily due to loss from
continuing operations of approximately $(397,000) and the loss on disposition of
properties (discontinued operations) of approximately $(116,000). The loss from
continuing operations is from the Company's oil and gas operations.
The Company has discontinued Hydro-Test's operation since July 1998 and has
discontinued a portion of its oil and gas operations after the disposition of
oil and gas producing assets to an unrelated party in April 1998. As such,
revenues and expenses from discontinued operations in 1999 will be inconsistent
with the 1998 amounts.
11
<PAGE>
ITEM 6 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
---------------------------------------------------------------------
OF OPERATIONS (Continued)
--------------
BUSINESS REVIEW (Continued)
Oilfield Services Segment (Continued)
- ---------------------------
1999 COMPARED WITH 1998 (Continued)
The Company's other income decreased by approximately $28,000 during 1999, due
primarily to the decrease in cash and cash equivalents as a result of net
operating loss and purchase of oil and gas properties in Wyoming (see Note 7 for
detail). Other income in 1999 in the amount of $117,000 was primarily interest
income derived from cash and cash equivalents deposited with financial
institutions. This trend is expected to continue in 2000 until the majority of
cash is used for the purchase of new businesses or producing assets, or other
purposes.
General and administrative expenses decreased by approximately 10%, due to
management's cost reduction effort.
1998 COMPARED WITH 1997
The Company had negative cash flows from operations of approximately $631,000
for the year ended December 31, 1998, as compared with a negative cash flow from
operations of $133,000 in the prior year. The decrease in cash flow from
operating activities was primarily the result of the net operating loss due to
the drop in oil prices, as well as increased general and administrative expenses
associated with professional fees incurred during merger/sale negotiations.
The Company had net income of approximately $595,000, compared to net income of
$0 in the prior year. Current year net income was primarily due to the gain on
disposition of properties (discontinued operations) of approximately $1,482,000
and loss from continuing operations of approximately $887,000. The loss from
continuing operations is the net effect of continued net losses from Hydro-Test
of approximately $67,000 and net loss of approximately $820,000 from the
Company's oil and gas operations, including the $242,000 impairment losses
recorded in 1998.
The Company has discontinued Hydro-Test's operation since July 1998 and has
discontinued its oil and gas operations after the disposition of oil and gas
producing assets to an unrelated party in April 1998. As such, revenues and
expenses from discontinued operations in 1999 will be inconsistent with the 1998
amounts.
The Company's other income decreased by approximately $87,000 during 1998, due
primarily to the prior year's one-time payments for options to purchase assets
of the Company. Other income in 1998 in the amount of $145,000 was primarily
interest income derived from cash and cash equivalents deposited with financial
institutions. This trend is expected to continue in 1999 until the majority of
cash is used for the purchase of new businesses or producing assets, or other
purposes.
General and administrative expenses increased by approximately 10%, due to
additional professional fees incurred during negotiations to sell the Company's
assets.
12
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Brown Armstrong Randall Reyes Paulden &McCown,
Independent Auditor's Report. . . . . . . . . . . . . . 14
Consolidated Balance Sheets at December 31, 1999 and 1998 15-16
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998. . . . . . . . . . . . . . . 17
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999 and 1998. . . . . . . . . 18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998. . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements. . . . . . . . 20-32
</TABLE>
13
<PAGE>
REPORT OF BROWN ARMSTRONG RANDALL
REYES PAULDEN & MCCOWN
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, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the two years then ended and the related December 31,
1999 and 1998 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, 1999 and 1998, 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 5 to the financial statements, on February 4, 1998, the
Company entered into an agreement and sold a major segment of its operations.
The segment represents a significant portion of the Company's total assets and
operations.
BROWN ARMSTRONG RANDALL
REYES PAULDEN & McCOWN
ACCOUNTANCY CORPORATION
Bakersfield, California
March 21, 2000
14
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in thousands, except par value amounts)
ASSETS
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $2,128 $2,928
Accounts receivable. . . . . . . . . . . . . . . . . . . . . 54 8
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 31 52
------ ------
Total Current Assets. . . . . . . . . . . . . . . . . . . 2,213 2,988
Restricted Cash. . . . . . . . . . . . . . . . . . . . . . . . 25 25
Property and Equipment, net (including oil and gas properties
accounted for on the successful efforts method). . . . . . . . 355 129
Notes Receivable and Other Assets. . . . . . . . . . . . . . . 437 417
------ ------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $3,030 $3,559
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statemeennts.
15
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in thousands, except par value amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 157 $ 133
Accrued liabilities . . . . . . . . . . . . . . . . . . . 4 44
Royalties payable . . . . . . . . . . . . . . . . . . . . 11 11
------ ------
Total Current Liabilities. . . . . . . . . . . . . . . 172 188
Prepetition Liabilities . . . . . . . . . . . . . . . . . . 448 448
------ ------
Total Liabilities. . . . . . . . . . . . . . . . . . . 620 636
------ ------
Shareholders' Equity
Preferred stock:
$.10 par value, 5,000,000 shares authorized; no shares
no shares issued and outstanding. . . . . . . . . . . - -
Common stock:
$.80 par value, 25,000,000 shares authorized; 1,059,404
and 1,059,417 shares issued and outstanding at
December 31, 1999 and 1998, respectively . . . . . . . 848 848
Capital in Excess of Par Value. . . . . . . . . . . . . . . 563 563
Retained Earnings . . . . . . . . . . . . . . . . . . . . . 999 1,512
------ ------
Total Shareholders' Equity . . . . . . . . . . . . . . 2,410 2,923
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . . . . . $3,030 $3,559
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statemeennts.
16
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues
Oilfield services . . . . . . . . . . . . . . . . . . $ - $ 68
Oil and gas . . . . . . . . . . . . . . . . . . . . . 236 255
Other income. . . . . . . . . . . . . . . . . . . . . 117 145
------- -------
Total Revenues. . . . . . . . . . . . . . . . . . . 353 468
------- -------
Costs and Expenses
Oilfield services . . . . . . . . . . . . . . . . . . 15 128
Oil and gas . . . . . . . . . . . . . . . . . . . . . 215 402
Depreciation, depletion and amortization. . . . . . . 9 32
General and administrative. . . . . . . . . . . . . . 473 522
Interest. . . . . . . . . . . . . . . . . . . . . . . 1 4
Impairment loss . . . . . . . . . . . . . . . . . . . - 242
Other expense . . . . . . . . . . . . . . . . . . . . 37 25
------- -------
Total Costs and Expenses. . . . . . . . . . . . . . 750 1,355
------- -------
Loss from continuing operations before income taxes . . (397) (887)
Discontinued operations, net of income taxes
Income (loss) on disposition net of income tax of $0
for 1999 and 1998 . . . . . . . . . . . . . . . . . (116) 1,482
------- -------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . $ (513) $ 595
======= =======
Per Share Amounts
From continuing operations. . . . . . . . . . . . . . $(0.37) $(0.84)
From discontinued operations. . . . . . . . . . . . . (0.11) 1.40
------- -------
Net income (loss) per share . . . . . . . . . . . . . . $(0.48) $ .56
======= =======
Weighted average common shares outstanding. . . . . . . 1,059 1,059
======= =======
</TABLE>
(Per share amounts have been adjusted retroactively for the effects of a one for
eight reverse stock split on January 9, 1998).
The accompanying notes are an integral part of these financial statemeennts.
17
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(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 . . . 1,059,417 848 563 902 2,313
Prior period adjustment. . . . . - - - 15 15
---------- ------- ---------- ---------- -------
Balance, December 31, 1997
As restated. . . . . . . . . . . 1,059,417 848 563 917 2,328
Net income . . . . . . . . . . . - - - 595 595
---------- ------- ---------- ---------- -------
Balance, December 31, 1998 . . . 1,059,417 848 563 1,512 2,923
Fractional adjustments . . . . . (13) - - - -
Net income . . . . . . . . . . . - - - (513) (513)
---------- ------- ---------- ---------- -------
Balance, December 31, 1999 . . . 1,059,404 $ 848 $ 563 $ 999 $2,410
========== ======= ========== ========== =======
</TABLE>
(Per share amounts have been adjusted retroactively for the effects of a one for
eight reverse stock split on January 9, 1998).
The accompanying notes are an integral part of these financial statemeennts.
18
<PAGE>
PETROMINERALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . $ (513) $ 595
Adjustment to reconcile net income (loss) to net cash
used by operating activities:
Depreciation, depletion and amortization . . . . . 9 32
Impairment loss. . . . . . . . . . . . . . . . . . - 242
Accounts receivable. . . . . . . . . . . . . . . . (46) (1,482)
Loss on disposal of fixed assets . . . . . . . . . 116 107
Other current assets . . . . . . . . . . . . . . . 21 (23)
Inventories. . . . . . . . . . . . . . . . . . . . - 50
Restricted cash. . . . . . . . . . . . . . . . . . - 15
Accounts payable and accrued liabilities . . . . . (16) (66)
Royalties payable. . . . . . . . . . . . . . . . . - (18)
Prepetition liabilities. . . . . . . . . . . . . . - (68)
------- --------
Net Cash Used by Operating Activities. . . . . . . . . . (429) (616)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment . . . . . . . . . . (356) (190)
Purchase of partnership interest . . . . . . . . . . . - (215)
Proceeds from sale of assets . . . . . . . . . . . . . 5 3,685
Notes receivable . . . . . . . . . . . . . . . . . . . (20) 40
------- --------
Net Cash Provided (Used) by Investing Activities . . . . (371) 3,320
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of bank debt. . . . . . . . . . . . . . . . . - (11)
------- --------
Net increase (decrease) in cash and cash equivalents . . (800) 2,693
Cash and cash equivalents at beginning of year . . . . . 2,928 235
------- --------
Cash and cash equivalents at end of year . . . . . . . . $2,128 $ 2,928
======= ========
SUPPLEMENTAL DISCLOSURES ON CASH FLOW INFORMATION:
Cash paid during the period for interest. . . . . . . $ 1 $ 4
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statemeennts.
19
<PAGE>
PETROMINERALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
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 and natural gas 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 from continuing operations of $397,000 and $887,000 for the years
ended December 31, 1999 and 1998, respectively.
On February 2, 1998, the Company entered into an agreement with American Energy
Operations, Inc. (AEO) and sold substantially all of its oil and gas operating
assets to AEO effective April 1, 1998. Remaining oil and gas assets, which
included primarily indirect working interests in a few of the disposed
properties, have been impaired and were considered to have no economic value at
December 31, 1998. However, due to the increase in the price of crude oil during
1999, these properties were estimated to have discounted net cash in flow of
approximately $669,000 at December 31, 1999 as a result of the Company's latest
engineering reserve report.
In 1999, the Company purchased a working interest in certain gas properties
located in Carbon County, Wyoming. As of December 31, 1999, one well is
considered to have proved reserves with future discounted net cash in flow of
approximately $67,000 based on the Company's latest engineering reserve report.
Furthermore, 2 wells are currently producing at uneconomic rates. The operator
has plans to work on both wells during the 2nd quarter of 2000 to return them to
economic producing rates.
With respect to the Company's subsidiary, Hydro-Test International, Inc.,
industry conditions caused a significant downturn in the oilfield service
business in the first quarter of 1995. Because of this downturn, combined with
Hydro-Test's inability to refinance its debt and obtain a working capital line,
the Company adopted a formal plan to liquidate this subsidiary. This plan was
abandoned, and 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. 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. In July 1998, Hydro-Test ceased
commercial operations and employed one person at its office in Texas.
On June 8, 1999, Hydro-Test International, Inc. filed a voluntary petition for
Bankruptcy under Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy
Court in the Southern District of Texas. The creditor's meeting was held in
July 1999. None of Hydro-Test's creditors attended the meeting. In its Chapter
7 petition, Hydro-Test indicated that it estimated that funds would be available
for distribution to unsecured creditors.
20
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Basis of Presentation and Going Concern (Continued)
- --------------------------------------------
GOING CONCERN (Continued)
In late September 1999, the remaining assets of Hydro-Test, whose carrying value
was approximately $121,000, were sold by the bankruptcy trustee for
approximately $5,000 in cash. As of December 31, 1999, the bankruptcy
proceedings remain open. As a result, the remaining prepetition liability of
$448,000 has been kept on the Company's financial statements at December 31,
1999, until the bankruptcy proceedings complete.
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.
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.
Restricted Cash
- ----------------
The Company has a Certificate of Deposit (CD) with a value of approximately
$25,000 at December 31, 1999 and 1998 that has been recorded as restricted cash.
The CD has been pledged to the Bureau of Land Management to cover environmental
costs.
Revenue Recognition
- --------------------
Revenues from the sale of petroleum produced are recognized upon the passage of
title, net of royalties and net profits interests.
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 net 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, 1998 and 1999.
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.
21
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Property and Equipment (Continued)
- ------------------------
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,
and Carbon County, Wyoming, properties.
The Company adopted SFAS No. 121 in 1996. The future impairment loss on the oil
and gas properties has been 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. At December 31, 1999, no oil and gas properties were
considered to be impaired.
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.
Disclosures about Fair Value of Financial Instruments
- -----------------------------------------------------------
The carrying amount of cash and cash equivalents, restricted cash, accounts
receivable, other current assets, accounts payable and accrued expenses
approximates fair value because of the short-term maturity of these instruments.
It is impractical to estimate the fair value of the production payment
receivable included in other assets because there is no stated interest rate or
maturity, and because the realization of the receivable is subject to price and
market factors uncontrollable by the Company.
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 9, 1998.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to classifications
followed for 1999. These reclassifications had no effect upon reported net
income.
New Accounting Pronouncements
- -------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or liabilities
in the statement of financial position and measurement of those instruments at
fair value. The statement is effective for fiscal years beginning after June 15,
2000 (see SFAS 137 below for detail). Management is evaluating SFAS 123 and does
not believe that adoption of the statement will have a material impact on the
Company's financial statements.
22
<PAGE>
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
--------------------------------------------------------
New Accounting Pronouncements (Continued)
- -------------------------------
Effective January 1999, FASB issued Statement of Financial Accounting Standard
No. 134 (SFAS 134), Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage loans Held for Sale by a Mortgage Banking Enterprise.
The Company typically does not invest in mortgage-backed securities.
In February 1999, FASB issued Statement of Financial Accounting Standards No.
135 (SFAS 135), Rescission of FASB Statement No. 75 and Technical Corrections.
This Statement is effective for financial statements issued for fiscal years
ending after February 15, 1999. Management is evaluating SFAS 135, and does not
believe that adoption of the statement will impact the Company's financial
statements.
In June 1999, FASB issued Statement of Financial Accounting Standard No. 136
(SFAS 136), transfers of Assets to a Not-for-Profit Organization or Charitable
Trust That Raises or Holds Contributions for Others. This Statement is
effective for financial statements issued for fiscal periods beginning after
December 15, 1999. Management is evaluating SFAS 136 and does not believe that
adoption of the statement will have a material impact on the Company's financial
statements.
During June 1999, FASB issued Statement of Financial Accounting Standard No. 137
(SFAS 137), Accounting for Derivative Instruments and hedging
Activities-Deferral of the Effective Date of FASB Statement 133. The Statement
defers the effective date of SFAS 133 to June 15, 2000. Management is
evaluating SFAS 123 and does not believe that adoption of the statement will
have a material impact on the Company's financial statements.
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>
1999 1998
------ ------
<S> <C> <C>
At Cost
Undeveloped properties . . . . . . . . . . . . . . $ 342 $ -
------ ------
Other Property and Equipment
Furniture, fixtures and equipment. . . . . . . . . 466 451
Accumulated depreciation related to other property
and equipment. . . . . . . . . . . . . . . . . . (453) (444)
------ ------
Net Other Property and Equipment . . . . . . . . . . 13 7
------ ------
At Net Realizable Value:
Oilfield service equipment . . . . . . . . . . . . - 122
------ ------
Property and Equipment, net. . . . . . . . . . . . . $ 355 $ 129
====== ======
</TABLE>
Depreciation, depletion and amortization for the years ended December 31, 1999
and 1998 was $9,000 and $32,000, respectively.
23
<PAGE>
NOTE 2 - PROPERTY AND EQUIPMENT (Continued)
------------------------
Financial Accounting Standards Board Statements No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
(SFAS 121)." This statement requires that long-lived assets be held and used by
an entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Management
believes that the remaining carrying amount of plant assets is recoverable based
on current cash flows projections. Such projections are predicated on currently
supported estimates and assumptions. The cash flows that the Company will
ultimately realize could differ materially from the projected amounts.
During 1998, the Company determined that the decline in estimated oil and gas
reserves due to the sale of substantially all oil and gas operating assets (see
Note 5), depressed oil prices, and the Company's continuing operating losses
indicated impairment of the Company's remaining oil and gas properties. The
estimated undiscounted cash flows anticipated from operating the oil and gas
properties indicated that a write-down to fair market value was required under
SFAS 121. This write-down resulted in a charge to income of $242,000, which is
included in the Statement of Operations as impairment loss. The estimated fair
value of these assets was determined based on an independent appraisal. No
impairment occurred during 1999 as a result of the Company's latest geological
reserve report obtained from the independent appraisal.
NOTE 3 - PREPETITION LIABILITIES
------------------------
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.
On June 8, 1999, Hydro-Test International, Inc. filed a voluntary petition for
Bankruptcy under Chapter 7 of the U.S. Bankruptcy Code with the U.S. Bankruptcy
Court in the Southern District of Texas. In its Chapter 7 petition, Hydro-Test
indicated that it estimates funds will be available for distribution to
unsecured creditors.
In late September 1999, the remaining assets of Hydro-Test, whose carrying value
was approximately $121,000, were sold by the bankruptcy trustee for a total of
approximately $5,000 in cash. As of December 31, 1999, the bankruptcy
proceedings remain open. As a result, the remaining prepetition liability of
$448,000 has been kept on the Company's financial statements at December 31,
1999 until the bankruptcy proceedings complete.
NOTE 4 - DISPOSITION/ACQUISITION OF ASSETS
-----------------------------------
Sale of Oil and Gas Operating Assets
- ------------------------------------------
On February 4, 1998, the Company entered into a contract for the sale of
substantially 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 sale was effective April 1, 1998 and the purchase price was $4,670,000,
which included $3,739,000 in cash and an interest free production payment of
$931,000. The production payable is to be paid in installments in any month in
which certain postings for crude oil exceeds $13.50 per barrel. The monthly
payment will be equal to one-half of the difference between the posted price and
$13.50, multiplied by the barrels produced.
24
<PAGE>
NOTE 4 - DISPOSITION/ACQUISITION OF ASSETS (Continued)
-----------------------------------
Sale of Oil and Gas Operating Assets (Continued)
- ------------------------------------------
In the third quarter of 1998, persistent declines in the price of oil triggered
management to reevaluate both the recorded value and net realizable value of the
$931,000 production payment given in the exchange. Management determined that
approximately 40% ($372,000) of the stated value of the production payment will
be realized by the Company. Accordingly, the proceeds from the sale and the
gain as previously reported at June 30, 1998 were reduced by $559,000 to reflect
management's revised valuation of the production payment receivable. The
previously reported gain was also recalculated from June 30, 1998 to
re-capitalize certain assets previously expensed. During the year ended
December 31, 1999, due to increase in crude oil prices, the Company received
production payments totaling $50,000, reducing the outstanding receivable to
$322,000.
The Company retained interest in some of its properties. However, as discussed
in Note 2, the Company's engineering report for December 31, 1998 concluded that
the value of the reserves related to the remaining properties was $0.
Accordingly, an impairment loss was recorded to report the remaining assets at
$0
Purchase of Oil and Gas Operating Assets
- ----------------------------------------------
On September 20, 1999, the Company completed the acquisition of a 25% interest
in a natural gas field in southwest Wyoming. As part of the acquisition the
Company acquired a 25% interest in two producing gas wells with a current
production rate of 500 mcfd per day (100 mcfd net) and committed to participate
in the drilling of two additional test wells by May 2000. The acquisition also
included a field-wide gas gathering system.
The Company's acquisition of the 25% interest was concluded as a participant
with two other related companies (see Note 7 for detail of related party
transactions), HAT, LLC and Nevadacor Energy, Inc., which together acquired 50%
of Thorofare Energy, Inc.'s existing acreage position, existing wells, well
operating equipment and facilities together with production and pipelines and
prospective acreage acquisition in an area of interest negotiated between the
parties. The Purchase and Participation Agreement provides for leasehold
ownership as follows:
<TABLE>
<CAPTION>
<S> <C>
Petrominerals Corporation 25%
HAT, LLC. . . . . . . . . 14%
Nevadacor Energy, Inc.. . 11%
</TABLE>
NOTE 5 - INCOME TAXES
-------------
A reconciliation of the provision (benefit) for income taxes to the statutory
Federal income tax rate before extraordinary items is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----- ------
<S> <C> <C>
Statutory Federal income tax (benefit). . . $ - $ 207
Increase (decrease) in provision resulting
from losses without tax benefit . . . . . - (207)
----- ------
$ - $ -
===== ======
</TABLE>
25
<PAGE>
NOTE 5 - INCOME TAXES (Continued)
-------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The following table
summarizes the significant components of the Company's deferred tax assets and
liabilities as of December 31,:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards . . . . . . . . . . . $ 2,383 $ 2,150
Valuation reserve for deferred tax assets. . . . . . . (2,383) (2,145)
-------- --------
Net Deferred Tax Assets . . . . . . . . . . . . . . $ - $ 5
======== ========
Deferred Tax Liabilities:
Tax over book depreciation, amortization and depletion $ - $ 5
======== --------
Deferred Tax Liabilities, net of deferred tax assets $ - $ -
======== ========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $7,009,000 for Federal income tax purposes that will expire
beginning in the year 2002. For financial reporting purposes, a valuation
allowance of $2,383,000 has been recorded to offset the deferred tax asset
related primarily to these carryforwards.
NOTE 6 - 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 March 6, 1997, the Board adopted a resolution granting stock options to
purchase up to 5,000 shares of common stock to the then 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 former 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.
In September 1999, the Company entered into an agreement with a key employee.
Under this agreement, the Company granted stock options to purchase up to 60,000
shares of common stock to the key employee. Under the terms of the agreement,
the employee can purchase 20,000 shares of common stock at a price of $3.00 per
share vesting upon execution of the engagement agreement; another 20,000 shares
of common stock at a price of $3.00 per share vesting in six months from the
execution date of the engagement agreement; and another 20,000 shares of common
stock at a price of $5.00 per share vesting in eighteen months from the
execution date of the engagement agreement.
On October 5, 1999, the Board of Directors adopted a resolution to award stock
options to purchase up to 20,000 shares of common stock to its employee
directors, 11,000 shares of common stock to its non-employee directors, and
10,000 shares to its corporate counsel. Under the terms of the resolution of
common stock. These stock options can be exercised at a price fixed to average
market price of shares traded during the month of October 1999. This average
price is approximately $2.72 per share.
26
<PAGE>
NOTE 6 - COMMON STOCK (Continued)
-------------
No stock options were exercised during the years ended December 31, 1999 and
1998.
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 interest 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, 1999 and 1998.
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, 1998. 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, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------- ---------------
Weighted Weighted
Average Shares Income (Loss) Average Shares Income (Loss)
(in thousands) Per Share (in thousands) Per Share
- ------------------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Basic
Loss from continuing
operations. . . . . . (1,059) (0.37) (1,059) (0.84)
============= =============
Income from discontinued
operations. . . . . . . (0.11) 1.40
------------- ---------------
Net Income (Loss) . . . . (0.48) 0.56
============= ===============
Diluted
Loss from continuing
operations. . . . . . (1,059) (0.37) (1,059) (0.84)
============= =============
Income from discontinued
operations. . . . . . . (0.11) 1.40
------------- ---------------
Net Income (Loss) . . . . (0.48) 0.56
============= ===============
</TABLE>
(All share amounts have been adjusted retroactively for the effects of a one for
eight reverse stock split on January 9, 1998).
Basic and diluted earnings per share are the same, as any impact from the
exercise of stock options would be anti-dilutive.
NOTE 7 - 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 $25,000 and $18,000 for 1999 and
1998, respectively.
On December 3, 1996, the Company became the general partner of Petrominerals
96-1, a newly formed limited partnership. Three directors/former directors of
the Company are limited partners in Petrominerals 96-1. The Company bought out
all outside interests from the limited partners for $214,755 in April 1998. The
partnership assets were then sold to American Energy Operations, Inc. pursuant
to the sale of the Company's oil and gas holdings effective April 1, 1998 (see
Note 5).
27
<PAGE>
NOTE 7 - RELATED PARTIES AND RELATED PARTY TRANSACTIONS (CONT.)
------------------------------------------------------------
As mentioned in Note 4, during 1999, the Company entered into an agreement to
gain working interest in certain wells and leases in the state of Wyoming. Two
participating entities with Petrominerals Corporation in the acquisition are
HAT, LLC. and Nevadacor Energy, Inc. Nevadacor who is acting as agent for Kaymor
Energy, LLC (Kaymor), a Limited Liability Company controlled by Petrominerals
Corporation's president, CEO and shareholder. In addition, a key employee of the
Company has a minor interest in HAT, LLC.
NOTE 8 - 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>
1999
---------
Revenues . . . . . . . . . . $ 58 $ 76 $ 128 $ 91 $ 353
Costs and expenses . . . . . 137 160 222 231 750
--------- --------- --------- --------- -------
Income (loss) from
continuing operations. . . (79) (84) (94) (140) (397)
Discontinued operations,
net of taxes . . . . . . . - - (116) - (116)
--------- --------- --------- --------- -------
Net income (loss). . . . . . $ (79) $ (84) $ (210) $ (140) $ (513)
========= ========= ========= ========= =======
Net income (loss) per share. (0.07) (0.08) (0.20) (0.13) (0.48)
========= ========= ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
1998
---------
Revenues . . . . . . . . . . $ 188 $ 110 $ 102 $ 68 $ 468
Costs and expenses . . . . . 346 238 263 508 1,355
--------- --------- --------- --------- -------
Income (loss) from
continuing operations. . . (158) (128) (161) (440) (887)
Discontinued operations,
net of taxes . . . . . . . - 2,161 (476) (203) 1,482
--------- --------- --------- --------- -------
Net income (loss). . . . . . $ (158) $ 2,033 $ (637) $ (643) $ 595
========= ========= ========= ========= =======
Net income (loss) per share. (0.15) 1.92 (0.60) (0.61) $ 0.56
========= ========= ========= ========= =======
</TABLE>
(Per share amounts have been adjusted retroactively for the effects of a one for
eight reverse stock split on January 9, 1998).
NOTE 9 - SEGMENT INFORMATION
--------------------
The Company adopted SFAS No. 131, Disclosure About Segments of an Enterprise and
Related Information "SFAS 131" in 1998 which changes the way the Company reports
information about its operating segments.
The Company identifies reportable segments by product and country, although the
Company currently does not have foreign country segments. The Company includes
revenues from both external customers and revenues from transactions with other
operating segments in its measure of segment profit or loss. The Company also
includes interest revenue and expense, DD&A, and other operating expenses in its
measure of segment profit or loss.
The accounting policies of the reportable segments are the same as those
described in the Summary of Significant Accounting Principles (see Note 1).
28
<PAGE>
NOTE 9 - SEGMENT INFORMATION (Continued)
--------------------
The Company's operations are classified into two principal industry segments.
Following is a summary of segmented information for 1999 and 1998:
<TABLE>
<CAPTION>
Oil
Oilfield Production
Services and Sales Total
---------- ----------- -------
<S> <C> <C> <C>
Year Ended December 31, 1999
Revenue from external customers . . . . . $ - $ 277 $ 277
========== =========== =======
Interest revenue. . . . . . . . . . . . . $ - $ 117 $ 117
========== =========== =======
Interest expense. . . . . . . . . . . . . $ - $ 1 $ 1
========== =========== =======
Expenditures for segment assets . . . . . $ - $ 342 $ 342
========== =========== =======
Depreciation, depletion and amortization. $ - $ 9 $ 9
========== =========== =======
Lease impairment. . . . . . . . . . . . . $ - $ - $ -
========== =========== =======
Total Assets (net of intercompany items). $ 7 $ 3,023 $3,030
========== =========== =======
Loss from continuing operations . . . . . $ - $ (397) $ (397)
========== =========== =======
Loss from discontinued operations . . . . $ (116) $ - $ (116)
========== =========== =======
Net Loss. . . . . . . . . . . . . . . . . $ (116) $ (397) $ (513)
========== =========== =======
</TABLE>
<TABLE>
<CAPTION>
Oil
Oilfield Production
Services and Sales Total
---------- ----------- -------
<S> <C> <C> <C>
Year Ended December 31, 1998
Revenue from external customers . . . . . $ 68 $ 400 $ 468
========== =========== =======
Interest revenue. . . . . . . . . . . . . $ - $ 122 $ 122
========== =========== =======
Interest expense. . . . . . . . . . . . . $ 1 $ 3 $ 4
========== =========== =======
Expenditures for segment assets . . . . . $ - $ 405 $ 405
========== =========== =======
Depreciation, depletion and amortization. $ 1 $ 31 $ 32
========== =========== =======
Lease impairment. . . . . . . . . . . . . $ - $ 242 $ 242
========== =========== =======
Total Assets (net of intercompany items). $ 125 $ 3,434 $3,559
========== =========== =======
(Loss) from continuing operations . . . . $ (67) $ (820) $ (887)
========== =========== =======
Income from discontinued operations . . . $ - $ 1,482 $1,482
========== =========== =======
Net Income (Loss) . . . . . . . . . . . . $ (67) $ 662 $ 595
========== =========== =======
</TABLE>
Effective April 1, 1998, the Company disposed of its oil production segment by
sale to an unaffiliated third party.
NOTE 10 - ENVIRONMENTAL MATTERS
----------------------
Monterey Park, California
- ---------------------------
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.
29
<PAGE>
NOTE 10 - ENVIRONMENTAL MATTERS (Continued)
----------------------
Monterey Park, California (Continued)
- ---------------------------
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 wastewater 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.
Santa Barbara, California
- ---------------------------
On February 7, 2000, the Environmental Protection Agency (EPA) advised the
Company that it had been identified as having disposed of waste material at the
Casmalia Disposal site in Santa Barbara County, California, and that the Company
is potentially liable for certain costs associated with site cleanup.
Records supplied by the EPA indicate that the Company disposed of allowable,
non-hazardous drilling mud and other oil field fluids at the site at various
times between 1980 and 1985. Based upon a preliminary analysis of the EPA
records, it appears that the Company's disposal activities at the site were
conducted in compliance with applicable EPA regulations.
The Company's disposal activities at the site were conducted in compliance with
applicable EPA regulations.
The Company's financial exposure, if any, cannot be determined at this time.
NOTE 11 - 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.
NOTE 12 - CONCENTRATION OF BUSINESS AND CREDIT RISK
----------------------------------------------
The Company sold substantially all of its oil and gas to Texaco Trading and
Transportation, Inc. (Texaco). In fiscal year 1999 and 1998, revenue from the
sale to Texaco was more than 50% of the Company's gross revenue from continuing
operations.
The Company maintains most cash and cash equivalents in short-term (less than 30
days) commercial paper managed by Union Bank of California which does not have
Federal Insurance or collaterals to secure the balance. At December 31, 1999 and
1998, unsecured cash and cash equivalents were $1,900,000 and $2,775,000,
respectively.
30
<PAGE>
NOTE 13 - BANKRUPTCY LIQUIDATION
-----------------------
As mentioned in Note 1, the Company's wholly owned subsidiary, Hydro-Test
International, Inc., filed a voluntary petition for Bankruptcy under Chapter 7
of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in the Southern
District of Texas on June 8, 1999. The creditor's meeting was held in July
1999. None of Hydro-Test's creditors attended the meeting. In its Chapter 7
petition, Hydro-Test indicated that it estimates funds will be available for
distribution to unsecured creditors. As of December 31, 1999 the petition
remains open.
In late September 1999, the remaining assets of Hydro-Test, whose carrying value
was approximately $121,000, were sold by the bankruptcy trustee for cash. The
assets were sold for approximately $5,000 in cash and remaining carrying value
was expensed as of December 31, 1999.
Because the petition remains open, the remaining prepetition liability of
$448,000 has been kept on the Company's financial statements. If upon the
settlement of the liquidation, the remaining prepetition liability has not been
pursued by creditors, the Company will recognize the appropriate gain.
NOTE 14 - 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>
1999 1998
----- ------
<S> <C> <C>
Produced oil and gas sales . . . . . . . . . . . . . . . . . $ 236 $ 255
Less:
Operating expenses . . . . . . . . . . . . . . . . . . . . 215 402
Depreciation, depletion and amortization . . . . . . . . . 9 31
----- ------
Results of operations from oil and gas producing activities,
excluding corporate overhead and interest costs. . . . . . $ 12 $(178)
===== ======
</TABLE>
No development or property acquisition costs were incurred in 1997 or 1998.
Estimated Quantities of Oil and Gas Reserves
- --------------------------------------------------
The following table presents the Company's estimates of its proved oil
equivalent (in thousands of barrels equivalent*) 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>
1999 1998
------ ------
<S> <C> <C>
Proved developed and undeveloped reserves: (Mboe)
Beginning of period . . . . . . . . . . . . . . $ - $ 871
Purchase of minerals in place . . . . . . . . . 14 -
Revision of previous estimates. . . . . . . . . 155 -
Production. . . . . . . . . . . . . . . . . . . (22) (47)
Sale of minerals in place . . . . . . . . . . . - (824)
------ ------
End of period . . . . . . . . . . . . . . . . . . 147 -
Proved developed reserves:
Beginning of period . . . . . . . . . . . . . . - 871
End of period . . . . . . . . . . . . . . . . . 147 -
</TABLE>
* (Six mcf of natural gas has been converted to one barrel of crude oil).
31
<PAGE>
NOTE 14 - SUPPLEMENTAL OIL AND GAS PROPERTIES AND RELATED RESERVES (UNAUDITED)
--------------------------------------------------------------------
(Continued)
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, 1999 and 1998. 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.
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>
1999 1998
-------- -----
<S> <C> <C>
Future cash inflows. . . . . . . . . . . . . . . . . . . $ 3,159 $ -
Future production and development costs. . . . . . . . . (2,022) -
-------- -----
Future net cash flows. . . . . . . . . . . . . . . . . . 1,137 -
10% annual discount for estimated timing of cash flows . 401 -
-------- -----
Standardized measure of discounted future net cash flows $ 736 $ -
======== =====
</TABLE>
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>
1999 1998
-------- --------
<S> <C> <C>
Sales and transfers of oil and gas produced,
net of production cost. . . . . . . . . . . $ (236) $ 131
Net changes in prices and production costs,
based on beginning of year barrels. . . . . (2,022) -
Revisions to previous estimates . . . . . . . 3,224 -
Accretion of discount . . . . . . . . . . . . (400) -
Sale of minerals in place . . . . . . . . . . - (4,968)
Other . . . . . . . . . . . . . . . . . . . . 170 -
-------- --------
Net Increase (Decrease) . . . . . . . . . . . $ 736 $(4,837)
======== ========
</TABLE>
32
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None.
33
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION 16(A) OF THE
--------------------------------------------------------------------
SECURITIES EXCHANGE ACT OF 1934
-----------------------------------
The Executive Officers of Petrominerals, together with the years in which such
Officers were named to their present offices are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Named to
Name Position with Company Present Position
- ----------------------------------- ------------------------ ----------------
President, Chief
Executive Officer, Chief
Financial Officer and
Morris V. Hodges* . . . . . . . . . Director 1998
Everett L. Hodges** . . . . . . . . Secretary and Treasurer 1998
</TABLE>
Each of the Executive Officers serves at the pleasure of the Board of Directors.
* Mr. Morris Hodges was appointed President and Chief Executive Officer on
December 30, 1998. Mr. Hodges has held the position of Assistant Secretary since
March 1995.
** Mr. Everett Hodges was appointed Secretary and Treasurer on December 30,
1998.
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MORRIS V. HODGES 65 Director 1979
- ----------------
</TABLE>
Mr. Morris V. Hodges was appointed President and Chief Executive Officer on
December 30, 1998. 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; Kaymor Petroleum Products,
Inc.; Sunset Pipeline and Terminalling, Inc.; Coastal Petroleum Refiners, Inc.;
and Hydraulic Rod Pumps, International. 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EVERETT L. HODGES 67 Director 1979
- -----------------
</TABLE>
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.; California Oil Independents, Inc.; Coastal Petroleum
Refiners, Inc.; and has served as a director and officer 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.
34
<PAGE>
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION 16(A) OF THE
--------------------------------------------------------------------
SECURITIES EXCHANGE ACT OF 1934 (Continued)
-----------------------------------
Biographical Information (Continued)
- -------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
WILLIAM N. HAGLER 67 Director 1998
- -----------------
</TABLE>
Mr. William N. Hagler is Chairman of the Board of Directors, CEO and President
of Intermountain Refining Co., Inc., a company he founded in 1984. Intermountain
Refining is or has been engaged in petroleum refining and marketing,
co-generation of electric power and natural gas production. Since 1955, Mr.
Hagler has been continuously employed in various phases of the petroleum
industry with Exxon, Cities Service Oil Company, Riffe Petroleum Company,
Plateau, Inc., and Unico, Inc., a company he founded in 1979. Mr. Hagler is a
director of Consolidated Oil and Transportation Company. In addition, he is a
President of Red Hills Manufacturing Company and Hagler Oil and Gas Company. Mr.
Hagler serves on the Public Utility Commission for the City of Farmington, New
Mexico. Mr. Hagler currently sits on the audit committee.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
JOHN C. MCMAHON 53 Director 1999
- ---------------
</TABLE>
Mr. John C. McMahon has been employed as Vice President of Koch Oil's West Coast
crude oil operations from January 1978 - December 1998. This was a privately
held company engaging in the crude oil marketing, gathering and trading of both
domestic and foreign crude oil. Mr. McMahon retired from Koch in January 1999
after Koch Oil's assets were sold to E.O.T.T.
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 and William
- -----------------
Hagler. 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, as all discussions and decisions were made
by the full Board of Directors, which includes the Ad-Hoc Committee membership.
Audit Committee - This committee consists of Mr. William Hagler. 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,
as all discussions and decisions were made by the full Board of Directors, which
includes the Audit Committee membership.
ATTENDANCE AT BOARD MEETINGS
During the last fiscal year, the Board of Directors of the Company held three
regular meetings and two special meeting. Attendance at such meetings of the
Board was 100%.
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, 1999, 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.
35
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION (Continued)
-----------------------
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
Year Salary
---- -------
<S> <C> <C>
Morris V. Hodges, President, Chief Executive Officer and
Chief Financial Officer. . . . . . . . . . . . . . . . 1999 $42,000
</TABLE>
Mr. Hodges was appointed Chairman, President, Chief Executive Officer, and Chief
Financial Officer of Petrominerals Corporation on December 30, 1998.
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.
COMPENSATION OF DIRECTORS
During the year ended December 31, 1999, each of the three non-employee
directors who held office were paid $350 per month for the first 10 months and
$750 per month for the last two months for a total of $13,150. In addition, the
non-employee directors are reimbursed for reasonable expenses incurred in
connection with any meetings attended.
The Company did not pay any additional fees to directors for serving as members
of the Audit or Ad-Hoc 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 24, 1999, 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>
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------------------ --------------------- -----------------
<S> <C> <C>
Everett L. Hodges. . . . . . . . . . 88,060 (2) 8.31%
Morris V. Hodges . . . . . . . . . . 100,687 (3) 9.50%
--------------------- -----------------
188,747 (1) 17.81%
===================== =================
</TABLE>
(1) All directors and officers, as a group, including persons named above.
36
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT (Continued)
-------------------------------------------------------
(2) The 88,060 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 4,175 shares held directly by Everett L.
Hodges, and 10,398 shares held of record by Energy Production & Sales Co., Inc.
(EPS). The 88,060 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.
(3) The 100,687 shares beneficially held by Morris V. Hodges include 714
shares held of record jointly in the Morris V. Hodges and Kathryn M. Hodges
Trust, and 1,050 shares held directly by Morris V. Hodges. This amount also
includes 10,398 shares held of record by Sunset Pipeline and Terminalling, Inc.,
a company controlled by Mr. Hodges, and 88,525 shares held by the adult children
of Morris V. Hodges and Kathryn M. Hodges for the benefit of the children and
their grandchildren. 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.
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.
37
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT (Continued)
-------------------------------------------------------
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.
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 March 21, 1999, 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, 1999 and
1998.
38
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
TRANSACTIONS WITH MANAGEMENT AND OTHERS
As mentioned in Note 4, during 1999, the Company entered into an agreement to
gain working interest in certain wells and leases in the state of Wyoming. Two
participating entities with Petrominerals Corporation in the acquisition are
HAT, LLC and Nevadacor Energy, Inc. Nevadacor who is acting as agent for Kaymor
Energy, LLC (Kaymor), a Limited Liability Company controlled by Petrominerals
Corporation's president, CEO and shareholder. In addition, a key employee of the
Company has a minor interest in HAT, LLC.
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.
39
<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 Paulden & McCown
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . 14
Consolidated Balance Sheets at December 31, 1999 and 1998 . . . . . 15-16
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 20-32
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, 1999 and 1998:
Schedule II - Valuation, Qualifying Accounts and Reserves . . . . . 42
</TABLE>
40
<PAGE>
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
--------------------------------------------------------
ON FORM 8-K (Continued)
-------------
3. Reports on Form 8-K
----------------------
A statement on the eight-for-one reverse split of the Company's common
stock was filed on January 22, 1998, on Form 8-K.
A statement on the proposed sale of the oilfield properties was filed on
February 4, 1998, on Form 8-K.
A statement on the sale of the oilfield properties was filed on May 21,
1998, on Form 8-K.
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.
41
<PAGE>
PETROMINERALS CORPORATION
SCHEDULE II - VALUATION, QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1999 AND 1998
(In Thousands)
<TABLE>
<CAPTION>
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
1999. . . . . . . . . . . . . . . . . $ - $ - $ -
============= =========== =======
1998. . . . . . . . . . . . . . . . . $ 10,963 $ 10,963 $ -
============= =========== =======
Balance at. . . . . . . . . . . . . . . . . (Recoveries) Balance at
Beginning . . . . . . . . . . . . . . . . . Charged to End of
of Period . . . . . . . . . . . . . . . . Income Period
- --------------------------------------------- ------------- -----------
Allowance for doubtful receivable
1999. . . . . . . . . . . . . . . . . $ - $ - $ -
============= =========== =======
1998. . . . . . . . . . . . . . . . . $ 29 $ 29 $ -
============= =========== =======
</TABLE>
42
<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)
By: /s/ Morris V. Hodges
-----------------------
Morris V. Hodges, President and Chief Executive Officer
Dated:
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:
<TABLE>
<CAPTION>
<S> <C>
By: /s/Morris V. Hodges
- -------------------------------------------
Morris V. Hodges
President, Chief Executive Officer
Dated:. . . . . . . . . . . . . . . . . . . Chief Financial Officer, and Director
By: /s/ Everett L. Hodges
- -------------------------------------------
Dated:. . . . . . . . . . . . . . . . . . . Everett L. Hodges, Director
By: /s/ William N. Hagler
- -------------------------------------------
Dated:. . . . . . . . . . . . . . . . . . . William N. Hagler, Director
</TABLE>
43
<PAGE>
EXHIBITS
44
<PAGE>
45
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
45
<PAGE>
1. Hydro-Test International, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,153
<SECURITIES> 0
<RECEIVABLES> 376
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,213
<PP&E> 808
<DEPRECIATION> 453
<TOTAL-ASSETS> 3,030
<CURRENT-LIABILITIES> 172
<BONDS> 0
0
0
<COMMON> 848
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,030
<SALES> 236
<TOTAL-REVENUES> 353
<CGS> 239
<TOTAL-COSTS> 750
<OTHER-EXPENSES> 510
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (397)
<INCOME-TAX> 0
<INCOME-CONTINUING> (397)
<DISCONTINUED> (116)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (513)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
