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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-2517
TOREADOR ROYALTY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-0991164
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
530 PRESTON COMMONS WEST
8117 PRESTON ROAD
DALLAS, TEXAS 75225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 369-0080
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 $.15625 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Each Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not 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-K or any amendment to this Form 10-K. [X].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD
BY NON-AFFILIATES, COMPUTED BY REFERENCE TO THE CLOSING SALES PRICE OF SUCH
STOCK, AS OF MARCH 17, 1998 WAS $14,669,892. (For purposes of determination of
the foregoing amount, only directors, executive officers and 10% or greater
stockholders have been deemed affiliates.)
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, PAR
VALUE $.15625, AS OF MARCH 17, 1998 WAS 4,979,827 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement furnished to stockholders
in connection with its Annual Meeting of Stockholders to be held May 21, 1998,
are incorporated by reference in Part III of this Form 10-K. Such proxy
statement will be filed with the Commission on or about April 24, 1998.
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TOREADOR ROYALTY CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
PART I
ITEM 1. BUSINESS.
Toreador Royalty Corporation, a Delaware corporation (the "Company" or
"Toreador"), is engaged in oil and gas exploration, development and production
activities. The Company conducts its business primarily through its ownership
of perpetual oil and gas mineral and royalty interests in approximately 870,000
gross (530,000 net) acres in four geologic provinces located in the Texas
Panhandle and West Texas. The properties and mineral interests owned by the
Company are set forth under Item 2 below. The Company believes that, through
these holdings, it is a significant factor in the exploration of these
provinces and has an advantage over other oil and gas companies
active in these areas. Since 1988, the Company has pursued a strategy of
marketing exploration projects on this acreage to industry operators. Most of
the exploration and development of the Company's acreage has been performed by
other oil companies. The Company receives option and lease bonus income when
exploration rights are granted to those companies, and, if drilling is
successful, it receives royalty income from the oil and gas production. This
royalty income is free of any capital or operating costs to Toreador.
Toreador leases and participates as a working interest owner on selected
projects and prospects on its acreage. In the last few years, the Company
has turned its attention to generating new 3-D and 2-D seismic projects on
its minerals for the purpose of better defining prospects on the minerals. On
a selective basis, Toreador may incur costs when it participates as a working
interest owner in conducting these seismic operations. Some of these 3-D and
2-D projects require outlays for Toreador's working interest portion of lease
bonus and drilling costs. Those costs, however, may be offset in whole or in
part by income from the Company's option and lease bonuses. At December 31,
1997, the Company held working interests on its minerals under approximately
115,800 gross (107,700 net) acres of undeveloped leasehold interests and
13,500 gross (13,500 net) acres of undeveloped options. Under non-Toreador
mineral acreage, the Company held approximately 3,600 gross (3,600 net) acres
of undeveloped options from third parties at December 31, 1997. At that same
date, the Company held approximately 30,400 gross (2,200 net) acres of proved
developed producing acreage. At December 31, 1997, the Company's total
proved reserves were approximately 981 MBOE, 56% of which were oil and 44% of
which were natural gas. Cumulative net production from the Company's
properties during 1997 was 69,903 Bbls of oil and 425,854 Mcf of natural gas.
From January 1, 1988 until December 31, 1997, 99 exploratory and
development wells have been drilled or re- entered on the Company's acreage,
26 of which were producing at December 31, 1997. Two wells that were drilled
in December 1997 were successfully completed as producers in January 1998. The
exploration activity on the Company's acreage has been primarily divided
between its Northern Ranch minerals, which encompass the southern Dalhart Basin
(the "Northern Ranch"), and its Southern Ranch minerals, which encompass
portions of the Palo Duro Basin, Matador Arch and the Eastern Shelf of the
Midland Basin (the "Southern Ranch"). The Company owns approximately 400,000
gross (270,000 net) mineral acres in the Northern Ranch and approximately
470,000 gross (260,000 net) mineral acres in the Southern Ranch.
From January 1, 1988 until December 31, 1997, 20 wells have been drilled
on the Northern Ranch, of which three wells in one field were producing at
December 31, 1997. Average gross daily production from these wells plus one
producing well shut-in during calendar 1997 was 84 Bbls of oil. In 1997, two
wells were drilled on the Northern Ranch resulting in one producing oil well.
The producing well was completed in January 1998 and average daily production
from this well was 198 Bbls of oil in February 1998.
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From January 1, 1988 until December 31, 1997, 79 wells have been drilled
on the Southern Ranch, resulting in 23 producing wells in six fields. Average
gross daily production from these wells during calendar 1997 was 333 Bbls of
oil. In 1997, nine exploration and development wells were drilled on the
Southern Ranch, resulting in six producing oil wells. One of the six wells
drilled was completed in January 1998.
The Company's experience in the drilling of exploratory and development
wells on leaseholds in which the Company had a working interest during the five
years ended December 31, 1997 is summarized as follows: In 1993, the Company
participated in two gross (.12 net) wells, one of which was initially completed
but later temporarily abandoned and the other was plugged and abandoned in
1994. All of these wells were exploratory. In 1994, the Company participated
in four gross (.875 net) wells, three of which were successfully completed as
producers, and one of which was a dry hole. Two of these four wells were
exploratory, and two were development wells. In 1995, the Company participated
in nine gross (approximately 3.45 net) wells, three of which were successfully
completed as producers, and six of which were dry holes. Six of these nine
wells were exploratory and three were development wells. In 1996, the Company
participated in eight gross (approximately 1.50 net) wells, four of which were
successfully completed as producers and four of which were dry holes. Seven of
these wells were exploratory and one was a development well. In 1997, the
Company participated in ten gross (approximately 1.68 net) wells, six of which
were successfully completed as producers, and four of which were dry holes.
Seven of these wells were exploratory and three were development wells.
In this report, quantities of oil are expressed in barrels ("Bbls"), and
quantities of natural gas are expressed in thousands of cubic feet ("Mcf"),
millions of cubic feet ("MMcf") or billions of cubic feet ("Bcf"). A "BOE"
means one barrel of oil equivalent using the ratio of one barrel of oil to 6
Mcf of gas. A "MBOE" means one thousand BOE. A "Mcfe" means one thousand
cubic feet, "MMcfe" means one million cubic feet and "Bcfe" means one billion
cubic feet, of gas equivalents, each using the ratio of 6 Mcf of gas to one
barrel of oil.
STRATEGY
Since 1988, the Company has pursued a strategy of marketing exploration
projects on its acreage to industry operators. In addition, Toreador has
increased its exploration exposure by acquiring leases or options for its own
account, by securing seismic and drilling commitments from third parties, and
by upgrading its existing database, which consists of approximately 65,000 of
3-D data and 1,500 miles of 2-D data. During 1997, the Company entered into
one 3-D seismic exploration agreement encompassing approximately 3,600 acres
covering a portion of the Company's Northern Ranch minerals. This more
aggressive approach includes structuring lease and option agreements on the
properties to require timely drilling and ongoing development. The Company has
also established closer relationships with its co- mineral owners that hold
executive rights on the acreage. While the Company has been successful in
attracting third party capital to explore its acreage and plans to continue
this approach, management believes that stockholder value would be further
enhanced by participating for a working interest in exploring the Company's
mineral base. By doing so, the Company increases control of and accelerates
exploration on the mineral acreage.
Supplementing its activities on its acreage, the Company has acquired
producing properties as a means of building its current cash flow as well as
expanding its reserve base. In 1997, the Company spent approximately $193,000
to acquire proved reserves totaling 358 MMcfe (approximately 323 MMcf of
natural gas and 5,800 Bbls of oil) or approximately $0.54 per MMcfe. The
Company has focused its acquisition activity on non-operated working interests.
Management believes that there is less competition for small acquisitions of
non-operated properties, that they can be acquired at more attractive rates of
return than other producing properties and that they require little or no
additional operational or supervisory staffing.
HISTORY
Toreador was incorporated in 1951. The history of its mineral rights
dates back to 1882 and the formation of the Matador Land & Cattle Company
("ML&C"), which assembled approximately one million acres for ranching, most of
which is located in the Texas Panhandle and West Texas. When the ML&C was sold
in 1951, Toreador was formed and assigned 50% of the mineral rights under the
ranch acreage. Toreador later acquired an additional 25% of the mineral rights
under some of the ranches.
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In 1937, the ML&C executed a lease covering the Southern Ranch with Exxon
(then Humble Oil) that critically affected the development of this acreage.
The lease provided that, by drilling only one well per year, Exxon could hold
the entire 470,000 acres in perpetuity. As a result of prorationing in Texas,
Exxon, like most major oil companies, had shut-in production and had little or
no incentive to drill more than the one well per year required to maintain its
lease. During the period from 1937 to 1966, Exxon drilled or caused to be
drilled 43 wells. During this same period on the Northern Ranch, various
operators, including Superior Oil and Shell, drilled 15 wells. After losing a
series of court cases concerning similar leases, Exxon surrendered its lease on
the Southern Ranch in 1966. The Northern and Southern Ranches attracted little
industry attention until the early 1980s. The first oil discovery on the
Northern Ranch was made in 1985 and on the Southern Ranch in 1986. Exploration
on Toreador's acreage was still retarded to some degree during this time by two
large, long-term leases on the Northern Ranch to Exxon that required minimal
drilling. These leases have expired. Thirty-five wells were drilled on
Toreador's acreage in the Northern and Southern Ranches, from 1966 to 1987.
In 1988, the Company adopted a strategy calling for a more pro-active
approach to managing the Company's acreage. Toreador began to actively market
exploration projects and prospects on its acreage directly to other oil
companies. In addition, the Company began to acquire geophysical options and
leases from the owners of the executive rights in order to promote them to
other oil companies. In some instances in which the Company has been
successful in promoting these projects and prospects to other companies,
Toreador has taken on a selected basis a working interest in the geophysical
options and leases. As an adjunct to this strategy, the Company embarked on an
acquisition program in late 1988 in order to build its oil and gas reserves and
cash flow.
As of December 31, 1997, a total of 190 exploration and development wells
have been drilled on the Company's mineral acreage, resulting in a well density
of less than one well per 4,600 acres. In certain areas on the Company's
acreage, well densities are less than one well per 20,000 acres. Since the
Company adopted its current strategy in 1988, 99 wells have been drilled on
Toreador's acreage at December 31, 1997, or approximately 52% of all the wells
drilled on the acreage. Management believes that its active approach to
marketing its acreage combined with industry advances in technology,
particularly 3-D seismic, has accounted for most of the increase in seismic
surveying and leasing activity. Furthermore, drilling can be accelerated by
the Company using its own capital resources.
GOVERNMENTAL REGULATION
The Company's natural gas and oil exploration, production and related
operations are subject to extensive rules and regulations promulgated by
federal and state agencies. For example, the State of Texas and many other
states require permits for drilling operations, drilling bonds and reports
concerning operations and impose other requirements relating to the exploration
and production of natural gas and oil, and regulate spacing, plugging and
abandonment of wells. Failure to comply with such rules and regulations can
result in substantial penalties. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and affects its
profitability. These states also have statutes or regulations addressing
conservation matters, including provisions for the unitization or pooling of
natural gas and oil properties, the establishment of maximum rates of
production from wells. These statutes and regulations may limit the rate at
which oil and gas can be produced from the Company's properties. Although the
Company believes it is in substantial compliance with all applicable laws and
regulations, because those laws and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such laws.
The Federal Energy Regulatory Commission ("FERC") regulates interstate
natural gas transportation rates and service conditions, which affect the
marketing of gas produced by the Company, as well as the revenues received by
the Company for sales of such production. Since the mid-1980s, FERC has issued
a series of orders, culminating in Order Nos. 636, 636-A and 636-B ("Order
636"), that have significantly altered the marketing and transportation of gas.
Order 636 mandated a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in
issuing the order was to increase competition within all phases of the natural
gas industry. Order 636 was generally upheld on appeal, and the portions
remanded for further action do not appear to materially affect the Company.
Because Order 636 may be modified as a result of appeals and various pipeline
restructuring proceedings which are in progress or on appeal, it is difficult
to predict the ultimate impact
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of the orders on the Company and its gas marketing efforts. Generally, Order
636 has eliminated or substantially reduced the interstate pipelines'
traditional role as wholesalers of natural gas and has substantially increased
competition and volatility in natural gas markets.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive and
changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling,
emission, transportation and discharge of materials into the environment, and
relating to safety and health. The recent trend in environmental legislation
and regulation generally is toward stricter standards, and this trend will
likely continue. These laws and regulations may require the acquisition of a
permit or other authorization before construction or drilling commences and for
certain other activities; limit or prohibit construction, drilling and other
activities on certain lands lying within wilderness and other protected areas;
and impose substantial liabilities for pollution resulting from the Company's
operations. The permits required for various of the Company's operations are
subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines or injunction, or both. In
the opinion of management, the Company is in substantial compliance with
current applicable environmental laws and regulations, and the Company has no
material commitments for capital expenditures to comply with existing
environmental requirements. Nevertheless, changes in existing environmental
laws and regulations or in interpretations thereof could have a significant
impact on the Company, as well as the oil and gas industry in general. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and comparable state statutes impose strict, joint and several liability on
owners and operators of sites and on persons who disposed of or arranged for
the disposal of "hazardous substances" found at such sites. It is not uncommon
for the neighboring land owners and other third parties to file claims for
personal injury and property damage allegedly caused by hazardous substances
released into the environment. The Resource Conservation and Recovery Act
("RCRA") and comparable state statutes govern the disposal of "solid waste" and
"hazardous waste" and authorize imposition of substantial fines and penalties
for noncompliance. Although CERCLA currently excludes petroleum from its
definition of "hazardous substance," state laws affecting the Company's
operations impose clean-up liability relating to petroleum and petroleum
related products. In addition, although RCRA classifies certain oil field
wastes as "non-hazardous," such exploration and production wastes could be
reclassified as hazardous wastes thereby making such wastes subject to more
stringent handling and disposal requirements.
The Company has acquired leasehold interests in numerous properties that
for many years have produced natural gas and oil. Although the previous owners
of these interests have used operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have
been disposed of or released on or under the properties. In addition, most of
the Company's properties are operated by third parties over whom the Company
has no control. Notwithstanding the Company's lack of control over properties
operated by others, the failure of the operator to comply with applicable
environmental regulations may, in certain circumstances, adversely impact the
Company.
COMPETITION
The oil and gas industry is highly competitive. Since many companies and
individuals are engaged in exploring for oil and gas and acquiring oil and gas
properties, a high degree of competition for desirable exploratory and
producing properties exists. A number of the companies with which Toreador
competes are larger and have greater financial resources than Toreador.
The availability of a ready market for Toreador's oil and gas production
depends on numerous factors beyond its control, including the level of consumer
demand, the extent of worldwide oil and gas production, the cost and
availability of alternative fuels, the costs of and proximity of pipelines and
other transportation facilities, regulation by state and federal authorities
and the cost of complying with applicable environmental regulations.
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EMPLOYEES
The Company has three employees, the President, a Vice President and one
administrative employee. The Company also retains two consultants.
ITEM 2. PROPERTIES.
NORTHERN RANCH MINERALS
SOUTHERN DALHART BASIN. The southern Dalhart Basin, where Toreador owns
mineral interests under approximately 400,000 gross acres located in Oldham and
Hartley Counties, Texas, is a moderate depth depression that formed in early
Pennsylvanian time. Commercial oil has been established in Pennsylvanian and
Permian age reservoirs in this basin. Porous reservoir rocks are present in
granite washes, carbonate banks and dolomites, which provide multiple drilling
targets. In the central part of the basin, source rocks are buried at depths
sufficient to generate oil. Wrench fault tectonism across the basin formed
early structural features capable of trapping later migrating oil. Oil
accumulations in several formations between 4,000 feet and 8,000 feet have been
found through exploratory drilling. Most of this drilling has been
concentrated in east-central Oldham County, Texas. There have been relatively
few exploratory wells in wide expanses of the basin west of the main producing
area and many of these were drilled prior to 1970. Much of this lightly
explored area includes Toreador acreage, a majority of which is located on the
west flank of the basin updip from the main concentration of production to the
east. Most of the reserves in the basin have been discovered in granite wash
reservoirs trapped on fault associated structural closures.
Oil accumulations in the basin have been found on structural highs.
Therefore, defining structural uplifts is the prime objective in exploring for
new reserves in the southern Dalhart Basin. In recent years, the oil and gas
industry's increasingly widespread use of 3-D seismic technology has enhanced
its ability to find and delineate structural prospects. Toreador, with other
parties, introduced 3-D seismic exploration to the southern Dalhart Basin in
July 1993 with an 18,000 acre project on the Company's acreage. The three
wells drilled on this project, while dry, proved that porous reservoirs exist
within the area and that 3-D seismic data could correctly image structures and
reef/bank anomalies.
In April 1994, Toreador acquired an oil and gas lease on the 95,000 acre
Fulton Ranch under which it already holds 75% of the mineral rights. Toreador
has approximately 300 miles of 2-D seismic coverage on the ranch, and using
this data, has generated several prospects and geologic leads which justify
more detailed 3-D seismic surveys. The P.D. Walker Field, which encompasses
120 acres under which Toreador has a 15% royalty interest, is also located on
the ranch, but is not included in this lease.
In the third quarter of 1995, Toreador acquired in the aggregate an
18.93% working interest in the four-well Proctor Ranch Field located in Hartley
County, Texas. In addition to this acquisition, Toreador holds an 18.75%
royalty interest in this property. Under the terms of the acquisition
agreement, Toreador invested $90,600, adding an estimated 21,100 net Bbls to
its reserves at an acquisition cost of $4.29 per Bbl.
In August 1996, Toreador entered into two exploratory agreements covering
in excess of 50,000 acres in the Dalhart Basin. The first was an 8,935 acre
option-farmout agreement, being a portion of Toreador's 47,600 acre lease on
the Smith (formerly Proctor) Ranch located in Oldham and Hartley Counties,
Texas. Under the terms of the agreement, the operator elected to drill a well
earning a 75% working interest in the initial prospect. This well, in which
Toreador was carried for a 25% working interest, resulted in a dry hole, and
the operator allowed this option to expire in January 1997. Toreador finalized
a second agreement in December 1996, with the same operator covering a
contiguous 41,900 acre block, under which the operator elected to allow the
option to expire in December 1997 without conducting any 3-D geophysical
surveys.
In January 1995, the Company leased approximately 13,000 acres on the
Smith Ranch (formerly the Proctor Ranch) in Hartley County, Texas with the
intent of accelerating third party interest in various projects generated by
the Company. In January 1997, Toreador entered into a farmout agreement with
Corlena Oil Company (the operator) covering approximately 1,900 acres of the
Toreador leasehold. In March 1997, the Company participated for a 25% working
interest in drilling the first well to test Pennsylvanian age Granite Wash
reservoirs. This initial exploratory well
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was plugged and abandoned after testing water and non-commercial quantities of
oil. The operator then conducted a 3-D seismic survey covering approximately
2,700 acres of Toreador's 13,000 acre leasehold. In January 1998, the operator
drilled a new oil field discovery well, the #2-A Smith Ranch, to open the
Pedarosa (Granite Wash) Field at approximately 5,500 feet. At completion this
well was initially pumping at a daily rate of 167 Bbls of oil and no water. In
addition to its working interest, the Company has a 15% net royalty interest.
As of March 17, 1998, a third well was drilling on this lease.
SOUTHERN RANCH MINERALS
PALO DURO BASIN. The Palo Duro Basin, where Toreador owns mineral
interests under approximately 195,000 gross acres located in Motley and Cottle
Counties, Texas, is a moderate depth depression between the Matador Arch on the
south and the Amarillo uplift complex to the north. Limited exploration to
date has resulted in discovery of three Canyon age reef fields. In the past
five years, several companies have conducted 3-D seismic surveys along these
reef trends.
MATADOR ARCH. The Matador Arch, where Toreador owns mineral interests
under approximately 90,000 gross acres, is a prominent east-west structural
positive traversing North Texas and southern Oklahoma. It is bounded on the
north and south by large vertical faults that have an orientation
characteristic of regional scale wrench faulting. Between the faults, basement
blocks have been uplifted and folded into a complex of structural highs that
fostered reef growth from Middle Pennsylvanian age into the Permian Wolfcamp
section.
Toreador's acreage covers part of the Matador Arch trending through
Motley County, Texas. Nearby Wolfcamp Reef production in the Roaring Springs
Fields complex has recovered approximately nine million Bbls of oil from a
depth of 4,200 feet. For the period of June 1994 through February 1998,
Toreador has participated in ten Wolfcamp test wells of which six have been
successfully completed.
In October 1995, Toreador acquired an additional 12.5% working interest
in the five-well Matador Field located in Motley County, Texas. Prior to this
acquisition, Toreador held a 25% working interest as well as a 15% royalty
interest in this property. Under the terms of the acquisition agreement,
Toreador invested $225,700, adding an estimated 46,100 net Bbls to its reserves
at an acquisition cost of $4.90 per Bbl.
In March 1997, Toreador entered into an exploration agreement with Apache
Corporation covering approximately 22,500 acres located on the Matador Arch
north and east of three fields, commonly referred to as the Roaring Springs
Fields complex. Apache serves as the operator in this joint venture and has a
56.25% working interest in the acreage. Toreador has retained a 43.75% working
interest. In May 1997, Apache conducted a 3-D seismic survey covering
approximately 9,500 acres, which also encompassed the five-well Matador Field.
After conducting this seismic survey, Apache selected a lease covering
approximately 650 acres, all of which surrounds the existing Matador Field.
Apache allowed the option covering the remaining 13,000 acres under the
exploration agreement to expire without conducting any additional seismic
surveys. In January 1998, the initial development well drilled by Apache to
test the Wolfcamp Reef reservoir was successful. At completion this well was
pumping at a daily rate of 36 Bbls of oil and three Bbls of water. As of March
17, 1998, Apache was drilling a second development well on their lease. In
addition to its working interest, the Company has a 15% net royalty interest.
EASTERN SHELF. The Eastern Shelf of the Midland Basin, where Toreador
owns mineral interests under approximately 185,000 gross acres located primarily
in Dickens County, Texas, is prospective for shallow Permian age oil
accumulations in the Tannehill Sand and possible deeper objectives in the
Pennsylvanian section. Seven Tannehill fields have been discovered on Toreador
minerals since 1986, the largest field in terms of cumulative oil production as
of December 31, 1997 contained as many as nine producing wells. The 21 wells
currently producing from these seven fields averaged daily production of 24 Bbls
of oil per well in December 1997.
In 1994, Toreador entered into an option agreement with an industry
partner covering approximately 11,000 acres on the Pitchfork Ranch located in
Dickens County. Tannehill production near this block has recovered over 2.5
million Bbls of oil from a cluster of three fields located directly to the west
of this block and over 1.5 million Bbls of oil from another field located two
miles to the east. The industry partner conducted a 3-D seismic survey across
this acreage
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block during 1995 and Toreador was carried for a 25% working interest through
the seismic acquisition, processing and interpretation phase of the project.
Following the interpretative phase of the project, the operator selected 2,000
acres for lease. Toreador also owns a 46.9% mineral interest under 1,800
acres. The first well was drilled on this acreage in March 1996, and was
abandoned as a dry hole. A second well, in which Toreador elected not to
participate as a working interest partner, was also dry. In April 1997, the
operator drilled a third well offsetting Toreador acreage, in which Toreador
also elected not to participate as a working interest partner. The well was
dry and the operator allowed the leases on Toreador's acreage to expire in July
1997.
In September 1996, Toreador entered into an exploration agreement with
Louis Dreyfus Natural Gas Corporation ("LDNG") covering approximately 37,000
acres located on the Eastern Shelf of the Midland Basin, comprising all of
Toreador's mineral interest under the Pitchfork Ranch that is not currently
held by production nor under lease or option. Under the terms of the agreement,
Toreador is carried for a 10.5% working interest through the 3-D seismic
acquisition, processing and interpretation phases of the project. In July
1997, LDNG completed a 20,000 acre 3-D seismic survey over the south half of
Toreador's Pitchfork Ranch mineral acreage. In the survey area, approximately
6,600 acres were leased under 10 separate leases.
In September 1997, LDNG embarked on a seven well drilling program based
upon the results of the 3-D seismic survey. Toreador participated in drilling
all seven wells whereby four wells were successfully completed in the Tannehill
Sand at approximately 4,200 feet resulting in two new oil fields and three wells
were dry. Toreador participated with a working interest ranging from 10.5% to
10.9%, in addition to its 9.4% net royalty interest. Three of the four
producers were completed for an average daily pump rate of 128 Bbls of oil each,
while the fourth well was completed for a daily rate of 15 Bbls of oil. In
addition to the Tannehill Sand objective, the first well drilled by LDNG, in
which Toreador had a carried working interest, was drilled below 6,900 feet to
test Pennsylvanian objectives. While dry in the deeper section, this well was
plugged back to the Tannehill Sand as a new oil field discovery. In January
1998, those four wells combined had an average daily production of 282 Bbls of
oil per day. In January 1998, LDNG commenced a new seven-well drilling program
for the Tannehill Sand. As of March 17, 1998, LDNG has drilled five wells, of
which two were successful and three were dry. Two of the five wells were
development wells in the Tannehill Sand where the first well was completed and
pumping at a daily rate of 128 Bbls of oil. The second well was awaiting the
installation of pumping equipment after a positive swab test. LDNG has
indicated to Toreador, that it plans to commence in May 1998 a second 3-D
seismic project covering 17,600 acres. This 3-D seismic survey affects 2,200
acres of Toreador's mineral holdings and the balance of the survey is located to
the east of those mineral holdings.
NATURE OF PROPERTY INTEREST
On the Northern and Southern Ranches, the Company generally owns fee
interests in the minerals that include rights to receive portions of lease
bonuses, delay rentals and royalties, but generally not the executive rights --
the rights to sign leases -- which are typically held by surface owners.
Therefore, the Company must rely on the owners of the executive rights to
execute leases of the acreage. In situations in which the Company has acquired
working interests in acreage in which it has mineral rights, it has acquired
those interests through the signing of leases by holders of the executive
rights. The majority of the owners of executive rights work closely with the
Company; however, each acts independently of the Company in deciding to execute
leases.
GEOLOGIC DATABASE
Under the terms of a typical lease granted on its minerals, Toreador is
entitled to receive copies of all data, including seismic lines, well logs,
cores and tests. The Company has approximately 65,000 acres of 3-D seismic
data and approximately 1,500 miles of 2-D seismic data relating to the Northern
and Southern Ranches.
Toreador uses its database to generate specific drilling prospects and
geologic leads to encourage further exploration on its mineral acreage. In
particular, geologic leads based on 2-D seismic data are important in marketing
large 3-D seismic surveys. The Company makes its database available to third
parties interested in generating exploration projects on its acreage.
Management estimates that it would be costly to duplicate this data, which is
carried at no cost on its balance sheet.
-7-
<PAGE> 9
OTHER PROPERTIES AND ACQUISITIONS
In 1996 and 1997, a number of significant events occurred in areas where
the Company owns working interests and royalty interests outside of the
Company's Northern and Southern Ranch minerals. In December 1996, the Company
which owned a 50% working interest acquired the remaining 50% working interest
and became operator of a well located in the Welch field of Dawson County,
Texas. Average daily production from this well was 15 gross (12 net) Bbls of
oil in 1997. In July 1996, the Company participated with a 22.1% working
interest in the drilling of a successful infill well in the Hrubetz (Tannehill)
field waterflood, Taylor County, Texas, which increased average daily unit
production from 10 gross (1.6 net) Bbls of oil in June 1996 to a peak of 199
gross (32 net) Bbls of oil in June 1997. In Caddo County, Oklahoma, the
Company owns approximately a 1.2% royalty interest in a gas well that was
restimulated in the later part of 1996 which resulted in daily gas production
increasing from an average of 667 Mcf gross (8 net) in February 1996 to a peak
of 5,300 Mcf gross (62 net) in December 1997. Cumulative gross production from
this well since 1982 has been over 12.7 Bcf of natural gas.
During the period May 1996 through February 1997, the Company acquired a
combination of royalty and overriding royalty interests totaling approximately
0.03% and approximately a 0.25% working interest in the SACROC Unit of the
Kelly-Snyder field in Scurry County, Texas. This unit is a large, tertiary CO2
(carbon dioxide) flood which averaged approximately 6,900 gross (14 net) Bbls of
oil per day in December 1997. The operator continues to enhance flood
performance through improved reservoir management and reducing operating costs.
In 1997, the operator negotiated a more favorable gas processing agreement for
the unit whereby handling CO2 is more cost efficient and processing capacity is
improved.
In 1997, the Company acquired a combination of working, royalty and
overriding royalty interests totaling 358 MMcfe. The majority of the value
belongs to those working interest properties located in Panola County, Texas.
The Company owns approximately 2.7% working interest in the Emma Eddy Gas Unit
of the Carthage (Cotton Valley) Field.
From 1988 until December 31, 1997 Toreador has spent approximately $3.9
million to acquire producing, mineral and overriding royalty interests totaling
6.7 Bcfe for a consolidated acquisition cost of approximately $0.58/Mcfc.
OIL AND GAS RESERVES
In January 1998, the Company retained the independent petroleum consulting
firm, Netherland, Sewell & Associates, Inc. to prepare estimates of its oil and
gas reserves for the producing mineral interests owned by the Company as of
December 31, 1997. Utilizing current available data, these estimates of proved
reserves were made using geological and engineering methods generally accepted
in the petroleum industry. At December 31, 1997 the Company's net proved
developed producing reserves were estimated to be 450,646 Bbls of oil and
2,487,574 Mcf of natural gas. Additional information concerning the Company's
estimated proved oil and gas reserves is included in Item 8. - Financial
Statements and Supplementary Data. No estimates of total proved net oil or gas
results have been filed with or included in reports to any federal authority or
agency prior to this Report on Form 10-K.
Petroleum engineering is not an exact science and involves estimates
based upon numerous factors, many of which are inherently variable and
uncertain. Consequently, reserve estimates are imprecise and are subject to
change as additional information becomes available. Estimates based upon short
periods of production may not be as reliable as those based upon longer
production histories. Further, estimates of oil and gas reserves, of
necessity, are projections based on engineering data. As a result of the
uncertainties inherent in the interpretation of such data, there can be no
assurance that the Company's estimated oil and gas reserves will ultimately be
developed. Estimates of the reserves and future net revenues involve
projecting future results under current operating and economic conditions.
Actual production, revenues, taxes, development expenditures and operating
expenses may not occur as estimated. Product prices vary over time due to
market forces which are beyond the Company's control.
-8-
<PAGE> 10
VOLUMES, PRICES AND COSTS
The following table sets forth certain information regarding volumes of
the Company's production of oil and natural gas, the Company's average sales
price per Bbl of crude oil and average sales price per Mcf of natural gas,
together with the Company's average production cost per BOE for the three years
ended December 31, 1997 from producing interests:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Production
Oil (Bbls) . . . . . . . . . . . . . . . . . . . . . 69,903 68,318 61,537
Gas (Mcf) . . . . . . . . . . . . . . . . . . . . . . 425,854 348,539 277,621
Oil equivalents (BOE) (1) . . . . . . . . . . . . . . 140,879 126,408 107,807
Average Sales Price
Oil ($/Bbl) . . . . . . . . . . . . . . . . . . . . . $19.04 $21.51 $16.22
Gas ($/Mcf) . . . . . . . . . . . . . . . . . . . . . 2.33 2.40 1.37
Oil equivalents ($/Bbl) . . . . . . . . . . . . . . . 16.50 18.25 12.79
Average production costs per BOE(1) . . . . . . . . . $4.93 $4.63 $ 3.53
</TABLE>
- ---------------
(1) A BOE means one barrel of oil equivalent using the ratio of one barrel of
oil to six Mcf of gas.
-9-
<PAGE> 11
WELLS DRILLED ON THE COMPANY'S MINERALS
The following table sets forth for each of the last three years the
number of net exploratory and development wells drilled by or on behalf of the
Company. An exploratory well is a well drilled to find and produce oil or gas
in an unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
A development well is a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive. The
number of wells drilled refers to the number of wells completed at any time
during the respective year, regardless of when drilling was initiated; and
"completion" refers to the installation of permanent equipment for the
production of oil or gas, or, in the case of a dry hole, to the reporting of
the plugging date to the appropriate state regulatory agency.
<TABLE>
<CAPTION>
Net Exploratory Wells
---------------------
Productive(1) Dry(2)
------------- ------
Year Ended
December 31,
-----------
<S> <C> <C>
1995 . . . . . . . . 0.25 2.30
1996 . . . . . . . . 0.50 0.98
1997 . . . . . . . . 0.57(3) 0.46
</TABLE>
<TABLE>
<CAPTION>
Net Development Wells
---------------------
Productive(1) Dry(2)
------------- ------
Year Ended
December 31,
-----------
<S> <C> <C>
1995 . . . . . . . . 0.50 0.38
1996 . . . . . . . . 0.03 0.00
1997 . . . . . . . . 0.55(4) 0.11
</TABLE>
- -----------------
(1) A productive well is an exploratory or a development well that is
not a dry hole.
(2) A dry hole is an exploratory or development well found to be
incapable of producing either oil or gas in sufficient quantities
to justify completion as an oil or gas well.
(3) One (1) gross (0.25 net) exploratory well, which was a producer,
was drilled in December 1997 but completed in January 1998.
(4) One (1) gross (0.44 net) development well, which was a producer,
was drilled in December 1997 but completed in January 1998.
-10-
<PAGE> 12
PRODUCING WELLS AND ACREAGE
The following table sets forth the gross and net producing oil and gas
wells in which the Company owned an interest and the developed and undeveloped
gross and net leasehold acreage held by the Company as of December 31, 1997. A
"gross" well or acre is a well or acre in which the Company has a working
interest. The number of gross wells is the total number of wells in which a
working interest is owned. A "net" well or acre is deemed to exist when the
sum of fractional ownership working interests and/or royalty interests in a
gross well or acre equals one. The number of net wells or acres is the sum of
the fractional working interests and/or royalty interests owned in gross wells
or acres expressed as whole numbers and fractions thereof. A "royalty
interest" is a share of production, free of expenses of production. A "working
interest" is the operating interest under an oil and gas lease.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
<S> <C>
Oil Wells(1)
Working Interest
Gross . . . . . . . . . . . . . . . 47
Net . . . . . . . . . . . . . . . . 7.49
Average working interest (%) . . . . 15.93
Royalty Interest
Gross . . . . . . . . . . . . . . . 37
Net . . . . . . . . . . . . . . . . 3.58
Average royalty interest (%) . . . . 9.68
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
<S> <C>
Gas Wells(1)
Working Interest
Gross . . . . . . . . . . . . . . . 48
Net . . . . . . . . . . . . . . . . 5.05
Average working interest (%) . . . . 10.51
Royalty Interest
Gross . . . . . . . . . . . . . . . 8
Net . . . . . . . . . . . . . . . . 0.30
Average royalty interest (%) . . . . 3.75
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
<S> <C>
Acreage(1)
Developed
Gross . . . . . . . . . . . . . . . 30,399
Net . . . . . . . . . . . . . . . . 2,215
Undeveloped(2)
Gross . . . . . . . . . . . . . . . 115,790
Net . . . . . . . . . . . . . . . . 107,696
</TABLE>
- ------------------------
(1) Excludes wells or acres in which the Company owns less than a 1%
working or royalty interest.
(2) Undeveloped acreage is considered to be those leased acres on which
wells have not been drilled or completed to a point that would permit
the production of commercial quantities of oil and gas regardless of
whether or not the acreage contains proved reserves.
-11-
<PAGE> 13
PRESENT ACTIVITIES
From January 1, 1998 through March 17, 1998, the Company participated
in drilling four gross (0.57 net) exploratory wells and four gross (0.76 net)
development wells on the Company's mineral holdings. Two of the four
exploratory wells were dry and two were drilling as of March 17, 1998. Two of
the four development wells were producers, one was dry and one was drilling as
of March 17, 1998. Five wells had an objective at approximately 4,200 feet for
the Tannehill Sand in Dickens County, Texas, one well had an objective at 3,500
feet for the Lower Wolfcamp Reef in Motley County, Texas and one had an
objective at 5,600 feet for the Granite Wash Sand in Hartley County, Texas.
Estimated dry hole costs to the Company are approximately $15,000 for wells
testing the Tannehill Sand, $61,000 for wells testing the Lower Wolfcamp Reef
and $50,000 for wells testing the Granite Wash. All eight wells were drilled
on behalf of the Company.
The Company also participated in drilling one gross (0.03 net)
development well not on its mineral holdings. As of March 17, 1998, this
11,300 foot Cotton Valley Sand well located in Gregg County, Texas was
drilling. The Company's proportionate share of the estimated dry hole costs
and completed well costs are approximately $12,600 and $23,700, respectively.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject
of, any legal proceedings, actual or threatened, which would have a material
adverse effect on the business and affairs of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
ended December 31, 1997 to a vote of the Company's security holders, through
solicitation of proxies or otherwise.
-12-
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, par value $.15625 per share, is traded in
the Nasdaq National Market under the trading symbol "TRGL." The table below
sets forth the high and low sales prices per share for the periods indicated as
reported by the National Market.
<TABLE>
<CAPTION>
1997 High Low
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . 3 1/8 2 3/8
Second Quarter . . . . . . . . . . . . . . . 3 1/2 2 1/4
Third Quarter . . . . . . . . . . . . . . . . 4 5/8 3
Fourth Quarter . . . . . . . . . . . . . . . 4 13/16 4
</TABLE>
<TABLE>
<CAPTION>
1996 High Low
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . 2 9/16 2 1/8
Second Quarter . . . . . . . . . . . . . . . 3 1/8 2 1/8
Third Quarter . . . . . . . . . . . . . . . . 3 3/16 2 1/4
Fourth Quarter . . . . . . . . . . . . . . . 3 2 1/4
</TABLE>
The approximate number of record holders of the Common Stock as of
March 17, 1998, was 526.
Dividends on the Common Stock may be declared and paid out of funds
legally available when and as determined by the Company's Board of Directors.
No cash dividends have been paid on the Company's Common Stock to date.
Management plans to continue its policy of holding and investing corporate
funds on a conservative basis. In addition, under the terms of the credit
facility described in "Management's Discussion and Analysis of Financial
Condition and Result of Operations -- Liquidity and Capital Resources," the
Company is prohibited from paying dividends on the Common Stock (other than
dividends payable in shares of Common Stock).
-13-
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data with
respect to the Company's financial condition and results of operations for the
periods indicated. The selected financial data should be read in conjunction
with the financial statements and related notes set forth in Item 8 of this
Part II.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas sales $ 2,325,148 $ 2,306,791 $ 1,378,390 $ 1,323,129 $ 1,632,572
Lease bonuses and rentals . . . . . 287,604 118,430 138,804 396,106 178,984
Interest and other income . . . . . 149,841 162,297 213,464 222,527 147,823
Gain on sale of marketable
securities and other assets . . . 26,171 526,567 -- -- 95,217
------------- ----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . 2,788,764 3,114,085 1,730,658 1,941,762 2,054,596
------------- ----------- ----------- ----------- -----------
Costs and Expenses:
Lease operating expense . . . . . . 695,007 585,732 380,888 347,058 362,683
Dry holes and abandonments . . . . 166,710 130,647 358,210 125,838 2,733
Depreciation, depletion and
amortization . . . . . . . . . . 539,346 273,026 233,709 247,654 328,540
Geological and geophysical . . . . 546,634 227,744 297,047 235,719 191,391
General and administrative . . . . 802,723 907,086 1,078,171 886,547 758,672
Loss on settlement of benefit plans 173,971 -- -- -- --
------------- ----------- ----------- ----------- -----------
Total costs and expenses . . . . 2,924,391 2,124,235 2,348,025 1,842,816 1,644,019
------------- ----------- ----------- ----------- -----------
Income (loss) before federal
income taxes . . . . . . . . . . (135,627) 989,850 (617,367) 98,946 410,577
Provision (benefit) for federal
income taxes . . . . . . . . . . (84,261) 263,100 (206,936) (26,638) 76,925
------------- ----------- ----------- ----------- -----------
Net income (loss) . . . . . . . . . $ (51,366) $ 726,750 $ (410,431) $ 125,584 $ 333,652
============= =========== =========== =========== ===========
Basic income (loss) per share . . . $ (0.01) $ 0.14 $ (0.08) $ 0.02 $ 0.07
Diluted income (loss) per share $ (0.01) $ 0.14 $ (0.08) $ 0.02 $ 0.07
Weighted average shares
outstanding
Basic . . . . . . . . . . . . . 5,022,216 5,216,941 5,334,190 5,028,610 4,548,468
Diluted . . . . . . . . . . . . 5,022,216 5,216,941 5,334,190 5,064,258 4,592,946
CASH FLOW DATA:
Net cash provided (used) by
operating activities . . . . . . $ 830,643 $ 609,364 $ (10,963) $ 418,885 $ 629,499
Capital expenditures for oil
and gas property and
equipment . . . . . . . . . . . . $ (717,481) $ (893,418) $(1,048,757) $ (553,020) $ (695,527)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . . . . . $ 3,007,121 $ 3,383,668 $ 3,538,206 $ 4,646,688 $ 1,491,792
Oil and gas properties, net . . . . 3,210,074 3,306,020 3,201,283 2,733,101 2,580,603
Total assets . . . . . . . . . . . 6,526,785 7,008,924 7,051,052 7,649,904 4,343,106
Long-term debt . . . . . . . . . . -- -- -- -- --
Stockholders' equity . . . . . . . 6,217,195 6,624,180 6,810,485 7,261,761 4,125,986
</TABLE>
-14-
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-K, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and under "Business
and Properties" regarding estimated proved reserves, the Company's financial
position, business strategy, plans and objectives of management of the Company
for future operations, and industry conditions, are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Any forward-looking statements
herein are subject to certain risks and uncertainties inherent in petroleum
exploration, development and production, including, but not limited to the risk
that no commercially productive oil and gas reservoirs will be encountered;
inconclusive results from 3-D seismic projects; delays or cancellation of
drilling operations as a result of a variety of factors; volatility of oil and
gas prices due to economic and other conditions; intense competition in the oil
and gas industry; operational risks (e.g., fires, explosions, blowouts,
cratering and loss of production); insurance coverage limitations and
requirements; and potential liability imposed by intense governmental
regulation of oil and gas production; all of which are beyond the control of
the Company. Any one or more of these factors could cause actual results to
differ materially from those expressed in any forward-looking statement. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this paragraph and otherwise
in this report.
LIQUIDITY AND CAPITAL RESOURCES
Historically, most of the exploration activity on the Company's acreage
has been funded and conducted by other oil companies. Exploration activity
typically generates lease bonus and option income to the Company. If drilling
is successful, the Company receives royalty income from the oil or gas
production but bears none of the capital or operating costs. In order to
accelerate the evaluation of its acreage as well as increase its ownership in
any reserves discovered, the Company has increased and intends to further
increase its level of participation in exploring its acreage by acquiring
working interests. The extent to which the Company may acquire working
interests will depend on the availability of outside capital and cash flow from
operations. Currently, the primary sources of capital for the financing of the
Company's operations are cash flows from operations. In November 1997, the
Company obtained a $10 million credit facility from Compass Bank with an
initial availability of $4 million which it may use to fund acquisition and
development of oil and gas properties. The Company has not drawn any amounts
under the facility. In addition, the Company may reinvest proceeds from option
and lease bonuses by taking a working interest in 3-D seismic projects or in
wells. To the extent cash flow from operations does not significantly increase
and external sources of capital are limited or unavailable, the Company's
ability to make the capital investment to participate in 3-D seismic surveys
and increase its interest in projects on its acreage will be limited. Future
funds are expected to be provided through production from existing producing
properties and new producing properties that may be discovered through
exploration of the Company's acreage by third parties or by the Company itself.
Funds may also be provided through external financing in the form of debt or
equity. There can be no assurance as to the extent and availability of these
sources of funding.
Subsequent to year end, the price of NYMEX light sweet crude oil declined
from $17.64 per Bbl at December 31, 1997 to a low of approximately $13.00 per
Bbl during the first quarter of 1998. The Company expects that this decline in
oil prices will have a negative effect on the Company's earnings and cash flows
in the first quarter of 1998.
In September 1997, the Company engaged Dain Rauscher (formerly Rauscher
Pierce Refsnes, Inc.) as its financial advisor in evaluating strategic
alternatives available to the Company, including a sale of the Company, a merger
with another company and other forms of business combinations. The consummation
of any such transaction could result in a material increase or decrease in the
Company's liquidity, depending on the structure of the transaction. As of the
date of this Report, the Company is not aware of any demands, commitments or
events which will result in its liquidity increasing or decreasing in a material
way. The Company presently has no debt and maintains its excess cash funds in
interest-bearing deposits. From time to time, the Company may receive lease
bonuses which cannot be anticipated, and when funds are available, the Company
may elect to participate in exploratory ventures. The Company also may acquire
producing oil and gas assets which could require the use of debt.
-15-
<PAGE> 17
Management believes that sufficient funds are available internally to
meet anticipated capital requirements for fiscal 1998.
The Company has used $1,042,696 of its cash reserves to purchase 402,700
shares of its Common Stock as of December 31, 1997. These purchases were made
pursuant to a stock repurchase programs authorized by the Board of Directors on
October 10, 1995, of up to 100,000 shares of Common Stock, a second stock
repurchase program on April 22, 1996, of up to 150,000 shares of Common Stock
and a third stock repurchase program on April 21, 1997 of up to 300,000 shares.
As of March 17, 1998, the Company has purchased an aggregate of 182,700 shares
at a purchase price of $506,918 under the third repurchase program. The
repurchases of the Company's shares of Common Stock were made in unsolicited
open-market purchases, at market (not premium) prices, without fixed terms and
not contingent upon the tender of a fixed minimum number of shares or in
response to a third party bid and otherwise in accordance with Rule 10b-18
under the Securities Exchange Act of 1934, as amended.
-16-
<PAGE> 18
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Total revenues for 1997 were $2,788,764 compared with $3,114,085 in 1996.
Revenues from oil and gas sales increased slightly to $2,325,148 in 1997 from
$2,306,791 in 1996. This 0.8% increase reflects an 11.4% increase in volume on
a BOE basis offset by a 9.6% decrease on a price per BOE basis. The Company's
net oil production increased 2.3% to 69,903 Bbls in 1997 from 68,318 Bbls in
1996. Net natural gas production increased 22.2% to 425,854 Mcf in 1997 from
348,539 Mcf in 1996. Lease bonuses and rentals were $287,604 in 1997, up from
$118,430 in 1996.
Interest income was $147,237 in 1997 versus $138,720 in 1996. A gain
resulting from the sale of marketable securities decreased from $516,867 in 1996
to none in 1997. This reflects the Company's sale of 100% of its units in the
San Juan Basin Royalty Trust which was completed in August 1996.
Total costs and expenses were $2,924,391 in 1997 as compared with
$2,124,235 in 1996 representing a 37.7% increase. The largest increase came from
geological and geophysical expenses where expenses increased 140% to $546,634 in
1997 versus $227,744 in 1996. This reflects the Company's increased level of
participation in 3-D seismic surveys conducted on its mineral holdings in 1997.
Depreciation, depletion and amortization increased 97.5% to $539,346 from
$273,026 reflecting a downward revision to the proved developed reserves created
by a combination of some underperforming properties and lower oil and gas
prices. Dry holes and abandonments increased 27.6% to $166,710 in 1997 from
$130,647 in 1996, reflecting the Company's increased level of participation in
drilling exploratory and development wells on its mineral holdings. Lease
operating expenses increased 18.7% to $695,007 in 1997 versus $585,732 in 1996,
as a result of the Company acquiring more working interest properties in 1996
and 1997. The Company's general and administrative expenses decreased $104,363
or 11.5% to $802,723 in 1997 from $907,086 in 1996, of which $114,277 reflects a
reduction in salary to its former chairman and chief executive officer of the
Company. During 1997, the Company incurred a loss of $173,971 which has been
recorded as a loss on settlement of benefit plans. This loss consists of a 100%
settlement of the pension benefit for $87,654 and a payment of $88,617 for
settlement of the supplemental executive retirement plan. There were no losses
on settlement of benefit plans in 1996.
Total net loss for 1997 was $51,366 or $0.01 per share compared to net
income of $726,750 or $0.14 per share in 1996. Included in 1996 total net
income is a $386,607 after tax gain from the sale of marketable securities and
other assets or $0.07 per share.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Total revenues for 1996 were $3,114,085 compared with $1,730,658 in 1995.
Revenues from oil and gas sales increased to $2,306,791 in 1996 from $1,378,390
in 1995. This 67.4% increase reflects increased oil and gas volumes from recent
acquisitions, new well completions and higher oil and gas prices. The Company's
net oil production rose 11% to 68,318 Bbls in 1996 from 61,537 Bbls in 1995.
Net natural gas production increased 26% to 348,539 Mcf from 277,621 Mcf in
1995. On an oil equivalent basis, net production increased 17% to 126 MBOE in
1996 from 108 MBOE in 1995. Lease bonuses and delay rentals were $118,430 in
1996, down from $138,804 in 1995.
Reflecting lower rates, interest income from investments was $138,720 in
1996 versus $183,106 in 1995. Distributions from marketable securities decreased
to $12,253 in 1996 from $30,358 in 1995. This 59.6% decrease reflects the
Company's sale of 100% of its units in the San Juan Basin Royalty Trust which
was completed in August 1996. The Company recognized pretax gains from the sale
of all units in the San Juan Basin Royalty Trust of $516,867 and a $9,700 sale
of other assets. In the absence of such gains, net income in 1996 would have
been $340,143. Distributions from and sales of marketable securities will no
longer be a source of funds in 1997 or beyond.
Total costs and expenses were $2,124,235 in 1996 as compared with
$2,348,025 in 1995 representing a 9.5% decrease. The largest percentage
decrease came in dry hole and abandonments, where expenses decreased 63.5% to
$130,647 in 1996 versus $358,210 in 1995, reflecting the reduced number of dry
holes in which in which the Company participated. Geological and geophysical
expenses decreased 23.3% to $227,744 in 1996 versus $297,047 in 1995. The
Company's general and administrative expenses decreased $171,085 or 15.9 % to
$907,086 in 1996 from $1,078,171 in 1995, approximately $200,000 of which were
incurred in connection with a proxy contest in May 1995. Lease operating
expenses increased 53.8% to $585,732 in 1996 versus $380,888 in 1995, as a
result of acquiring more working
-17-
<PAGE> 19
interest properties. In 1996 depreciation, depletion and amortization
increased to $273,026 compared to $233,709 in 1995 reflecting more property
owned by the Company.
Net income was $726,750 or $0.14 per share in 1996 as compared to a net
loss of $410,431 or $0.08 per share in 1995. Included in 1996 total net income
is a $386,607 after tax gain or $0.07 per share from the sale of securities and
other assets. There were no sale of securities in 1995 and the 1995 results
included approximately $200,000 in expenses related to a proxy contest.
ACCOUNTING CHANGES
INVESTMENTS IN MARKETABLE SECURITIES
In January 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." SFAS 115 establishes standards of financial accounting and
reporting for investments in equity securities that have readily determinable
fair market values and for all investments in debt securities. The Company has
designated its investment in the San Juan Basin Royalty Trust as "securities
available for sale." At December 31, 1996, the Company no longer owned any
marketable securities in the San Juan Basin Royalty Trust. The Company sold all
of its units and reported a pre-tax gain of $516,867 in 1996. At December 31,
1995, the market value of these securities was $661,501, resulting in a gross
unrealized gain in the amount of $535,243 and an unrealized gain, net of tax
effects, of $353,268.
ENVIRONMENTAL MATTERS
No environmental liabilities are recorded at December 31, 1997 and 1996.
Additionally, the Company is not aware of a material unrecorded liability for
any expected environmental costs.
CAPITAL AND EXPLORATION EXPENDITURES
In 1997, the Company's geological and geophysical expenses increased to
$546,634 compared to $227,744 in 1996. This reflects the Company's increased
level of participation in 3-D seismic surveys conducted on its mineral holdings.
Its expenditures on oil and gas property and equipment decreased to $717,481 in
1997 from $893,418 in 1996, reflecting smaller acquisitions of producing oil and
gas properties. The Company's 1998 capital and exploratory budget, excluding any
acquisitions the Company may make, could range from $700,000 to $1,000,000,
depending on the timing of any new seismic surveys and drilling of exploratory
and development wells in which the Company may hold a working interest position.
In 1996, the Company's geological and geophysical expenses were $227,744 as
compared to $297,047 in 1995. Its expenditures on oil and gas property and
equipment decreased to $893,418 from $1,048,757, reflecting decreased
participation in the exploration and development activity on its mineral
acreage.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share".
This Statement is effective for financial statements issued for periods ending
after December 15, 1997. Earlier adoption is not permitted. SFAS 128 requires
dual presentation of basic and diluted EPS for entities with complex capital
structures. The impact of adopting this statement will not have a material
effect on the Company's earnings per share calculation.
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Both Statements become effective for fiscal years beginning after
December 15, 1997. These Statements require disclosure of certain components of
changes in equity and certain information about operating segments and
geographic areas of operation. These Statements will not have any effect on the
results of operations or financial position of the Company.
YEAR 2000 ISSUE
The Company has reviewed its current computer software and hardware
systems, and is currently working to resolve the potential problems associated
with the Year 2000 and the processing of date sensitive information by such
systems. Based on preliminary information, the Company believes that it will be
able to implement successfully the systems and programming changes necessary to
address the Year 2000 issues, and does not expect the cost of such changes to
have a material impact on the Company's financial position, results of
operations or cash flows in future periods.
-18-
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants and Consolidated Financial
Statements are set forth on pages F-1 through F-20 of this Report and are
incorporated herein.
The financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Financial Statements or
the Notes to the Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the Company's directors, nominees for directors
and executive officers is set forth under the heading "Election of Directors"
in the Company's Proxy Statement relating to the Annual Meeting of Shareholders
to be held May 21, 1998, which will be filed with the Securities and Exchange
Commission on or about April 24, 1998, and which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is set forth under the
heading "Executive Compensation and Other Transactions" in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held May 21,
1998, which will be filed with the Securities and Exchange Commission on or
about April 24, 1998, and which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial owners
and management is set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement relating to
the Annual Meeting of Shareholders to be held May 21, 1998, which will be filed
with the Securities and Exchange Commission on or about April 24, 1998, and
which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions is
set forth under the heading "Executive Compensation and Other Transactions" in
the Company's Proxy Statement relating to the Annual Meeting of Shareholders to
be held May 21, 1998, which will be filed with the Securities and Exchange
Commission on or about April 24, 1998, and which is incorporated herein by
reference.
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Index
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1997 and 1996
Consolidated Statement of Operations for the three years ended
December 31, 1997
-19-
<PAGE> 21
Consolidated Statement of Changes in Stockholders' Equity for the three
years ended December 31, 1997
Consolidated Statement of Cash Flows for the three years ended
December 31, 1997
Notes to Consolidated Financial Statements
2. The financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Financial
Statements or the Notes to Financial Statements.
3. Exhibits:
No.
3.1 - Certificate of Incorporation of Toreador Royalty
Corporation dated July 13, 1951, as amended March 16, 1981
and June 4, 1987 (previously filed as Exhibit 3.1 to
Toreador Royalty Corporation Annual Report on Form 10-K for
the year ended December 31, 1989, and incorporated herein
by reference).
3.2 - Certificate of Amendment of Certificate of Incorporation,
as amended, of Toreador Royalty Corporation dated July 3,
1990 (previously filed as Exhibit 3.2 to Toreador Royalty
Corporation Annual Report on Form 10-K for the year ended
December 31, 1990, and incorporated herein by reference).
3.3 - Certificate of Amendment of Certificate of Incorporation,
as amended, of Toreador Royalty Corporation dated August
13, 1992 (previously filed as Exhibit 3.3 to Toreador
Royalty Corporation Annual Report on Form 10-K for the year
ended December 31, 1993, and incorporated herein by
reference).
3.4 - Certificate of Designations of Series A Junior
Participating Preferred Stock of Toreador Royalty
Corporation, dated April 3, 1995 (previously filed as
Exhibit 3 to Toreador Royalty Corporation Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995,
and incorporated herein by reference).
3.5 - Amended and Restated Bylaws of Toreador Royalty Corporation
(previously filed as Exhibit 3.3 to Toreador Royalty
Corporation Annual Report on Form 10-K for the year ended
December 31, 1991, and incorporated herein by reference).
3.6 - Amendment to Bylaws of Toreador Royalty Corporation
(previously filed as Exhibit 3.5 to Toreador Royalty
Corporation Annual Report on Form 10-K for the year ended
December 31, 1993, and incorporated herein by reference).
3.7 - Amendment to Bylaws of Toreador Royalty Corporation.
4.1 - Rights Agreement dated as of April 3, 1995, between
Toreador Royalty Corporation and Continental Stock Transfer
& Trust Company (previously filed as Exhibit 1 to Toreador
Royalty Corporation Current Report on Form 8-K dated April
3, 1995, and incorporated herein by reference).
10.1+ - Stock Option Agreement dated August 1, 1988 between
Toreador Royalty Corporation and Peter R. Vig (previously
filed as Exhibit 10.B to Toreador Royalty Corporation
Current Report on Form 8-K dated August 11, 1988, and
incorporated herein by reference).
10.2+ - Stock Grant Agreement dated August 1, 1988 between Toreador
Royalty Corporation and Peter R. Vig (previously filed as
Exhibit 10.C to Toreador Royalty Corporation Current Report
on Form 8-K dated August 11, 1988, and incorporated herein
by reference).
10.3+ - Form of Stock Option Agreement by and between Toreador
Royalty Corporation and Donald E. August, John V. Ballard,
J.W. Bullion, John Mark McLaughlin, and Jack L. Woods
(previously filed as Exhibit
-20-
<PAGE> 22
4.6 to Toreador Royalty Corporation Form S-8 (No.
333-14145) filed with the Securities and Exchange
Commission on October 15, 1996, and incorporated herein by
reference).
10.4+ - Stock Option Agreement dated February 17, 1994, by and
between Toreador Royalty Corporation and Thomas P. Kellogg,
Jr. (previously filed as Exhibit 4.7 to Toreador Royalty
Corporation Form S-8 (No. 333-14145) filed with the
Securities and Exchange Commission on October 15, 1996, and
incorporated herein by reference).
10.5 - Form of Stock Option Agreement by and between Toreador
Royalty Corporation and Edward C. Marhanka and Earl V.
Tessem, as amended (previously filed as Exhibit 4.8 to
Toreador Royalty Corporation Form S-8 (No. 333-14145) filed
with the Securities and Exchange Commission on October 15,
1996, and incorporated herein by reference).
10.6+ - Non-qualified Stock Option Agreement dated as of May 17,
1997 by and between Toreador Royalty Corporation and Jack
L. Woods (previously filed as Exhibit 10.1 to Toreador
Royalty Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, and incorporated herein by
reference).
10.7+ - Incentive Stock Option Agreement dated as of May 15, 1997
by and between Toreador Royalty Corporation and John Mark
McLaughlin (previously filed as Exhibit 10.2 to Toreador
Royalty Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, and incorporated herein by
reference).
10.8+ - Incentive Stock Option dated as of May 15, 1997 by and
between Toreador Royalty Corporation and Edward C. Marhanka
(previously filed as Exhibit 10.4 to Toreador Royalty
Corporation Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, and incorporated herein by reference).
10.9+ - Employment Agreement dated as of May 1, 1997 by and between
Toreador Royalty Corporation and Edward C. Marhanka
(previously filed as Exhibit 10.5 to Toreador Royalty
Corporation Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, and incorporated herein by reference).
10.10+ - Consulting Agreement dated as of May 1, 1997 by and between
Toreador Royalty Corporation and Jack L. Woods (previously
filed as Exhibit 10.3 to Toreador Royalty Corporation
Quarterly Report on Form 10- Q for the quarter ended June
30, 1997 and incorporated herein by reference).
10.11 - Employment Agreement dated February 9, 1989, as amended by
Agreement dated February 28, 1990, between Toreador Royalty
Corporation and James S. Blair (previously filed as Exhibit
4.5 to Toreador Royalty Corporation Form S-8 (No.
333-14145) filed with the Securities and Exchange
Commission on October 15, 1996, and incorporated herein by
reference).
10.12 - Joint Venture Agreement dated March 1, 1989, among Toreador
Royalty Corporation, Bandera Petroleum, et al. (previously
filed as Exhibit 10.9 to Toreador Royalty Corporation
Annual Report on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference).
10.13+ - Toreador Royalty Corporation 1990 Stock Option Plan
(previously filed as Exhibit 10.7 to Toreador Royalty
Corporation Annual Report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference).
10.14+ - Amendment to Toreador Royalty Corporation 1990 Stock Option
Plan, effective as of May 15, 1997.
10.15+ - Toreador Royalty Corporation 1994 Non-Employee Director
Stock Option Plan, as amended (previously filed as Exhibit
10.12 to Toreador Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by
reference).
-21-
<PAGE> 23
10.16 - Warrant for the Purchase of Shares of Common Stock issued
to Petrie Parkman & Co. dated May 23, 1994 (previously
filed as Exhibit 10.1 to Toreador Royalty Corporation
Registration on Form S-3, and incorporated herein by
reference (No. 33-80572) filed with the Securities and
Exchange Commission on June 22, 1994, and incorporated
herein by reference).
10.17+ - Form of Indemnification Agreement dated as of April 25,
1995 between Toreador Royalty Corporation and each of the
members of its Board of Directors (previously filed as
Exhibit 10 to Toreador Royalty Corporation Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995,
and incorporated herein by reference).
10.18 - Severance Agreement by and between Toreador Royalty
Corporation and James S. Blair dated March 2, 1996
(previously filed as Exhibit 10.16 to Toreador Annual
Report on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference).
21.1 - Subsidiary of Toreador Royalty Corporation.
23.1 - Consent of Price Waterhouse LLP.
23.2 - Consent of Netherland, Sewell & Associates, Inc.
27.1 - Financial Data Schedule
- ----------------
+ Management contract or compensatory plan
(b) Reports on Form 8-K:
None.
-22-
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TOREADOR ROYALTY CORPORATION
Date: March 26, 1998
By /s/ JOHN MARK McLAUGHLIN
--------------------------------------------
John Mark McLaughlin, Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Capacity in
Signature which signed Date
- --------- ------------ ----
<S> <C> <C>
/s/ JOHN MARK McLAUGHLIN Chairman, President and Director March 26, 1998
- -------------------------------------- (Principal Executive Officer and
John Mark McLaughlin Principal Financial Officer)
/s/ JOHN V. BALLARD Director March 26, 1998
- --------------------------------------
John V. Ballard
/s/ J.W. BULLION Director March 26, 1998
- --------------------------------------
J.W. Bullion
/s/ THOMAS P. KELLOGG, JR. Director March 26, 1998
- --------------------------------------
Thomas P. Kellogg, Jr.
/s/ PETER R. VIG Director March 26, 1998
- --------------------------------------
Peter R. Vig
/s/ JACK L. WOODS Director March 26, 1998
- --------------------------------------
Jack L. Woods
/s/ EDWARD C. MARHANKA Vice President and Treasurer March 26, 1998
- -------------------------------------- (Principal Accounting Officer)
Edward C. Marhanka
</TABLE>
-23-
<PAGE> 25
TOREADOR ROYALTY CORPORATION
ITEM 14(a)(1) and (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Financial Statements:
Consolidated Balance Sheet as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Operations for the three years ended December 31, 1997 . . . . . . . . . . . . . . F-4
Consolidated Statement of Changes in Stockholders' Equity for the three years
ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Cash Flows for the three years ended December 31, 1997 . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
All financial statement schedules have been omitted as all required information
has been included in the consolidated financial statements and notes thereto.
F-1
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Toreador Royalty Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Toreador Royalty Corporation and its subsidiary at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
March 23, 1998
F-2
<PAGE> 27
TOREADOR ROYALTY CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,876,652 $ 3,074,111
Accounts receivable 334,851 508,793
Federal income tax receivable 62,307 54,899
Deferred tax benefit 15,945 --
Other current assets 26,956 65,101
----------- -----------
Total current assets 3,316,711 3,702,904
----------- -----------
Properties and equipment, less accumulated
depreciation, depletion and amortization 3,210,074 3,306,020
----------- -----------
Total assets $ 6,526,785 $ 7,008,924
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 309,590 $ 256,298
Federal income taxes payable -- 62,938
----------- -----------
Total current liabilities 309,590 319,236
Deferred tax liabilities -- 65,508
----------- -----------
Total liabilities 309,590 384,744
----------- -----------
Stockholders' equity:
Preferred stock, $1.00 par value, 4,000,000 shares
authorized; none issued -- --
Common stock, $.15625 par value, 10,000,000 shares
authorized; 5,367,571 and 5,356,571 shares issued 838,683 836,964
Capital in excess of par value 3,646,834 3,577,385
Retained earnings 2,791,117 2,842,483
Minimum pension liability -- (88,543)
----------- -----------
7,276,634 7,168,289
Treasury stock at cost,
408,400 and 213,900 shares (1,059,439) (544,109)
----------- -----------
Total stockholders' equity 6,217,195 6,624,180
----------- -----------
Total liabilities and stockholders' equity $ 6,526,785 $ 7,008,924
=========== ===========
</TABLE>
The company uses successful efforts method of accounting for its
oil and gas producing activities.
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 28
TOREADOR ROYALTY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 2,325,148 $ 2,306,791 $ 1,378,390
Lease bonuses and rentals 287,604 118,430 138,804
Interest and other income 149,841 162,297 213,464
Gain on sale of marketable securities
and other assets 26,171 526,567 --
----------- ----------- ----------
Total revenues 2,788,764 3,114,085 1,730,658
----------- ----------- ----------
Costs and expenses:
Lease operating expense 695,007 585,732 380,888
Dry holes and abandonments 166,710 130,647 358,210
Depreciation, depletion and amortization 539,346 273,026 233,709
Geological and geophysical 546,634 227,744 297,047
General and administrative 802,723 907,086 1,078,171
Loss on settlement of benefit plans 173,971 -- --
----------- ----------- ----------
Total cost and expenses 2,924,391 2,124,235 2,348,025
----------- ----------- ----------
Income (loss) before federal income taxes (135,627) 989,850 (617,367)
Provision (benefit) for federal income taxes (84,261) 263,100 (206,936)
----------- ----------- ----------
Net income (loss) $ (51,366) $ 726,750 $ (410,431)
=========== =========== ===========
Basic income (loss) per share $ (0.01) $ 0.14 $ (0.08)
=========== =========== ===========
Diluted income (loss) per share $ (0.01) $ 0.14 $ (0.08)
=========== =========== ===========
Weighted average shares outstanding:
Basic 5,022,216 5,216,941 5,334,190
Diluted 5,022,216 5,216,941 5,334,190
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 29
TOREADOR ROYALTY CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Capital in Minimum
---------------------- excess of Retained pension
Shares Amount par value earnings liability
------ ------ --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 5,349,071 $ 835,792 $ 3,560,042 $ 2,526,164 $ --
Net unrealized loss on
marketable securities -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Net loss -- -- -- (410,431) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 5,349,071 835,792 3,560,042 2,115,733 --
Issuance of common stock 7,500 1,172 17,343 -- --
Net unrealized gain on
marketable securities -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Minimum pension liability -- -- -- -- (88,543)
Net income -- -- -- 726,750 --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 5,356,571 836,964 3,577,385 2,842,483 (88,543)
Issuance of common stock 11,000 1,719 69,449 -- --
Purchase of treasury stock -- -- -- -- --
Minimum pension liability -- -- -- -- 88,543
Net loss -- -- -- (51,366) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 5,367,571 $ 838,683 $ 3,646,834 $ 2,791,117 $ --
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TOREADOR ROYALTY CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Total
Unrealized Treasury stockholders'
gains/(losses) stock equity
------------- ------- ------------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 356,507 $ (16,744) $ 7,261,761
Net unrealized loss on
marketable securities (3,239) -- (3,239)
Purchase of treasury stock -- (37,606) (37,606)
Net loss -- -- (410,431)
----------- ----------- -----------
Balance at December 31, 1995 353,268 (54,350) 6,810,485
Issuance of common stock -- -- 18,515
Net unrealized gain on
marketable securities (353,268) -- (353,268)
Purchase of treasury stock -- (489,759) (489,759)
Minimum pension liability -- -- (88,543)
Net income -- -- 726,750
----------- ----------- -----------
Balance at December 31, 1996 -- (544,109) 6,624,180
Issuance of common stock -- -- 71,168
Purchase of treasury stock -- (515,330) (515,330)
Minimum pension liability -- -- 88,543
Net loss -- -- (51,366)
----------- ----------- -----------
Balance at December 31, 1997 $ -- $(1,059,439) $ 6,217,195
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE> 30
TOREADOR ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (51,366) $ 726,750 $ (410,431)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 539,346 273,026 233,709
Dry holes and abandonments 166,710 130,647 358,210
Gain on sale of marketable securities
and other assets (26,171) (526,567) --
Decrease (increase) in accounts receivable 173,942 (340,047) (8,045)
Decrease (increase) in federal income tax receivable (7,408) 32,551 (19,436)
Decrease (increase) in pension obligation 88,543 29,782 (12,973)
Decrease (increase) in other current assets 38,145 (42,929) --
Increase in accounts payable and
accrued liabilities 53,290 63,060 28,475
Increase (decrease) in federal income
taxes payable (62,938) 62,938 --
Deferred tax expense (benefit) (81,453) 200,161 (166,069)
Other, net 3 (8) (14,403)
----------- ----------- -----------
Net cash provided (used) by operating activities 830,643 609,364 (10,963)
Cash flows from investing activities:
Expenditures for oil and gas property and equipment (717,481) (893,418) (1,048,757)
Proceeds from lease bonuses and rentals 77,583 415,074 10,917
Proceeds from sale of marketable
securities and other assets 56,065 652,826 --
Purchase of furniture and fixtures and other assets (107) (30,066) (15,682)
----------- ----------- -----------
Net cash provided (used) by investing activities (583,940) 144,416 (1,053,522)
Cash flows from financing activities:
Proceeds from issuance of common stock 71,168 18,515 --
Purchase of treasury stock (515,330) (489,759) (37,606)
----------- ----------- -----------
Net cash provided (used) by financing activities (444,162) (471,244) (37,606)
Net increase (decrease) in cash and cash equivalents (197,459) 282,536 (1,102,091)
Cash and cash equivalents, beginning of year 3,074,111 2,791,575 3,893,666
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,876,652 $ 3,074,111 $ 2,791,575
=========== =========== ===========
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Income taxes $ 4,475 $ -- $ (21,431)
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE> 31
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Toreador Royalty Corporation (the "Company") explores for and produces
oil and gas reserves principally in the southwestern part of the United
States. The Company owns in excess of 535,000 net mineral acres located
primarily in the Texas Panhandle and West Texas. In addition, the Company
owns working or royalty interests in Texas, New Mexico, Oklahoma,
Arkansas, and Louisiana. The Company's business activities are with
industry partners located within the United States.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of Toreador
Royalty Corporation and its wholly-owned subsidiary, Toreador Exploration
& Production Inc. All intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks
and all highly liquid investments with original maturities of three
months or less. The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant risk on cash.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for oil
and gas exploration and development expenditures. Under this method,
costs of successful exploratory wells and all development wells are
capitalized. Costs to drill exploratory wells which do not find proved
reserves are expensed. Acquisition costs of mineral interests in oil and
gas properties remain capitalized until they are impaired or a
determination has been made to discontinue exploration of the lease, at
which time all related costs are charged to expense. Impairment of
unproved properties is assessed and recorded on a property-by-property
basis. Upon sale or abandonment of units of property or the disposition
of miscellaneous equipment, the cost is removed from the asset account,
the related reserves relieved of the accumulated depreciation or
depletion and the gain or loss is credited to or charged against
operations. Maintenance and repairs are charged to expense; betterments
of property are capitalized and depreciated as described below.
REVENUE RECOGNITION
Oil and natural gas revenues are accounted for using the sales method.
Under this method, sales are recorded on all production sold by the
Company regardless of the Company's ownership interest in the respective
property. Imbalances result when sales differ from the seller's net
revenue interest in the particular property's reserves and are tracked to
reflect the Company's balancing position. At December 31, 1997 and 1996,
the imbalance and related value were immaterial.
F-7
<PAGE> 32
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASE BONUSES
The Company defers bonuses received from leasing minerals in which
unrecovered costs remain by recording the bonuses as a reduction of the
unrecovered costs. Bonuses received from leasing mineral interests
previously expensed are taken into income. For federal income tax
purposes, lease bonuses are regarded as advance royalties (ordinary
income).
DEPRECIATION, DEPLETION AND AMORTIZATION
The Company provides for depreciation, depletion and amortization of its
investment in producing oil and gas properties on the unit-of-production
method, based upon independent reserve engineers' estimates of
recoverable oil and gas reserves from the property. Depreciation expense
for fixed assets is generally calculated on a straight-line basis based
upon estimated useful lives of five years.
IMPAIRMENT OF ASSETS
The Company evaluates the carrying value of its long-lived assets,
consisting primarily of oil and gas properties, when events or changes in
circumstances indicate that the carrying value of such assets may be
impaired. The determination of impairment is based upon expectations of
undiscounted future cash flows of the related asset.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, and accounts payable and accrued
liabilities approximate fair value, unless otherwise stated, as of
December 31, 1997 and 1996.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the anticipated
future tax effects of temporary differences between the financial
statement basis and the tax basis of the Company's assets and liabilities
using enacted tax rates in effect at year end. A valuation allowance for
deferred tax assets is recorded when it is more likely than not that the
benefit from the deferred tax asset will not be realized.
STOCK-BASED EMPLOYEE COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," in 1996. Under the
provisions of SFAS No. 123, the Company has elected to continue using the
intrinsic value method of accounting for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Under the intrinsic value
method, if the exercise price of the Company's stock options equals the
market value of the underlying stock on the date of grant, no
compensation expense is recognized. See Note 11 for the required
disclosure of pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123.
F-8
<PAGE> 33
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which establishes new requirements for
computing and presenting earnings per share information. The Company, as
required, adopted this statement in the fourth quarter of 1997.
Accordingly, all earnings per share and weighted average common shares
outstanding information presented in these financial statements and
footnotes have been restated to conform to the new statement. For each of
the three years in the period ended December 31, 1997, there were no
adjustments to net income for purposes of calculating basic and diluted
earnings per share and there were no differences in the weighted average
common shares used in the basic and diluted earnings per share
computations due to antidilution.
2. MARKETABLE SECURITIES
Marketable securities were comprised of 105,840 shares in the San Juan
Basin Royalty Trust at December 31, 1995. The Company's cost in this
royalty trust was $126,258. During 1996, the Company sold all shares in
the San Juan Basin Royalty Trust for proceeds of $643,125 resulting in a
gain of $516,867.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------- ---------------
<S> <C> <C>
Oil and gas $ 334,851 $ 305,317
Acquisition costs refund - 183,227
Other - 20,249
--------------- ---------------
$ 334,851 $ 508,793
=============== ===============
</TABLE>
Accounts receivable consist primarily of amounts arising from oil and gas
sales. Receivables are due from companies engaged principally in oil and
gas activities, with payment terms on a short-term basis and in
accordance with industry standards.
As all ownership interests were for sale in a property in which the
Company owned a 50% interest, the Company purchased a 100% interest in
the property in December 1996. In February 1997, the Company was refunded
its original interest in the property equivalent to $183,227.
4. PROPERTIES AND EQUIPMENT
Properties include mineral fee interests acquired by the Company during
1951 and 1958. These interests totaled approximately 535,000 net mineral
acres underlying approximately 882,000 surface acres in the Texas
Panhandle, West Texas, Montana and Colorado. It is recognized that the
ultimate realization of the investment in these properties is dependent
upon future exploration and development operations which are dependent
upon satisfactory leasing and drilling arrangements with others.
F-9
<PAGE> 34
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Properties and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Undeveloped mineral and royalty interests $ 334,489 $ 334,489
Nonproducing leaseholds 26,911 123,372
Producing leaseholds 3,152,332 2,755,144
Producing royalty interests 1,422,512 1,406,812
Lease and well equipment 303,388 151,243
Furniture and fixtures and other assets 79,019 113,823
----------- -----------
5,318,651 4,884,883
Accumulated depreciation, depletion and amortization (2,108,577) (1,578,863)
----------- -----------
$ 3,210,074 $ 3,306,020
=========== ===========
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Professional fees $ 3,251 $ 28,396
Lease operating expense 92,430 103,175
Trade accounts payable 19,894 23,724
Drilling costs 194,015 83,885
Accrued pension expense -- 17,118
----------- -----------
$ 309,590 $ 256,298
=========== ===========
</TABLE>
6. INTEREST AND OTHER INCOME
Interest and other income consists of:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest - Certificates of deposit
U.S. Treasury bills, and Money
Market accounts $147,237 $138,720 $183,106
Distribution from Grantor Trusts:
San Juan Basin Royalty Trust -- 12,253 30,358
Other 2,604 11,324 --
-------- -------- --------
$149,841 $162,297 $213,464
======== ======== ========
</TABLE>
F-10
<PAGE> 35
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses incurred by the Company are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Salaries $ 213,000 $ 327,277 $ 318,658
Professional fees 161,745 139,794 103,300
Insurance 57,730 57,005 63,554
Retirement expense 69,188 69,050 55,017
Rent expense 34,297 30,913 34,827
Directors' fees and travel expenses 78,963 40,334 54,866
Shareholder relations 53,126 77,166 265,358
Travel and entertainment 21,800 52,726 56,164
Telephone and utilities 16,588 19,908 23,230
Taxes, other than income 37,747 38,285 25,975
Other 58,539 54,628 77,222
---------- ---------- ----------
$ 802,723 $ 907,086 $1,078,171
========== ========== ==========
</TABLE>
8 INCOME TAXES
The Company's provision (benefit) for income taxes was comprised of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current $ (2,808) $ 62,939 $ (40,867)
Deferred (81,453) 200,161 (166,069)
--------- --------- ---------
Provision (benefit) for income taxes $ (84,261) $ 263,100 $(206,936)
========= ========= =========
</TABLE>
The primary reasons for the difference between tax expense at the
statutory federal income tax rate and the Company's provision for income taxes
were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Theoretical tax at 34% $ (46,113) $ 336,703 $(209,905)
Surtax or rate difference (958) (8,973) --
Statutory depletion in excess of tax basis (38,013) (64,317) --
Other 823 (313) 2,969
--------- --------- ---------
Provision (benefit) for income taxes $ (84,261) $ 263,100 $(206,936)
========= ========= =========
</TABLE>
In 1995, the net operating loss for tax purposes totaled $698,357, of
which $182,293 was carried back and utilized against prior year taxable
income. The remaining $516,064 was carried forward and used in 1996.
F-11
<PAGE> 36
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Intangible drilling and development costs $(117,774) $ (95,648)
Lease and well equipment (12,619) (2,826)
Leasehold costs (16,596) (28,663)
--------- ---------
Gross deferred tax liabilities (146,989) (127,137)
--------- ---------
Deferred tax assets:
Alternative minimum tax credit carryforwards 59,574 61,629
Depletion carryforwards 49,528 --
Geological and geographical costs 53,832 --
--------- ---------
Gross deferred tax assets 162,934 61,629
--------- ---------
Net deferred tax assets (liabilities) $ 15,945 $ (65,508)
========= =========
</TABLE>
Of the change in deferred taxes, $181,982 was credited to net unrealized
gain on marketable securities classified in stockholders' equity for
1996. The tax credit carryforwards and depletion carryforwards are
available indefinitely.
9. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which
covers all Company employees. The benefits are based on years of service
and the employee's compensation. Contributions are intended to provide
not only for benefits attributed to service to date but also for those
expected to be earned in the future.
In 1996, the Company established a Supplemental Executive Retirement Plan
("SERP") covering certain key employees. The SERP provides for
incremental pension payments from the Company's funds so that retirement
benefit payments are equal to amounts that would have been payable from
the Company's principal pension plan if it were not for limitations on
those payments imposed by income tax regulations.
During 1997 the Company settled its benefit plan obligations with certain
employees resulting in a loss of $173,971 which has been recorded as a
loss on settlement of benefit plans in the consolidated statement of
operations. The loss consists of a 100% settlement of the pension benefit
for $87,654 and a payment of $88,617 for settlement of the SERP. The loss
is primarily attributable to the settlement of benefit plans upon the
resignation of the then Chairman and Chief Executive Officer of the
Company.
F-12
<PAGE> 37
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic pension expense includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits earned during
the year $ 55,212 $ 54,452 $ 50,898
Interest cost on projected benefit
obligation 15,401 26,828 21,779
Actual return on plan assets (25,777) (10,260) (15,679)
Net amortization and deferral 18,207 (10,302) (5,058)
-------- -------- --------
Net periodic pension expense $ 63,043 $ 60,718 $ 51,940
======== ======== ========
</TABLE>
The assumptions used to develop the net periodic pension expense were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7% 7% 7%
Expected long-term rate of return on assets 7% 7% 7%
Rate of increase in compensation levels 3.5% 4% 3%
</TABLE>
The following table sets forth the funded status of the plan and the related
asset and liability amounts for the plan as of December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 487 $ 404,276 $ 317,818
========= ========= =========
Accumulated benefit obligation $ 2,436 $ 404,276 $ 338,345
========= ========= =========
Projected benefit obligation $ 4,365 $ 463,933 $ 383,255
Plan assets at fair value 5,020 387,158 363,080
--------- --------- ---------
Plan assets (greater)/less than projected
benefit obligation (655) 76,775 20,175
Unrecognized net asset existing at
transition date 17,248 20,122 22,996
Unrecognized net loss (104,902) (168,322) (161,496)
Adjustment for minimum pension liability -- 88,543 --
Realized loss on settlement 87,654 -- --
--------- --------- ---------
Accrued (prepaid) pension cost $ (655) $ 17,118 $(118,325)
========= ========= =========
</TABLE>
At December 31, 1996, the Company recognized a minimum pension liability
for its underfunded plan. The minimum liability is equal to the excess of
the accumulated benefit obligation over the fair value of plan assets.
This amount plus any deferred pension asset was recognized as a reduction
to stockholders' equity of $88,543 at December 31, 1996.
F-13
<PAGE> 38
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEASE AND OTHER COMMITMENTS
In November 1993, the Company signed a lease agreement to lease new
office space for a period of sixty-three months, beginning January 6,
1994 and ending March 31, 1999. Minimum annual rentals at December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998 38,242
1999 9,561
</TABLE>
In November 1997, the Company obtained a $10 million credit facility
with an initial availability of $4 million which it may use to fund
acquisition and development of oil and gas properties. The Company has
not drawn any amounts under the facility.
In September 1997, the Company engaged a financial advisor in evaluating
strategic alternatives available to the Company, including a sale of the
Company, a merger with another company and other forms of business
combinations.
11. STOCK COMPENSATION PLANS
At December 31, 1997 the Company has granted stock options to key
employees, directors and certain consultants of the Company which are
described below.
In May 1990, the Company adopted the 1990 Stock Option Plan ("the Plan").
The aggregate number of shares of common stock issuable under the Plan is
225,000. The Plan provides for the granting of stock options at exercise
prices equal to the market price of the stock at the date of the grant.
In September 1994, the Company adopted the 1994 Nonemployee Director
Stock Option Plan ("Nonemployee Director Plan"). The number of shares of
common stock issuable under the Nonemployee Director Plan is 200,000
shares in the aggregate. The Nonemployee Director Plan provides for the
granting of stock options at exercise prices equal to the market price of
the stock at the grant date.
Options under the Plan and the Nonemployee Director Plan are granted
periodically throughout the year and are generally exercisable in equal
increments over a three-year period and have a maximum term of 10 years.
Pursuant to SFAS No. 123, the Company recorded an expense of $44,011
during 1997 with respect to stock options granted to certain consultants
to the Company.
A summary of stock option transactions are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- --------------------- --------------------
Weighted- Weighted- Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 452,500 $ 3.16 470,000 $ 3.15 490,000 $ 3.17
Granted 117,500 2.50 - - - -
Exercised (11,000) 2.47 (7,500) 2.47 - -
Forfeited (90,000) 3.36 (10,000) 3.25 (20,000) 3.56
-------- -------- -------- --------- ------- ---------
Outstanding at end of year 469,000 $ 2.97 452,500 $ 3.16 470,000 $ 3.15
======= ======== ======= ========= ======= =========
Exercisable at end of year 411,500 $ 3.02 402,500 $ 3.13 363,333 $ 3.08
======= ======== ======= ========= ======= =========
</TABLE>
F-14
<PAGE> 39
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the fixed price stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- ------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 2.47 31,500 1.2 Years 2.47 31,500 2.47
2.50 117,500 9.5 Years 2.50 60,000 2.50
3.00 200,000 0.6 Years 3.00 200,000 3.00
3.25 - 3.50 70,000 6.7 Years 3.43 70,000 3.43
3.63 50,000 4.8 Years 3.63 50,000 3.63
---------- --------- ---- -------- ----
2.47 - 3.63 469,000 4.2 Years 2.97 411,500 3.02
========== ========= ==== ======== ====
</TABLE>
At December 31, 1997, 162,500 shares were available for grant under the
Plan and 150,000 shares were available for grant as options under the
Nonemployee Director Plan.
The Company applied APB Opinion No. 25 in accounting for its stock
options and accordingly, no compensation cost has been recognized for
stock options in the financial statements. Had compensation costs for the
Company's two stock-based compensation plans been determined based on the
fair value at the grant dates under those plans consistent with the
method prescribed by SFAS No. 123, the Company's pro forma net income and
earnings per share would have been reduced to the pro forma amounts
listed below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- -----------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (51,366) $ 726,750 $ (410,431)
Pro forma $ (82,515) $ 726,750 $ (410,431)
Basic earnings per share As reported $ (0.01) $ 0.14 $ (0.08)
Pro forma $ (0.02) $ 0.14 $ (0.08)
Diluted earnings per share As reported $ (0.01) $ 0.14 $ (0.08)
Pro forma $ (0.02) $ 0.14 $ (0.08)
</TABLE>
There were no options granted during 1996 and 1995. The fair value of
each option granted during 1997 is estimated on the date of grant using
the Black-Scholes Option-Pricing model with the following assumptions
respectively: dividend yield of $0/share for all years: expected
volatility of 39%; risk-free interest rate of 6.4%; and expected lives of
5 years.
F-15
<PAGE> 40
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. CAPITAL
On May 23, 1994, the Company privately placed 809,071 shares of common
stock for an aggregate consideration of $2,831,749. In its private
placement agreement with the purchasers, the Company granted such
purchasers registration rights, pursuant to which a registration
statement on Form S-3 covering all the shares was filed on June 22, 1994.
The registration statement was declared effective July 11, 1994 and the
Company was obligated to maintain such effectiveness until May 23, 1996.
The Company filed an amendment to the registration statement on Form S-3
deregistering 439,642 shares of common stock that remained unsold on
May 23, 1996. In connection with the private placement, the Company's
placement agent received a five-year warrant to purchase 106,867 shares
of common stock at a price of $4.375 per share.
The placement agent has rights to participate in registered offerings of
common stock by the Company. The net proceeds to the Company from the
private placement (after deducting the placement agent's fee of $141,112
and expenses of approximately $75,000) were approximately $2,616,000.
The Company adopted a stockholder rights plan on April 3, 1995 designed
to assure that the Company's stockholders receive fair and equal
treatment in the event of any proposed takeover of the Company and to
guard against partial tender offers and other abusive takeover tactics to
gain control of the Company without paying all stockholders a fair price.
Under the rights plan, the Company declared a dividend of one right
("Right") on each share of Company common stock. Each Right will entitle
the holder to purchase one one-hundredth of a share of a new Series A
Junior Participating Preferred Stock, par value $1.00 per share, at an
exercise price of $12.00. The Rights are not currently exercisable and
will become exercisable only in the event a person or group acquires
beneficial ownership of 20 percent or more of Toreador's outstanding
common stock or announces a tender offer or exchange offer to acquire
such ownership level. The Rights are subject to redemption by the Company
for $.01 per Right at any time prior to the tenth day after the first
public announcement of the acquisition by any person or group of
beneficial ownership of 20 percent or more of Company common stock. The
dividend distribution was made on April 13, 1995 to stockholders of
record at the close of business on that date. The rights will expire on
April 13, 2005.
In October 1995, the Company's Board of Directors authorized the
repurchase of up to 100,000 shares of the Company's common stock. This
repurchase was completed in April 1996. In April 1996, the Company's
Board of Directors authorized the repurchase of an additional 150,000
shares of the Company's common stock. This repurchase was completed in
April 1997.
In April 1997, the Company's Board of Directors authorized the repurchase
of an additional 300,000 shares of the Company's common stock. As of
December 31, 1997, the Company had repurchased 152,700 shares of its
common stock from the third repurchase program. Management anticipates
that any future repurchases of the Company's common stock will be funded
from the Company's cash flow from operations and working capital.
F-16
<PAGE> 41
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. UNAUDITED QUARTERLY FINANCIAL INFORMATION
A summary of unaudited quarterly consolidated financial information for
1997 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 677,835 $ 449,702 $ 513,409 $ 684,202 $ 2,325,148
Lease bonuses and rentals 109,938 2,800 150,890 23,976 287,604
Interest and other income 37,377 39,963 35,532 36,969 149,841
Gain on sale of other assets -- -- -- 26,171 26,171
---------- ---------- ---------- ---------- ----------
825,150 492,465 699,831 771,318 2,788,764
COSTS AND EXPENSES
Lease operating expense 138,215 141,930 138,072 276,790 695,007
Dry hole and abandonments 53,455 10,067 800 102,388 166,710
Depreciation, depletion and amortization 57,588 56,754 64,052 360,952 539,346
Geological and geophysical 74,014 79,475 303,202 89,943 546,634
General and administrative 229,796 289,440 154,837 128,650 802,723
Settlement of benefit plans 29,171 86,317 58,483 -- 173,971
---------- ---------- ---------- ---------- ----------
582,239 663,983 719,446 958,723 2,924,391
---------- ---------- ---------- ---------- ----------
Income (loss) before federal income taxes 242,911 (171,518) (19,615) (187,405) (135,627)
Provision (benefit) for federal income taxes 77,959 (55,189) (16,159) (90,872) (84,261)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 164,952 $ (116,329) $ (3,456) $ (96,533) $ (51,366)
========== ========== ========== ========== ==========
Basic income (loss) per share $ 0.03 $ (0.02) $ (0.00) $ (0.02) $ (0.01)
Diluted income (loss) per share $ 0.03 $ (0.02) $ (0.00) $ (0.02) $ (0.01)
Weighted average shares outstanding 5,140,960 5,042,070 4,949,791 4,958,845 5,022,216
</TABLE>
The 1997 first, second and third quarter results have been restated to reflect
the pension settlement during the first, second and third quarters. Income
(loss) from operations and net income (loss) as previously reported for the
first, second and third quarter were $272,082, ($85,201) and $38,867, and
$184,205, ($59,360) and $35,142, respectively.
F-17
<PAGE> 42
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. OIL AND GAS INFORMATION (UNAUDITED)
The following information is presented pursuant to SFAS No. 69,
Disclosures about Oil and Gas Producing Activities:
RESULTS OF OPERATIONS
Results of operations from oil and gas producing activities were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Crude oil, condensate and natural gas $2,325,148 $2,306,791 $1,378,390
Lease bonuses and delay rentals 287,604 118,430 138,804
---------- ---------- ----------
Total revenues 2,612,752 2,425,221 1,517,194
---------- ---------- ----------
Costs and expenses:
Lease operating costs 695,007 585,732 380,888
Exploration costs 713,344 358,391 655,257
Depreciation and depletion 539,346 273,026 233,709
---------- ---------- ----------
Income before income taxes 665,055 1,208,072 247,340
Income tax expense 226,119 410,744 84,096
---------- ---------- ----------
Results of operations from producing
activities (excluding corporate
overhead) $ 438,936 $ 797,328 $ 163,244
========== ========== ==========
</TABLE>
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C>
Unproved properties $ 361,400 $ 457,861 $ 803,094
Proved leaseholds 4,574,844 4,161,956 3,516,339
Lease and well equipment 303,388 151,243 103,929
----------- ----------- -----------
5,239,632 4,771,060 4,423,362
----------- ----------- -----------
Less: Accumulated depreciation,
depletion and amortization (2,036,912) (1,507,553) (1,242,285)
----------- ----------- -----------
Capitalized costs $ 3,202,720 $ 3,263,507 $ 3,181,077
=========== =========== ===========
</TABLE>
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND
DEVELOPMENT ACTIVITIES:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Acquisition of properties
Proved $ 192,670 $ 371,761 $ 360,100
Unproved 56,245 69,838 87,251
Exploration costs 166,710 130,647 358,210
Development costs 301,856 321,172 243,196
---------- ---------- ----------
Costs incurred $ 717,481 $ 893,418 $1,048,757
========== ========== ==========
</TABLE>
F-18
<PAGE> 43
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND GAS RESERVES
The following table identifies the Company's net interest in estimated
quantities of proved oil and gas reserves and changes in such estimated
quantities. Reserve estimates were prepared by independent petroleum
engineers and such estimates were reviewed and adjusted by Company
management. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and gas properties. Accordingly,
the estimates are expected to change as future information becomes
available. Estimated proved developed and undeveloped oil and gas
reserves at December 31, 1997, 1996 and 1995 are tabulated below.
Crude oil includes condensate and natural gas liquids and is stated
in barrels (bbl). Natural gas is stated in thousands of cubic
feet (mcf).
<TABLE>
<CAPTION>
OIL(BBL) GAS(MCF)
----------- -----------
PROVED DEVELOPED AND UNDEVELOPED RESERVES
<S> <C> <C>
December 31, 1994 463,091 2,621,137
Purchases of reserves in place 82,386 67,181
Revisions of previous estimates 30,125 81,705
Extensions, discoveries and other additions 55,216 115,034
Production (61,537) (277,621)
----------- -----------
December 31, 1995 569,281 2,607,436
Purchases of reserves in place 219,268 266,899
Revisions of previous estimates 35,082 372,202
Extensions, discoveries, and other additions 35,959 154,942
Production (68,318) (348,539)
----------- -----------
December 31, 1996 791,272 3,052,940
Purchases of reserves in place 5,410 265,316
Revisions of previous estimates (317,393) (471,860)
Extensions, discoveries, and other additions 143,792 143,998
Production (69,903) (425,854)
----------- -----------
December 31, 1997 553,178 2,564,540
=========== ===========
PROVED DEVELOPED RESERVES
- -------------------------
December 31, 1994 397,959 2,621,137
=========== ===========
December 31, 1997 501,726 2,487,574
=========== ===========
</TABLE>
There were no proved undeveloped reserves at December 31, 1996 or 1995.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS REVENUES
Pursuant to SFAS No. 69, the Company has developed the following
information titled "Standardized Measure of Discounted Future Net Cash
Flows Relating to Proved Oil and Gas Quantities" (Standardized Measure).
Accordingly, the Standardized Measure has been prepared assuming year-end
selling prices adjusted for future fixed and determinable contractual
price changes, year-end development and production costs, year-end
statutory tax rates adjusted for future tax rates already legislated and
a 10% annual discount rate. The Standardized Measure does not purport to
be an estimate of the fair market value of the Company's reserves. An
estimate of fair value would also have taken into account, among other
things, the expected recovery of reserves in excess of proved reserves,
anticipated changes in future prices and costs and a discount factor
representative of the time value of money and risks inherent in producing
oil and gas.
F-19
<PAGE> 44
TOREADOR ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Future cash inflows $14,558,500 $29,686,583 $14,627,515
Future production costs 4,096,800 9,594,044 4,235,501
Future development costs 366,900 -- 45,289
----------- ----------- -----------
Future net cash flows before income taxes 10,094,800 20,092,539 10,346,725
Future income tax expense 2,628,421 6,001,855 2,775,274
----------- ----------- -----------
Future net cash flows 7,466,379 14,090,684 7,571,451
10% annual discount for estimated
timing of cash flows 2,597,628 5,773,051 2,861,316
----------- ----------- -----------
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves $ 4,868,751 $ 8,317,633 $ 4,710,135
=========== =========== ===========
</TABLE>
The average oil and gas prices used to calculate future net cash
inflows at December 31, 1997 were $15.87 per barrel and $2.25 per mcf,
respectively. At December 31, 1997 and March 17, 1998, respectively,
the NYMEX price for oil was $17.64 per barrel and $13.21 per barrel and
the NYMEX price for gas was $2.264 per MMBtu and $2.155 per MMBtu.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH RELATING
TO PROVED OIL AND GAS RESERVES
The following are the principal sources of change in the standardized
measure:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 $ 8,317,633 $ 4,710,135 $ 3,948,980
Sales of oil and gas produced, net (1,630,141) (1,721,059) (997,502)
Net changes in prices and production
costs (2,968,223) 3,393,314 433,089
Extensions and discoveries 1,432,864 884,206 698,314
Revisions of previous quantity estimates (3,720,824) 719,335 344,019
Net change in income taxes 1,737,609 (1,726,595) (342,776)
Accretion of discount 831,763 601,140 490,747
Purchases of reserves 494,526 371,761 494,501
Other 373,544 1,085,396 (359,237)
----------- ----------- -----------
Balance at December 31 $ 4,868,751 $ 8,317,633 $ 4,710,135
=========== =========== ===========
</TABLE>
F-20
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------------- ------------------------------------------------------------------------------------------
<S> <C>
3.1 - Certificate of Incorporation of Toreador Royalty Corporation dated July 13, 1951, as amended
March 16, 1981 and June 4, 1987 (previously filed as Exhibit 3.1 to Toreador Royalty Corporation
Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by
reference).
3.2 - Certificate of Amendment of Certificate of Incorporation, as amended, of Toreador Royalty
Corporation dated July 3, 1990 (previously filed as Exhibit 3.2 to Toreador Royalty Corporation
Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by
reference).
3.3 - Certificate of Amendment of Certificate of Incorporation, as amended, of Toreador Royalty
Corporation dated August 13, 1992 (previously filed as Exhibit 3.3 to Toreador Royalty Corporation
Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by
reference).
3.4 - Certificate of Designations of Series A Junior Participating Preferred Stock of Toreador Royalty
Corporation, dated April 3, 1995 (previously filed as Exhibit 3 to Toreador Royalty Corporation
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, and incorporated herein
by reference).
3.5 - Amended and Restated Bylaws of Toreador Royalty Corporation (previously filed as Exhibit 3.3 to
Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1991, and
incorporated herein by reference).
3.6 - Amendment to Bylaws of Toreador Royalty Corporation (previously filed as Exhibit 3.5 to Toreador
Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1993, and
incorporated herein by reference).
3.7* - Amendment to Bylaws of Toreador Royalty Corporation.
4.1 - Rights Agreement dated as of April 3, 1995, between Toreador Royalty Corporation and Continental
Stock Transfer & Trust Company (previously filed as Exhibit 1 to Toreador Royalty Corporation
Current Report on Form 8-K dated April 3, 1995, and incorporated herein by reference).
10.1 - Stock Option Agreement dated August 1, 1988 between Toreador Royalty Corporation and Peter R. Vig
(previously filed as Exhibit 10.B to Toreador Royalty Corporation Current Report on Form 8-K dated
August 11, 1988, and incorporated herein by reference).
10.2 - Stock Grant Agreement dated August 1, 1988 between Toreador Royalty Corporation and Peter R. Vig
(previously filed as Exhibit 10.C to Toreador Royalty Corporation Current Report on Form 8-K dated
August 11, 1988, and incorporated herein by reference).
10.3 - Form of Stock Option Agreement by and between Toreador Royalty Corporation and Donald E. August,
John V. Ballard, J.W. Bullion, John Mark McLaughlin, and Jack L. Woods (previously filed as Exhibit
4.6 to Toreador Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange
Commission on October 15, 1996, and incorporated herein by reference).
10.4 - Stock Option Agreement dated February 17, 1994, by and between Toreador Royalty Corporation and
Thomas P. Kellogg, Jr. (previously filed as Exhibit 4.7 to Toreador Royalty Corporation Form S-8
(No. 333-14145) filed with the Securities and Exchange Commission on October 15, 1996, and
incorporated herein by reference).
10.5 - Form of Stock Option Agreement by and between Toreador Royalty Corporation and Edward C. Marhanka
and Earl V. Tessem, as amended (previously filed as Exhibit 4.8 to Toreador Royalty
</TABLE>
<PAGE> 46
<TABLE>
<S> <C>
Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on October
15, 1996, and incorporated herein by reference).
10.6 - Non-qualified Stock Option Agreement dated as of May 17, 1997 by and between Toreador Royalty
Corporation and Jack L. Woods (previously filed as Exhibit 10.1 to Toreador Royalty Corporation
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by
reference).
10.7 - Incentive Stock Option Agreement dated as of May 15, 1997 by and between Toreador Royalty
Corporation and John Mark McLaughlin (previously filed as Exhibit 10.2 to Toreador Royalty
Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference).
10.8 - Incentive Stock Option dated as of May 15, 1997 by and between Toreador Royalty Corporation and
Edward C. Marhanka (previously filed as Exhibit 10.4 to Toreador Royalty Corporation Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference).
10.9 - Employment Agreement dated as of May 1, 1997 by and between Toreador Royalty Corporation and Edward
C. Marhanka (previously filed as Exhibit 10.5 to Toreador Royalty Corporation Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference).
10.10 - Consulting Agreement dated as of May 1, 1997 by and between Toreador Royalty Corporation and Jack L.
Woods (previously filed as Exhibit 10.3 to Toreador Royalty Corporation Quarterly Report on Form 10-
Q for the quarter ended June 30, 1997 and incorporated herein by reference).
10.11 - Employment Agreement dated February 9, 1989, as amended by Agreement dated February 28, 1990,
between Toreador Royalty Corporation and James S. Blair (previously filed as Exhibit 4.5 to Toreador
Royalty Corporation Form S-8 (No. 333-14145) filed with the Securities and Exchange Commission on
October 15, 1996, and incorporated herein by reference).
10.12 - Joint Venture Agreement dated March 1, 1989, among Toreador Royalty Corporation, Bandera Petroleum,
et al. (previously filed as Exhibit 10.9 to Toreador Royalty Corporation Annual Report on Form 10-K
for the year ended December 31, 1989, and incorporated herein by reference).
10.13 - Toreador Royalty Corporation 1990 Stock Option Plan (previously filed as Exhibit 10.7 to Toreador
Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference).
10.14* - Amendment to Toreador Royalty Corporation 1990 Stock Option Plan, effective as of May 15, 1997.
10.15 - Toreador Royalty Corporation 1994 Non-Employee Director Stock Option Plan, as amended (previously
filed as Exhibit 10.12 to Toreador Annual Report on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference).
10.16 - Warrant for the Purchase of Shares of Common Stock issued to Petrie Parkman & Co. dated May 23, 1994
(previously filed as Exhibit 10.1 to Toreador Royalty Corporation Registration on Form S-3, and
incorporated herein by reference (No. 33-80572) filed with the Securities and Exchange Commission on
June 22, 1994, and incorporated herein by reference).
10.17 - Form of Indemnification Agreement dated as of April 25, 1995 between Toreador Royalty Corporation
and each of the members of its Board of Directors (previously filed as Exhibit 10 to Toreador
Royalty Corporation Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, and
incorporated herein by reference).
10.18 - Severance Agreement by and between Toreador Royalty Corporation and James S. Blair dated March 2,
1996 (previously filed as Exhibit 10.16 to Toreador Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference).
21.1* - Subsidiary of Toreador Royalty Corporation.
</TABLE>
<PAGE> 47
<TABLE>
<S> <C>
23.1* - Consent of Price Waterhouse LLP.
23.2* - Consent of Netherland, Sewell & Associates, Inc.
27.1* - Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 3.7
TOREADOR ROYALTY CORPORATION
RESOLUTION ADOPTED
BY THE BOARD OF DIRECTORS
AS OF APRIL 21, 1997
RELATING TO AMENDMENT TO BYLAWS
RESOLVED, that the first sentence of Section 3.02 of the Bylaws shall
amended to read as follows:
"The number of directors which shall constitute the whole board shall
not be less that (6) nor more than (15)."
<PAGE> 1
EXHIBIT 10.14
EXHIBIT A
AMENDMENT TO
TOREADOR ROYALTY CORPORATION
1990 STOCK OPTION PLAN
Pursuant to the provisions of Section 9 of the Toreador Royalty
Corporation 1990 Stock Option Plan (the "Plan"), the Plan is hereby amended,
effective as of May 15, 1997, as follows:
1. Paragraph 1.7 of the Plan is hereby amended in its entirety to
read as follows:
"Eligible Individuals shall mean officers and key employees,
including officers and directors who are also employees of the
Corporation or any of its Affiliates.
2. Paragraph 3.1 of the Plan is hereby amended in its entirety to
read as follows:
"The Plan shall be administered by a Committee appointed by
the Board of Directors and consisting of not less than two
members of the Board of Directors, who, at the time of their
appointment to the Committee and at all times during their
service as members of the Committee, are "non-employee
directors" as then defined under Rule 16b-3 under the Act or
any successor rule.
3. Capitalized terms used and not otherwise defined herein have
the respective meanings given to them in the Plan.
TOREADOR ROYALTY CORPORATION
By: /s/ JOHN MARK McLAUGHLIN
----------------------------------
Name: John Mark McLaughlin
-----------------------------
Title: President
----------------------------
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARY OF TOREADOR ROYALTY CORPORATION
Toreador Royalty Corporation has one wholly-owned subsidiary, Toreador
Exploration & Production Inc., a Texas corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-14145 and 333-39309) of Toreador Royalty
Corporation of our report dated March 23, 1998 appearing on page F-2 of this
Annual Report on Form 10-K.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
March 31, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the
incorporation by reference in the Registration Statements on Form S-8 (Nos.
333-14145 and 333-39309) of Toreador Royalty Corporation of our estimates of
reserves, included in this Annual Report on Form 10-K, and to all references to
our firm included in this Annual Report.
/S/ NETHERLAND, SEWELL & ASSOCIATES, INC.
Dallas, Texas
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,876,652
<SECURITIES> 0
<RECEIVABLES> 397,158
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,316,711
<PP&E> 5,318,651
<DEPRECIATION> 2,108,577
<TOTAL-ASSETS> 6,526,785
<CURRENT-LIABILITIES> 309,590
<BONDS> 0
0
0
<COMMON> 838,683
<OTHER-SE> 5,378,512
<TOTAL-LIABILITY-AND-EQUITY> 6,526,785
<SALES> 2,325,148
<TOTAL-REVENUES> 2,788,764
<CGS> 0
<TOTAL-COSTS> 2,924,391
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (135,627)
<INCOME-TAX> (84,261)
<INCOME-CONTINUING> (51,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,366)
<EPS-PRIMARY> (0.010)
<EPS-DILUTED> (0.010)
</TABLE>
