ITEM 1. BUSINESS.
GENERAL
Toreador Resources Corporation, a Delaware corporation, is an independent international energy company engaged in oil and gas exploration, development, production, leasing and acquisition activities. We principally conduct our business through: (i) the exploration for, and the acquisition and development of, oil and natural gas reserves, and (ii) our ownership of perpetual mineral and royalty interests in approximately 2,643,000 gross (1,368,000 net) acres. We currently hold interests in foreign developed and undeveloped oil and gas properties in the Paris Basin, France, the Cendere and Zeynel Fields in Turkey and the Bonasse Field and Southwest Cedros Peninsula License in Trinidad, West Indies. Our domestic properties include 766,000 gross (461,000 net) acres located in the Texas Panhandle and West Texas. In Alabama, Mississippi and Louisiana, we own 1,775,000 gross (876,000 net) acres. We also own various royalty interests in Arkansas, California, Kansas and Michigan covering 102,000 gross (31,000 net) acres. We also own various working interest properties in Texas, Kansas, New Mexico and Oklahoma. For a more detailed description of our properties please see “Item 2.
ITEM 2. PROPERTIES.
INTERNATIONAL
FRANCE
We own and operate five producing oil fields in the Paris Basin, France. Four of those are located within the Neocomian Field complex and one in the Charmottes area.
NEOCOMIAN FIELDS
Pursuant to two production permits, we own a 100% working interest in the Neocomian Fields, a group of four oil accumulations located approximately 120 kilometers southeast of Paris. The Chateau Renard Field was discovered in 1958, Chuelles and St. Firmin-des-Bois in 1961 and Courtenay in 1964. The property currently has 78 producing oil wells. As of December 31, 2002, the Neocomian Fields had net proved reserves of 9,847 MBbl.
CHARMOTTES
We own a 100% working interest in the Charmottes Field, located 60 kilometers southeast of Paris. The property has nine oil wells of which eight are currently producing. The Charmottes Field was initially developed following the discovery well drilled in 1984. As of December 31, 2002, the Charmottes Field had net proved reserves of 1,396 MBbl.
TURKEY
In Turkey, we have interests in the Zeynel and Cendere Fields. We also hold interests in 35 exploration licenses in four other geographic regions of Turkey totaling 4.1 million gross acres (2.7 million net).
ZEYNEL
We have an 8.5% royalty interest in the Zeynel Field, located in south-central Turkey, with net proved reserves of 70 MBbl at December 31, 2002. The Zeynel #15 development well was drilled and completed in 2002. In late 2002, the East Hasancik-1 well was drilled by the operator on a new field in the Zeynel permit. The well was an oil discovery and is expected be deepened to other objectives in 2003. We hold a 6.75% royalty interest in the new field.
CENDERE
We have an approximate 19.6% working interest in the Cendere Field, that is located in central Turkey. The property has 16 oil wells currently producing. We had net proved reserves of 902 MBbl in the Cendere Field as of December 31, 2002. The Cendere 19 well was drilled and completed as a producer in 2002. A 3D seismic survey is planned for this field in 2003 to identify new drilling locations.
BLACK SEA PERMITS
We are operator and hold a 49% working interest in eight permits covering 962,000 gross acres (471,000 net). During 2002, we completed a seismic study covering 1,275 KMS of 2D Seismic data over our exploration licenses in the Black Sea. Based on the interpretation of the seismic data, we plan to drill two wells during early 2004.
CENTRAL AND SOUTHEAST EXPLORATION PERMITS
We hold 26 exploration licenses in the central and southeast portions of Turkey. A number of producing fields in Iran and Iraq trend in a north by northwesterly direction and wrap into southern Turkey through the area encompassing many of our exploration permits. As of December 31, 2002, there were no net reserves for the land covered by the Central and Southeast Exploration Permits.
THRACE BASIN PERMITS
In the Thrace Basin, located in the European portion of Turkey, we have a 50% interest in three exploration permits and a 25% interest in one permit. The Thrace Basin has shown potential for natural gas. In this part of the country, gas is productive from shallow depths. With a pipeline through the region from Bulgaria to Istanbul and gas-fired power plants on the coast along the Marmara Sea, we could benefit from the area’s existing infrastructure. Based on the interpretation of the data from a previous seismic survey, we drilled two wells during 2002. The first well was dry, and the second awaits completion of testing. As of December 31, 2002, there were no net reserves for the land covered by the Thrace Basin Permits.
ROMANIA
In early 2003, we expanded our international portfolio when the Romanian government awarded the company a concession for the Viperesti Block in exchange for a staged work commitment. We are a 100% owner and operator of the block that lies in an oil-rich region in east-central Romania in the southeastern foothills of the Carpathian Mountains. Viperesti, which spans 324,000 acres, is surrounded by and on trend with many sizable oil fields to the southwest and northeast. The block is prospective in the Tertiary formations at depths ranging from 4,500-6,000 feet.
During a five-year exploration period, we plan to acquire and assimilate geological and geophysical data, analyze seismic information and re-enter one of several previously drilled wells on the block. Subsequently, we could drill one or more exploration wells.
TRINIDAD, WEST INDIES
In Trinidad, all of our operations are conducted by and licenses are held through Trinidad Exploration and Development, Ltd. (“TED”), of which we are now a 11.28% owner. During late 2002, TED drilled the Rapso-1 well on Trinidad’s Southwest Peninsula Block, exploring the sands in the Tertiary Morne L’Enfer, Forest and Cruse formations. Work on the Rapso-1 well has been suspended and is waiting for further testing. Toreador has determined not to participate in future exploration on the block. Consequently, Toreador’s interest in TED has been diluted to 11.28% and will be diminished further as TED pursues its drilling program.
The Rapso-1 is an oil prospect that explored the sands in the Tertiary Morne L’Enfer, Forest, and Middle and Lower Cruse formations. Work on the Rapso-1 has been suspended, and the well awaits testing. Additional drilling on the block is under evaluation.
The Southwest Peninsula Block comprises about 45,000 prospective acres onshore and offshore southwest Trinidad. It is about nine miles from the Venezuelan coast and on trend with sizable oil fields in Venezuela and onshore Trinidad. TED is operator of the license area and holds a 72.5% working interest in the block. The Petroleum Company of Trinidad & Tobago Ltd., the Trinidadian national oil company, holds the remaining 27.5% interest.
DOMESTIC
We own perpetual oil and gas mineral and royalty interests in approximately 2,643,000 gross (1,368,000 net) acres primarily located in Alabama, Arkansas, California, Kansas, Michigan, Louisiana, Mississippi and Texas. The majority of mineral leasing activity occurs on the acreage we own in Mississippi and Texas.
We also hold working interests in 927 gross wells (53 net) primarily in Texas, Oklahoma, New Mexico, Kansas, Louisiana, and Arkansas.
We are participating in the completion of the Walton Gas Unit 2-2 well located on the 1,000-acre Walton Gas Unit prospect. Part of the larger Bethel Dome Project in Anderson County in east Texas, the exploratory well has been drilled to a total depth of 10,100 feet and producing casing set to total depth. Completion operations, including flow testing, continue. Toreador has a 5.86% interest in the well and any subsequent offset development-well locations.
We continued our participation in the development of the Silver Spur (Tannehill) Field located in Dickens County, Texas on company owned minerals. The Hollis R. Sullivan Inc. Pitchfork-Toreador “22” No. 6 well was successfully drilled and completed as an oil well. Early in 2003 we also participated in the drilling and completion of the Hollis R. Sullivan Inc. Pitchfork-Toreador “22” No. 7 well. This brings the number of producing wells in field to nine. Toreador maintains a 9.375% working interest with a combined 16.875% revenue interest in the field.
In Oktibbeha County, Mississippi, there has been increased mineral-leasing activity on in the Black Warrior Basin’s Deep Knox gas play. Since the Maben Field was discovered in 1976, only one well was producing until additional wells were drilled in the late 1990’s. Now there are 11 producing wells in the Maben Field, the result of new seismic and drilling technology. Recent geologic studies show the Deep Knox play extends in a northwest/southeast trend, covering 11 additional counties in Mississippi and three counties in Alabama.
In Jefferson Davis County, Mississippi, operators completed 13 wells on our mineral holdings in the Selma Chalk formation using new fracturing techniques, improving production from the Gwinville Field in 2002. We anticipate additional activity and higher production levels continuing in 2003 in this area where Toreador holds significant mineral interests.
In West Texas, Toreador owns a 16.6% working interest on 6,000 gross acres where one well was successfully completed and a second well is being completed. The operator is using horizontal multi-lateral drilling techniques in the San Andres formation to expose more of the reservoir and increase total fluid recovery.
TITLE TO OIL AND GAS PROPERTIES
INTERNATIONAL
FRANCE
We do not hold title to properties in France but have been granted exploration and production permits by the French government. We have two French exploration permits, Nangis and Courtenay. There are no proved reserves associated with these permits. The Nangis permit expires in 2005, and the Courtenay permit expires in 2006. The French exploration permits have minimum financial requirements that must be met during their terms. If such obligations are not met, the permits could be subject to forfeiture.
The French production permits covering five producing oil fields in the Paris Basin follow:
Although the French government has the option to renew production permits, we believe it will renew such production permits so long as we, the license holder, demonstrate financial and technical capabilities and establish the studies used in defining the work schedule. However, there can be no assurance that we will be able to renew any permits that expire.
TURKEY
We do not hold title to properties in Turkey but have been granted exploitation leases and exploration licenses by the Turkish government:
Under Turkish law, “exploitation leases” are generally granted for a period of 20 years and may be renewed upon application for two additional ten-year periods. “Exploration licenses” are generally granted for four-year terms and may be extended for two additional two-year terms, provided that drilling obligations stipulated under Turkish law are satisfied. If an exploration license is extended for development as an exploitation lease, the period of the exploration license(s) is counted towards the 20-year exploitation lease.
ROMANIA
In early 2003, we expanded our international portfolio when the Romanian government awarded the company a concession for the Viperesti Block in exchange for a staged work commitment. We are a 100% owner and operator of the block that lies in an oil-rich region in east-central Romania in the southeastern foothills of the Carpathian Mountains. Viperesti, which spans 324,000 acres, is surrounded by and on trend with many sizable oil fields to the southwest and northeast. The block is prospective in the Tertiary formations at depths ranging from 4,500-6,000 feet.
During a five-year exploration period, we plan to acquire and assimilate geological and geophysical data, analyze seismic information and re-enter one of several previously drilled wells on the block. Subsequently, we could drill one or more exploration wells.
DOMESTIC
We have acquired interests in producing and non-producing acreage in the form of working interests, perpetual fee mineral interests, royalty interests and overriding royalty interests. Substantially all of our property interests are leased to third parties. The leases grant the lessee the right to explore for and extract oil and gas from specified areas. Consideration for a lease usually consists of a lump-sum payment (i.e., bonus) and a fixed annual charge (i.e., delay rental) prior to production (unless the lease is paid up) and, once production has been established, a royalty based generally upon the proceeds from the sale of oil and gas. Once wells are drilled, a lease generally continues so long as production of oil and gas continues. In some cases, leases may be acquired in exchange for a commitment to drill or finance the drilling of a specified number of wells to predetermined depths. We receive annual delay rentals from lessees of certain properties in order to prevent the leases from being terminated. Title to leasehold properties is subject to royalty, overriding royalty, carried, net profits and other similar interests and contractual arrangements customary in the oil and gas industry, and to liens incident to operating agreements, liens relating to amounts owed to the operator, liens for current taxes not yet due and other encumbrances.
As is common industry practice, we conduct little or no investigation of title at the time we acquire undeveloped properties, other than a preliminary review of local mineral records. However, we do conduct title investigations and, in most cases, obtain a title opinion of local counsel before commencement of drilling operations. We believe that the methods we utilize for investigating title prior to acquiring any property are consistent with practices customary in the oil and gas industry and that such practices are adequately designed to enable us to acquire good title to such properties. Some title risks, however, cannot be avoided, despite the use of customary industry practices.
We own oil and gas mineral and royalty interests in approximately 16,000 gross acres in Louisiana. Unlike the other states where we own perpetual minerals, the laws in Louisiana are such that the minerals prescribe to the surface owner after 10 years have passed without any production or drilling on said lands. Because we do not own the surface rights in any of the properties that were acquired in December 1998, we do not maintain many of our mineral rights if production ceases for 10 years.
Our properties are generally subject to:
•
Customary royalty and overriding royalty interests;
•
Liens incident to operating agreements and
•
Liens for current taxes and other burdens and minor encumbrances, easements and restrictions.
We believe that none of these burdens either materially detracts from the value of our properties or materially interfere with their use in the operation of our business. Substantially all of our domestic properties are pledged as collateral under the Texas Facility.
OIL AND GAS RESERVES
The following table sets forth information about our estimated net proved reserves at December 31, 2002 and 2001. LaRoche Petroleum Consultants, Ltd., an independent petroleum engineering firm in Dallas, Texas, prepared the estimates of proved developed reserves, proved undeveloped reserves and discounted present value (pretax). We prepared the estimate of standardized measure of proved reserves in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 69, “Disclosures about Oil and Gas Producing Activities.” No reserve reports have been provided to any governmental agency.
Reserves were estimated using oil and gas prices and production and development costs in effect on December 31, 2002 and 2001, without escalation. The reserves were determined using both volumetric and production performance methods. France and Turkey have oil reserves only. Proved reserves are those estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. THE VALUES REPORTED MAY NOT NECESSARILY REFLECT THE FAIR MARKET VALUE OF THE RESERVES.
For additional information concerning our oil and gas reserves and estimates of future net revenues attributable thereto, see Note 18 of the Notes to the Consolidated Financial Statements.
PRODUCTIVE WELLS
The following table sets forth our gross and net interests in productive oil and gas wells as of December 31, 2002. Productive wells include wells currently producing or currently capable of production.
(1)
“Gross” refers to all wells in which we have a working interest.
(2)
“Net” refers to the aggregate of our percentage working interest in gross wells before royalties, before or after payout, as appropriate.
ACREAGE
The following table sets forth the developed and undeveloped acreage attributable to our ownership as of December 31, 2002.
Undeveloped acreage includes only those leased acres on which wells have not been drilled or completed to permit the production of commercial quantities of oil and gas regardless of whether or not the acreage contains proved reserves.
DRILLING ACTIVITIES
(1)
“Gross” is the number of wells in which we have a working interest.
(2)
“Net” is the aggregate obtained by multiplying each gross well by our after payout percentage working interest.
(3)
“Gas” means gas wells that are either currently producing or are capable of production.
(4)
“Oil” means producing oil wells.
(5)
“Abandoned” means wells that were dry when drilled and were abandoned without production casing being run.
(6)
We drilled no wells in France during 2002.
(7)
Only oil wells were drilled in Turkey.
NET PRODUCTION, UNIT PRICES AND COSTS
The following table summarizes our oil, natural gas and natural gas liquids production, net of royalties, for the periods indicated. It also summarizes calculations of our total average unit sales prices and unit costs. Because we consummated our acquisition of Madison on December 31, 2001, the table excludes information related to Madison’s operations for 2001 and 2000.
PRESENT ACTIVITIES
For the period January 1, 2003 through April 10, 2003, we did not participate in drilling any exploratory wells.
OFFICE LEASE
We occupy approximately 18,746 square feet of office space at 4809 Cole Avenue, Suite 108, Dallas, Texas 75205 under a lease from Chalk Stream Properties, L.P. We also occupy approximately 1,377 square feet of office space at 13/15 Boulevard de la Madeleine, 75001 Paris, France leased from Societe la Madeleine, and approximately 621 square feet of office space at 9400 N. Central Expressway, Suite 1209, Dallas, Texas 75231. Total rental expense for 2002 was approximately $362,000.
INTERNET ADDRESS
We make available electronically, free of charge through our Internet website address (www.toreador.net), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with the Securities and Exchange Commission (the "SEC") pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the SEC. These reports are directly accessible on the Internet at www.sec.gov/edgar/searchedgar/webusers.htm.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Karak Petroleum. Madison and its wholly-owned subsidiary, Trans-Dominion Holdings Ltd., were named as defendants in a complaint filed in Alberta, Canada, in 1999. The complaint arose from a dispute between Karak Petroleum, a subsidiary of Trans-Dominion Holdings, and the operator of an exploratory well in Pakistan in 1994 in which Karak was a joint interest partner. The plaintiffs alleged that they were owed approximately $500,000. On August 7, 2002, we reached an agreement with the plaintiffs in this matter. Under the terms of the agreement, we agreed to pay the plaintiffs $400,000 for full release of liability. Written documentation reflecting the foregoing was finalized on August 29, 2002. The agreement required that we remit the $400,000 in two installments. The first installment of $50,000 was paid on August 29, 2002, and the remaining $350,000 was recorded as a liability and was to be paid by February 3, 2003. In February 2003, the plaintiffs agreed to accept the $350,000 in monthly installments payable at the beginning of each month beginning February 2003.
Turkish Registered Capital. Under the existing Petroleum Law of Turkey, capital which is invested by foreign companies for projects such as oil and gas exploration can be registered with the General Directorate of Petroleum Affairs, thereby qualifying for protection against adverse changes in the exchange rate between the time of the initial investment and the time such capital is repatriated out of Turkey. Since 1997 the Turkish government has suspended such protection for repatriated capital. As holder of more than $50 million of registered capital, we have filed suit in Turkey to attempt to restore the exchange rate protections afforded under the law. No amounts are accrued related to this contingency. Pursuant to the terms of the acquisition agreement, holders of Madison common stock have the right to receive, in cash or our common stock, 30% of certain potential payments that may be received from the Turkish government for the protection of repatriated capital. In March 2002 a lower level court ruled in favor of Madison. The ruling was subject to automatic appeal that was heard in December 2002. We are currently awaiting the ruling on the appeal. However, we cannot predict the outcome of this matter.
Trinidad Arbitration. At December 31, 2001, we held a 25% interest in Trinidad Exploration and Development, Ltd. (“TED”), a Trinidad company engaged in oil and gas exploration. Until August 2000, TED was a wholly-owned subsidiary of Madison, at which time Madison sold a 75% interest to another company. Under the terms of the sale, the buyer was required to fund $4.0 million in costs of drilling and exploration before Madison was required to contribute additional amounts in accordance with its 25% shareholding. During 2001, TED was primarily engaged in a seismic program to conduct exploration on a license interest in the Southwest Peninsula of Trinidad. In late August, Madison received an initial billing for capital contributions to fund the ongoing exploration. The operator claimed, however, that Madison did not make timely payments and that Madison’s interest in TED should be reduced from 25% to 12.5%. On September 18, 2002, we received a ruling from the American Arbitration Association related to this matter. The arbitrator ruled that certain payments by Toreador’s subsidiary were delinquent, and, according to the terms of the shareholders agreement, Toreador’s interest in TED has been reduced from 25% to 16.33%. Since the ruling, our interest has been further reduced to 11.28%, the result of our non-participation in certain capital and operating costs incurred by TED.
From time to time, we are named as a defendant in other legal proceedings arising in the normal course of business. In our opinion, the final judgment or settlement, if any, that may be awarded with any suit or claim would not have a material adverse effect on our financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our shares of common stock, par value $.15625 per share, are traded on the Nasdaq National Market System under the trading symbol “TRGL” and are traded on the Toronto Stock Exchange under the symbol “TRX”. The following table sets forth the high and low sale prices per share for the common stock for each quarterly period during the past two fiscal years as reported by Nasdaq based upon quotations that reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HOLDERS AND CLOSING PRICE
As of April 10, 2003, there were 9,337,517 shares of common stock outstanding and held of record by approximately 890 holders (inclusive of those brokerage firms, clearing houses, banks and other nominee holders, holding common stock for clients, with all such nominees being considered as one holder).
The closing price of the common stock on the Nasdaq National Market System on April 10, 2003 was $2.85. The closing price on the Toronto Stock Exchange on April 10, 2003 was Canadian $4.17.
DIVIDENDS
Dividends on the common stock may be declared and paid out of funds legally available when and as determined by our board of directors. We paid cash dividends totaling $52,000 during 2000. Our board of directors plans to continue our policy of holding and investing corporate funds on a conservative basis, and thus we do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, under the terms of the Texas Facility described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources,” we are prohibited from paying dividends on the common stock without prior consent from Bank of Texas, National Association (other than dividends payable in shares of common stock). The terms of our Series A Convertible Preferred Stock and our Series A-1 Convertible Preferred Stock prohibit us from paying dividends on the common stock without the approval of the holders of a majority of the then outstanding shares of the Series A Convertible Preferred Stock and the Series A-1 Convertible Preferred Stock.
Dividends on our Series A Convertible Preferred Stock and our Series A-1 Convertible Preferred Stock are paid on a quarterly basis per the terms of each series. Cash dividends totaling $374,000, $360,000 and $360,000 were declared, and $270,000, $360,000 and $360,000 were paid for the years ended December 31, 2002, 2001 and 2000, respectively, on the Series A Convertible Preferred Stock. Cash dividends totaling $14,000 were declared for the year ended December 31, 2002 on the Series A-1 Convertible Preferred Stock. Future dividends will be paid in cash only at a rate of $110,813 per calendar quarter. We are prohibited from paying dividends over $100,000 on the preferred stock without the consent from Bank of Texas, National Association.
SALES OF UNREGISTERED SECURITIES
In the fourth quarter of 2002, we issued the following equity securities that were not registered under the Securities Act of 1933, as amended:
On November 1, 2002, pursuant to a private placement we issued $925,000 of Series A-1 Convertible Preferred Stock to certain of our directors and entities controlled by certain of our directors.
The Series A-1 Convertible Preferred Stock is governed by a certificate of designation. The Series A-1 Convertible Preferred Stock was sold for a face value of $25.00 per share, and pays an annual cash dividend of $2.25 per share that results in an annual yield of 9.0%. At the option of the holder, the Series A-1 Convertible Preferred Stock may be converted into common shares at a price of $4.00 per common share. The $4.00 conversion price was higher than the market price of our common stock at the time of issuance. The Series A-1 Convertible Preferred Stock is redeemable at our option, in whole or in part, at any time on or after November 1, 2007. The optional redemption price per share is the sum of (1) $25.00 per share of the Series A Convertible Preferred Stock plus (2) any accrued unpaid dividends, and such sum is multiplied by a declining multiplier. The multiplier is 105% until October 31, 2008, 104% until October 31, 2009, 103% until October 31, 2010, 102% until October 31, 2011, 101% until October 31, 2012, and 100% thereafter. In connection with the securities purchase agreement, the parties entered into a registration rights agreement effective November 1, 2002, among Toreador and the persons party thereto which provides for the registration of the common stock issuable upon conversion of the Series A-1 Convertible Preferred Stock.
The sale of the Series A-1 Convertible Preferred Stock was effected in reliance upon the exemption from securities registration afforded by the provisions of Section 4(2) of the Securities Act of 1933, as amended, and Regulation D as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data with respect to our 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. Financial Statements and Supplementary Data” of this Part II.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the captions “Business,” “Properties,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this annual report may constitute “forward-looking” statements for purposes of the 1933 Act, and the Securities Exchange Act of 1934 and, as such, may involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of us to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. When used in this report, the words “anticipates,” “estimates,” “plans,” “believes,” “continues,” “expects,” “projections,” “forecasts,” “intends,” “may,” “might,” “could,” “should,” and similar expressions are intended to be among the statements that identify forward-looking statements. Various factors that could cause the actual results, performance or achievements of us to differ materially from our expectations are disclosed in this report (“Cautionary Statements”), including, without limitation, those statements made in conjunction with the forward-looking statements included under the captions identified above and otherwise herein. All written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the Cautionary Statements.
INTRODUCTION
In Management’s Discussion and Analysis, we explain our general financial condition and the results of operations including:
As you read Management’s Discussion and Analysis, it may be helpful to refer to our Consolidated Statements of Operations on page. These financial statements present the results of our operations for 2002, 2001 and 2000. In Management’s Discussion and Analysis, we analyze and explain the annual changes in the specific line items in the Consolidated Statements of Operations.
CRITICAL ACCOUNTING POLICIES
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States requires us to use estimates and assumptions to determine certain of our assets, liabilities, revenues and expenses. We base these estimates and assumptions upon the best information available to us at the time of the estimates or assumptions. Our estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, our actual results could differ materially from our estimates. The most significant estimates made by our management include future net cash flow for purposes of evaluating oil and gas properties for impairment, unrealized gains and losses on commodity derivatives, oil and gas sales receivable, and valuation of goodwill. The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary in determining the value of related assets or liabilities. A full description of all of our significant accounting policies is included in Note 2 to our Consolidated Financial Statements included in this annual report.
We follow the successful efforts method of accounting for our oil and gas properties. Under this method, we capitalize the costs of successful wells and expense the costs of dry holes. Accordingly, our operations can be materially impacted if our drilling efforts are unsuccessful. Dry hole costs amounted to $1.1 million in 2002, $1.8 million in 2001 and $51,000 in 2000. Under the successful efforts method, we must also evaluate our investments in each producing field. If such investments are greater than our estimates of undiscounted future net cash flow, then we must record a charge to impairment for the difference between our investment and the discounted future net cash flow. Accordingly, any year in which oil and/or gas prices decline, our operations and financial position could be materially impacted by a charge to impairment. Such charges amounted to $0.5 million in 2002, $1.3 million in 2001 and zero in 2000.
Because our primary operations are oil and gas sales, we are exposed to fluctuations in oil and gas commodity prices. We employ a policy of hedging well-defined price risks with oil and gas swaps and options, but we do not designate such instruments as hedges for accounting purposes. Because we do not designate our derivatives as hedges, we record them at fair value based on the current price of either the option or swap as quoted on the New York Mercantile Exchange, and recognize changes in their fair values in earnings as they occur. Accordingly, our operations and financial position could be materially impacted by changes in the fair values of our hedging instruments. Such changes in the fair values of our hedging instruments are driven by commodity prices. The following summarizes the results of our hedging program (amounts in thousands):
We estimate our accrual for oil and gas sales receivable by first predicting the volumes we will produce based on recent production trends and, if available, production information provided by our operators. Then we multiply those volumes by the average posted commodity prices for the periods of production, less a differential. The product is our oil and gas sales receivable accrual. Our estimates of quantity production or average price could vary from actual quantities produced and prices realized, causing material variations in our financial position and results of operations.
As a result of our acquisition of Madison, we recorded approximately $5.0 million of goodwill. This goodwill was allocated between reporting units based on the relative value of each units proved reserves. We periodically review the value of goodwill by comparing it with future net cash flow realizable from the properties we acquired in the acquisition of Madison. To the extent that the recorded amount of goodwill plus the carrying value of the oil and gas properties is greater than the future net cash flow related to the oil and gas properties acquired, we record a charge to goodwill impairment for the difference in the recorded value and our estimate of discounted net cash flow. We noted no impairment indicators related to goodwill for the year ended December 31, 2002.
Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” encourages, but does not require, the adoption of a fair value-based method of accounting for employee stock-based compensation transactions. We have elected to apply the provisions of Accounting Principles Board Opinion No. 25 (“Opinion 25”), “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for our stock-based compensation plans. Under Opinion 25, compensation cost is measured using an intrinsic value method and is calculated as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant above the amount an employee must pay to acquire the stock. Had compensation costs for employees under our two stock-based compensation plans been determined using the fair value method proscribed by SFAS No. 123, our net income (loss) and earnings (loss) per share would have been affected as follows (in thousands, except per share data):
LIQUIDITY AND CAPITAL RESOURCES
During 2002, cash flow from operations before working capital changes and including proceeds from the sale of properties and other assets was $8.5 million, compared with $10.3 million for 2001. Cash flow from operations before working capital changes and not including proceeds from the sale of properties and other assets during 2002 was $3.9 million, versus $8.1 million for 2001. We continually review the operating results of each of our properties. If there are under-performing properties, we attempt to liquidate them. During 2002, we received $4.6 million in proceeds from sales of property and equipment. We anticipate that cash flow from operations during 2003 will be approximately $11.3 million that will be used for budgeted capital expenditures and the retirement of debt.
On November 1, 2002, we issued $925,000 of Series A-1 Convertible Preferred Stock. The Series A-1 Convertible Preferred Stock is governed by a certificate of designation. The Series A-1 Convertible Preferred Stock was sold for a face value of $25.00 per share, and pays an annual cash dividend of $2.25 per share that results in an annual yield of 9.0%. At the option of the holder, the Series A-1 Convertible Preferred Stock may be converted into common shares at a price of $4.00 per common share. The $4.00 conversion price was higher than the market price of our common stock at the time of issuance. The Series A-1 Convertible Preferred Stock is redeemable at our option, in whole or in part, at any time on or after November 1, 2007. The optional redemption price per share is the sum of (1) $25.00 per share of the Series A Convertible Preferred Stock plus (2) any accrued unpaid dividends, and such sum is multiplied by a declining multiplier. The multiplier is 105% until October 31, 2008, 104% until October 31, 2009, 103% until October 31, 2010, 102% until October 31, 2011, 101% until October 31, 2012, and 100% thereafter. In connection with the securities purchase agreement, the parties entered into a registration rights agreement which provides for the registration of the common stock issuable upon conversion of the Series A-1 Convertible Preferred Stock. We have used the net proceeds from the private placement to fund portions of our exploration and development program and for other general corporate purposes.
We currently have two senior borrowing facilities. First, we have a revolving credit facility with Bank of Texas (the “Texas Facility”), which had permitted borrowings of $19.4 million at December 31, 2002. At December 31, 2002, we had borrowings outstanding under the Texas Facility of approximately $18.8 million. We are required to make monthly principal payments of $150,000 under the Texas Facility until all outstanding amounts are repaid, and accordingly, we have included $1,800,000 in the current portion of long-term debt on the balance sheet related to this revolving credit facility. On September 23, 2002, we entered into an amendment with Bank of Texas that reestablished the amount of permitted borrowings and the portion that we are required to pay monthly. The required payments will be made out of cash flow from operations. During 2002, we used $1.6 million of our available cash flow to reduce the amounts outstanding under the Texas Facility.
We also have another revolving credit facility with Barclays Bank, Plc (the "Barclays Facility"). Under the Barclays Facility, we had $14.6 million outstanding at December 31, 2002. During 2002, we used $4.5 million of our available cash flow to reduce the amounts outstanding under the Barclays Facility.
During 2002, Barclays advised us that it intended to withdraw from the reserve-based lending business and to transfer the balance of its reserve-based loans to one or more third-party banking institutions. As a result of this change in direction and the existence of various technical defaults under the Barclays Facility, we entered into various waiver agreements with Barclays in 2002 and 2003 pursuant to which we agreed to make a principal payment of $300,000 in January 2003 and to make monthly principal payments of at least $400,000 until the entire outstanding balance is repaid. Accordingly, we have included $4.7 million (representing our required payments for 2003) in the current portion of long-term debt on the balance sheet. In addition, we are not allowed to borrow any additional funds under the Barclays Facility. Pursuant to the terms of the waiver agreements, we have issued to Barclays warrants that are currently exerciable to purchase an aggregate of 400,000 shares of our Common Stock at an exercise price of $3.50 per share and have agreed to issue an additional warrant to purchase 100,000 shares of our Common Stock at an exercise price of $3.52 per share. These warrants have certain registration rights. We have also agreed, among other items, to apply certain amounts that may be received by Toreador for asset sales and the Turkish capital repatriation to the repayment of the Barclays Facility.
We diligently have explored alternatives to refinance all or part of our existing capital structure, including the Barclays Facility. We have received a commitment to provide funds necessary for the extinguishment of the Barclays Facility. The form of the commitment is based on a third party institution providing a structured financing of up to $45 million in a combination of fixed term, floating rate senior debt, subordinated, fixed term, fixed rate debt, and equity. However, no assurance can be given that this structured financing will occur. If the third party institution is unable to provide a commitment for the financing on or before April 30, 2003, we have received a binding commitment to provide up to $15 million to refinance the Barclays Facility which would be based on a five-year amortization payable in equal monthly installments of $250,000 at an interest rate to be determined. In addition, we are pursuing other alternatives, including other refinancing options and the possible sale of our French properties as a means of discharging the Barclays Facility and providing additional working capital.
We anticipate that our 2003 capital expenditures budget, excluding any acquisitions we may make, will be approximately $4.0 million. We intend to fund our capital expenditures budget from operating cash flow, the proceeds of any financing we are able to secure, in excess of the payoff amount of the Barclays Facility, or a combination thereof. We will continue to spend most of our 2003 capital budget on prospects in our inventory as a result of the acquisition of Madison. We will limit our activity in France to development drilling on our existing properties. In Turkey, we
anticipate that exploration work will continue on several projects, including the interpretation of seismic data recently acquired in the Black Sea.
We may reinvest proceeds from option and lease bonuses by taking a working interest in 3D 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, our ability to make the capital investment to participate in 3D seismic surveys and increase our interest in projects on our acreage will be limited. We expect to receive future funds through production from existing producing properties and new producing properties that may be discovered through exploration of our acreage by third parties or by us. In addition to the properties described above, we also may acquire other producing oil and gas assets, which could require the use of debt, including the Texas Facility or other forms of financing.
We maintain our excess cash funds in interest-bearing deposits and in marketable securities.
We believe that sufficient funds will be available from operating cash flow or borrowings under the Texas Facility or new financings to meet anticipated capital requirements for fiscal 2003. The following table sets forth our contractual obligations at the end of 2002 for the periods shown (dollars in thousands):
Through December 31, 2002, we have used $2,534,000 of our cash reserves to purchase 721,027 shares of our common stock including 40,000 that were repurchased during 2002 for $180,000. Based on market conditions and cash availability, we intend to repurchase shares of our common stock when we deem appropriate. Such repurchases will be funded from available operating cash flows.
Dividends on our common stock may be declared and paid out of funds legally available when and as determined by our board of directors. Our policy is to hold and invest corporate funds on a conservative basis, and thus we do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, under the terms of the Texas Facility we are prohibited from paying dividends over $100,000 without prior consent from Bank of Texas, National Association (other than dividends payable in shares of common stock). The terms of our Series A Convertible Preferred Stock and our Series A-1 Convertible Preferred Stock prohibit us from paying dividends on the common stock without the approval of the holders of a majority of the then outstanding shares of the Series A Convertible Preferred Stock and the Series A-1 Convertible Preferred Stock.
Dividends on our Series A Convertible Preferred Stock and our Series A-1 Convertible Preferred Stock are paid on a quarterly basis. Cash dividends totaling $374,000 were declared ($270,000 were paid) for the year ended December 31, 2002. Cash dividends of $360,000 were declared and paid in 2001 and 2000. Future dividends will be paid in cash only at a rate of $110,813 per calendar quarter. We are prohibited from paying dividends over $100,000 without the consent from Bank of Texas, National Association. Thus, approval will be required prior to the payment of the dividends.
No stock options were exercised during 2002. During 2001, we received a total of $256,000 as a result of the exercise of stock options to purchase our common stock by a director and former employees of a company acquired in 2000. Those options related to 10,000 shares of common stock with an exercise price of $3.625 per share and 70,400 shares of common stock with an exercise price of $3.12, respectively.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001
REVENUES
Oil and gas sales. Oil and gas sales revenues increased by approximately $9.1 million, or 65%, from $14.0 million to $23.1 million for the years ended December 2001 and 2002, respectively. This was due to revenues from the operations of the properties acquired in the Madison acquisition, offset by a decrease in United States revenues. Oil and gas sales revenues from the properties acquired in the Madison acquisition amounted to $11.6 million, while United States revenues decreased by $2.4 million, or 18%. The decrease in United States revenues was the result of decreases in both production and price. United States production decreased 53,000 BOE, or 9%, as a result of the natural decline of our existing properties along with the sale of miscellaneous under-performing properties during 2002. Additionally, the average prices we received for oil and natural gas sales decreased from $23.39 per barrel to $22.08 per barrel, and $3.76 per Mcf in 2001 from $3.10 per Mcf in 2002.
Gain (loss) on commodity derivatives. We utilize commodity derivative instruments as part of our risk management program and to comply with the requirements of our senior credit facilities. These transactions are generally structured as either swaps or collar contracts. A swap has the effect of an outright sale at a specific price. A collar has the effect of creating a sale only if a floor or ceiling price is exceeded. These instruments (i) reduce the effect of the price fluctuations of the commodities we produce and sell; (ii) support our annual capital budgeting and expenditure plans; (iii) protect the amounts required for servicing outstanding debt; and (iv) maximize the funds available under our existing credit facilities. The trading party that represents the other side of each of these transactions is known as a “counterparty.” The counterparty of our United States transactions is Coral Energy Holdings, L.P., an affiliate of Royal Dutch/Shell. The counterparty of our French transactions is Barclays Capital. The following table summarizes the results of our risk-management efforts during 2002 and 2001 (in thousands):
As noted above, we have structured our commodity derivatives to reduce the effect of price fluctuations of the commodities we produce and sell. As a result, those derivatives decline in value as the underlying commodity prices rise. Any losses incurred on derivatives are offset by higher oil and gas sales revenues due to increases in underlying commodity prices. However, under the requirements of Statement of Financial Accounting Standards No. 133 and because we chose not to designate our derivatives as hedges, mark to market loss on the derivatives is generally accrued through earnings prior to the recognition of higher sales prices. See Note 7 in the Notes to Consolidated Financial Statements included in this filing for more details.
Lease bonuses and rentals. Lease bonuses and rentals increased $216,000, or 36%, due to increases in leasing activity as a result of several wildcat discoveries in and around the minerals we own in Mississippi.
EXPENSES
Lease operating. Lease operating expenses increased $3.4 million, or 104%, due to the operations of the properties we acquired in the Madison acquisition and are commensurate with the increase in operating revenue from the Madison properties. Higher lease operating expenses were offset by decreases in U.S. production taxes, the result of the decline in oil and gas sales prices discussed above. Operating expenses in 2002 associated with the properties in the Madison acquisition amounted to $4.1 million.
Exploration and acquisition. Exploration and acquisition expense decreased $385,000, or 15%, due to a reduction in drilling activity, compared with 2001.
Depreciation, depletion and amortization. DD&A remained relatively unchanged from 2001 at approximately $5.0 million. An increase due to depletion of costs allocated to properties acquired in the Madison acquisition of approximately $1.9 million was offset by a decrease in U.S. depletion of $1.7 million. The decrease in U.S. depletion was the result of higher reserve quantities. We provide depletion on our oil and gas properties on the units-of-production method, which is calculated as current-year production divided by beginning reserves multiplied by the net value of the properties. Production decreased by 9% from 2001, resulting in a lower depletion rate.
Impairment of oil and gas properties. Impairment charged in 2002 amounted to $529,000, compared with $1.3 million in 2001, both of which related to US properties only. The decrease in the charge to impairment is the result of an increase in the value of our reserves commensurate with the increase in year-end pricing. Oil and gas prices used to evaluate our reserves at December 31, 2001, were $17.52 per barrel and $2.71 per Mcf, compared with $28.00 and $4.74 at December 31, 2002.
General and administrative. General and administrative expenses increased $4.9 million, or 175%. The majority of this increase was the result of the acquisition of Madison; however, a significant portion of these expenses consists of nonrecurring items that are either transaction and transition costs or other expenses of a one-time nature. General and administrative expense of approximately $2.3 million is directly attributable to the operation of our new French and Turkish properties. The balance represents the ongoing expenses of the support staff that joined us as a result of the Madison acquisition.
OTHER INCOME AND EXPENSE
Other income and expense resulted in a net expense of $6.0 million during 2002 versus $1.8 million for 2001. Net expense increased $4.2 million, primarily due to a decline in the value of our investment in Trinidad Exploration and Development, Ltd. (“TED”), losses on property sales and increased interest expense. During 2002, our interest in TED was reduced from 25.0% to 16.33%. Accordingly, we have recorded a charge to equity in earnings of unconsolidated entities of $1.2 million reflecting the valuation of the ultimate amount estimated to be recovered from our investment.
In addition to the decline in value of our investment in TED, we incurred losses on property sales of $2.1 million during 2002, compared with $0.5 million in 2001. As part of our ongoing program to high grade our property portfolio, we elected to proceed with the sale of several non-economic, non-strategic properties that were under-performing rather than sustain continued operating losses on those properties. Interest expense increased as a result of the revolving credit balances and the convertible debenture assumed in the Madison acquisition.
NET INCOME (LOSS) AVAILABLE TO COMMON SHARES
During 2002, we incurred a net loss of $6.5 million, compared with $1.0 million for 2001. Lower results for 2002 were due to losses on commodity derivatives (oil and gas hedges), one-time transaction and transition costs related to the Madison acquisition, higher operating costs of the newly combined company after the addition of the Madison exploration staff, the decline in value of our investment in TED and losses on the sales of under-performing properties.
OTHER COMPREHENSIVE INCOME
The most significant element of comprehensive income, other than net income (loss), is foreign currency translation. The functional currency of our operations in France is the Eurodollar, and in Turkey the functional currency is the Turkish Lira. The exchange rates used to translate the financial position of those operations at December 31, 2002, were approximately US$ 1.05 per Euro and US$ 0.62 per million Turkish Lira. The Euro rate at December 31, 2001, was US$ 0.87 per Euro and US$ 0.69 per million Turkish Lira. These fluctuations caused an unrealized translation gain of $2.2 million for 2002. No such charges existed during 2001 because we had no foreign operations during that period.
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
Oil and gas sales. Oil and natural gas sales revenues increased by approximately $800,000, or 6% from $13.2 million to $14.0 million for the years ended December 2001 and 2000, respectively. The increase was the result an increase in oil and natural gas production brought about by recent acquisitions. We received $23.39 per Bbl for its oil production during the year ended December 31, 2001, which is 18% less than the $28.45 received in the same period of 2000. We sold our gas production during the year ended December 31, 2001 for $3.76 per Mcf, which is 5% lower than the $3.94 per Mcf received during the same period of 2000. Natural gas volumes sold increased 35% from 1,319 MMcf during the year ended December 31, 2000 to 1,781 MMcf during the year ended December 31, 2001, while oil volumes increased 8% from 274 MBbls to 296 MBbls over the same period. The increase in oil and natural gas production is due primarily from production on the properties acquired in the acquisition of Texona Petroleum Corporation, and the Razorhawk acquisition in Kansas. Additionally, we had gains on natural gas commodity derivatives of approximately $1.1 million for the year ended December 31, 2001, that were not present in 2000.
Lease bonuses and rentals. Lease bonuses and rentals increased by $124,000 or 26% from $472,000 to $596,000, primarily due to our efforts to optimize our mineral holdings.
Total revenues increased $2.2 million, or 16%, $13.5 to $15.7 million for the year ended December 31, 2000 and 2001, respectively.
EXPENSES
Lease operating expenses. Lease operating expenses increased by approximately $1.0 million or 43%, to $3.3 million for the year ended December 31, 2001 from $2.3 million for the same period in 2000. This increase was principally the result of adding working interest properties through the acquisition of Texona Petroleum Corporation in September 2000 and working interest properties acquired in the Razorhawk acquisition in Kansas in April 2001.
Exploration and acquisition. Exploration and acquisition expenses increased from $309,000 to $2.6 million for the year ended December 31, 2000 and 2001, respectively. This increase is commensurate with the increase in our drilling activity between the two periods. We drilled 14 developmental and 21 exploration wells during the year ended December 31, 2001, of that 17 were dry holes. The total dry hole expense included in this category is $553,000 during the year ended December 31, 2001.
Depreciation, depletion and amortization. Depreciation, depletion and amortization increased by $2.5 million, or 104%, to $4.9 million for the year ended December 31, 2001 from $2.4 million for the same period in 2000. A portion of this increase relates to increased oil and gas production during 2001. The primary reason for the large increase is the significant loss of reserves due to lower oil and gas prices at December 31, 2001 as compared to the unusually high prices at December 31, 2000. The downward revision of oil and gas reserves forces the 2001 production to represent a much higher percentage of overall reserves, resulting in a higher depletion rate.
General and administrative. General and administrative expenses increased by $500,000, or 22%, to $2.8 million from $2.3 million for the year ended December 31, 2001 and 2000, respectively. The increase is due primarily to increased payroll related costs from added personnel required to manage growth, and expenditures related to increased stockholder relations activities.
Compared to the year ended December 31, 2000, we significantly increased our operations for the year ended December 31, 2001 through the acquisition of Texona and the Razorhawk and Anderson acquisitions. We also incurred unusually high depletion in 2001 as previously mentioned. Additionally, we strongly focused on our exploration program during that time. As a result, total costs and expenses increased $6.3 million or 86% from $7.3 million in the year ended December 31, 2000 to $13.6 million for the same period in 2001.
OTHER INCOME AND EXPENSE
Equity in the earnings of unconsolidated entities consists primarily of our portion of EnergyNet’s operations. During the year ended December 31, 2001, EnergyNet incurred a net loss of approximately $651,000 ($228,000 net to our interest). For the same period in 2000, EnergyNet incurred a loss of approximately $464,000 ($64,000 net to our interest).
We recognized loss on sale of properties and other assets of $487,000 during the year ended December 31, 2001, compared to a gain of $408,000 for the same period in 2000. The loss in 2001 was the result of selling two large working interest properties that had encountered operational problems during the year and were losing money.
Interest and other income increased from $71,000 in 2000 to $163,000 in 2001 due primarily to new revenues from saltwater disposal and gathering system activities brought about by the acquisition of Texona in September 2000.
Interest expense decreased by approximately $100,000 between the years ended December 31, 2001 and 2000, from $1.4 to $1.3 million. This is due to a decrease in the average rate of interest on our revolving line of credit.
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
The loss applicable to common shares amounted to $1.0 million, or $0.16 per basic and diluted share versus income of $3.0 million, or $0.54 per basic share and $0.50 per diluted share for the year ended December 31, 2001 and 2000, respectively.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
We derived the selected historical financial data in the table below from our unaudited interim consolidated financial statements. The sum of net income per share by quarter may not equal the net income per share for the year due to variations in the weighted average shares outstanding used in computing such amounts. The historical data presented here are only a summary, and should be read in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this annual report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The risks inherent in our market-sensitive instruments are the potential loss arising from adverse changes in oil and gas commodity prices, interest rates and foreign currency exchange rates as discussed below. The sensitivity analysis does not, however, consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.
The following quantitative and qualitative information is provided about financial instruments to which we are a party as of December 31, 2002, and from which we may incur future earnings gains or losses from changes in commodity prices. We do not designate our derivatives as hedges; however, we do not enter into derivative or other financial instruments for trading purposes.
Oil And Gas Prices. We market our oil and gas production primarily on a spot market basis. As a result, our earnings could be affected by changes in the prices for these commodities, regulatory matters or demand for the commodities. As market conditions dictate, from time to time, we will lock in future oil and gas prices using various hedging techniques. We do not use such financial instruments for trading purposes, and we are not a party to any leveraged derivatives. Market risk is estimated as a 10% decrease in the prices of oil and gas. Based on our projections for 2003 sales volumes at fixed prices, such a decrease would result in a reduction to oil and gas sales revenue of approximately $2.0 million before considering the effect of the gas hedging agreements discussed below.
Interest Rates. Our earnings are affected by changes in short-term interest rates related to our line of credit. Market risk is estimated as a hypothetical increase in short-term interest rates of 100 basis points. Based on our projections of outstanding borrowings for fiscal 2003, such an increase could result in an addition to interest expense of approximately $300,000.
Foreign Currency Exchange Rates. The functional currency of our French operations is the Eurodollar, and the functional currency of our Turkish operations is the Turkish Lira. While our oil sales are calculated on a United States dollar basis, we are exposed to the risk that the values of our French and Turkish assets will decrease and that the amounts of our French and Turkish liabilities will increase. Market risk is estimated as a 10% decrease in the exchange rate for Eurodollars and Turkish Lira to United States dollars. Based on the net assets in our French and Turkish operations at December 31, 2002, such a decrease would result in an unrealized loss of approximately $0.8 million due to foreign currency exchange rates.
Derivative Financial Instruments. We utilize commodity derivative instruments as part of our risk management program. These transactions are generally structured as either swaps or collar contracts. A swap has the effect of an outright sale at a specific price. A collar has the effect of creating a sale only if a floor or ceiling price is exceeded. These instruments (i) reduce the effect of the price fluctuations of the commodities we produce and sell; (ii) support our annual capital budgeting and expenditure plans; (iii) protect the amounts required for servicing outstanding debt; and (iv) maximize the funds available under our existing credit facilities. The trading party that represents the other side of each of these transactions is known as a “counterparty.” The counterparty of our United States transactions is Coral Energy Holdings, L.P., an affiliate of Royal Dutch/Shell. The counterparty of our French transactions is Barclays Capital.
The following table lists our open natural gas derivative contracts as of December 31, 2002. All contracts are based on NYMEX pricing. We estimated the fair value of the option agreement at December 31, 2002, from quotes by the counterparty representing the amounts we would expect to receive or pay to terminate the agreements on that date. We estimated the fair value of the swap agreement based on the difference between the strike prices and the forward NYMEX discounted prices for each determination period multiplied by the notional volume for each period.
(1)
MMBtu - Million British thermal units.
The following table lists our open crude oil derivative contracts as of December 31, 2002. We estimated the fair value of the agreement based on the difference between the strike prices and the forward index discounted prices for each determination period multiplied by the notional volume for each period.
See Note 2 of Notes to Consolidated Financial Statements for a description of our accounting procedures followed relative to hedge derivative financial instruments and for specific information regarding the terms of our derivative financial instruments that are sensitive to changes in crude oil and gas commodity prices.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Accountants and Consolidated Financial Statements are set forth beginning on page of this annual report on Form 10-K and are incorporated herein.
The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes to the Consolidated Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to our directors, nominees for directors and executive officers will be set forth under the heading “Election of Directors” and “Executive Officers” in our Proxy Statement relating to the 2003 Annual Meeting of Stockholders, that will be filed with the Securities and Exchange Commission on or prior to April 30, 2003, and which is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation will be set forth under the heading “Executive Compensation and Other Transactions” in our Proxy Statement relating to the 2003 Annual Meeting of Stockholders, that will be filed with the Securities and Exchange Commission on or prior to April 30, 2003, and that is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by Item 403 of Regulation S-K will be set forth under the heading “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement relating to the 2003 Annual Meeting of Stockholders, that will be filed with the Securities and Exchange Commission on or prior to April 30, 2003, and that is incorporated herein by reference.
Equity Compensation Plan Information. The following table sets forth information as of December 31, 2002 with respect to compensation plans under which shares of our common stock may be issued.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions will be set forth under the heading “Certain Relationships and Related Transactions” in our Proxy Statement relating to the 2003 Annual Meeting of Stockholders, that will be filed with the Securities and Exchange Commission on or prior to April 30, 2003, and that is incorporated herein by reference.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. The term “disclosure controls and procedures” is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports it files under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing of this annual report, and they have concluded that as of that date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Securities Exchange Act of 1934, as amended.
(b) Changes in Internal Controls. There were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation by our Chief Executive Officer and our Chief Financial Officer, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1.
Index to Consolidated Financial Statements Report of Independent Auditors, Consolidated Balance Sheets as of December 31, 2002 and 2001, Consolidated Statements of Operations for the three years ended December 31, 2002, Consolidated Statements of Changes in Stockholders’ Equity for the three years ended December 31, 2002, Consolidated Statements of Cash Flows for the three years ended December 31, 2002, and 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 Consolidated Financial Statements or the Notes to Consolidated Financial Statements.
3.
Exhibits:
2.1
-
Certificate of Ownership and Merger merging Toreador Resources Corporation into Toreador Royalty Corporation, effective June 5, 2000 (previously filed as Exhibit 2.1 to Toreador Resources Corporation Current Report on Form 8-K filed on June 5, 2000, File No. 0-2517, and incorporated herein by reference).
2.2
-
Agreement and Plan of Merger, dated as of October 3, 2001, between Toreador Resources Corporation and Madison Oil Company (previously filed as Exhibit 2.1 to Toreador Resources Corporation Registration Statement on Form S-4, No. 333-72314, filed on October 26, 2001, and incorporated herein by reference).
2.3
-
Voting Agreement, dated as of October 3, 2001, by Herbert L. Brewer, David M. Brewer and PHD Partners, LP for the benefit of Toreador Resources Corporation (previously filed as Exhibit 2.4 to Toreador Resources Corporation Registration Statement on Form S-4, No. 333-72314, filed on October 26, 2001, and incorporated herein by reference).
3.1
-
Amended and Restated Certificate of Incorporation, of Toreador Resources Corporation (previously filed as Exhibit 3.1 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-2517, and incorporated herein by reference).
3.2
-
Second Amended and Restated Bylaws of Toreador Resources Corporation (previously filed as Exhibit 3.2 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-2517, and incorporated herein by reference).
3.3
-
Certificate of Designation of Series A-1 Convertible Preferred Stock of Toreador Resources Corporation, dated October 30, 2002 (previously filed as Exhibit 3.1 to Toreador Resources
Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 0-2517, and incorporated herein by reference).
4.1
-
Registration Rights Agreement, effective December 16, 1998, among Toreador Royalty Corporation and persons party thereto (previously filed as Exhibit 10.2 to Toreador Royalty Corporation Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 1998, File No. 0-2517, and incorporated herein by reference).
4.2
-
Settlement Agreement dated June 25, 1998, among the Gralee Persons, the Dane Falb Persons and Toreador Royalty Corporation (previously filed as Exhibit 10.1 to Toreador Royalty Corporation Current Report on Form 8-K filed with the Securities and Exchange Commission on July 1, 1998, File No. 0-2517, and incorporated herein by reference).
4.3
-
Registration Rights Agreement, effective July 31, 2000, among Toreador Royalty Corporation and persons party thereto (previously filed as Exhibit 4.5 to Toreador Resources Corporation Registration Statement on Form S-3, No. 333-52522 filed with the Securities and Exchange Commission on December 22, 2000, and incorporated herein by reference).
4.4
-
Registration Rights Agreement, effective September 11, 2000, among Toreador Resources Corporation and Earl E. Rossman, Jr., Representative of the Holders (previously filed as Exhibit 4.6 to Toreador Resources Corporation Registration Statement on Form S-3, No. 333-52522, filed with the Securities and Exchange Commission on December 22, 2000, and incorporated herein by reference).
4.5*
-
Registration Rights Agreement, effective November 1, 2002, among Toreador Resources Corporation and persons party thereto.
10.1+
-
Employment Agreement, dated as of May 1, 1997 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, File No. 0-2517, and incorporated herein by reference).
10.2+
-
Employment letter agreement between Madison Oil Company and Michael J. FitzGerald dated September 10, 2001 (previously filed as Exhibit 10.1 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, File No. 0-2517, and incorporated herein by reference).
10.3+
-
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, File No. 0-2517, and incorporated herein by reference).
10.4+
-
Amendment to Toreador Royalty Corporation 1990 Stock Option Plan, effective as of May 15, 1997 (previously filed as Exhibit 10.14 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-2517, and incorporated herein by reference).
10.5+
-
Toreador Royalty Corporation Amended and Restated 1990 Stock Option Plan, effective as of September 24, 1998 (previously filed as Exhibit A to Toreador Royalty Corporation Preliminary Proxy Statement filed with the Securities and Exchange Commission on March 12, 1999, File No. 0-2517, and incorporated herein by reference).
10.6+
-
Amendment Number One to Toreador Resources Corporation Amended and Restated 1990 Stock Option Plan (previously filed as Exhibit 10.1 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-2517, and incorporated herein by reference).
10.7+
-
Amendment Number Two to Toreador Resources Corporation Amended and Restated 1990 Stock Option Plan (previously filed as Exhibit 10.4 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-2517, and incorporated herein by reference).
10.8+
-
Toreador Royalty Corporation 1994 Non-Employee Director Stock Option Plan, as amended (previously filed as Exhibit 10.12 to Toreador Royalty Corporation Annual Report on Form 10-K for the year ended December 31, 1995 File No. 0-2517, and incorporated herein by reference).
10.9+
-
Toreador Resources Corporation Amended and Restated 1994 Non-employee Director Stock Option Plan (previously filed as Exhibit 10.2 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-2517, and incorporated herein by reference).
10.10+
-
Toreador Resources Corporation 2002 Stock Option Plan (previously filed as Exhibit 10.16 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2001, File No. 0-2517, and incorporated herein by reference).
10.11+
-
Amendment Number One to the Toreador Resources Corporation 2002 Stock Option Plan (previously filed as Exhibit 10.5 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-2517, and incorporated herein by reference).
10.12+
-
Form of Indemnification Agreement, dated as of April 25, 1995, between Toreador Royalty Corporation and each of the members of our 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, File No. 0-2517, and incorporated herein by reference).
10.13
-
Loan Agreement, effective February 16, 2001, between Toreador Resources Corporation, Toreador Exploration & Production Inc., Toreador Acquisition Corporation and Tormin, Inc. and Bank of Texas, National Association (previously filed as Exhibit 10.9 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2000, File No. 0-2517, and incorporated herein by reference).
10.14
-
First Amendment to Loan Agreement dated November 8, 2001 between Toreador Resources Corporation, Toreador Exploration & Production Inc., Toreador Acquisition Corporation and Tormin, Inc. and Bank of Texas, National Association Plan (previously filed as Exhibit 10.12 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2001, File No. 0-2517, and incorporated herein by reference).
10.15
-
Second Amendment to Loan Agreement dated May 9, 2002 between Toreador Resources Corporation, Toreador Exploration & Production Inc., Toreador Acquisition Corporation and Tormin, Inc. and Bank of Texas, National Association (previously filed as Exhibit 10.3 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-2517, and incorporated herein by reference).
10.16
-
Third Amendment to Loan Agreement dated August 7, 2002 between Toreador Resources Corporation, Toreador Exploration & Production Inc., Toreador Acquisition Corporation and Tormin, Inc. and Bank of Texas, National Association (previously filed as Exhibit 10.1 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 0-2517, and incorporated herein by reference).
10.17
-
Fourth Amendment to Loan Agreement dated September 30, 2002 between Toreador Resources Corporation, Toreador Exploration & Production Inc., Toreador Acquisition Corporation and Tormin, Inc. and Bank of Texas, National Association (previously filed as Exhibit 10.2 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 0-2517, and incorporated herein by reference).
10.18
-
Revolving Credit Facility Agreement dated March 30, 2001, between Madison Oil Company Europe, Madison Oil France S.A., Madison/Chart Energy SCS (n/k/a Madison Energy France), and Barclays Capital (previously filed as Exhibit 10.13 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2001, File No. 0-2517, and incorporated herein by reference).
10.19
-
Contract for the Supply of Crude Oil from the Parisian Basin, effective January 1, 1997, between Elf Antwar France and Midland Madison Petroleum Company (n/k/a Madison Energy France) (previously filed as Exhibit 10.14 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2001, File No. 0-2517, and incorporated herein by reference).
10.20
-
Amended and Restated Convertible Debenture, dated December 31, 2001, between Madison Oil Company and PHD Partners LP. (previously filed as Exhibit 10.15 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2001, File No. 0-2517, and incorporated herein by reference).
10.21
-
Settlement Agreement dated June 28, 2002, and executed August 29, 2002, between Tullow Pakistan (Developments) Limited and Toreador Resources Corporation (previously filed as Exhibit 10.3 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 0-2517, and incorporated herein by reference).
10.22
-
Subordinated Revolving Credit Agreement, dated as of October 3, 2001, between Madison Oil Company and Toreador Resources Corporation (previously filed as Exhibit 2.2 to Toreador Resources Corporation Registration Statement on Form S-4, No. 333-72314, filed on October 26, 2001, and incorporated herein by reference).
10.23
-
Subordinated Revolving Credit Note, dated as of October 3, 2001, between Toreador Resources Corporation and Madison Oil Company (previously filed as Exhibit 2.3 to Toreador Resources Corporation Registration Statement on Form S-4, No. 333-72314, filed on October 26, 2001, and incorporated herein by reference).
10.24*
-
Securities Purchase Agreement, effective November 1, 2002, among Toreador Resources Corporation and persons party thereto.
10.25*
-
Shareholders Agreement between Anglo-African Energy, Inc. and Trans-Dominion Holdings Limited, dated August 1, 2000.
10.26*
-
Consulting Agreement between Toreador Resources Corporation and Richard D. Preston, effective June 1, 2002.
10.27*
-
Waiver Letter between Madison Energy France S.C.S. (formerly Madison/Chart Energy S.C.S.), Madison Oil Company Europe, Madison Oil France S.A., Madison Oil Company, Madison Petroleum Inc., Madison (Turkey) Inc., Madison Oil Turkey Inc. and Toreador Resources Corporation and Barclays Bank PLC dated March 21, 2002.
10.28*
-
Waiver Letter between Madison Energy France S.C.S. (formerly Madison/Chart Energy S.C.S.), Madison Oil Company Europe, Madison Oil France S.A., Madison Oil Company, Madison Petroleum Inc., Madison (Turkey) Inc., Madison Oil Turkey Inc. and Toreador Resources Corporation and Barclays Bank PLC dated December 31, 2002.
10.29*
-
Waiver Letter between Madison Energy France S.C.S. (formerly Madison/Chart Energy S.C.S.), Madison Oil Company Europe, Madison Oil France S.A., Madison Oil Company, Madison Petroleum Inc., Madison (Turkey) Inc., Madison Oil Turkey Inc. and Toreador Resources Corporation and Barclays Bank PLC dated March 25, 2003.
10.30*
-
Warrant Letter between Toreador Resources Corporation and Barclays Capital dated March 25, 2003.
10.31*
-
Amendment to Settlement Agreement dated as of February 3, 2003, between Tullow Pakistan (Developments) Limited and Toreador Resources Corporation.
10.32*
-
Waiver Letter between Madison Energy France S.C.S. (formerly Madison Chart/Energy S.C.S.), Madison Oil Company Europe, Madison Oil France S.A., Madison Oil Company, Madison Petroleum Inc., Madison (Turkey) Inc., Madison Oil Turkey Inc. and Toreador Resources Corporation and Barclays Bank PLC dated April 11, 2003.
16.1
-
Letter on Change in Certifying Accountant from PricewaterhouseCoopers LLP, dated June 30, 1999 (previously filed as Exhibit 16 to Amendment No. 2 to Toreador Royalty Corporation Current Report on Form 8-K/A filed on June 30, 1999, File No. 0-2517, and incorporated herein by reference).
21.1*
-
Subsidiaries of Toreador Resources Corporation.
23.1*
-
Consent of Ernst & Young LLP.
23.2*
-
Consent of LaRoche Petroleum Consultants, Ltd.
24.1*
-
Power of Attorney (See Signatures in Part IV)
99.1*
-
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2*
-
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
Filed herewith.
+
Management contract or compensatory plan
(b) Reports on Form 8-K:
On November 8, 2002, we filed a Current Report on Form 8-K dated November 8, 2002, with the Securities and Exchange Commission to report a press release containing financial information.
On November 14, 2002, we filed a Current Report on Form 8-K dated November 13, 2002, with the Securities and Exchange Commission under Item 9. Regulation FD Disclosure to report certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Toreador’s Chief Executive and Financial Officers of the financial statements included in our Form 10-Q for the periods ended September 30, 2002.
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.
Date: April 15, 2003
TOREADOR RESOURCES CORPORATION
By:
/s/ G. Thomas Graves III
G. Thomas Graves III, President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of Toreador Resources Corporation hereby constitutes and appoints G. Thomas Graves III and Douglas W. Weir, or either of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file any and all amendments (including post-effective amendments) to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as full to all intents and purposes as he himself might or could do if personally present, thereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done.
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 as indicated therein.
CERTIFICATION OF PRESIDENT AND
CHIEF EXECUTIVE OFFICER
I, G. Thomas Graves III, President and Chief Executive Officer of Toreador Resources Corporation certify that:
(1)
I have reviewed this annual report on Form 10-K of Toreador Resources Corporation;
(2)
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods represented in this annual report;
(4)
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a)
Designed such disclosure controls and procedures to ensure that material information relating to the registrant including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report (the “Evaluation Date”); and
(c)
Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5)
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function);
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
(6)
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ G. Thomas Graves III
G. Thomas Graves III
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
I, Douglas W. Weir, Senior Vice President and Chief Financial Officer of Toreador Resources Corporation certify that:
(1)
I have reviewed this annual report on Form 10-K of Toreador Resources Corporation;
(2)
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods represented in this annual report;
(4)
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a)
Designed such disclosure controls and procedures to ensure that material information relating to the registrant including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report (the “Evaluation Date”); and
(c)
Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5)
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function);
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
(6)
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
TOREADOR RESOURCES CORPORATION
ITEM 8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TOREADOR RESOURCES CORPORATION
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Toreador Resources Corporation:
We have audited the accompanying consolidated balance sheets of Toreador Resources Corporation as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. 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 audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Toreador Resources Corporation at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
Dallas, Texas
April 11, 2003
TOREADOR RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
TOREADOR RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to the consolidated financial statements.
TOREADOR RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
See accompanying notes to the consolidated financial statements.
TOREADOR RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the consolidated financial statements.
TOREADOR RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
See accompanying notes to the consolidated financial statements.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Toreador Resources Corporation (“Toreador,” “we,” “us,” “our,” or the “Company”) is an independent oil and gas company engaged in foreign and domestic oil and gas exploration, development, production, leasing and acquisition activities. The accompanying consolidated financial statements are presented in U.S. dollars and in accordance with accounting principles generally accepted in the United States.
ACQUISITION OF MADISON OIL COMPANY
Toreador, MOC Acquisition Corporation, a wholly owned subsidiary of Toreador (“MOC”), and Madison Oil Company (“Madison”) entered into an Agreement and Plan of Merger dated October 3, 2001 (“Merger Agreement”). The transaction was consummated on December 31, 2001 by the merger of MOC with and into Madison with Madison being the surviving corporation of such merger (the “Merger”) and becoming a wholly owned subsidiary of Toreador. Pursuant to the Merger Agreement, the issued and outstanding shares of the common stock of Madison were converted into an aggregate of 3,101,573 shares of Toreador’s $0.15625 par value common stock (“Common Stock”), based on an exchange ratio of 0.118 shares of Toreador Common Stock for each issued and outstanding share of Madison common stock. Holders of Madison common stock were also given the right to receive, in cash or our common stock, 30% of certain potential payments that may be received from the Turkish government for the protection of repatriated capital based on a formula specified in the Merger Agreement under the section entitled “Conversion of Shares.” In addition, certain stock options to acquire Madison common stock became Toreador stock options exercisable for 41,300 shares of Common Stock, warrants to acquire Madison common stock became Toreador warrants exercisable for 111,509 shares of Common Stock and a Madison debenture convertible into Madison common stock has been amended and is now convertible into 319,962 shares of Common Stock. (See further discussion in Note 9).
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related footnotes are presented in U.S. dollars and in accordance with accounting principles generally accepted in the United States. Certain prior-year amounts have been reclassified to conform to the 2002 presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
BASIS OF CONSOLIDATION
Toreador consolidates all of its majority-owned subsidiaries. We account for our interest in other joint ventures using the equity method. All material intercompany accounts and transactions are eliminated in consolidation. We account for our investments in entities in which we hold less than a majority interest under the equity method.
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. We maintain our cash in bank deposit accounts, which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant risk on cash.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
CONCENTRATION OF CREDIT RISK AND ACCOUNTS RECEIVABLE
Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash, accounts receivable, and our hedging and derivative financial instruments. We place our cash with high credit quality financial institutions. We sell oil and natural gas to various customers. Historically, we have not experienced any losses related to accounts receivable, and accordingly, we do not believe an allowance for doubtful accounts is warranted either at December 31, 2002 or 2001. Substantially all of our accounts receivable are due from purchasers of oil and gas. We place our hedging and derivative financial instruments with financial institutions and other firms that we believe have high credit ratings. For a discussion of the credit risks associated with our hedging activities, please see “Derivative Financial Instruments” below.
MARKETABLE SECURITIES
Toreador’s marketable securities, consisting primarily of common shares of publicly traded companies, are classified as available-for-sale. Unrealized holding gains and losses on securities available-for-sale are recorded as a component of other comprehensive income, net of tax effect. The fair values for marketable securities are based on quoted market prices. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in current earnings.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash equivalents, short-term investments, accounts receivable, marketable securities, accounts payable and accrued liabilities, long-term debt, and the convertible debenture approximate fair value, unless otherwise stated, as of December 31, 2002 and 2001.
DERIVATIVE FINANCIAL INSTRUMENTS
We use various swap and option contracts to (i) reduce the effect of the volatility of price changes on the commodities we produce and sell, (ii) support our annual capital budgeting and expenditure plans and (iii) protect the amounts required for servicing outstanding debt and (iv) maximize the funds available under our existing credit facilities. In order to accomplish this objective, we enter into oil and gas swap and option agreements that fix the price of oil and gas sales within ranges determined acceptable at the time we execute the contracts.
We are exposed to credit losses in the event of nonperformance by the counterparties to our financial instruments. We anticipate, however, that such counterparties will be able to fully satisfy its obligations under the contracts. We do not obtain collateral or other security to support financial instruments subject to credit risk but we monitor the credit standing of the counterparties. At December 31, 2002, we had no amounts receivable from our counterparties. At December 31, 2001, we had gross receivables from our counterparty of $331,000, of which $19,000 related to amounts receivable from settled trades and $312,000 related to unrealized gains on the contracts.
We have elected not to designate the derivative financial instruments to which we are a party as hedges, and accordingly, we record such contracts at fair value and recognize changes in such fair value in current earnings as they occur.
INVENTORIES
At December 31, 2002 and 2001, other current assets included $891,000 and $530,000 of inventory, respectively. Those amounts consist of technical equipment and crude oil held in storage tanks. We record such inventories at the lower of actual cost or market.
OIL AND GAS PROPERTIES
We follow 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 that do not find proved reserves are expensed. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the Company carries the costs of drilling such exploratory wells as an asset for no more than one year following completion of drilling. If, after that year has passed, a determination that proved reserves have been found cannot be made, Toreador
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
will assume that the well is impaired, and charges the cost to expense. Significant costs associated with the acquisition of oil and gas properties are capitalized. 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.
DEPRECIATION, DEPLETION AND AMORTIZATION
We provide depreciation, depletion and amortization of our investment in producing oil and gas properties on the units-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 three to seven years.
IMPAIRMENT OF ASSETS
We evaluate producing property costs for impairment and reduce such costs to fair value if the sum of expected undiscounted future cash flows is less than net book value pursuant to Statement of Financial Accounting Standard No. 144 (Statement 144) “Accounting for the Impairment or Disposal of Long-Lived Assets.” On January 1, 2002 we adopted Statement No. 144. Because we had no properties held for sale at December 31, 2002 or 2001, adopting Statement 144 did not have a material impact on our financial position. We assess impairment of non-producing leasehold costs and undeveloped mineral and royalty interests periodically on a property-by-property basis. We charge any impairment in value to expense in the period incurred. We incurred impairment losses on our United States oil and gas producing properties of $529,000 in 2002, $1,309,000 in 2001, and zero in 2000. The impairments in 2002 were the result of several properties depleting faster than expected. There were no properties with individually significant impairments, nor was there any particular group of properties that were impaired. The impairment in 2001 was the result of overall decreases in the quantity of reserves and decreases in price, and was not concentrated on any particular group of properties.
ASSET RETIREMENT OBLIGATIONS
On August 15, 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. Initiated in 1994 as a project to account for the costs of nuclear decommissioning, the FASB expanded the scope to include similar closure or removal-type costs in other industries that are incurred at any time during the life of an asset. That standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. We adopted Statement 143 on January 1, 2003. Upon adoption of Statement 143, we recorded asset retirement obligations totaling approximately $341,000 discounted to present value. Additionally, we recorded the cumulative effect of change in accounting principle amounting to approximately $64,000, net of related tax. We do not expect the effects of adopting Statement 143 to have a material impact on our financial position or results of operations in future years.
GOODWILL
On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement 142). Under Statement 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life). Prior to our Merger with Madison, we had no goodwill, so the adoption of this standard will have no impact on our financial position or results of operations. As the result of adopting Statement 142, we will review annually the value of goodwill recorded as a result of the Merger with Madison, or more frequently if impairment indicators arise. We recognized no goodwill impairment during 2002.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICES (continued)
REVENUE RECOGNITION
We account for gas revenues 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, 2002 and 2001, the imbalance and related value were immaterial.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, (“SFAS 123”) “Accounting for Stock-Based Compensation,” encourages, but does not require, the adoption of a fair value-based method of accounting for employee stock-based compensation transactions. The Company has elected to apply the provisions of Accounting Principles Board Opinion No. 25 (“Opinion 25”), “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its employee stock-based compensation plans. Under Opinion 25, compensation cost is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant above the amount an employee must pay to acquire the stock.
Had compensation costs for employees under our two stock-based compensation plans been determined based on the fair value at the grant dates under those plans consistent with the method proscribed by SFAS No. 123, our pro forma net income and earnings per share would have been reduced to the pro forma amounts listed below (in thousands):
FOREIGN CURRENCY TRANSLATION
The functional currency of the countries in which the Company operates is the U.S. dollar in the US, the Eurodollar in France and the Turkish Lira in Turkey. Gains and losses resulting from the translations of local currencies into U.S. dollars are included in other comprehensive income for the current period. The Company periodically reviews the operations of its entities to ensure the functional currency of each entity is the currency of the primary economic environment in which it operates.
INCOME TAXES
Toreador is subject to income taxes in the United States, France, and Turkey. The current provision for taxes on income consists primarily of income taxes based on the tax laws and rates of the countries in which operations were conducted during the periods presented. Toreador computes its provision for deferred income taxes using the liability method. Under the liability method, deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to recognize the future tax benefits to the extent, based on available evidence, it is more likely than not they will be realized.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“Statement 145”), related to accounting for debt extinguishments, leases and intangible assets of motor carriers. The provisions of Statement 145 are effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. Because we do not have, and we do not anticipate having, debt extinguishments or the type of lease transactions mentioned in Statement 145, we believe that adopting Statement 145 will not have a material impact on our financial position or results of operations.
In July 2002, the FASB issued Statement No, 146, Accounting for Costs Associated with Exit or Disposal Activities (“Statement 146”). Statement 146 requires that a liability for costs associated with an exit or disposal activity should be initially recognized when it is incurred. Statement 146 differs from existing standards in that under existing standards, such costs are recognized in the period in which an entity commits to a plan of disposal. Under Statement 146, the costs will be recognized in the period when an actual disposal is under way. Examples of costs included under Statement 146 include one-time termination benefits, costs to consolidate or close facilities and to relocate employees. Statement 146 is effective for exit or disposal activities initiated after December 31, 2002. Because we currently have not committed to any disposal or exit plans that would be covered under Statement 146, adopting Statement 146 will not have a material impact on our financial position or results of operations.
In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain Financial Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 (“Statement 147”). Statement 147 is not applicable to our business.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“Statement 148”). Statement 148 provides alternative methods of transition to the fair value method of accounting proscribed by FASB Statement No. 123, Accounting for Stock-Based Compensation (“Statement 123”). Statement 148 also amends the disclosure provisions of Statement 123 and Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. Statement 148 does not require companies to account for employee stock options under the fair value method. We do not anticipate adopting the fair value method of accounting for stock-based compensation; however, we have adopted the disclosure provisions of Statement 148 in this filing.
3. MARKETABLE SECURITIES
Marketable securities at December 31, 2002 and 2001 consist of several issues of common and preferred stock with an aggregate fair market value of $45,000 and $348,000, respectively. We have designated these investments as “securities available for sale” pursuant to Statement of Financial Accounting Standards No. 115. The net unrealized loss related to these securities is $143,000 ($90,000 net of tax) at December 31, 2002 and $56,000 ($33,000 net of tax) at December 31, 2001. During 2002, securities with historical cost of $256,000 were sold for $242,000, resulting in a net loss of $14,000 ($9,000 net of tax). During 2001, securities with historical cost of $454,000 were sold for $431,000, resulting in a net loss of $23,000 ($14,000 net of tax). The $14,000 net loss in 2002 includes unrealized losses of $7,000 which were reclassified from accumulated other comprehensive income. The $23,000 net loss in 2001 reflects unrealized gains of $56,000 which were reclassified from accumulated other comprehensive income.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTIES AND EQUIPMENT
Oil and Gas Properties consist of the following:
During 2002, the Company sold various properties and equipment for $4,628,000 (net of closing costs) resulting in a loss of $2,129,000 before tax.
6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
In July 2000, we acquired 35% of EnergyNet.com, Inc. (“EnergyNet”), an Internet based oil and gas property auction company. At December 31, 2002 and 2001, our investment in EnergyNet amounted to $400,000 and $464,000, respectively. During 2002, 2001 and 2000, we recorded equity in the loss of EnergyNet of $64,000, $227,000 and $64,000 respectively.
In April 2000, we acquired a 50% interest in Capstone Royalty, LLC (“Capstone”), a joint venture formed to acquire mineral interests at county auctions in west Texas and develop those interests. Our investment in Capstone amounted to $108,000 and $133,000 at December 31, 2002 and 2001, respectively. We recorded equity in the earnings of Capstone amounting to zero in 2002, $8,000 in 2001 and $10,000 in 2000. In 2002, we received a distribution of $25,000 from Capstone.
As part of our Merger with Madison (see Note 9), we acquired a 25% interest in Trinidad Exploration and Development, Ltd. (“TED”). TED is involved in oil exploration in the Southwest Cedros Peninsula of Trinidad. Our investment in TED amounts to $2,652,000 at December 31, 2002 before any impairment. In addition to our investment in TED, we also have a note receivable of $500,000 from TED. During 2002, we were unsuccessful in our arbitration case against TED’s majority shareholder, and our interest was diluted from 25% to 16.33%. Due to the reduction in our ownership, we recorded a charge of approximately $920,000 as equity in earnings of unconsolidated investments, reflecting the diminished valuation of the ultimate amount estimated to be recovered from our investment. Additionally, we have evaluated our ability to collect our receivable from TED and have reserved 50% of the receivable, or $250,000.
7. DERIVATIVE FINANCIAL INSTRUMENTS
We utilize commodity derivative instruments as part of our risk management program. These transactions are generally structured as either swaps or collar contracts. A swap can be described as having the effect of an outright sale at a specific price. A collar has the effect of creating a sale only if a floor or ceiling price is exceeded. These instruments (i) reduce the effect of the price fluctuations of the commodities we produce and sell; (ii) support our annual capital budgeting and expenditure plans; (iii) protect the amounts required for servicing outstanding debt; and (iv) maximize the funds available under our existing credit facilities. The trading party that represents the other side of each of these transactions is known as a “counterparty.” The counterparty of our United States transactions is Coral Energy Holdings, L.P., an affiliate of Royal Dutch/Shell. The counterparty of our French transactions is Barclays Capital.
The following table lists our open natural gas derivative contracts as of December 31, 2002. All contracts are based on NYMEX pricing. We estimated the fair value of the option agreement at December 31, 2002, from quotes by the counterparty representing the amounts we would expect to receive or pay to terminate the agreements on that date. We estimated the fair value of the swap
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
agreement based on the difference between the strike prices and the forward NYMEX prices for each determination period multiplied by the notional volume for each period.
(1) MMBtu - Million British thermal units.
The following table lists our open crude oil derivative contracts as of December 31, 2002. We estimated the fair value of the agreement based on the difference between the strike prices and the forward index prices for each determination period multiplied by the notional volume for each period.
See “Note 2. Accounting Policies” for more information.
8. LONG-TERM DEBT
Long-term debt consists of the following:
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT (continued)
REVOLVING LINE OF CREDIT WITH BANK OF TEXAS, N.A.
On February 16, 2001, the Company entered into a $75 million credit agreement with Bank of Texas, National Association (the “Texas Facility”) that matures on February 16, 2006. The majority of the Company’s United States oil and gas properties are pledged as collateral under the Texas Facility.
On November 8, 2001, the Texas Facility was amended to bifurcate the amounts outstanding into two tranches. Tranche A represents all amounts outstanding up to $18,024,750, and Tranche B represents all amounts outstanding in excess of that amount. On May 9, 2002, the Texas Facility was further amended to specify that all amounts under Tranche B be repaid by July 2002. On August 1, 2002, the Texas Facility was amended extending the due date for Tranche B to November 2002 and increasing Tranche A to $20,000,000. On September 23, 2002, the Texas Facility was amended for the fourth time. The fourth amendment sets the borrowing base at $19,375,000 and calls for monthly commitment reductions of $150,000 until February 16, 2006, at which time all outstanding principal and interest must be repaid. Accordingly, we have included $1.8 million in current portion of long-term debt on the balance sheet.
Amounts outstanding under Tranche A bear interest at the Stated Rate, defined as: the lesser of (i) the difference between the prime rate of interest on corporate loans (4.25% at December 31, 2002) less the Applicable Margin, as defined below; or (ii) the sum of the LIBOR rate (1.38% at December 31, 2002) plus the LIBOR spread as defined below:
Amounts due under Tranche B were repaid in full during 2002. As of December 31, 2002 the total amount outstanding of $18,760,000 fell under Tranche A. The Texas Facility contains various affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, the sale of assets and the payment of dividends on common stock, change of control and management and require us to meet certain financial requirements. Specifically, we must maintain a current ratio of 1.00 to 1.00 (exclusive of amounts due under revolving credit arrangements) and a debt service coverage ratio of not less than 1.25 to 1.00. As of December 31, 2002, we were in compliance with all covenants.
REVOLVING LINE OF CREDIT WITH BARCLAYS BANK, PLC
As part of our Merger with Madison (see Note 9), we assumed a revolving credit facility with Barclays Bank, Plc (the “Barclays Facility”) that matures on December 31, 2005 and is secured by the production from our French properties. The Barclays Facility is structured in three separate tranches with interest rates based on LIBOR plus 2.5% to 3%. Total borrowings are limited to the lesser of the nominal facility amount or a semi-annual borrowing base. Barclays previously advised us that it intended to withdraw from the reserve-based lending business and to transfer the balance of its reserve-based loans to one or more third-party banking institutions Until a third-party lender assumes the facility, we will not be allowed to borrow any additional funds under the Barclays Facility. In the interim, we are required to repay $300,000 in January 2003 and to make monthly principal payments subsequent to January 2003 of $400,000 until December 31, 2005, at which time all outstanding principal and interest is due. Accordingly, we have included $4.7 million in the current portion of long-term debt on the balance sheet.
We diligently have explored alternatives to refinance all or part of our existing capital structure, including the Barclays Facility. We have received a commitment to provide funds necessary for the extinguishment of the Barclays Facility. The form of the commitment is based on a third party institution providing a structured financing of up to $45 million in a combination of fixed term, floating rate senior debt, subordinated, fixed term, fixed rate debt, and equity. However, no assurance can be given that this structured financing will occur. If the third party institution is unable to provide a commitment for the financing on or before April 30, 2003, we have received a binding commitment to provide up to $15 million to refinance the Barclays Facility which would be based on a five-year amortization payable in equal monthly installments of $250,000 at an interest rate to be determined. In addition, we are pursuing other alternatives, including other refinancing options and the possible sale of our French properties as a means of discharging the Barclays Facility and providing additional working capital.
Annual principal maturities under the Texas and Barclays Facilities are as follows (in thousands):
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. MERGER WITH MADISON OIL COMPANY
As discussed in Note 1, we completed the Merger with Madison Oil Company on December 31, 2001. Madison is an independent producer of oil and gas with interests in undeveloped acreage and producing oil properties in France and Turkey, and held a 25% interest in Trinidad Exploration and Development, Ltd. (“Trinidad”). The interest in Trinidad has subsequently been reduced to 11.28%. We acquired all of the outstanding shares of Madison’s common stock in exchange for the consideration discussed in Note 1. The primary reasons for the merger were to (i) expand the diversity of Toreador’s portfolio of oil and gas assets to include international activities (ii) to offer a larger, more diverse company to our current and potential investors, and (iii) to combine the talents of both companies’ management to strengthen Toreador’s pre-existing exploration, operating and exploitation capacity. As the Merger was effective on December 31, 2001, no results of Madison’s operations are included in Toreador’s results of operations for the years ended December 31, 2000 and 2001.
CONTINGENT TURKISH PAYMENT
Two of Madison’s subsidiaries that operate in Turkey may be owed cash by the Turkish government pursuant to Section 116 of the Turkish Petroleum Regulations for prior investments made by such subsidiaries in Turkey for petroleum operations prior to the effective date of the Merger. Under the existing Petroleum Law of Turkey, capital which is invested by foreign companies for projects such as oil and gas exploration can be registered with the General Directorate of Petroleum Affairs, thereby qualifying for protection against adverse changes in the exchange rate between the time of the initial investment and the time such capital is repatriated out of Turkey. Since 1997, the Turkish government has suspended such protection for repatriated capital. As holder of approximately $50 million of registered capital, during the second quarter of 2001, Madison filed suit in an administrative court in Turkey to attempt to restore the exchange rate protections afforded under the law. Numerous other non-Turkish oil and gas companies have filed similar claims. In March 2002 a lower level court ruled in favor of Madison. The ruling was subject to an automatic appeal that was heard in December 2002. We are currently awaiting the written ruling from the court before any further action can be taken and understand that we may not have been successful in this appeal.
Toreador has agreed to (i) apply for such money on or prior to the second anniversary date of the Merger becoming effective and (ii) attempt to receive such money on or prior to the third anniversary date of the Merger becoming effective. If on or prior to the third anniversary date of the Merger Toreador receives any such payments for which an application is made on or prior to the second anniversary date of the Merger, the holders of Madison common stock on the effective date of the Merger will receive in cash or in shares of Toreador common stock, an amount equal to 30% of the amount received, minus certain expenses, such as all costs and expenses that are incurred by Toreador in connection with processing the application for such money. If any shares of Toreador common stock are issued to satisfy this contingent obligation, the shares will be priced based on the weighted average trading prices of Toreador common stock for the 20 consecutive trading days ending at least three business days prior to the date such shares are delivered for mailing to the Madison stockholders.
The maximum Turkish payment has been estimated at $30,000,000 (approximately 60% of Madison’s registered capital). This number was estimated based on Madison’s then existing registered capital and a reasonable estimate as determined by Toreador’s management in consultation with Madison’s management and Madison’s Turkish legal advisors of the amount of such registered capital that could be recovered on or prior to the second anniversary date of the Merger becoming effective given the anticipated process in Turkey and the timing of the filing of the claim and the registration process. The former Madison stockholders are entitled to receive 30% of such $30,000,000 or $9,000,000 (less certain expenses which are to be paid out of this amount and which are not currently estimable). If Toreador common stock then has a weighted trading value (as specified above) of $3.00 per share, 3,000,000 shares of Toreador common stock would be issuable to former Madison stockholders. However, the number of such shares issued may vary materially depending on the amount received, the market price of Toreador’s common stock and the total expenses.
PURCHASE PRICE VALUATION AND ALLOCATION
The following table shows the value of the consideration given to former Madison shareholders plus the cash costs of completing the merger, and the allocation of that amount to the assets acquired and the liabilities assumed. We made our purchase price allocation based on the best estimates available at the time of preparation of these financial statements. We will continue to evaluate such evidence and adjust our purchase price allocation if warranted. Due to the uncertainty of the collection of the Contingent Turkish Payment, we have not allocated any value to a receivable for such money.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. MERGER WITH MADISON OIL COMPANY (continued)
(1)
$4.60 represents the closing price of Toreador common stock on December 31, 2001, the effective date of the merger.
(2)
We estimated the fair value of the options and warrants using the Black Scholes model, using historic volatility measured over periods similar to the expected lives of the options and warrants.
(3)
Goodwill represents the net purchase price plus the liabilities we assumed minus the fair value of the assets acquired.
As part of our Merger with Madison, we assumed and amended a convertible debenture (“Debenture”) payable to PHD Partners LP. The general partner of PHD Partners LP is a corporation wholly owned by David M. Brewer, a director and significant shareholder of Toreador. The debenture bears interest at 10% per annum and is due on March 31, 2006. At the holders’ option, the debenture can be converted into common stock at a ratio of $6.75 per share. We have 319,962 common shares reserved for issuance related to the conversion of the convertible debenture.
10. CAPITAL
Toreador has 160,000 shares of nonvoting Series A Preferred Stock outstanding at December 31, 2002 and 2001. At the option of the holder, the Series A Preferred Stock may be converted into common shares at a price of $4.00 per common share (conversion would amount to 1,000,000 Toreador common shares). The Series A Preferred Stock accrues dividends at an annual rate of $2.25 per share payable quarterly in cash. At any time after December 31, 2004, we may elect to redeem for cash any or all shares of Series A Convertible Preferred Stock. The optional redemption price per share is the sum of (1) $25.00 per share of the Series A Convertible Preferred Stock plus (2) any accrued unpaid dividends, and such sum is multiplied by a declining multiplier. The multiplier is 105% until November 30, 2005, 104% until November 30, 2006, 103% until November 30, 2007, 102% until November 30, 2008, 101% until November 30, 2009, and 100% thereafter.
In November 2002, we issued 37,000 shares of Series A-1 Preferred Stock. At the option of the holder, the Series A-1 Preferred Stock may be converted into common shares at a price of $4.00 per common share (conversion would amount to 231,250 Toreador common shares). The Series A-1 Preferred Stock accrues dividends at an annual rate of $2.25 per share payable quarterly in cash. At
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. CAPITAL (continued)
any time on or after November 1, 2007, we may elect to redeem for cash any or all shares of Series A-1 Convertible Preferred Stock. The optional redemption price per share is the sum of (1) $25.00 per share of the Series A Convertible Preferred Stock plus (2) any accrued unpaid dividends, and such sum is multiplied by a declining multiplier. The multiplier is 105% until October 31, 2008, 104% until October 31, 2009, 103% until October 31, 2010, 102% until October 31, 2011, 101% until October 31, 2012, and 100% thereafter.
On September 19, 2000, we completed a merger with Texona Petroleum Corporation (“Texona”). We exchanged a total of 1,115,000 of our common shares for all of Texona’s outstanding shares. We issued 1,025,000 of those shares to Texona stockholders during 2000. In April 2001, we received approval from a majority of our stockholders, via written consent, to issue the remaining 90,000 shares (the “Deferred Shares”). We issued the Deferred Shares during May 2001. We recorded the fair value of the Deferred Shares as an addition to properties and equipment, together with an increase to deferred tax liabilities, which represents the difference between book and income tax bases of the related assets.
As part of our Merger with Madison (see Note 9), we issued warrants for the purchase of 111,509 shares of our common stock. The warrants have exercise prices ranging from $4.30 to $9.23 and expire from May 25, 2002 to November 6, 2010. In 2002, 88,499 warrants with a price of $9.23 expired without being exercised. There are 4,130 warrants at $8.05 that expire in July 2010, 11,800 warrants at $5.37 that expire in August 2010 and 7,080 warrants at $4.30 that expire in November 2010.
11. INCOME TAXES
The Company’s provision (benefit) for income taxes consists of the following:
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
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:
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, 2002 and 2001 were as follows:
Our Merger with Madison resulted in a net deferred tax liability of $10.2 million due to the difference between the book and tax bases of the assets acquired and the benefit of net operating loss carryforwards. The following table summarizes our net operating loss by country and their respective expiration dates. We have recorded a valuation allowance based on the difference between the available net operating loss carryforwards and our estimates of the amount of such carryforwards we will be able to use to offset taxable income prior to the expiration of such carryforwards (in thousands).
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
12. EARNINGS PER SHARE
In accordance with the provisions of FASB Statement of Financial Accounting Standards No. 128, “Earnings per Share,” basic earnings per share is computed on the basis of the weighted-average number of common shares outstanding during the periods. Diluted earnings per share is computed based upon the weighted-average number of common shares plus the assumed issuance of common shares for all potentially dilutive securities.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS
The Company had a noncontributory defined benefit pension plan that was cancelled effective January 1, 2000. The benefits were based on years of service and the employee’s compensation. A full distribution was made to each eligible employee during 2000. At the time of the cancellation of the defined benefit plan, Toreador established a 401(k) retirement savings plan. Employees are eligible to defer portions of their salaries, limited by Internal Revenue Service regulations. Employer matches are discretionary, and are determined annually by the board of directors. Such discretionary matches amounted to $34,000 in 2002, $25,000 in 2001, and $15,000 in 2000.
14. STOCK COMPENSATION PLANS
We have granted stock options to key employees and directors of Toreador as described below.
In May 1990, we adopted the 1990 Stock Option Plan (“the 1990 Plan”). The 1990 Plan, as amended, provides for grants of up to 500,000 stock options to employees and directors at exercise prices greater than or equal to market on the date of the grant. On May 30, 2002, we amended the 1990 Plan increasing the grants available to 1,000,000.
In December 2001, we adopted the 2002 Stock Option Plan (“2002 Plan”). The 2002 Plan provides for grants of up to 500,000 stock options to employees and directors at exercise prices greater than or equal to market on the date of the grant.
In September 1994, we adopted the 1994 Nonemployee Director Stock Option Plan (“Nonemployee Director Plan”). The Nonemployee Director Plan provides for grants of up to 200,000 stock options to Nonemployee directors of Toreador at exercise prices greater than or equal to market on the date of the grant. On May 30, 2002, we amended the Nonemployee Director Plan increasing the grants available to 500,000
The Board of Directors grants options under our plans periodically. Generally, option grants are exercisable in equal increments over a three-year period, and have a maximum term of 10 years.
A summary of stock option transactions is as follows:
For stock options granted during 2002 the following represents the weighted-average exercise prices and the weighted-average fair value based upon whether or not the exercise price of the option was greater than, less than or equal to the market price of the stock on the grant date:
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK COMPENSATION PLANS (continued)
The following table summarizes information about the fixed price stock options outstanding at December 31, 2002:
At December 31, 2002, there were 565,894 shares available for grant under existing plans.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK COMPENSATION PLANS (continued)
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
15. COMMITMENTS AND CONTINGENCIES
We lease our office space under non-cancelable operating leases, expiring during 2006 and 2007. We also sublease portions of the leased space to one related party and two unrelated parties under non-cancelable sub-leases that expire on June 30, 2006. The following is a schedule of minimum future rentals under the our non-cancelable operating leases, giving effect to the non-cancelable sub-leases, as of December 31, 2002 (in thousands):
Net rent expense totaled $362,000 in 2002, $128,000 in 2001, and $86,000 in 2000.
Karak Petroleum. Madison and its wholly-owned subsidiary Trans-Dominion Holdings Ltd. were named as defendants in a complaint filed in Alberta, Canada, in 1999. The complaint arose from a dispute between Karak Petroleum, a subsidiary of Trans-Dominion Holdings, and the operator of an exploratory well in Pakistan in 1994 in which Karak was a joint interest partner. The plaintiffs alleged that they were owed approximately $500,000. On August 7, 2002, we reached an agreement with the plaintiffs in this matter. Under the terms of the agreement, we agreed to pay the plaintiffs $400,000 for full release of liability. Written documentation reflecting the foregoing was finalized on August 29, 2002. The agreement required that we remit the $400,000 in two installments. The first installment of $50,000 was paid on August 29, 2002, and the remaining $350,000 was to be paid by February 3, 2003. This liability was recorded in 2002. In February 2003, the plaintiffs agreed to accept the $350,000 in monthly installments payable at the beginning of each month beginning February 2003.
Turkish Registered Capital. Under the existing Petroleum Law of Turkey, capital which is invested by foreign companies for projects such as oil and gas exploration can be registered with the General Directorate of Petroleum Affairs, thereby qualifying for protection against adverse changes in the exchange rate between the time of the initial investment and the time such capital is repatriated out of Turkey. Since 1997 the Turkish government has suspended such protection for repatriated capital. As holder of more than $50 million of registered capital, we have filed suit in Turkey to attempt to restore the exchange rate protections afforded under the law. No amounts are accrued related to this contingency. Holders of Madison common stock have the right to receive, in cash or our common stock, 30% of certain potential payments that may be received from the Turkish government for the protection of repatriated capital. In March 2002 a lower level court ruled in favor of Madison. The ruling was subject to automatic appeal that was heard in December 2002. We are currently awaiting their ruling. We cannot predict the outcome of this matter.
Trinidad Arbitration. At December 31, 2001, we held a 25% interest in Trinidad Exploration and Development, Ltd. (“TED”), a Trinidad company engaged in oil and gas exploration. Until August 2000, TED was a wholly-owned subsidiary of Madison, at which time Madison sold a 75% interest to another company. Under the terms of the sale, the buyer was required to fund $4.0 million in costs of drilling and exploration before Madison was required to contribute additional amounts in accordance with its 25% shareholding. During 2001, TED was primarily engaged in a seismic program to conduct exploration on a license interest in the Southwest Peninsula of Trinidad. In late August, Madison received an initial billing for capital contributions to fund the ongoing exploration. The operator
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (continued)
claimed, however, that Madison did not make timely payments and that Madison’s interest in TED should be reduced from 25% to 12.5%. On September 18, 2002, we received a ruling from the American Arbitration Association related to this matter. The arbitrator ruled that certain payments by Toreador’s subsidiary were delinquent, and, according to the terms of the shareholder agreement, Toreador’s interest in TED has been reduced from 25% to 16.33%. Since the ruling, our interest has been further reduced to 11.28%, the result of our non-participation in certain capital and operating costs incurred by TED.
From time to time, we are named as a defendant in other legal proceedings arising in the normal course of business. In our opinion, the final judgment or settlement, if any, which may be awarded with any suit or claim would not have a material adverse effect on our financial position.
16. RELATED PARTY TRANSACTIONS
William I. Lee, a director of the Company also owns Wilco Properties, Inc. We entered into a technical services agreement with Wilco Properties, Inc. (“Wilco”) effective February 1, 1999 whereby we provided accounting and geological management services for a monthly fee of $7,250. On June 1, 2002, we terminated the agreement, but continued to provide limited services to Wilco during the transition and charged Wilco a reduced monthly fee through the end of 2002. We recorded reductions to general and administrative expense of $47,250 in 2002, and $87,000 in both 2001 and 2000 related to this agreement. We had receivables from Wilco related to this arrangement amounting to $11,000 at December 31, 2002, $29,000 at December 31, 2001, and $21,750 at December 31, 2000. The Company also subleases office space to Wilco pursuant to a sub-lease agreement. We recorded reductions to rent expense totaling $40,000 in 2002, $29,000 in 2001, and $15,000 in 2000 related to the sublease with Wilco. We have an informal agreement with Wilco under which one of the two companies incurs, on behalf of the other, certain miscellaneous expenses that are subsequently reimbursed by the other company. We had amounts receivable related to this arrangement of $5,000 and $27,000 at December 31, 2002 and 2001, respectively. There were no amounts due to or from Wilco at December 31, 2000 under this arrangement.
On November 1, 2002, pursuant to a private placement we issued $925,000 of Series A-1 Convertible Preferred Stock to certain of our directors or entities controlled by certain of our directors. The Series A-1 Convertible Preferred Stock is governed by a certificate of designation. The Series A-1 Convertible Preferred Stock was sold for a face value of $25.00 per share, and pays an annual cash dividend of $2.25 per share that results in an annual yield of 9.0%. At the option of the holder, the Series A-1 Convertible Preferred Stock may be converted into common shares at a price of $4.00 per common share. The $4.00 conversion price was higher than the market price of our common stock at the time of issuance. The Series A-1 Convertible Preferred Stock is redeemable at our option, in whole or in part, at any time on or after November 1, 2007. The optional redemption price per share is the sum of (1) $25.00 per share of the Series A Convertible Preferred Stock plus (2) any accrued unpaid dividends, and such sum is multiplied by a declining multiplier. The multiplier is 105% until October 31, 2008, 104% until October 31, 2009, 103% until October 31, 2010, 102% until October 31, 2011, 101% until October 31, 2012, and 100% thereafter. In connection with the securities purchase agreement, the parties entered into a registration rights agreement effective November 1, 2002, among Toreador and the persons party thereto which provides for the registration of the common stock issuable upon conversion of the Series A-1 Convertible Preferred Stock.
The sale of the Series A-1 Convertible Preferred Stock was effected in reliance upon the exemption from securities registration afforded by the provisions of Section 4(2) of the Securities Act of 1933, as amended, and Regulation D as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended.
In 2002, we acquired Wilco Turkey Ltd (“WTL”) from Wilco Properties, Inc. (“WPI”). WTL’s primary asset is an interest (ranging from 52.5% to 87.5%) in exploration licenses covering 2.2 million acres in the Thrace Basin and in the central and southeast areas of Turkey. We also acquired from F-Co Holdings Kandamis (“F-Co”) additional interests (ranging from 7.5% to 12.5%) in the same exploration licenses. The purpose of the acquisition was to obtain, explore and possibly develop the acreage covered by the licenses. The acreage in the Thrace Basin is adjacent to or near the acreage we held prior to the acquisition of WTL. In exchange for all of the outstanding common stock of WTL, we have agreed to give WPI an overriding royalty interest in any successful wells we drill on the acreage covered by the exploration licenses we acquired. We have also agreed to give F-Co, in exchange for its interest in the acreage, an overriding royalty interest in any successful wells we drill on the acreage. As of the acquisition date, there were no outstanding liabilities associated with WTL. We did not convey value to WPI or F-Co on the acquisition date, or assume any liabilities; therefore, the fair value of the transaction was zero. We have allocated no value to the assets acquired from WTL and F-Co. WPI is controlled by William I. Lee, a director and shareholder, and F-Co is owned by Peter L. Falb, a director and shareholder.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. RELATED PARTY TRANSACTIONS (continued)
We own a 35% interest in EnergyNet.com, Inc., an Internet based oil and gas property auction company. We paid commissions on property sales to EnergyNet totaling approximately $369,000 during 2002, $187,000 during 2001, and $25,000 during 2000.
The Company entered into a consulting agreement with Earl Rossman, Jr. effective October 1, 2000, whereby Mr. Rossman provides consulting services for the Company for a monthly fee of $13,000. Mr. Rossman was President of Texona Petroleum Corporation immediately prior to the execution of the Merger Agreement. The consulting agreement expired on September 30, 2001. The Company paid fees totaling $117,000 during 2001 and $39,000 during 2000.
17. INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES AND OPERATING SEGMENTS
We have operations in only one industry segment, the oil and gas exploration and production industry. We have structured the Company along geographic operating segments or regions. As a result, we have reportable operations in the United States, France and Turkey. Geographic operating segment income tax expenses have been determined based on statutory rates existing in the various tax jurisdictions where we have oil and natural gas producing activities.
The following tables provide the geographic operating segment data required by Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information. Operations in France and Turkey began when we completed our Merger with Madison on December 31, 2001. Accordingly, we had operations in only the U.S. segment during the three- and nine-month periods ended September 30, 2001. Subsequent to December 31, 2001, we combined the “United States” and “Headquarters and Other” segments to more accurately reflect the way we analyze our operations.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES AND OPERATING SEGMENTS (continued)
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES AND OPERATING SEGMENTS
(continued)
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES AND OPERATING SEGMENTS (continued)
The following table reconciles the total assets for reportable segments to consolidated assets.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SUPPLEMENTAL OIL AND GAS RESERVES AND STANDARDIZED MEASURE INFORMATION (UNAUDITED)
We retain an independent engineering firm to provide annual year-end estimates of our future net recoverable oil and gas reserves. Estimated proved net recoverable reserves we have shown below include only those quantities that we can expect to be commercially recoverable at prices and costs in effect at the balance sheet dates under existing regulatory practices and with conventional equipment and operating methods. Proved developed reserves represent only those reserves that we may recover through existing wells. Proved undeveloped reserves include those reserves that we may recover from new wells on undrilled acreage or from existing wells on which we must make a relatively major expenditure for recompletion or secondary recovery operations.
Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider probable reserves, anticipated future oil and gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SUPPLEMENTAL OIL AND GAS RESERVES AND STANDARDIZED MEASURE INFORMATION (UNAUDITED) (continued)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
We have summarized the standardized measure of discounted net cash flows related to our proved oil and natural gas reserves. We have based the following summary on a valuation of proved reserves using discounted cash flows based on year-end prices, costs and economic conditions and a 10% discount rate. The additions to proved reserves from purchase of reserves in place and new discoveries and extensions could vary significantly from year to year; additionally, the impact of changes to reflect current prices and costs of reserves proved in prior years could also be significant. Accordingly, you should not view the information presented below as an estimate of the fair value of our oil and natural gas properties, nor should you consider the information indicative of any trends.
The prices of oil and natural gas at December 31, 2002, 2001, and 2000 used in the above table, were $29.30, $16.95, and $25.21 per Bbl of oil, respectively, and $4.62, $2.71, and $9.21 per Mcf of natural gas, respectively.
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SUPPLEMENTAL OIL AND GAS RESERVES AND STANDARDIZED MEASURE INFORMATION (UNAUDITED) (continued)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH RELATING TO PROVED OIL AND GAS RESERVES
The following are the principal sources of change in the standardized measure:
INDEX TO EXHIBITS
*
Filed herewith.
+
Management contract or compensatory plan