SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-2517
TOREADOR RESOURCES CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-0991164
----------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4809 Cole Avenue, Suite 108
Dallas, Texas 75205
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 559-3933
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 2001
- -------------------------------- ---------------------------------
Common Stock, $0.15625 par value 6,339,944 shares
TOREADOR RESOURCES CORPORATION
INDEX
<Table>
<Caption>
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets (Unaudited) 2
September 30, 2001 and December 31, 2000
Consolidated Statements of Operations (Unaudited) 3
Three and Nine Months Ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows (Unaudited) 4
Nine Months Ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</Table>
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TREADOR RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 252 $ 1,756
Accounts and notes receivable 2,161 2,678
Available-for-sale securities, at fair value 412 256
Other 1,264 103
------------- -------------
Total current assets 4,089 4,793
Properties and equipment, net, using the
successful efforts method of accounting 42,910 34,630
Investments in unconsolidated entities 643 716
Other assets 205 186
------------- -------------
$ 47,847 $ 40,325
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,124 $ 1,349
Federal income taxes payable 1,194 266
------------- -------------
Total current liabilities 2,318 1,615
Long-term debt 18,904 15,244
Deferred tax liability 3,455 3,205
------------- -------------
Total liabilities 24,677 20,064
Stockholders' equity:
Preferred stock, $1.00 par value, 4,000,000
shares authorized; 160,000 issued 160 160
Common stock, $0.15625 par value, 20,000,000
shares authorized; 6,953,971 and 6,786,571 shares issued 1,087 1,060
Capital in excess of par value 15,612 14,906
Retained earnings 8,361 5,619
Accumulated other comprehensive income (loss) (44) 54
------------- -------------
25,176 21,799
Treasury stock at cost:
614,027 and 527,000 shares (2,006) (1,538)
------------- -------------
Total stockholders' equity 23,170 20,261
------------- -------------
$ 47,847 $ 40,325
============= =============
</Table>
See accompanying notes to the consolidated financial statements.
2
TOREADOR RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
(in thousands, except share data)
Revenues:
Oil and natural gas sales $ 2,719 $ 3,499 $ 11,568 $ 8,278
Gain on commodity derivatives 454 -- 1,022 --
Lease bonuses and rentals 162 139 488 386
Interest and other income 42 14 143 28
Equity in earnings of unconsolidated investments (18) (49) (173) (49)
Gain (loss) on sale of marketable securities (15) -- (10) (54)
Gain on sale of properties and other assets 115 298 285 357
------------- ------------- ------------- -------------
Total revenues 3,459 3,901 13,323 8,946
------------- ------------- ------------- -------------
Costs and expenses:
Lease operating 780 642 2,332 1,483
Exploration and acquisition 472 74 921 177
Depreciation, depletion and amortization 662 585 2,278 1,568
General and administrative 658 510 2,036 1,497
Interest 276 359 975 1,024
------------- ------------- ------------- -------------
Total costs and expenses 2,848 2,170 8,542 5,749
------------- ------------- ------------- -------------
Income before federal income taxes 611 1,731 4,781 3,197
Provision for federal income taxes 226 596 1,769 1,098
------------- ------------- ------------- -------------
Net income 385 1,135 3,012 2,099
------------- ------------- ------------- -------------
Dividends on preferred shares 90 90 270 270
------------- ------------- ------------- -------------
Income applicable to common shares $ 295 $ 1,045 $ 2,742 $ 1,829
============= ============= ============= =============
Basic earnings per share $ 0.05 $ 0.19 $ 0.43 $ 0.35
============= ============= ============= =============
Diluted earnings per share $ 0.04 $ 0.17 $ 0.40 $ 0.32
============= ============= ============= =============
Weighted average shares outstanding
Basic 6,374 5,508 6,320 5,278
Diluted 7,582 6,819 7,568 6,589
</Table>
See accompanying notes to the consolidated financial statements.
3
TOREADOR RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
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(in thousands)
Cash flows from operating activities:
Net income $ 3,012 $ 2,099
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 2,278 1,568
Loss on sale of marketable securities 10 54
Gain on sale of properties (285) (357)
Equity in earnings of unconsolidated investments 173 49
Dry holes and abandonments 553 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts and notes receivable 517 (681)
Increase in other current assets (1,161) (99)
Decrease (increase) in other assets 109 (8)
Decrease in accounts payable and accrued liabilities (225) (285)
Increase in federal income taxes payable 928 926
Other (32) --
------------- -------------
Net cash provided by operating activities 5,877 3,266
Cash flows from investing activities:
Expenditures for oil and gas property and equipment (11,026) (972)
Acquisition of Texona Petroleum Corporation -- (126)
Proceeds from the sale of oil and gas properties 638 507
Proceeds from lease bonuses and rentals 488 36
Investment in EnergyNet.com, Inc. (100) (156)
Sale of short-term investments -- 14
Purchase of marketable securities (643) (74)
Proceeds from sale of marketable securities 326 36
Purchase of furniture and fixtures (95) (32)
------------- -------------
Net cash used in investing activities (10,412) (767)
Cash flows from financing activities:
Payment for debt issuance costs (138) --
Borrowings under revolving credit arrangements 9,043 --
Repayments under revolving credit arrangements (5,383) (1,437)
Proceeds from issuance of stock 247 --
Payment of preferred and common dividends (270) (322)
Purchase of treasury stock (468) (268)
------------- -------------
Net cash provided by (used in) financing activities 3,031 (2,027)
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,504) 472
Cash and cash equivalents, beginning of period 1,756 341
------------- -------------
Cash and cash equivalents, end of period $ 252 $ 813
============= =============
</Table>
See accompanying notes to the consolidated financial statements.
4
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
You should read these consolidated financial statements in the context of the
consolidated financial statements and notes in the 2000 Annual Report on Form
10-K of Toreador Resources Corporation (the "Company, we, us, our") filed with
the Securities and Exchange Commission. In our opinion, the information
furnished herein reflects all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results of these interim
periods. Operating results for the three and nine month periods ended September
30, 2001 may not necessarily be indicative of the results for the year ending
December 31, 2001.
Comprehensive income - The following table presents the components of
comprehensive income, net of related tax (amounts in thousands):
<Table>
<Caption>
Nine Months ended
September 30,
-------------------------------
2001 2000
------------ ------------
Net income available to common stockholders $ 2,742 $ 1,829
Change in fair value of available-for-sale securities (98) 40
------------ ------------
Comprehensive income $ 2,644 $ 1,869
============ ============
</Table>
<Table>
<Caption>
Three Months ended
September 30,
-------------------------------
2001 2000
------------ ------------
Net income available to common stockholders $ 295 $ 1,045
Change in fair value of available-for-sale securities (25) 5
------------ ------------
Comprehensive income $ 270 $ 1,050
============ ============
</Table>
The only components of accumulated other comprehensive income, net of related
tax, relate to changes in the fair values of our available-for-sale investments
in marketable securities.
New Accounting Pronouncements - On January 1, 2001, we adopted Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 133"). This statement requires companies to record derivatives on
the balance sheet as assets and liabilities, measured at fair value. Gains and
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. At December 31, 2000, we elected not to designate the
derivatives to which we are a party as hedges, and accordingly, recorded such
transactions at fair value, and recognized changes in such fair value in current
earnings. Therefore, there was no impact on our financial position at January 1,
2001 as the result of adopting Statement 133.
5
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
On July 20, 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, Business Combinations ("Statement 141"), and No. 142, Goodwill and
Other Intangible Assets ("Statement 142"). Statement 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
Statement 141 further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of Statement 141 are effective for
any business combination accounted for by the purchase method that is completed
after June 30, 2001 (i.e., the acquisition date is July 1, 2001 or after).
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). The amortization provisions of
Statement 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, companies are required to adopt Statement 142 in their fiscal year
beginning after December 15, 2001 (i.e., January 1, 2002 for calendar year
companies). Early adoption is permitted for companies with fiscal years
beginning after March 15, 2001 provided that their first quarter financial
statements have not been issued. Because of the different transition dates for
goodwill and intangible assets acquired on or before June 30, 2001 and those
acquired after that date, pre-existing goodwill and intangibles will be
amortized during this transition period until adoption whereas new goodwill and
indefinite lived intangible assets acquired after June 30, 2001 will not.
We do not have any pending business combinations designated as
pooling-of-interests, and we do not have any goodwill or indefinite lived
intangible assets recorded on our balance sheet. Accordingly, adopting
Statements 141 and 142 should have no impact on our financial position or
results of operations. We intend to account for our pending merger with Madison
Oil Company, discussed later in this document, in accordance with the provisions
of Statements 141 and 142.
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 will adopt this standard on January 1, 2003.
We have not completed the process of determining the impact of adopting the
standard.
6
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
On October 5, 2001, the FASB issued a final statement on asset impairment
(Statement 144) that is applicable to financial statements issued for fiscal
years beginning after December 15, 2001 (January 2002 for Toreador). The FASB's
new rules on asset impairment supersede FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and provide a single accounting model for long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of Statement 121, the new rules significantly change the criteria
that would have to be met to classify an asset as held-for-sale. This
distinction is important because assets held-for-sale are stated at the lower of
their fair values or carrying amounts and depreciation is no longer recognized.
The new rules also supersede the provisions of APB Opinion 30 with regard to
reporting the effects of a disposal of a segment of a business and require
expected future operating losses from discontinued operations to be displayed in
discontinued operations in the period(s) in which the losses are incurred
(rather than as of the measurement date as presently required by APB 30). In
addition, more dispositions will qualify for discontinued operations treatment
in the income statement. Toreador is still evaluating the impact of adopting
Statement 144.
NOTE 2 - NON-PRODUCING MINERAL AND ROYALTY INTERESTS
Our principal properties include perpetual mineral and royalty interests
totaling approximately 1,368,000 net mineral acres underlying approximately
2,643,000 gross acres. These properties include approximately 1,775,000 gross
(876,000 net) acres in Mississippi, Alabama, and Louisiana, collectively
referred to as the "Southeastern States Holdings" and 766,000 gross (461,000
net) acres located in the Texas Panhandle and West Texas, collectively referred
to as the "Texas Holdings." We also own various royalty interests in Arkansas,
California, Kansas, and Michigan covering 102,000 gross (31,000 net) acres,
collectively referred to as the "Four States Holdings." The ultimate realization
of the investment in these properties depends on future exploration and
development operations, which depend on satisfactory leasing and drilling
arrangements with others and favorable oil and gas prices.
NOTE 3 - Derivative Financial Instruments
During 2000, we entered into call options covering an average volume of 35,000
MMBtu per month at an average index price of $7.27 per MMBtu, coupled with put
options covering an average volume of 60,000 MMBtu per month at an average index
price of $4.01 per MMBtu. The options began in March 2001, and expired in
October 2001. During the second quarter of 2001, we entered into a swap covering
50,000 MMBtu per month from June 2001 through October 2001, under the terms of
which we pay the index price and receive a fixed price of $4.35. As of September
30, 2001, all amounts under these contracts had settled. For the three and nine
month periods ended September 30, 2001, we realized gains related to these
contracts amounting to approximately $693,000.
The following table sets forth our natural gas hedging contracts. All contracts
are swap agreements for the sale of natural gas and are based on NYMEX pricing.
We estimated the fair value of the option agreement at September 30, 2001, from
quotes by the counterparty representing the amounts we would expect to receive
or pay to terminate the agreements on September 30, 2001. We estimated the fair
value of the swap 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. We designate all commodity contracts as
derivatives, and accordingly, record such contracts at fair value and recognize
changes in such
7
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
fair value in earnings as they occur. The aggregate unrealized gain of $237,000
is included in other current assets at September 30, 2001.
<Table>
<Caption>
Notional
Volume per Aggregate
Month Volume Fair Value
Contract Effective Termination (MMBtu) (MMBtu) Strike Price September 30,
Type Date Date (1) (1) Range 2001
- -------- --------- ----------- ---------- --------- ------------ -------------
February December $ 2.86 -
Swap 2002 2002 60,000 660,000 $ 3.60 $134,000
Put November
Option 2001 March 2002 40,000 200,000 $ 3.00 $103,00
</Table>
(1) MMBtu - Million British thermal units.
NOTE 4 - LONG-TERM DEBT
On February 16, 2001, we entered into a new credit agreement with Bank of Texas,
N.A. The current credit facility provides a maximum line of credit up to
$75,000,000, subject to the underlying collateral value. Our oil and gas
properties located in Arkansas, Kansas, Mississippi, New Mexico, Oklahoma, and
Texas serve as collateral under the current credit facility. The current credit
facility expires on February 16, 2006, at which time all outstanding principal
and interest are due. The current credit facility bears interest at the lesser
of (i) the difference between the prime rate of interest on corporate loans less
the Applicable Margin, as defined below; or (ii) the sum of the LIBOR rate plus
the LIBOR spread as defined below:
<Table>
<Caption>
% of Borrowing Base Outstanding Applicable Margin LIBOR Spread
------------------------------- ----------------- ------------
Greater than or equal to 75% 1.00% 2.00%
Less than 75% 1.25% 1.75%
</Table>
Additionally, the current credit facility requires a commitment fee of 0.375% on
the unused portion if less than 75% of the borrowing base is outstanding, and
0.500% if 75% or greater of the borrowing base is outstanding.
The current credit 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 and a debt service coverage
ratio of not less than 1.25 to 1.00. We are in compliance with all covenants as
of September 30, 2001.
8
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
NOTE 5 - EARNINGS PER ORDINARY SHARE
The following table reconciles the numerators and denominators of the basic and
diluted earnings per ordinary share computation for earnings from continuing
operations:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Basic earnings per share: (in thousands, except per share data)
Numerator:
Net income $ 385 $ 1,135 $ 3,012 $ 2,099
Less: dividends on preferred shares 90 90 270 270
------------- ------------- ------------- -------------
Net income applicable to common shares $ 295 $ 1,045 $ 2,742 $ 1,829
============= ============= ============= =============
Denominator:
Common shares outstanding 6,374 5,508 6,320 5,278
============= ============= ============= =============
Basic earnings per share $ 0.05 $ 0.19 $ 0.43 $ 0.35
Diluted earnings per share:
Numerator:
Net income $ 385 $ 1,135 $ 3,012 $ 2,099
Less: dividends on preferred shares 90 N/A N/A N/A
------------- ------------- ------------- -------------
Net income $ 295 $ 1,135 $ 3,012 $ 2,099
============= ============= ============= =============
Denominator:
Common shares outstanding 6,374 5,508 6,320 5,278
Common stock options 208 311 248 311
Conversion of preferred shares N/A(1) 1,000 1,000 1,000
------------- ------------- ------------- -------------
6,582 6,819 7,568 6,589
============= ============= ============= =============
Diluted earnings per share $ 0.04 $ 0.17 $ 0.40 $ 0.32
============= ============= ============= =============
</Table>
(1) preferred shares are antidilutive for the three months ended September 30,
2001.
9
TOREADOR RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
NOTE 6 - PROPERTY ACQUISITIONS
On April 26, 2001, we acquired working interests in 18 gross wells in Meade
County, Kansas for approximately $4.2 million (the "Razorhawk Acquisition"),
funded by existing cash and borrowings under the current credit facility. This
acquisition, if consummated on December 31, 2000, would have added approximately
2.7 Bcf (billion cubic feet) of natural gas to our total proved reserves. Our
depletion calculations reflect such additions.
On July 26, 2001, we acquired royalty and working interests in approximately 800
gross wells located in Kansas, New Mexico, and Oklahoma for approximately $4.0
million (the "Anderson Acquisition"), funded by existing cash and borrowings
under the current credit facility. This acquisition, if consummated on December
31, 2000, would have added approximately 78.9 MBbls (thousand barrels) of oil
and 2.5 Bcf of natural gas to our total proved reserves at that date. Our
depletion calculations reflect such additions.
NOTE 7 - COMMON STOCK
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.
NOTE 8 - SUBSEQUENT EVENTS
On October 3, 2001, we entered into a merger agreement with Madison Oil Company
("Madison"), a Delaware corporation traded on the Toronto Stock Exchange. The
terms of the agreement specify that stockholders of Madison will receive 0.118
shares of Toreador common stock for each Madison common share. Madison shares
will then be cancelled, and the surviving corporation will be Toreador Resources
Corporation and be headquartered in Dallas, Texas. Immediately subsequent to the
transaction, Madison's former stockholders will own approximately 32% of
Toreador's issued and outstanding common stock, based on both companies' number
of shares currently outstanding. The merger is subject to certain stockholder
approval for both companies, and to regulatory approval. We will account for the
merger as a purchase business combination, in accordance with Statement 141.
In connection with the merger with Madison, we established a line of credit
under which Madison can borrow from Toreador up to $5.0 million. Outstanding
borrowings under the note bear interest at the prime rate of interest as
published in the Wall Street Journal. The note expires on February 28, 2002, at
which time all outstanding principal and interest are due. Any repayments of
borrowings or outstanding interest amounts must be approved by Madison's senior
lender. At September 30, 2001, no amounts were outstanding under this facility.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TOREADOR RESOURCES CORPORATION
SEPTEMBER 30, 2001
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding our
financial position, business strategy, plans and objectives of our management
for future operations, and industry conditions, are forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to be correct. Any forward-looking statements herein are subject to
certain risks and uncertainties inherent in petroleum exploration, development
and production, including, but not limited to, the risk (1) that no commercially
productive oil and gas reservoirs will be encountered; (2) that acquisitions of
additional producing properties may not occur or be feasible, or that such
acquisitions may not be profitable; (3) that inconclusive results from 3-D
seismic projects may occur; (4) that delays or cancellation of drilling
operations may result from a variety of factors; (5) that oil and gas prices may
be volatile due to economic and other conditions; (6) from intense competition
in the oil and gas industry; (7) of operational risks (e.g., fires, explosions,
blowouts, cratering and loss of production); (8) of insurance coverage
limitations and requirements; and (9) of potential liability imposed by intense
governmental regulation of oil and gas production; all of which are beyond our
control. Any one or more of these factors could cause actual results to differ
materially from those expressed in any forward-looking statement. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements disclosed in this paragraph and otherwise in this report.
OVERVIEW
Our business strategy is to generate strong and consistent growth in reserves,
production, operating cash flows and earnings through a program of exploration
and development drilling and strategic acquisitions of oil and gas properties. A
substantial portion of our growth has been the result of proved reserve
acquisitions.
We have set a high priority on disposing of non-essential assets during 2001. As
a result of this emphasis, we have closed property sales totaling approximately
$638,000 during 2001, resulting in net gains of approximately $285,000. Property
sales will continue to be a priority for the remainder of this year and through
2002, with our emphasis on using EnergyNet.com, Inc. ("EnergyNet") as the method
for the accomplishing that objective. We acquired a 35% interest in EnergyNet in
July 2000. Mr. G. Thomas Graves III, President of Toreador, also serves as
Chairman of the Board for EnergyNet.
LIQUIDITY AND CAPITAL RESOURCES
Historically, most of the exploration activity on our acreage has been funded
and conducted by other oil companies. Exploration activity by third party oil
companies typically generates lease bonus and option income to us. If such
drilling is successful, we receive royalty income from the oil or gas production
but bear none of the capital or operating costs.
11
TOREADOR RESOURCES CORPORATION
SEPTEMBER 30, 2001
We plan to continue to actively pursue exploration and development opportunities
on our own mineral acreage to take control over the optimization of our
non-producing leasehold assets. We have also expanded our exploration focus to
geologic regions with proven and attractive gas reserves that can provide better
rates of return. We also plan to evaluate 3-D seismic projects or drilling
prospects generated by third party operators. If judged geologically and
financially attractive, we will enter into joint ventures on those third party
projects or prospects which are within the capital exploration budget approved
by our board of directors.
We also intend to actively pursue opportunities to acquire producing properties
that represent unique opportunities for us to add additional reserves to our
reserve base. We will fund such activities using cash on hand, third party
sources, existing credit facilities, or any combination thereof.
The remaining 2001 capital and exploratory budget, excluding any acquisitions
that may be made, could range from $1.0 million to $2.0 million, depending on
the timing of the drilling of exploratory and development wells, and the
availability of future exploration projects.
At the present time, our primary source of capital is our revolving line of
credit. We intend to repay borrowings from our line of credit within a one to
two year period. During the nine months ended September 30, 2001, we borrowed
approximately $9.0 million, which we used primarily to fund our acquisitions of
the Razorhawk and Anderson Acquisitions. Through September 30, 2001, we repaid
$5.4 million of those amounts using our operating cash flow. During that time,
cash flow provided by operating activities, before changes in working capital,
amounted to approximately $5.7 million, or $0.75 per diluted share.
On February 16, 2001, we replaced our Compass Bank revolving credit facility
with, a $75 million credit agreement with the Bank of Texas, National
Association, that matures on February 16, 2006.
The current credit facility bears interest, at Toreador's option, based on (a) a
base rate equal to the higher of (i) the rate of interest per annum then most
recently published by The Wall Street Journal as the prime rate on corporate
loans for large U.S. commercial banks less 1.25%, or (ii) the sum of the rate of
interest, then most recently published by The Wall Street Journal as the
"federal funds" rate for reserves traded among commercial banks for overnight
use, less three quarters of one percent (0.75%), both as published in the Money
Rates section of The Wall Street Journal, or (b) the sum of the LIBOR Rate plus
1.75%. Additionally, the current credit facility calls for a commitment fee of
0.375% on the unused portion.
The current credit facility imposes certain restrictive covenants on Toreador,
including the maintenance of a debt service coverage ratio greater than or equal
to 1.25 to 1.00; maintenance of a current ratio greater than or equal to 1.00 to
1.00; and maintenance of a tangible net worth of not less than the sum of (i)
$13.65 million, plus (ii) 50% of the Toreador's annual net income, plus (iii)
100% of all equity contributions. At September 30, 2001, we were in compliance
with all of our covenants.
For the remainder of 2001, we anticipate using our operating cash flow to fund
Madison's borrowings under the line of credit we established for their use.
Madison intends to use such borrowings to reduce outstanding principal amounts
under its revolving line of credit with its senior lender.
We maintain excess cash amounts using highly liquid investments in a diversified
array of available-for-sale securities. At September 30, 2001, investments in
such securities amounted to approximately $412,000 at fair value.
12
TOREADOR RESOURCES CORPORATION
SEPTEMBER 30, 2001
Through September 30, 2001, we purchased approximately 614,027 shares of our
Common Stock at a total cost of $2.0 million. Our board of directors has
authorized us to purchase a total of 1,055,700 shares of our outstanding Common
Stock. As of September 30, 2001, 441,673 shares remained under this authority.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 VS. 2000
Oil and natural gas sales revenues decreased by $0.8 million or 22% from $3.5 to
$2.7 million for the three months ended September 30, 2000 and 2001,
respectively. The decline in revenues was the result of lower average oil and
gas prices, offset by increased natural gas production. Oil prices decreased 21%
from $29.66 per barrel (Bbl) in the third quarter of 2000 to $23.33 during the
third quarter of 2001. Gas prices for the same periods decreased 37% from $4.16
per thousand cubic feet (Mcf) to $2.61. Natural gas volumes sold increased 30%
from 301 to 392 million cubic feet (MMcf) during the third quarters of 2000 and
2001, respectively, while oil volumes decreased 4% from 74 thousand barrels
(MBbls) to 71 MBbls. Natural gas production increased due primarily from
production on the properties we acquired in the merger with Texona, and the
Razorhawk Acquisition. Additionally, we had gains on our natural gas commodity
derivatives of approximately $0.5 million for the third quarter of 2001, which
were not present in 2000.
We recognized gains on sale of properties and other assets of $115,000 for the
third quarter of 2001 as compared to $298,000 for the same period in 2000. The
properties we sold during the third quarter of 2001 were worth less money
because of the decrease in oil and gas prices mentioned above.
The decreases in oil and natural gas sales and gains on sales of properties and
other assets were the primary reasons for the 11% decrease in total revenues
from $3.9 to $3.5 million for the three months ended September 30, 2000 and
2001, respectively.
Lease operating expenses increased by $138,000 or 22% from $642,000 for the
third quarter of 2000 to $780,000 for the same period in 2001. This increase was
principally the result of adding working interest properties through our merger
with Texona in September 2000 and our working interest properties acquired in
the Razorhawk Acquisition in April 2001.
Exploration and acquisition expenses increased from $74,000 in the third quarter
of 2000 to $472,000 in same period of 2001, because we significantly increased
our drilling program during 2001. Dry hole expense amounted to $377,000 of the
total. We drilled two developmental and nine exploration wells during the three
months ended September 30, 2001. Eight of these wells were dry holes.
Depreciation, depletion and amortization increased by $77,000 or 13% from
$585,000 for the third quarter of 2000 to $662,000 for the same period of 2001.
This is due primarily to increased gas sales volumes as described above.
General and administrative expenses increased by $148,000 or 29% from $510,000
for the third quarter of 2001 to $658,000 for the same period in 2000. The
increase is due primarily to increased payroll related costs from added
personnel required to manage our growth, and expenditures related to increased
stockholder relations activities.
13
TOREADOR RESOURCES CORPORATION
SEPTEMBER 30, 2001
During the three months ended September 30, 2001, we incurred $276,000 in
interest expense, compared to $359,000 for the same period in 2000. The decrease
of $83,000, or 23% is primarily the result of a decrease in the average rate of
interest on our revolving line of credit. During the third quarter of 2001, we
paid an average of 5.75% on outstanding borrowings under our line of credit,
compared to 9.25% for the third quarter of 2000.
Compared to the third quarter of 2000, the merger with Texona and the Razorhawk
and Anderson Acquisitions significantly added to our operations during the third
quarter of 2001. Additionally, we strongly focused on our exploration program
during the quarter. As a result, our total costs and expenses increased $0.6
million, or 31% from $2.2 million in the third quarter of 2000 to $2.8 million
in the same period of 2001.
Our income applicable to common shares amounted to $295,000 and $1,045,000 for
the third quarters of 2001 and 2000, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2001 VS. 2000
Oil and natural gas sales revenues increased by $3.3 million or 40% from $8.3
million to $11.6 million for the nine months ended September 30, 2001 and 2000,
respectively. The increase was the result of higher gas prices, coupled with an
increase in oil and natural gas production. We received $25.13 per Bbl for our
oil production during the first nine months of 2001, which is 10% less than the
$27.92 we received in the same period of 2000. We sold our gas production during
the first nine months of 2001 for $4.56 per Mcf, which is 31% higher that the
$3.47 per Mcf we received during the same period of 2000. Natural gas volumes
sold increased 50% from 826 during the first nine months of 2000 to 1,238 MMcf
during the first nine months of 2001, while oil volumes increased 17% from 190
MBbls to 223 Mbbls over the same period. The increase in oil and natural gas
production is due primarily from production on the properties we acquired in the
merger with Texona, and the Razorhawk Acquisition. Additionally, we had gains on
our natural gas commodity derivatives of approximately $1.0 million for the nine
months ended September 30, 2001, which were not present in 2000.
Lease bonuses and rentals increased by $102,000 or 26% from $386,000 to
$488,000, primarily due to our efforts to optimize our mineral holdings.
Interest and other income increased from $28,000 in 2000 to $143,000 in 2001 due
primarily to new revenues from salt water disposal and gathering system
activities brought about by the merger with Texona in September 2000.
Equity in the earnings of unconsolidated entities consists primarily of our
portion of EnergyNet's operations. During the nine months ended September 30,
2001, EnergyNet incurred a net loss of approximately $517,000 ($181,000 net to
our interest). For the period in the nine months ended September 30, 2000 that
we owned our interest, EnergyNet incurred a loss of approximately $141,000
($49,000 net to our interest).
We recognized gains on sale of properties and other assets of $285,000 during
the nine months ended September 30, 2001, compared to $357,000 for the same
period in 2000. The properties we sold during 2001 were worth less money because
of recent decreases in oil and gas prices.
14
TOREADOR RESOURCES CORPORATION
SEPTEMBER 30, 2001
Total revenues increased $4.4 million, or 49%, $8.9 to $13.3 million for the
nine months ended September 30, 2000 and 2001, respectively.
Lease operating expenses increased by $849,000, or 57%, to $2.3 million for the
first nine months of 2001 from $1.5 million for the same period in 2000. This
increase was principally the result of adding working interest properties
through our merger with Texona in September 2000 and our working interest
properties acquired in the Razorhawk Acquisition in April 2001.
Exploration and acquisition expenses increased from $177,000 to $921,000 in the
first nine months of 2000 and 2001, respectively. This increase is commensurate
with the increase in our drilling activity between the two periods. We drilled
11 developmental and 19 exploration wells during the nine months ended September
30, 2001, of which 14 were dry holes. We recognized dry hole expense of $553,000
during the nine months ended September 30, 2001.
Depreciation, depletion and amortization increased by $710,000, or 45%, to $2.3
million for the first nine months of 2001 from $1.6 million for the same period
in 2000, primarily reflecting depletion related to the increased oil and gas
sales volumes described above.
General and administrative expenses increased by $539,000, or 36%, to $2.0
million from $1.5 million for the nine months ended September 30, 2001 and 2000,
respectively. The increase is due primarily to increased payroll related costs
from added personnel required to manage our growth, and expenditures related to
increased stockholder relations activities.
Interest expense remained constant between the nine months ended September 30,
2001 and 2000, at $1.0 million. This is due to a decrease in the average rate of
interest on our revolving line of credit, offset by increased outstanding
borrowings. During the first nine months of 2001, we paid an average of 6.5% on
outstanding borrowings under our line of credit, as compared to 9.0% for the
first nine months of 2000.
Compared to the first nine months of 2000, we significantly increased our
operations for the first nine months of 2001 through the merger with Texona and
the Razorhawk and Anderson Acquisitions. Additionally, we strongly focused on
our exploration program during that time. As a result, our total costs and
expenses increased $2.8 million or 49% from $5.7 in the first nine months of
2000 to $8.5 million for the same period in 2001.
Our income applicable to common shares amounted to $2.8 million and $1.8 million
for the nine months ended September 30, 2001 and 2000, respectively.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes from the information provided in Item 7A of
our Annual Report on Form 10-K for the year ended December 31, 2000.
15
PART II. OTHER INFORMATION
TOREADOR RESOURCES CORPORATION
SEPTEMBER 30, 2001
ITEM 1 - LEGAL PROCEEDINGS
From time to time, we are named as a defendant in various 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.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - INAPPLICABLE.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - INAPPLICABLE.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - INAPPLICABLE.
ITEM 5 - OTHER INFORMATION - INAPPLICABLE.
16
TOREADOR RESOURCES CORPORATION
SEPTEMBER 30, 2001
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein:
2.1 - Agreement and Plan of Merger, dated as of October 3, 2001,
by and among Toreador Resources Corporation, MOC
Acquisition 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 with the Securities and Exchange
Commission on October 26, 2001, and incorporated herein by
reference).
2.2 - 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 with the Securities and
Exchange Commission on October 26, 2001, and incorporated
herein by reference).
2.3 - 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 with the Securities and Exchange
Commission on October 26, 2001, and incorporated herein by
reference).
2.4 - 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
with the Securities and Exchange Commission on October 26,
2001, and incorporated herein by reference).
- ----------
* Filed herewith.
(b) Reports on Form 8-K:
On October 9, 2001, we filed a Current Report on Form 8-K dated
October 3, 2001, with the Securities and Exchange Commission to report the
execution of the Agreement and Plan of Merger between Toreador, MOC
Acquisition Corporation, a wholly owned subsidiary of Toreador, and
Madison Oil Company.
17
TOREADOR RESOURCES CORPORATION
SEPTEMBER 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOREADOR RESOURCES CORPORATION,
Registrant
November 14, 2001 /s/ G. Thomas Graves, III
--------------------------------------------
G. Thomas Graves, III
President and Chief Executive Officer
November 14, 2001 /s/ Douglas W. Weir
--------------------------------------------
Douglas W. Weir
Chief Financial Officer
18