UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from to .
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Commission File No. 1-6336
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Petrominerals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 95-2573652
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
970 Calle Negocio, San Clemente, California 92673
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(Address of principal executive offices)
(949) 366-3888
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(Issuer's telephone number)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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.
[ ] [X]
No Yes
The number of shares of Registrant's common stock outstanding at September 30,
2002 was 1,059,404.
PETROMINERALS CORPORATION
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 2002 and December 31, 2001 . . . . . 1
Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . 2
Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . 3
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 5
Item 3. Disclose Controls and Procedures. . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 8
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
--------------------------------
PETROMINERALS CORPORATION
BALANCE SHEETS
(In thousands, except par value data)
September 30, December 31,
2002 2001
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(Unaudited) (Audited)
ASSETS
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Current Assets
Cash and cash equivalents $ 752 $ 1,453
Accounts receivable 783 -
Prepaid expenses 15 34
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Total Current Assets 1,550 1,487
Restricted cash 25 25
Land held for resale - 212
Property and Equipment - net (including oil and gas
properties accounted for on the successful
efforts method) 131 436
Other Assets 49 43
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TOTAL ASSETS $ 1,755 $ 2,203
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts Payable $ 473 $ 76
Accrued liabilities 408 734
Royalties payable - 11
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Total Current Liabilities 881 821
Notes payable - 100
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Total Liabilities 881 921
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Shareholders' Equity
Preferred stock:
$.10 par value, 2,500,000 shares authorized;
no shares issued and outstanding - -
Common stock:
$.80 par value, 20,000,000 shares authorized;
1,059,404 and 1,159,404 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 848 928
Capital in excess of par value 563 633
Retained earnings (537) (241)
Cumulative other comprehensive income - (38)
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Total Shareholders' Equity 874 1,282
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,755 $ 2,203
=============== ==============
See accompanying notes to financial statements
1
PETROMINERALS CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Three Months For the Nine Months
Ended Sept 30 Ended Sept 30
2002 2001 2002 2001
-------------------------- -------------------------
(Unaudited) (Unaudited)
Revenues
Oil and gas $ 175 $ 86 $ 185 $ 246
Other income 82 62 347 213
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Total Revenues 257 148 532 459
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Costs and Expenses
Oil and gas 240 131 316 387
Depreciation, depletion and amortization - - 2 2
General and administrative 71 96 210 371
Impairment loss 100 - 300 -
Other expenses - 11 - 12
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Total Costs and Expenses 411 238 828 772
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Net Income (Loss) (154) (90) (296) (313)
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Net Income (Loss) per Share $ (0.15) $ (0.08) $ (0.28) $ (0.29)
=========== ============= ============ ===========
Weighted Average Common Shares Outstanding 1,059 1,063 1,059 1,063
=========== ============= ============ ===========
See accompanying notes to financial statements
2
PETROMINERALS CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine
Months Ended
September 30,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (296) $ (313)
Adjustments to reconcile net loss
to net cash used from operating activities:
Depreciation, depletion and amortization 2 2
Impairment loss 300 -
Changes in operating working capital:
(Increase) Decrease in accounts receivable (783) (49)
(Increase) Decrease in prepaid 19 20
(Increase) Decrease in other assets (6) -
(Decrease) Increase in accounts payable 397 124
(Decrease) Increase in royalties payable (11) -
(Decrease) Increase in accrued liabilities (326) 6
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Net Cash Used by Operating Activities (704) (210)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property and equipment 3 -
Capital expenditures - (3)
Purchase of partnership interest - (35)
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Net Cash Used by Investing Activities 3 (38)
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Net Decrease in Cash and Cash Equivalents (701) (248)
Cash and Cash Equivalents at beginning of period 1,478 1,812
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Cash and Cash Equivalents at end of period $ 777 $ 1,564
======== ==========
See accompanying notes to financial statements
3
PETROMINERALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
---------------------
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. The results of operations for the
nine month period ended September 30, 2002 are not necessarily indicative of the
results to be expected for the full year.
The accompanying financial statements do not include footnotes and certain
financial presentations normally required under generally accepted accounting
principles; and, therefore, should be read in conjunction with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2001.
Certain reclassifications have been made to the 2001 financial statements to
conform to the presentation used in 2002.
NOTE 2 - PER SHARE COMPUTATIONS
----------------------
Per share computations are based upon the weighted average number of common
shares outstanding during each year. Common stock equivalents are not included
in the computations since their effect would be anti-dilutive.
NOTE 3 - CONTINGENT LIABILITY
--------------------
As the Company owns 53% of certain wells in the Santa Clarita area and with the
continual decline of oil production from the field, the company will be faced in
the future with paying its share of the costs of plugging, abandonment and
remediation associated with these wells. Management estimates the costs to be
between $600,000 and $800,000.
NOTE 4 - GOING CONCERN
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The ability of Petrominerals Corporation to continue as a going concern is
predicated upon, among other things, the final outcome of the litigation
disclosed in the legal proceeding section of this form, and the ability to
generate cash from operations and obtain financing sources sufficiently to
satisfy our future obligations.
4
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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FINANCIAL CONDITION
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As discussed in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2001, the Company had sold substantially all of its oil and gas
properties in 1998 to an unrelated party. The Company did retain an interest in
two small oil properties and has subsequently completed an acquisition of a 25%
interest in a Wyoming gas field. As a result of the termination in California
operations and an expected reimbursement due to an insurance claim, net cash
flow decreased from a negative cash flow of approximately $(248,000) for the
first nine months of 2001 to a negative cash flow of approximately $(701,000)
for the same period in 2002. The current low level of cash flow is mainly
resulting from normal general and administrative costs. The Company continues to
seek new business opportunities; however due to the prolonged depletion of cash
resources, future plugging obligation, payments to EPA and the possibility of an
unfavorable judgment against the Company, prospects for consummating a new
business transaction are limited. Interested parties should be aware that unless
a new business opportunity can be implemented, the Company prospects are
doubtful.
Nine months ended September 30, 2002 as compared with the nine months ended
- --------------------------------------------------------------------------------
September 30, 2001
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The Company has recorded oil and gas sales revenues of $185,000 for the nine
months ended September 30, 2002 versus $246,000 for the same period in 2001. In
addition, Petrominerals realized other income of approximately $347,000 in the
first nine months of 2002. Revenues consisted primarily of insurance
reimbursements for the payment of legal fees resulting from the litigation with
Sole Energy Company, Item 3 of the 10-KSB for the year ended December 31, 2001.
As a result, the Company has recorded total revenues of $532,000 for the nine
months ended September 30, 2002 versus $459,000 for the same period in 2001. Net
realized oil prices decreased from $23.51 per barrel for the nine months ended
September 30, 2001 to $21.80 for the same period in 2002. Operating expenses
were $316,000 for the nine months ended September 30, 2002 versus $387,000 for
the same period in 2001. General and administrative expenses decreased to
$210,000 for the nine months ended September 30, 2002 versus $371,000 for the
same period in 2001. As a result, net loss decreased from $313,000 for the first
nine months of 2001 to $296,000 for the same period in 2002.
BUSINESS REVIEW
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Oil and Gas Segment
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As discussed in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2001, the Company had sold substantially all of its oil and gas
properties in 1998 to an unrelated party. In 1999, the Company initiated a
process to use the proceeds to either purchase additional oil and gas producing
assets or merge with another company. As a result of this process the Company
completed the acquisition of a 25% interest in the Smith Ranch natural gas field
located in southwest Wyoming for approximately $102,000 in cash in September
1999.
Wyoming Venture
- ----------------
In 1999 the Company acquired a 25% working interest in natural gas properties
and prospects on approximately 6,000 acres in Sweetwater and Carbon counties,
Wyoming. The property included a limited amount of conventional gas production
and an extensive coal bed methane gas prospect. As a part of the consideration
for the purchase, the Company participated in the cost of drilling two wells.
Efforts to increase the production of conventional gas have been disappointing;
however test work in the coal beds indicates the presence of substantial gas
reserves. The Company and its partners have concluded that they lack the
financial resources to develop these reserves and the property is being offered
for sale. Management believes that its share of the proceeds of a sale will be
sufficient to cover the carrying value of this asset.
5
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (Continued)
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BUSINESS REVIEW (Continued)
Santa Clarita Area
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As a result of the 1998 sale, the Company retained a 53% working interest in the
Castaic Hills Unit, a 100% working interest in a nearby oil well and an 83.3%
working interest in 2 non-producing oil wells in the nearby Hasley Canyon field.
The Hasley wells are being abandoned. Current net production from the 11 active
wells on these leases is approximately 24 barrels per day (bopd). With oil
prices at historically high levels, the operator has initiated a program of
returning wells to production and enhancement of the water disposal activities.
In addition to the retained working interest, the Company reserved a production
payment which was reserved for, and due to uncertainty over realization, and
currently has $0 carrying value. Under the purchase and sale agreement, this
payment is paid in installments in any month which certain posted prices for oil
produced exceeds $13.50 per barrel. The monthly payment is equal to one-half of
the difference between the weighted average posted price and $13.50, multiplied
by the number of barrels produced. Posted prices for the first half averaged
$20.87 per barrel. Revenue from this note was approximately $135,000 and is
reflected in the statements of operations as other income.
Signal Hill Real Property
- ----------------------------
On September 20, 2001, the Company acquired a 49% interest in certain real
property located in Signal Hill, California. This land was being held for resale
and subject to the seller's clean-up of the surface to Company's satisfaction
from oil storage tanks and other debris. Because clean-up has not been completed
by Seller and because Seller claims that the value of Company stock issued as a
consideration for the purchase has declined in value, the Company and Seller
have agreed to rescind the transaction and restore the consideration paid by
Company. In addition Seller has agreed that should the property sell for more
than the $500,000, during a two-year period following the rescission, any
overage from such a sale which would otherwise be attributable to the 49% shall
be paid to the Company. The carrying amount on the books of the Company is
$250,000 and the estimated market value of the land at December 31, 2001, is
$212,000.
Nasdaq Delisting and Transfer To OTC Bulletin Board
- ---------------------------------------------------
On April 9, 2002, the Company announced that as a result of reserving for
certain EPA liabilities as discussed in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2001, the Company was no longer in
compliance with the Nasdaq Small Cap minimum equity standard. Accordingly, the
Company was notified by the Nasdaq staff, on April 26, 2002, that the Company no
longer complied with the net tangible assets/shareholders' equity/market value
of listed securities/net income requirement and was subject to being delisted.
On May 30, 2002, the Company announced that Company's representatives appeared
before the Nasdaq Hearing Panel to request additional time to return to
compliance with the Nasdaq standards and to complete its due diligence regarding
the acquisition of Hero Nutritional Products, LLC. ("Hero"). The Hearing Panel
rejected the Company's request and delisted the Company's securities effective
July 9, 2002. The Company's securities, however, were immediately eligible to
trade on the OTC Bulletin Board.
Resignation of President and Election of New President
- ------------------------------------------------------
The Board, at its July meeting, accepted with regret the resignation of the
Company's President and Chief Financial Officer, Mr. Morris V. Hodges, tendered
for personal reasons and effective June 30, 2002. Mr. Everett L. Hodges, Vice
President, was elected to serve as President and Chief Financial Officer for the
remaining term. Subsequently, Mr. Morris V. Hodges also resigned as a Director
of the Company for health reasons.
6
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (Continued)
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BUSINESS REVIEW (Continued)
Shareholder Meeting
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Because of concern over the Jury Verdict [See ITEM 1. LEGAL PROCEEDING], the
----------------
Board of Directors is actively considering all of its options including
reorganization under Chapter 11 and has deferred the date for the Annual
Shareholder Meeting until the Company's status is more certain.
ITEM 3 - DISCLOSURE CONTROLS AND PROCEDURES
-------------------------------------
As of September 30, 2002, an evaluation was performed under the supervision and
with the participation of our management, including the CEO/CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including the CEO/CFO,
concluded that our disclosure controls and procedures were effective as of
September 30, 2002.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to
September 30, 2002.
7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Petrominerals announced jury Verdict in Litigation, see form 8-K dated November
7, 2002, though judgment has been stayed pending Company's motions to set aside
verdict and judgment for Company not withstanding verdict, the Board of
Directors is actively considering all of its options including reorganization
under Chapter 11 and has deferred the date for the Annual Shareholder Meeting
until the Company's status is more certain.
Petrominerals Announces Jury Verdict in Litigation. In prior filings the Company
announced that an action was filed against the Company and a former employee,
Daniel H. Silverman, in California, along with several other defendants by Sole
Energy Company ("Sole"). The complaint alleges that the defendants, and each of
them, interfered with Sole's contractual relationship, prospective economic
advantage and fraud. The crux of this matter issued out of letter of intent
negotiations between Sole and Nevadacor on the purchase of Hillcrest Beverly Oil
Corporation. ("HBOC") Nevadacor terminated these negotiations with Sole in
writing prior to Company's offer to purchase HBOC from Nevadacor. However, and
notwithstanding the termination by Nevadacor, Sole joined Petrominerals
Corporation as a Defendant. A motion for summary judgment in favor of Company
was granted; then reversed and is on appeal. An amended complaint naming
additional plaintiffs was set for trial over Company's objection and the judge
rejected Company's motions to stay the action until after the appeal had been
heard and allowed a trial to continue without the presence of necessary
defendants. A jury verdict was entered after a lengthy trial against Company for
a total of $19,257,416.29. Trial Counsel for Company expressed Company's
position in the following words:
"We believe that this outcome is outrageous. We plan the following:
1. We will object to the entry of any judgment until such time as the
pending appeal is resolved. [In response to the company's objection,
----------------------------------------
the trial judge recently ruled that he will not sign the proposed
-----------------------------------------------------------------
judgment until after he has had an opportunity to rule on post-trial
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motions.]
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2. We will move for new trial and/or remittitur [reduction] of the amount
-- -----------
of the judgments.
3. We will move for JNOV[Judgment (for Defendant) Notwithstanding
Verdict]
4. We will appeal on a number of grounds, including, but not limited to:
------------------------------
a. the plaintiffs lack standing having never been parties to the
letter of intent and/or assigning away any such rights
b. there is insufficient evidence of the existence of an
agreement/prospective economic advantage
C. there is no evidence of any wrongful acts by either of the
defendants [meaning Petrominerals Corporation and Petrominerals
employee, Daniel H. Silverman]
d. the lost profits damages are based on speculation (as admitted by
their expert)
We are disappointed, but not swayed regarding the merits of the case. "
ITEM 2. CHANGES IN SECURITIES
---------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
8
ITEM 5. OTHER INFORMATION
-----------------
The Board also determined that the office of Company should be moved to
970 Calle Negocio, San Clemente, CA 92673, Telephone: (949)366-3888 Fax: (949)
366-3889
from: 27241 Burbank, Foothill Ranch, California 92610-2500
ITEM 6. RESIGNATION OF REGISTRANT'S DIRECTORS
-------------------------------------
Following the June 30, 2002, Board Meeting, Mr. Morris V. Hodges resigned as a
Director of the Company for health reasons.
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits - Exhibits 99.1 (Certification of Chief Financial Officer and
Chief Executive Officer)
(b) Reports on Form 8-K - One Form 8-K filing occurred on November 7, 2002 to
announce that the Company rescinded a stock transaction involving the
purchase of land, had an unfavorable judgment in a lawsuit, and had a
change of address.
ITEM 8. CHANGE IN FISCAL YEAR
---------------------
N/A
ITEM 9. SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S
----------------------------------------------------
N/A
9
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETROMINERALS CORPORATION
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(Registrant)
/s/ Everett L. Hodges
- ----------------------------------
Everett L. Hodges
President, CEO & Chief Financial Officer
10