UNITED STATES

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 March 31, 2005

 

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 0-02517

 

**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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes

__

No

X

 

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 May 13, 2005

Common Stock, $0.15625 par value                                                    14,226,947 shares

 

 

 

**TOREADOR RESOURCES CORPORATION**

 

INDEX

 

Page Number

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements (Unaudited)

 

Consolidated Balance Sheets (Unaudited) March 31, 2005 and December 31, 2004

1

Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, 2005 and 2004

2

Consolidated Statements of Cash Flows (Unaudited)Three Months Ended March 31, 2005 and 2004

3

Notes to Consolidated Financial Statements

4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 3. Quantitative and Qualitative Disclosure about Market Risk

19

Item 4. Controls and Procedures

19

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

21

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

21

Item 3. Defaults Upon Senior Securities

21

Item 4. Submission of Matters to a Vote of Security Holders

21

Item 5. Other Information

21

Item 6. Exhibits 

21

Signatures

25

Exhibit Index

26

** **

** **

** **

** **

** **

 

i

 

 

 

**TOREADOR RESOURCES CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

(UNAUDITED)

 

**March 31,**

** **

**December 31,**

 

**2005**

** **

**2004**

**ASSETS**

***(in thousands, except share data)*********

Current assets:

 

 

 

Cash and cash equivalents

$       31,784

 

$           4,977

Accounts and notes receivable

5,336

 

3,230

Income taxes receivable

1,521  

 

— 

Other

2,266 

 

1,187

Total current assets

40,907

 

9,394

 

 

 

 

Oil and gas properties, net, using the successful efforts method of accounting

82,328

 

79,667

 

 

 

 

Investments in unconsolidated entities

1,879

 

1,467

Goodwill

2,487

 

2,487

Other assets

638

 

1,659

Total assets

$       128,239 

 

$      94,674

** **

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued liabilities

$         7,478

 

$        6,634

Current portion of long-term debt

— 

 

37

Income taxes payable

— 

 

1,633

Total current liabilities

7,478

 

8,304

 

 

 

 

Long-term debt

2,000

 

— 

Long-term accrued liabilities

308

 

1,136

Long-term asset retirement obligation

2,271

 

2,331

Deferred tax liability

11,183

 

10,660

Convertible subordinated notes

— 

 

7,500

Convertible debenture

1,485

 

1,485

Total liabilities

24,725

 

31,416

 

 

 

 

Stockholders' equity:

 

 

 

Preferred stock, Series A-1, $1.00 par value, 4,000,000 shares 

 

 

 

authorized; liquidation preference of $1,800,000; 72,000 and  154,000 shares  issued

72

 

154

Common stock, $0.15625 par value, 30,000,000

 

 

 

shares authorized; 14,771,224  and 11,724,146 shares issued

2,308 

 

1,832

Capital in excess of par value

78,271

 

37,523

Retained earnings

25,323

 

24,323

Accumulated other comprehensive income

74

 

1,960

 

106,048 

 

65,792

Treasury stock at cost:

 

 

 

721,027 shares

(2,534) 

 

(2,534) 

Total stockholders' equity

103,514            

 

63,258

Total liabilities and stockholders’ equity

$     128,239

 

$        94,674

 

 

1

 

 

 

**TOREADOR RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(UNAUDITED)

 

**Three Months Ended**

 

**March 31**

 

**2005**

** **

**2004**

 

*(in thousands, except share data)***

Revenues:

* *

* *

* *

Oil and gas sales

$       6,414

 

$       4,258

Loss on commodity derivatives

—

 

(410)

Lease bonuses and rentals

—

 

14

Total revenues

6,414

 

3,862

 

 

 

 

Costs and expenses:

 

 

 

Lease operating

2,120

 

1,924

Exploration and acquisition

374

 

228

Depreciation, depletion and amortization

917

 

816

Reduction in force

—

 

118

General and administrative

1,804

 

1,403

Total costs and expenses

5,215

 

4,489

 

 

 

 

Operating income (loss)

1,199

 

(627)

 

 

 

 

Other income (expense)

 

 

 

Equity in (earnings) losses of unconsolidated investments

89

 

(68)

Loss on sale of properties and other assets

—

 

(27)

Foreign currency exchange gain 

13

 

4,899

Other income 

245

 

163

Interest income (expense)

69

 

(996)

Total other income

416

 

            3,971

 

 

 

 

Income from continuing operations before income taxes

1,615

 

3,344

Provision (benefit) for income taxes

62

 

(400)

Income from continuing operations, net of income taxes

1,553

 

3,744

Income from discontinued operations, net of income taxes

10

 

18,242

Net income

1,563

 

21,986

Less: dividends on preferred shares

563

 

180

Net income applicable to common shares

$       1,000

 

$     21,806

 

 

 

 

Basic income per share

 

 

 

Continuing operations

$         0.08

 

$         0.38

Discontinued operations

—

 

 1.93 

 

$         0.08

 

$         2.31

 

 

 

 

Diluted income per share

 

 

 

Continuing operations

$         0.08                       

 

$         0.32                       

Discontinued operations

—

 

 1.52

 

$         0.08

 

$         1.84

Weighted average shares outstanding

 

 

 

Basic

12,801

 

9,435

Diluted

14,142

 

11,966

 

 

 

2

 

 

 

**TOREADOR RESOURCES CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(UNAUDITED)

 

**Three  Months EndedMarch 31**

 

**2005**

** **

**2004**

 

*(in thousands)***

Cash flows from operating activities:

 

 

 

Net income

$       1,563

 

$     21,986

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

Depreciation, depletion and amortization

917

 

 835

Gain on sale of properties 

—

 

(28,745)

Dry holes and abandonments

(5)

 

—

Unrealized losses on commodity derivatives

—

 

 96

        Equity in (earnings) losses of unconsolidated investments

(89)

 

 68

Realized gains on foreign currency transactions

(13)

 

(4,778)

Decrease (increase) in operating assets:

 

 

 

Accounts and notes receivable

(2,210)

 

787

Other current assets

(1,124)

 

643

Other assets

(68)

 

309

Increase (decrease) in operating liabilities:

 

 

 

Accounts payable and accrued liabilities

 265

 

(2,487)

Income taxes payable

(3,154)

 

9,500

Deferred taxes

1,719

 

 12

Net cash used in operating activities

(2,199)

 

(1,774)

 

 

 

 

Cash flows from investing activities:

 

 

 

Expenditures for properties and equipment

(6,210)

 

(1,906)

Proceeds from the sale of properties and equipment

—

 

41,954

Investment in unconsolidated subsidiaries

(323) 

 

 (289)

Net cash provided by (used in) investing activities

(6,533)

 

39,759

 

 

 

 

Cash flows from financing activities:

 

 

 

Borrowings of long-term debt

2,000

 

—

Payments of long-term debt

(37)

 

(28,436)

Proceeds from issuance of stock, net

33,221

 

 361

Payment of preferred dividends

(65)

 

 (180)

Net cash provided by (used in) financing activities

35,119

 

 (28,255)

Net increase in cash and cash equivalents

26,387

 

 9,730

Effects of foreign currency translation on cash and cash equivalents

              420

 

             (125)

Cash and cash equivalents, beginning of period

4,977

 

2,819

Cash and cash equivalents, end of period

$     31,784

 

$     12,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

 

NOTE 1 – BASIS OF PRESENTATION

 

You should read these consolidated unaudited financial statements along with the consolidated financial statements and notes in the 2004 Annual Report on Form 10-K of Toreador Resources Corporation (the “Company, Toreador, we, us, our”) filed with the Securities and Exchange Commission. In our opinion, the information furnished herein reflects all normal nonrecurring adjustments necessary for a fair presentation of the results of these interim periods.  

 

Unless otherwise noted, amounts reported in tables are in thousands, except per share and product per unit data.

 

NOTE 2 – PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries.  The equity method of accounting is used for companies and other investments in which we have significant influence.  All intercompany profits, transactions and balances have been eliminated.

 

NOTE 3 – DISCONTINUED OPERATIONS

 

In January 2004, we sold our U.S. mineral and royalty assets to Black Stone Acquisitions Partners I, L.P. (the “Royalty Sale”), retaining all of our working-interest properties.  From the approximate $45.0 million cash consideration that we received, we discharged our outstanding credit facilities in full.

 

NOTE 4 – COMPREHENSIVE INCOME

 

The following table presents the components of comprehensive income (loss), net of related tax:

 

** **

**Three Months Ended  March 31,**

 
** **

**2005**

**2004**

 
 

Net income 

$       1,000

$      21,806

 
Foreign currency translation adjustment

(1,886)

(4,806) 

Change in fair value of available-for-sale securities

—

(3)

Comprehensive income (loss)

$        (886)

$      16,997

 

 

4

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

 

 

NOTE 5 – ASSET RETIREMENT OBLIGATIONS

 

We apply Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”).  SFAS 143 requires entities to record the fair value of a liability for a legal obligation to retire an asset in the period in which the liability is incurred if a reasonable estimate of fair value can be made.  No wells were abandoned in the quarter ended March 31, 2005 or the quarter ended March 31, 2004.  Changes in asset retirement obligations during the three months ended March 31, 2005 and 2004 were as follows:

 

** **

** **

**2005**

** **

**2004**

Asset retirement obligation January 1

 

$     2,331

 

$     1,698

Asset retirement accretion expense

 

35

 

26

Less: plugging cost

 

—

 

—

Less: property sold

 

—

 

—

Foreign exchange gain/loss

 

( 95)

 

—

Asset retirement obligation at March 31

 

$    2,271

 

$    1,724

 

 

NOTE 6 – STOCK BASED COMPENSATION

 

Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement 123”), encourages, but does not require, the adoption of a fair value-based method of accounting for employee stock-based transactions.  We have elected to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“Opinion 25”), and related interpretations, in accounting for our employee stock-based compensation plans.  Under Opinion 25, compensation cost is measured as the excess, if any, of the quoted market price of our 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 Statement 123, our net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts listed below:

 

** **

** **

**Three Months EndedMarch 31,**

** **

** **

** **

**2005**

** **

**2004**

** **

 

 

*(in thousands, except share data)***

 

Net income, applicable to common shares, as reported

 

$     1,000

 

$    21,806

 

Basic earnings  per share reported

 

0.08

 

2.31

 

Diluted earnings  per share reported

 

0.08

 

1.84

 

Stock-based compensation costs under the intrinsic value method included in net income reported, net of related tax

 

—

 

—

 

Pro-forma stock-based compensation costs under the fair value method, net of related tax

 

26

 

68

 

Pro-forma income applicable to common shares, as under the fair-value method

 

974

 

21,738

 

Pro-forma basic earnings per share under the fair value method

 

0.08

 

2.30

 

Pro-forma diluted earnings per share under the fair value method

 

0.07  

 

1.83  

 

 

5

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

 

 

NOTE 6 – STOCK BASED COMPENSATION (Continued)

 

In December 2004, the FASB revised Financial Accounting Standard No. 123, Accounting for Stock Based Compensation.  This statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance.  This statement establishes standards for the accounting of transactions in which an entity exchanges its entity instruments for goods or services.  This statement focuses primarily on the accounting for transactions in which an entity obtains employee services in exchange for its equity instruments.  The statement is effective for interim quarters beginning after January 1, 2006.  We do not expect that the adoption of this statement will have a significant impact on our future results of operations or financial position.

 

NOTE 7 – NEW ACCOUNTING PRONOUNCEMENTS

 

In April 2005, the FASB issued Staff Interpretation No. 19-1 (“FSP 19-1”) Accounting for Suspended Well Costs, which provides guidance on the accounting for exploratory well costs and proposes an amendment to FASB Statement No. 19 (“FASB 19”), Financial Accounting and Reporting by Oil and Gas Producing Companies.  The guidance in FSP 19-1 applies to enterprises that use the successful efforts method of accounting as described in FASB 19.  The guidance in FSP 19-1 will not impact our consolidated financial position, results of operations, or cash flows.

 

NOTE 8 – GEOGRAPHIC OPERATING SEGMENT INFORMATION

 

We have operations in only one industry segment, the oil and gas exploration and production industry. We are structured along geographic operating segments or regions. As a result, we have reportable operations in the United States, France, Turkey and Romania.  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. 

 

 

 

 

 

 

 

6

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

 

****

 

**Three Months Ended March 31, 2005**

 

**United**

** **

** **

** **

** **

** **

** **

** **

 

**States**

** **

**France**

** **

**Turkey**

** **

**Romania**

** **

**Total**

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

Revenues:

 

 

 

 

 

 

 

 

 

    Oil and gas sales

$  1,521

 

$  4,291

 

$  602

 

   —

 

$  6,414

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Lease operating

450 

 

1,500 

 

170 

 

   —

 

2,120 

Exploration and acquisition

301 

 

   —

 

73 

 

   —

 

374 

Depreciation, depletion and 

 

 

 

 

 

 

 

 

 

amortization

301 

 

457 

 

156 

 

3 

 

917 

General and administrative

1,310 

 

240

 

254 

 

   —

 

1,804 

Total costs and expenses

2,362 

 

2,197 

 

653 

 

3 

 

5,215 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

(841)

 

2,094 

 

(51)

 

(3)

 

1,199 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Equity in gains of

 

 

 

 

 

 

 

 

 

unconsolidated investments

89 

 

   —

 

   —

 

   —

 

89 

Gain on sale of properties

   —

 

   —

 

   —

 

   —

 

   —

Foreign currency exchange gain 

   —

 

13 

 

   —

 

   —

 

13 

Other income

97   

 

160 

 

(12) 

 

   —

 

245 

Interest expense

(121)

 

197

 

(7)

 

   —

 

69

Total other income (expense)

65   

 

370 

 

(19) 

 

   — 

 

416 

 

 

 

 

 

 

 

 

 

 

Income (loss) before 

 

 

 

 

 

 

 

 

 

income tax

(776)

 

2,464 

 

(70)

 

(3)

 

1,615 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

(348)

 

410 

 

   —

 

   —

 

62 

Income (loss) from continuing operations

(428)

 

2,054 

 

(70)

 

(3)

 

1,553 

Income from discontinued operations,

 

 

 

 

 

 

 

 

(net of tax) (1)

      10 

 

   —

 

   —

 

   —

 

10 

Net income (loss)

  $         (418)  

 

$     2,054 

 

  $     (70)

 

$      (3)

 

$        1,563 

Dividends on preferred shares

$           563 

 

   —

 

    —

 

    —

 

$           563 

Total assets (2)

$     129,949   

 

$   42,617 

 

$   9,409 

 

$     176

 

$     128,239

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

All results relating to the mineral and royalty properties are required to be disclosed as discontinued operations. Please see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Results of Operations” for a more detailed description.

(2)  Total consolidated assets reflect the effect of intersegment eliminations.

 

7

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

 

 

 

**Three Months Ended March 31, 2004**

 
 

** **

** **

** **

** **

** **

** **

** **

** **

 

**United States**

** **

**France**

**Turkey******

**Romania******

**Total******

 
Revenues:

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

 
Oil and gas sales

 

$       1,487 

 

$     2,319 

 

$       452 

 

—

 

$           4,258 

 
Loss on commodity derivatives

 

(410)

 

—      

 

—      

 

—

 

(410)

 
Lease bonuses and rentals

 

14 

 

—      

 

—      

 

—

 

14

 
Total revenues

 

1,091 

 

2,319 

 

452 

 

—

 

3,862 

 
 

 

 

 

 

 

 

 

 

 

 

 
Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 
Lease operating

 

442 

 

1,298 

 

184 

 

—

 

1,924 

 
Exploration and acquisition

 

182 

 

—      

 

46 

 

—

 

228 

 
Depreciation, depletion and 

 

 

 

 

 

 

 

 

 

 

 
amortization

 

375 

 

281 

 

160 

 

—

 

816 

 
General and administrative

 

1,162 

 

196 

 

163 

 

—

 

1,521 

 
Total costs and expenses

 

2,161 

 

1,775 

 

553 

 

—

 

4,489 

 
 

 

 

 

 

 

 

 

 

 

 

 
Operating income (loss)

 

(1,070)

 

544 

 

(101)

 

—

 

(627)

 
 

 

 

 

 

 

 

 

 

 

 

 
Other income (expense)

 

 

 

 

 

 

 

 

 

 

 
Equity in losses of

 

 

 

 

 

 

 

 

 

 

 
unconsolidated investments

 

(68)

 

—      

 

—      

 

—

 

(68)

 
Loss on sale of properties

 

(27)

 

—      

 

—      

 

—

 

(27)

 
Foreign currency exchange gain 

 

—      

 

4,899 

 

—      

 

—

 

4,899 

 
Other income (expense)

 

22 

 

142 

 

(1)

 

—

 

163 

 
Interest expense

 

37 

 

(1,006)

 

(27)

 

—

 

(996)

 
Total other income (expense)

 

  (36) 

 

4,035 

 

(28) 

 

—

 

3,971

 
 

 

 

 

 

 

 

 

 

 

 

 
Income (loss) before 

 

 

 

 

 

 

 

 

 

 

 
income tax

 

(1,106)

 

4,579 

 

(129)

 

—

 

3,344 

 
 

 

 

 

 

 

 

 

 

 

 

 
Benefit for income taxes

 

(400)

 

—     

 

—      

 

—

 

(400)

 
Income (loss) from continuing operations

 

(706)

 

4,579 

 

(129)

 

—

 

3,744 

 
Income from discontinued operations, net of income tax (1)

 

18,242 

 

—     

 

—      

 

—

 

18,242 

 
Net income (loss)

 

$    17,536 

 

$     4,579 

 

$      (129)

 

$               —

 

$   21,986 

 
Dividends on preferred shares

 

$         180 

 

—      

 

—      

 

—

 

$        180

 
Total assets (2)

 

$    98,376 

 

$    28,066

 

$   12,049 

 

$               —

 

$        138,491 

 
 

 

 

 

 

 

 

 

 

 

 

 
 

 

(1)

All results relating to the mineral and royalty properties are required to be disclosed as discontinued operations. Please see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Results of Operations” for a more detailed description.

(2)  Total consolidated assets reflect the effect of intersegment eliminations.

 

8

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

 

 

NOTE 9 – LONG-TERM DEBT

 

Revolving Line of Credit with Natexis Banques Populaires

 

On December 23, 2004, we entered into a five-year $15.0 million reserve-based borrowing facility with a French lender to finance the development of our existing French fields, acquisitions of new fields, general working capital and our corporate purposes. The facility bears interest at a floating rate of 2.25-2.75% above LIBOR (2.84% at March 31, 2005) depending on the principal outstanding. The facility is collateralized by certain of our French assets, including contracts relating to our rights and interests in our French fields, our direct and indirect equity interests in certain of our subsidiaries and payments received from the sale of our French production. Toreador and certain of its U.S. and French subsidiaries have each guaranteed the obligations under the facility.  This facility will require monthly interest payments until December 23, 2009, at which time all unpaid principaland interest are due.  The $15.0 million facility contains various affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, the sale of assets, change of control and management, limitations on the distribution of dividends on stock and require us to meet certain financial requirements. Specifically, we must maintain an interest cost ratio of not less than 4.00 to 1.00, an indebtedness ratio of not less than 1.00 to 1.00, asset life cover ratio of not less than 1.25 to 1.00, a loan life cover ratio equal to or greater than 1.15 to 1.00 and a debt service coverage ratio equal to or greater than 1.10 to 1.00.  As of March 31, 2005, we were in compliance with all covenants and there were no outstanding balances.

 

Revolving Line of Credit with Texas Capital Bank, N.A.

 

On December 30, 2004, we entered into a five-year $25.0 million reserve-based borrowing facility with Texas Capital Bank, N.A. in order to finance the development and acquisition of oil and natural gas interests both domestically and internationally and for working capital purposes. The facility bears interest at a rate of prime less 0.5% (5.75% at March 31, 2005) and is collateralized by our domestic working interests. The borrowers under this facility are two of our domestic subsidiaries, and Toreador has guaranteed the obligations.  At March 31, 2005, we had $2 million outstanding under this facility and had approximately $1.8 million available for borrowings. The outstanding balance as of March 31, 2005 was repaid in April. A letter of credit for approximately $1 million was issued on our behalf in late April and is currently in force and outstanding.

 

The $25.0 million facility requires monthly interest payments until January 1, 2019 at which time all unpaid principal and interest are due.  The $25 million facility contains various affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, the sale of assets, change of control and management and require us to meet certain financial requirements. Specifically, we must maintain a current ratio of 1.25 to 1.00 (exclusive of amounts due under revolving credit arrangements) and an interest coverage ratio of not less than 3.00 to 1.00. As of March 31, 2005, we were in compliance with all covenants. 

 

Convertible Subordinated Notes

 

In July 2004, we sold to certain institutional investors pursuant to a private offering $7.5 million aggregate principal amount of 7.85% convertible subordinated notes due June 30, 2009. We used the net proceeds of the offering to accelerate our oil development program in France's Paris Basin and for general corporate purposes. The 7.85% convertible subordinated notes due June 30, 2009 bore interest at 

 

9

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

the rate of 7.85% per annum and were convertible into shares of Toreador common stock at a conversion price of $8.20 per share. Toreador had the right to cause the 7.85% convertible subordinated notes due June 30, 2009 to be converted on or after February 22, 2005, if the closing price of Toreador's common stock was greater than $14.35 for the 30 consecutive trading days prior to the date of Toreador's conversion notice. On January 13, 2005, we offered the option to the holders of the 7.85% convertible subordinated notes due June 30, 2009 to exchange their notes for the aggregate number of shares of our common stock issuable upon conversion of each of their notes and that portion of interest payable pursuant to the notes that would otherwise have been payable to the holders through February 22, 2005 absent conversion of the notes prior to such date. On or prior to January 20, 2005, all of our 7.85%convertible subordinated notes due June 30, 2009 were exchanged for an aggregate of 914,634 shares of our common stock and an aggregate cash payment (in lieu of interest) of approximately $85,000.

 

Convertible Debenture

 

Prior to the acquisition of Madison Oil Company, Madison Oil Company was party to a convertible debenture in the amount of approximately $2.2 million payable to PHD Partners LP and due on March 31, 2006. The general partner of PHD Partners LP is a corporation wholly-owned by David M. Brewer, a director and significant stockholder of Toreador. The original debenture bore interest at 10% per annum. As of March 31, 2004, the debenture was amended and restated to bear interest at 6% per annum, eliminate Madison Oil Company's right under certain circumstances to force a conversion of the principal into shares of Toreador common stock and eliminate Madison Oil Company's ability to repay principal prior to maturity. At the holder's option, the second amended and restated convertible debenture can be converted into Toreador common stock at a conversion price of $6.75 per share. At March 31, 2005,the outstanding principal amount of the second amended and restated convertible debenture was approximately $1.5 million. We have 219,962 shares of common stock reserved for issuance related to the conversion of the second amended and restated convertible debenture.  The fair value of the securities issuable under the original conversion terms amounted to $57,000 and is included in interest expenseon our statement of operations for the three months ended March 31, 2005.

 

NOTE 10 – LITIGATION

 

*Turkish Registered Capital*.  Under the existing Petroleum Law of Turkey, capital that is invested by foreign companies in projects such as oil and natural-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 the 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.  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. Theappellate court reversed the lower court’s ruling. We have appealed the ruling of the appellate court and are still waiting on a final determination. We have also appealed the case to the European Court. We cannot predict the outcome of this matter.  

 

*Other.*  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.

 

 

10

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

 

NOTE 11 – EARNINGS PER COMMON SHARE

 

The following table reconciles the numerators and denominators of the basic and diluted earnings per ordinary share computation:

 

 

**Three Months Ended**

** **

 

 

**March 31,**

** **

 

 

**2005**

** **

**2004**

** **

 

 

***(in thousands, except share data)*********

** **

Basic earnings per share:

 

 

 

 

 

Numerator

 

 

 

 

 

Income  from continuing operations, net of income tax

 

$                  1,553   

 

$                3,744   

 

Income from discontinued operations, net of income tax

 

10   

 

18,242   

 

Net income 

 

1,563   

 

21,986   

 

Less: dividends on preferred shares

 

563   

 

180   

 

Net income applicable to common shares

 

$                 1,000 

 

$               21,806 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

Common shares outstanding

 

    12,801 

 

9,435 

 

 

 

 

 

 

 

Basic earnings per share from:

 

 

 

 

 

Continuing operations

 

$                   0.08   

 

$                   0.38   

 

Discontinued operations

 

—

 

1.93   

 

Net income per share applicable to 

 

 

 

 

 

common shares

 

$                  0.08 

 

$                   2.31 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Numerator

 

 

 

 

 

Net income from continuing operations, net of income tax

 

$                  1,553        

 

$                3,744        

 

Income from discontinued operations, net of income tax

 

10   

 

18,242   

 

Net income 

 

1,563  

 

21,986  

 

Less: dividends on preferred shares

 

563   

 

N/A   

(1)

Plus: interest on convertible debt

 

54 

 

—

 

Net income applicable to common shares

 

$                 1,054  

 

$               21,986  

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

Common shares outstanding

 

12,801 

 

9,435 

 

Common stock options and warrants

 

948   

 

211   

 

Conversion of preferred shares

 

—

(2)

2,000

 

Conversion of notes payable

 

173   

 

—   

 

Conversion of debentures

 

220 

 

320

 

Diluted shares outstanding

 

14,142 

 

11,966 

 

 

 

 

 

 

 

Diluted earnings per share from:

 

 

 

 

 

Continuing operations

 

$                   0.08   

 

$                   0.32   

 

Discontinued operations

 

—

 

1.52 

 

Net income per share applicable to 

 

 

 

 

 

common shares

 

$                   0.08   

 

$                    1.84   

 

                          

(1)

Since we assumed that preferred shares were converted into common shares, there would have been no preferred dividends paid.

(2)

Preferred shares were anti-dilutive for the three months ended March 31, 2005.

 

11

 

**TOREADOR RESOURCES CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(unaudited)

 

 

 

 

NOTE 12 – CHANGES IN EQUITY

 

In July 2004, we sold to certain institutional investors pursuant to a private offering $7.5 million aggregate principal amount of 7.85% convertible subordinated notes due June 30, 2009. We used the net proceeds of the offering to accelerate our oil development program in France's Paris Basin and for general corporate purposes. The 7.85% convertible subordinated notes due June 30, 2009 bore interest at the rate of 7.85% per annum and were convertible into shares of Toreador common stock at a conversion price of $8.20 per share. We had the right to cause the 7.85% convertible subordinated notes due June 30, 2009 to be converted on or after February 22, 2005, if the closing price of our common stock was greater than $14.35 for the 30 consecutive trading days prior to the date of Toreador's conversion notice. On January 13, 2005, we offered the option to the holders of the 7.85%convertible subordinated notes due June 30, 2009 to exchange their notes for the aggregate number of shares of our common stock issuable upon conversion of each of their notes and that portion of interest payable pursuant to the notes that would otherwise have been payable to the holders through February 22, 2005 absent conversion of the notes prior to such date. On or prior to January 20, 2005, all of our 7.85% convertible subordinated notes due June 30, 2009 were exchanged for an aggregate of 914,634 shares of our common stock and an aggregate cash payment (in lieu of interest) of approximately $85,000.   The fair value of the securities issued in excess of the fair value of the securities issuable under the original conversion terms amounted to $57,000 and is included in interestexpense on our statement of operations for the three months ended March 31, 2005.

 

In February 2005, the Company sold 1,437,500 shares of its common stock pursuant to a public offering at a price of $24.25 per share. The sale resulted in net proceeds of approximately $32.4 million. The shares sold include 187,500 shares of common stock purchased by Morgan Keegan & Company, Inc., the underwriter of the offering, to cover over-allotments in connection with the offering. Toreador intends to use the net proceeds from the sale primarily to fund its 2005 capital expenditure budget and also for general corporate purposes. 

 

Additionally, in February 2005 the Company offered to each holder of its Series A-1 Convertible Preferred Stock (the “Preferred Stock”) the opportunity to convert such shares of Preferred Stock into shares of common stock of the Company pursuant to the terms of conversion of the Preferred Stock. In addition the Company offered additional shares of common stock as an inducement for the holders to convert the Preferred Stock at a time when the Company could not mandatorily redeem the Preferred Stock and in lieu of dividends that would otherwise accrue until such mandatory redemption date. On February 22, 2005, pursuant to this offer, the Company issued 389,754 shares of common stock (14,754 inducement shares) to James R. Anderson, 129,918 shares of common stock (4,918 inducement shares) to Karen Anderson, and 12,992 shares of common stock (492 inducement shares) to Roger A.Anderson. All shares issued upon conversion were issued at a conversion price of $4.00 per share.   The fair value of the securities issued in excess of the securities issuable under the original conversion terms amounted to$498,000 and is included in preferred dividends on our statement of operations for the three months ended March 31, 2005.

 

 

12

 

 

 

**ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION         AND RESULTS OF OPERATIONS**

 

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report may constitute “forward-looking” statements for purposes of the Securities Act of 1933, 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 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,” andsimilar expressions are intended to be among the statements that identify forward-looking statements. Various factors that could cause the actual results, performance or achievements 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 caption 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.

 

EXECUTIVE OVERVIEW
 

We are an independent international energy company engaged in oil and natural gas exploration, development, production, leasing and acquisition activities.  Our strategy is to increase our oil and natural gas reserves through a balanced combination of exploratory drilling, development and exploration projects and acquisitions.  We primarily focus on international exploration activities in countries where we can establish large acreage positions.  In addition, we target our operations in countries that we believe have stable governments, have attractive fiscal policies and are net-importers of oil and natural gas.

 

We currently hold interests in permits granting us the right to explore and develop oil and natural gas properties in the Paris Basin, France; onshore and offshore Turkey; onshore Romania; and offshore Trinidad, West Indies.  We also own various working-interest properties primarily in Texas, Kansas, New Mexico, Louisiana and Oklahoma.

 

Income applicable to common shares for the first quarter 2005 was $1.0 million, or $0.08 per diluted share, compared with income applicable to common shares of $21.8 million, or $1.84 per diluted share for the first quarter 2004.  Dividends for the first quarter 2005 included a non-cash charge of $498,000, or $0.04 per diluted share representing the value of common shares issued as an inducement for the conversion of 82,000 shares of Series A-1 Convertible Preferred Stock.  The first quarter 2004 income applicable to common shares included a gain on the sale of our U.S. mineral and royalty portfolio of $18 million and a foreign currency exchange gain of $4.9 million.

 

Operating income for the first quarter 2005 was $1.2 million as compared to an operating loss for the first quarter 2004 of $627,000. Lease operating expenses for the first quarter 2005 were $2.1 million as compared to $1.9 million for the first quarter 2004 due to increased workover expenses in France.  

 

Oil and natural gas production for the first quarter 2005 was 149,000 barrels of oil equivalent, as compared to 145,000 barrels of oil equivalent for the first quarter 2004.  The average realized price in the first quarter 2005 was $43.49 per barrel, a 48% increase over the first quarter 2004 average realized price of $29.18 per barrel.  The average realized natural gas price in the first quarter 2005 was $6.17 per thousand cubic feet, a 6% increase over the first quarter 2004 average realized price of $5.83 per thousand cubic feet.

 

13

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

This section should be read in conjunction with Notes 9 and 12 in the Notes to Consolidated Financial Statements included in this filing.

 

Liquidity

 

For the first three months of 2005, operating income was $1.2 million with an operating loss of $627,000 for the year-ago period. We expect that cash flow provided by operating activities for the remaining nine months of 2005 will be approximately $10 million.

 

We anticipate that our 2005 capital expenditures budget, excluding any acquisitions we may make, will be approximately $46.0 million. Capital expenditures through March 31, 2005 were $6.2 million. We intend to fund our capital expenditures budget from operating cash flow and cash currently on hand.  We anticipate spending most of our 2005 capital budget on prospects in our foreign inventory.  We will limit our activity in France to development drilling on our existing properties and exploration work on the Courtenay permit.  In Turkey, we anticipate continuing exploration and development work on several projects, including plans to drill three to eight wells in the western Black Sea. In Romania we plan to re-enter six wells and drill up to two development wells on our Fauresti permit.

 

We expect to receive future funds through production from existing producing properties and new producing properties that may be discovered through exploration, along with development properties added to existing fields. In addition to the properties described above, we also may acquire other producing oil and gas assets, which could require the use of debt or other forms of financing. 

 

Senior Debt

 

On December 23, 2004 we entered into a five-year $15.0 million reserve-based borrowing facility with a French lender to finance the development of our existing French fields, acquisitions of new fields, general working capital and our corporate purposes. The facility bears interest at a floating rate of 2.25-2.75% above LIBOR depending on the principal outstanding. The facility is collateralized by certain of our French assets, including contracts relating to our rights and interests in our French fields, our direct and indirect equity interests in certain of our subsidiaries and payments received from the sale of our French production. Toreador and certain of its U.S. and French subsidiaries have each guaranteed the obligations under the facility. This facility will require monthly interest payments until December 23, 2009, at which time all unpaid principal and interest are due. Underthe $15.0 million facility, at March 30, 2005, there were no amounts outstanding.    The $15.0 million facility contains various affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, the sale of assets, change of control and management, limitations on the distribution of dividends on stock and require us to meet certain financial requirements. Specifically, we must maintain an interest cost ratio of not less than 4.00 to 1.00, an indebtedness ratio of not less than 1.00 to 1.00, asset life cover ratio of not less than 1.25 to 1.00, a loan life cover ratio equal to or greater than 1.15 to 1.00 and a debt service coverage ratio equal to or greater than 1.10 to 1.00.  

 

On December 30, 2004, we entered into a five-year $25.0 million reserve-based borrowing facility with a U.S. lender in order to finance the development and acquisition of oil and natural gas interests both domestically and internationally and for working capital purposes. The facility bears interest at a rate of prime less 0.5% and is collateralized by our domestic working interests.  At March 31, 2005, there was $2 million outstanding under this facility and borrowings of approximately $ 1.3 million were 

 

14

 

 

available. The $25.0 million facility was paid in full in April 2005 and we currently have no outstanding balance. The $25.0 million facility contains various affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, the sale of assets, change of control and management and require us to meet certain financial requirements. Specifically, we must maintain a current ratio of 1.25 to 1.00 (exclusive of amounts due under revolving credit arrangements) and an interest coverage ratio of not less than 3.00 to 1.00. As of March 31, 2005, we were in compliance with all covenants.

 

Preferred Stock

 

Toreador had 154,000 shares of nonvoting Series A-1 Convertible Preferred Stock outstanding at December 31, 2004. On February 22, 2005, 82,000 shares of Series A-1 Convertible Preferred Stock were exchanged for an aggregate of 532,664 shares of our common stock.  The Company issued 389,754 shares of common stock (14,754 inducement shares) to James R. Anderson, 129,918 shares of common stock (4,918 inducement shares) to Karen Anderson, and 12,992 shares of common stock (492 inducement shares) to Roger A. Anderson. As of March 31, 2005, there were 72,000 shares of Series A-1 Convertible Preferred Stock outstanding. 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 (conversion would amount to 450,000 Toreador common shares). The Series A-1 Convertible Preferred Stock accrues dividends at an annualrate of $2.25 per share payable quarterly in cash. At 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-1 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.

 

Convertible Debentures/Notes

 

Prior to the acquisition of Madison Oil Company, Madison Oil Company was party to a convertible debenture in the amount of approximately $2.2 million payable to PHD Partners LP and due on March 31, 2006. The general partner of PHD Partners LP is a corporation wholly-owned by David M. Brewer, a director and significant stockholder of Toreador. The original debenture bore interest at 10% per annum. As of March 31, 2004, the debenture was amended and restated to bear interest at 6% per annum, eliminate Madison Oil Company's right under certain circumstances to force a conversion of the principal into shares of Toreador common stock and eliminate Madison Oil Company's ability to repay principal prior to maturity. At the holder's option, the second amended and restated convertible debenture can be converted into Toreador common stock at a conversion price of $6.75 per share. At March 31, 2005,the outstanding principal amount of the second amended and restated convertible debenture was approximately $1.5 million. We have 219,962 shares of common stock reserved for issuance related to the conversion of the second amended and restated convertible debenture.    Interest paid to PHD Partners LP in relation to this debenture amounted to approximately $22,000 in the first quarter of 2005.

 

In July 2004, we sold to certain institutional investors pursuant to a private offering $7.5 million aggregate principal amount of 7.85% convertible subordinated notes due June 30, 2009. We used the net proceeds of the offering to accelerate our oil development program in France's Paris Basin and for general corporate purposes. The 7.85% convertible subordinated notes due June 30, 2009 bore interest at the rate of 7.85% per annum and were convertible into shares of Toreador common stock at a conversion price of $8.20 per share. Toreador had the right to cause the 7.85% convertible subordinated notes due June 30, 2009 to be converted on or after February 22, 2005, if the closing price of Toreador's common stock was greater than $14.35 for the 30 consecutive trading days prior to the date of Toreador's conversion notice. On January 13, 2005, we offered the option to the holders of the 7.85%convertible subordinated notes due June 30, 2009 to exchange their notes for the aggregate number of shares of our common stock issuable upon conversion of each of their notes and that portion of interest payable pursuant to the notes that would otherwise have been payable to the holders through February 22, 2005 absent conversion of the notes prior to such date. On or prior to January 20, 2005, all of our 7.85% 

 

15

 

 

convertible subordinated notes due June 30, 2009 were exchanged for an aggregate of 914,634 shares of our common stock and an aggregate cash payment (in lieu of interest) of approximately $85,000.

 

Dividend and Interest Requirements

 

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.  The terms of 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-1 Convertible Preferred Stock.

 

Dividends on our Series A-1 Convertible Preferred Stock are paid quarterly. Cash dividends totaling $65,000 and $180,000 were paid for the three-month periods ended March 31, 2005 and 2004, respectively.  The Company also issued a common stock dividend for an aggregate of 20,164 shares of common stock as inducement to convert 82,000 shares our Series A-1 Convertible Preferred Stock.  These shares were valued at approximately $498,000 at the time of issuance.  Future dividends will be paid in cash at the rate of $0.5625 per share per full calendar quarter.  

 

The terms of the $15.0 million facility limit our ability to pay dividends on our common stock to twenty-five percent (25%) of net profits (as defined in the facility agreement) less an amounts paid on our preferred stock.

 

 

16

 

 

 

Contractual Obligations

 

We believe that sufficient funds will be available from operating cash flow, cash on hand and future potential financing sources (which may include senior debt, subordinated debt and/or equity) to meet anticipated capital budget requirements and fund potential acquisitions in 2005. The following table sets forth our contractual obligations in thousands at March 31, 2005 for the periods shown: 

 

 

 

 

Due Within

 

Total

 

1 Year

 

2 – 3 Years

 

4 – 5 Years

 

After 5 Years

Debt

$                3,573

 

$                  1,573

 

$                    —

 

$                 —

 

$              2,000

Leases

865

 

   377

 

   488

 

 

 

— 

Total

$                4,438

 

$                  1,950

 

$                    488

 

$                  —

 

$              2,000 

 

CRITICAL ACCOUNTING POLICIES

 

PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries.  The equity method of accounting is used for companies and other investments in which we have significant influence.  All intercompany profits, transactions, and balances have been eliminated. 

 

OIL & NATURAL GAS PROPERTIES

 

We follow the successful efforts method of accounting for our oil and natural gas properties**.**Under this method of accounting, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves.  If an exploratory well has not found proved reserves, these costs plus the costs of drilling the well are expensed.  The costs of development wells are capitalized, whether productive or nonproductive.  Geological and geophysical costs on exploratory prospects and the costs of carrying and retaining unproved properties are expensed as incurred.  An impairment allowance is provided to the extent that capitalized costs of unproved properties, on a property-by-property basis, are considered not to be realizable.  An impairment loss is recordedif the net capitalized costs of proved oil and natural gas properties exceed the aggregate undiscounted future net cash flows determined on a property-by-property basis.  The impairment loss recognized equals the excess of net capitalized costs over the related estimated discounted future net cash flows, determined on a property-by-property basis.  As a result of the foregoing, our results of operations for any particular period my not be indicative of the results that could be expected over longer periods.

 

At December 31, 2004, we had capitalized  exploratory  well costs,  pending the  determination  of proved reserves of approximately$8.9 million  associated with the Ayazli #1 and Calgan #2 wells in Turkey.  As of March 31, 2005,  these costs amount to  approximately$10.7 million. 

 

OIL & NATURAL GAS RESERVES

 

Engineering estimates of our oil and natural gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information.  There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and natural gas reserves can be designated as “proved.”  Proved reserve estimates are updated at least annually and take into account recent production and technical information about each field.  In addition, as prices and cost levels change from year to year, the estimate of proved reserves also changes.  This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.

 

Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depletion expense and impairment expense and in disclosing the supplemental standardized measure of discounted future net cash flows related to proved oil and natural gas properties.  Depletion rates are determined based on estimated proved reserve quantities (the denominator) and capitalized costs 

 

17

 

 

of producing properties (the numerator).  Producing properties’ capitalized costs are amortized based on the units of oil or natural gas produced.  Therefore, assuming all other variables are held constant, an increase in estimated proved reserves decreases our depreciation, depletion, and amortization expense.  Also estimated reserves are often used to calculate future cash flows from our oil and natural gas operations, which serve as an indicator of the fair value in determining whether a property is impaired or not.  The larger the estimated reserves, the less likely the property is impaired.

 

FOREIGN CURRENCY

 

The U.S. dollar is our reporting currently in all our areas of operations: Unites States, France, Turkey and Romania.  The U.S. dollar is our functional currency in the United States and Turkey.  The Eurodollar is our functional currency in France and the Lei is our functional currency in Romania. We attempt to manage our operations in such a manner as to reduce our exposure to foreign exchange losses.  However, there are many factor that affect foreign exchange rates and resulting exchange gains and losses, many of which are beyond our influence.  We recognize exchange gains and losses resulting from fluctuation in the relationship of the Turkish Lira to the U.S. dollar.  It is not possible to predict the extent to which we may be affected by future changes in exchange rates.

 

INCOME  TAXES

 

Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) net operating loss carryforwards. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

    In December 2004, the Financial  Accounting  Standards Board (FASB) issued Statement of Financial  Accounting Standard 123 (revised2004) Share-Based  Payment, an amendment to Statement of Accounting  Standards 123 and 95, as amended by SFAS No. 148,  "Accounting forStock-based  Compensation  Transition and Disclosure"  (collectively,  "Statement 123").  Statement 123 focuses primarily on accountingfor  transactions in which an entity obtains  employee  services in share-based  payment  transactions.  The statement is effective forinterim  quarters  beginning  after  January 1, 2006.  We do not expect that the  adoption of this  statement  will have a  significantimpact on our future results of operations or financial position.

 

In April 2005, the FASB issued Staff Interpretation No. 19-1 ("FSP 19-1") Accounting for Suspended Well Costs, which providesguidance on the accounting for exploratory well costs and proposes an amendment to FASB Statement No. 19 ("FASB 19"), FinancialAccounting and Reporting by Oil and Gas Producing Companies.  The guidance in FSP 19-1 applies to enterprises that use the successfulefforts method of accounting as described in FASB 19.  The guidance in FSP 19-1 will not impact our consolidated financial position,results of operations, or cash flows.

 

18

 

 

 

RESULTS OF OPERATIONS

 

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

 

The following tables present production and average unit prices and costs for the geographic segments indicated:

** **

**Three Months Ended**

** **

** **

**Three Months Ended**

** **

**March 31,**

** **

** **

**March 31,**

** **

**2005**

** **

**2004**

** **

** **

**2005**

** **

**2004**

Production

 

 

 

 

Average Price

 

 

 

Oil (MBbls):

 

 

 

 

Oil ($/Bbl):

 

 

 

United States

15

 

19

 

United States

$        46.94

 

$          31.23

France

97

 

85

 

France

44.15

 

29.28

Turkey

16

 

18

 

Turkey

36.48

 

26.47

Total

128

 

122

 

Total

$        43.49

 

$          29.18

 

 

 

 

 

 

 

 

 

Gas (MMcf):

 

 

 

 

Gas ($/Mcf):

 

 

 

United States

125

 

140

 

United States

$          6.17

 

$           5.83

France

—

 

—

 

France

—

 

—

Turkey

—

 

—

 

Turkey

—

 

—

Total

125

 

140

 

Total

$          6.17

 

$           5.83

 

 

 

 

 

 

 

 

 

MBOE:

 

 

 

 

$/BOE:

 

 

 

United States

36

 

42

 

United States

$        41.15

 

$          33.28

France

97

 

85

 

France

44.15

 

29.28

Turkey

16

 

18

 

Turkey

36.48

 

26.47

Total

149

 

145

 

Total

$        42.59

 

$          30.11

 

REVENUES

 

*Oil and gas sales.*Oil and natural gas sales increased by $2.2 million from first quarter 2004 to first quarter 2005 primarily due to a significantincrease in the average realized price of both oil and gas.    The average realized gas price in the first quarter of 2005 was $6.17per thousand cubic feet (Mcf) versus $5.83 per Mcf in the first quarter of 2004. The average realized oil price for the first quarterof 2005 was $43.49 per barrel versus $29.18 per barrel for the year-ago period.

 

We had no loss on commodity derivatives in the first quarter of 2005 as compared to $410,000 for the first quarter of 2004. We werenot party to any hedging contracts as of March 31, 2005.

 

*Lease bonuses and rentals.* During the first quarter of 2005 no lease bonuses and rentals were recorded, compared to $14,000 during the first quarter of 2004.

 

EXPENSES

 

*Lease operating.* Lease operating expenses increased $196,000, or 10%, due to continuing workover expenses in France. 

 

*Exploration and acquisition.* Exploration and acquisition expenses for the first quarter of 2005 were $374,000, 64% higher than exploration and acquisition expenses of $228,000 in the first quarter of 2004 due to increased evaluation activity on our international prospects. 

 

*Depreciation, depletion and amortization.*First-quarter 2005 depreciation, depletion and amortization expenses increased $101,000, or 12%, due to a higher unit of productionrate than that used in 2004, as well as increased investments in oil and gas properties.

 

 

19

 

 

 

*General and administrative*. General and administrative expenses increased 29%, for the first quarter of 2005 compared with the first quarter of 2004. The increase was due in part to indirect costs incurred for issuing equity and the conversion of preferred stock and convertible debt. Additionally, payroll costs increased due to bonus payments made in the first quarter of 2005. 

 

OTHER INCOME AND EXPENSE

 

    Other  income and expense was  $416,000  for the first  quarter of 2005 versus  $3.97  million for the first  quarter of 2004.  Thedecrease was  primarily  due to a 2004 realized  $4.9 million  foreign  currency  exchange gain related to the increase in value of theEurodollar against the U.S. dollar in connection with the discharge of the Barclays Facility.

 

DISCONTINUED OPERATIONS

 

The following table compares discontinued operations for the first quarters ended March 31, 2005 and 2004:

 

 

 

**Three Months Ended March 31,**

 

 

**2005**

 

**2004**

 

 

*(in thousands)***

Revenues:

 

 

 

 

Oil and gas sales

 

$               10

 

$               10

Lease bonuses and rentals

 

—

 

—

Loss on hedging activity

 

—

 

—

Total revenues

 

10

 

10

 

 

 

 

 

Costs and expenses:

 

 

 

 

Lease operating

 

—

 

—

Depreciation, depletion, and amortization

 

—

 

—

General and administrative

 

—

 

18

Interest

 

—

 

305

Total costs and expenses:

 

—

 

323

 

 

 

 

 

Gain on sale of properties

 

—

 

28,772

 

 

 

 

 

Income before taxes

 

10

 

28,459

Income tax provision

 

—

 

10,217

Income from discontinued operations

 

$                10

 

$        18,242

 

Income from discontinued operations for the first quarter 2005 was $10,000 versus $18.2 million for the first quarter 2004 related to the sale of U.S. royalty properties in January 2004 (see Note 3 in Notes to Consolidated Financial Statements).

 

NET INCOME AVAILABLE TO COMMON SHARES

 

For the first quarter of 2005, we reported income from continuing operations before taxes of $1.6 million, compared with $3.3 million for the same period of 2004.  Income from discontinued operations for the first quarter 2005 was $10,000 versus $18.2 million for the first quarter 2004 related to the sale of U.S. royalty properties in January 2004.  First-quarter 2005 income applicable to common shares was $1.0 million versus income applicable to common shares of $21.8 million in the first quarter of 2004.

 

 

20

 

 

OTHER COMPREHENSIVE INCOME

 

This item should be read in conjunction with Note 4 in the Notes to Consolidated Financial Statements included in this filing.

 

    The most significant element of comprehensive  income, other than net income, is foreign currency  translation.  As of December 31,2004, we had  accumulated  an  unrealized  gain of $2.0  million.  In the first quarter 2005 we had an unrealized  loss of $1.9 millionrelated to currency  fluctuations in France and Romania.  The functional  currency of our operations in France is the  Eurodollar,  thefunctional  currency  in Romania  is the Lei and in Turkey the  functional  currency  is the U.S.  dollar.  The  exchange  rate used totranslate the financial  position of the French and Romanian  operations at March 31, 2005 was  approximately  US $1.30 per  Eurodollarand 27,500 Lei per US $,  respectively.  The  Eurodollar  rate at March 31, 2004, was US $1.22 per  Eurodollar.  There were no Romanianoperations in the first quarter of 2004.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

**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, 2004. 

 

**ITEM 4 – CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls and Procedures*

 

An evaluation was performed under the supervision and with the participation of our management, including our chief executive officerand chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Basedon the evaluation and communications from Hein & Associates LLP to our Audit Committee in March 2005, our chief executive officer andchief financial officer concluded that the Company's disclosure controls and procedures were not effective in reporting, on a timelybasis, information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act,and this Quarterly Report on Form 10-Q, due to internal control deficiencies relating to the limited review of sensitive calculationsprepared by our controller, the failure to establish review procedures to detect errors in the calculation of foreign depletion andthe lack of adequate review and challenge of investee's revenue recognition as reflected in investee's unconsolidated financialstatements

 

Hein & Associates LLP advised the Audit Committee that each of these internal control deficiencies constitutes material weaknesses as defined in Statement of Auditing Standards No. 60.  Certain of these internal control weaknesses may also constitute material weaknesses in our disclosure controls.  Due to these material weaknesses, the Company, in preparing its financial statements for the period ended March 31, 2005, performed additional disclosure procedures relating to these items to ensure that such financial statements were stated fairly in all material respects in accordance with U.S. generally accepted accounting principles.

 

*Changes in Internal Control over Financial Reporting*

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of internal control that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

    However,  given the subsequent  identification  of the above material  weaknesses,  the Company has  implemented a course of actionreasonably  assured to remediate these material  weaknesses.  This course of action includes:  the decision to hire a Vice President ofAccounting  in the near  future in order to (i)  provide  focused  manpower  to  strengthen  our review  procedures,  (ii)  oversee allsensitive  calculations  and (iii) oversee the controls of all persons  reporting to the Vice President of Accounting;  documenting andenforcing  existing  policies and  procedures and  establishing  new processes  regarding  review of financial  information,  includingoversight of foreign depletion  calculations;  and implementing a new policy that would require  independent audits of certain materialunconsolidated subsidiaries; and establishing additional procedures for the timely preparation of committee meeting minutes.

 

 

22

 

 

 

**PART II. OTHER INFORMATION**

 

**ITEM 1 – LEGAL PROCEEDINGS**

 

There have been no material changes to the information reported under Item 3 – Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2004.  

 

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 other suits or claims would not have a material adverse effect on our financial position.

 

**ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

From January 1, 2005 through March 31, 2005, there were no equity securities issued pursuant to transactions exempt from the registration requirements under the Securities Act of 1933, as amended that were not disclosed previously in Forms 8-K.

 

See Part I. – Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Senior Debt” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “Dividend and Interest Requirements” regarding working capital restrictions and limitations on payments of dividends which sections are incorporated herein by reference.

 

**ITEM 3 – DEFAULT UPON SENIOR SECURITIES – None.**

 

**ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS – None.**

 

**ITEM 5 – OTHER INFORMATION – None.**

 

**ITEM 6 – EXHIBITS**

 

The following exhibits are included herein: 
1.1        -Underwriting Agreement, dated February 10, 2005, between Toreador Resources Corporation and Morgan Keegan & Co.,Inc. (previously filed as Exhibit 1.1 to Toreador Resources Corporation Current Report on Form 8-K filed with theSecurities and Exchange Commission on February 11, 2005, File No. 0-2517, and incorporated herein by reference). |
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