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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission File No.
March 31, 2000 0-9120
THE EXPLORATION COMPANY OF DELAWARE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 84-0793089
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
500 NORTH LOOP 1604 E., SUITE 250 SAN ANTONIO, TEXAS 78232
(Address of principal executive offices)
Registrant's telephone number, including area code: (210) 496-5300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of April 30, 2000.
Common Stock $0.01 par value 17,421,849
(Class of Stock) (Number of Shares)
Total number of pages is 10
PAGE 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
Assets March 31, 2000 December 31, 1999 August 31, 1999
- ------ -------------- ----------------- ---------------
Current Assets
Cash $ 3,900,599 $ 3,381,793 $ 968,516
Accounts receivable, net 2,063,286 1,939,136 2,253,349
Prepaid expenses 103,421 122,475 256,334
----------- ----------- -----------
Total Current Assets 6,067,306 5,443,404 3,478,199
Property and Equipment
Gas and oil properties, net of impairment 20,192,064 17,768,590 17,892,488
Other equipment 328,963 271,674 268,325
Less accumulated depreciation, depletion
and amortization (5,682,811) (5,204,354) (4,532,761)
------------ ----------- -----------
14,838,216 12,835,910 13,628,052
Other Assets 365,564 368,564 447,564
----------- ----------- -----------
Total Assets $ 21,271,086 $ 18,647,878 $ 17,553,815
=========== =========== ===========
Note: As recommended by the SEC, the Company is reporting, for
comparative purposes, its new fiscal year end balance sheet of
December 31, as well as its last audited balance sheet of
August 31.
See notes to financial statements.
PAGE 2
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
Liabilities and Stockholders' Equity March 31, 2000 December 31, 1999 August 31, 1999
-------------- ----------------- ---------------
Current Liabilities
Accounts payable and accrued expenses $ 1,213,492 $ 1,279,238 $ 678,478
Due to joint interest owners 2,081,799 2,479,776 1,760,248
Current portion of long term debt 776,681 1,476,730 2,565,067
------------- ------------- -------------
Total Current Liabilities 4,071,972 5,235,744 5,003,793
Long-term Liabilities
Long-term debt, net of current portion 117,865 203,206 529,742
Stockholders' Equity
Preferred stock, par value $.01 per share,
authorized 10,000,000, none issued
Common stock, par value $.01 per share;
authorized 50,000,000 shares; issued and
outstanding 17,421,849 shares at March 31, 2000
and 15,938,516 shares at December 31, 1999
and at August 31, 1999 174,219 159,385 159,385
Additional paid-in capital 43,887,483 40,651,444 40,651,444
Accumulated deficit (26,980,453) (27,601,901) (28,790,549)
------------- ------------ ------------
Total Stockholders' Equity 17,081,249 13,208,928 12,020,280
------------- ------------ ------------
Total Liabilities and Stockholders' Equity $ 21,271,086 $ 18,647,878 $ 17,553,815
============ ============ ============
Note: As recommended by the SEC, the Company is reporting, for
comparative purposes, its new fiscal year end balance sheet of
December 31, as well as its last audited balance sheet of
August 31.
See notes to financial statements.
PAGE 3
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
Revenues:
Gas and oil sales $ 2,560,209 $ 1,527,953
Other income 243,298 109,328
------------ ------------
2,803,507 1,637,281
Costs and Expenses:
Lease operations 361,369 252,383
Production taxes 177,507 111,857
Exploration expenses 338,634 71,092
Impairment of mineral properties 365,000 50,000
Depreciation, depletion and amortization 478,457 446,595
General and administrative 409,780 354,231
------------ -----------
Total costs and expenses 2,130,747 1,286,158
------------ -----------
Income from operations 672,760 351,123
Other Income (Expense):
Interest income 33,136 16,274
Interest expense (81,448) (152,989)
Loan fee amortization (3,000) (3,000)
------------- ------------
(51,312) (139,715)
------------- ------------
Net income $ 621,448 $ 211,408
============= ============
Amounts Per Common Share:
Basic and diluted income per common share $ 0.04 $ 0.01
============== =============
See notes to financial statements.
PAGE 4
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
Operating Activities:
Net income $ 621,448 211,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Impairment of properties 365,000 50,000
Depreciation, depletion and amortization 481,457 449,595
Changes in operating assets and liabilities:
Receivables (124,150) (377,823)
Prepaid expenses and other 19,054 33,105
Accounts payable and accrued expenses (463,723) (202,272)
------------- -------------
Net cash provided in operating activities 899,086 164,013
Investing Activities:
Development and purchases
of gas and oil properties (2,347,848) (830,080)
Purchase of other equipment (57,290) (7,527)
------------ ------------
Net cash provided in investing activities (2,405,138) (837,607)
Financing Activities:
Issuance of common stock, net of offering costs 2,810,248 -0-
Proceeds from debt obligations 52,720 -0-
Payments on debt obligations (838,110) (757,557)
------------ -------------
Net cash provided in financing activities 2,024,858 (757,557)
------------ -------------
Increase (decrease) in cash and equivalents 518,806 (1,431,151)
Cash and equivalents at beginning of period 3,381,793 2,112,890
------------ ------------
Cash and equivalents at end of period $ 3,900,599 $ 681,739
============ ============
See notes to financial statements
PAGE 5
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 2000 AND MARCH 31, 1999 (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of The Exploration Company (TXCO
or the Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accounting policies
followed by the Company are set forth in Note A to the August 31, 1999 audited
financial statements contained in the Company's annual report on Form 10-K.
On December 16, 1999, the Company's Board of Directors elected to change its
annual reporting period from a fiscal year ending August 31 to a calendar year
ending December 31, as announced in its Form 8-K filed on December 29, 1999. The
Company's next report on Form 10-K will be as of December 31, 2000, reporting
audited results of operations for the twelve month period then ended as well as
audited results for the four month period ended December 31, 1999. All financial
information previously presented on a fiscal year basis has been restated on a
calendar year basis for comparative purposes.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
For further information, refer to the financial statements and footnotes thereto
included in the Registrant Company's annual report on Form 10-K for the year
ended August 31, 1999, which is incorporated herein by reference.
2. COMMON STOCK AND BASIC INCOME OR LOSS PER SHARE
As of March 31, 2000, the Company had outstanding and exercisable warrants and
options to purchase 3,075,229 shares of common stock at prices ranging from
$0.98 to $6.00 per share. The warrants and options expire at various dates
through September 2008.
Basic income per share is computed based on the weighted average number of
common shares outstanding during the periods presented as follows:
Three Months
March 31, 2000 16,690,714
March 31, 1999 15,613,516
Diluted income per share is computed in accordance with FASB 128, and resulted
in a less than $.001 change to basic earnings per share for the periods ending
March 31, 2000 and March 31, 1999.
3. DEBT
At March 31, 2000 the Company had an outstanding balance of approximately
$300,000 under its existing financing agreement with Range Energy Finance
Corporation (NYSE:RRC) a publicly held energy company ("Range"). The Company's
financing agreement with Range is on a non-recourse basis, received in exchange
for a limited term overriding royalty interest related to specified depths
underlying certain of its gas and oil leases in Maverick County, Texas. The
override will terminate upon completion of repayment of the debt, which is
repayable with interest from a specified portion of sales proceeds of all
existing and future wells to be drilled on the subject leases. The debt was
repaid in full at April 30, 2000.
PAGE 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in this Form 10-Q, and with the
Company's latest audited financial statements and notes thereto as of and for
the annual period ended August 31, 1999, as reported in its Form 10-K as of
August 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash reserves of $3,381,793 at December 31, 1999 were increased by cash provided
from operating activities of $899,086. Additionally during the quarter, cash
provided from debt obligations of $52,720 and cash obtained through a private
placement of common stock of $2,810,248 net of offering costs, resulted in total
working capital of $7,143,847 available for use in meeting the Company's ongoing
operational and development needs during the three month period ended March 31,
2000.
During the three months ended March 31, 2000, portions of this capital were used
to fund payments on debt totaling $838,110 and related interest of $81,448. The
Company applied $2,347,848 to fund the expansion and ongoing development of its
gas and oil producing properties which included the acquisition of a significant
leasehold acreage block for future exploration. The Company also incurred
$674,000 in drilling and completion costs for wells drilled or completed during
the period and expended $194,000 in lease extension costs related to its
existing Maverick Basin lease block.
As a result of these activities, the Company's working capital position
significantly improved from $207,660 at December 31, 1999 to $1,995,334 at March
31, 2000. The Company's current ratio at March 31, 2000 reached 1.49 to 1
compared to a current ratio of 1.04 to 1 at December 31, 1999. The Company has
continued or increased its quarterly profitability for the last six consecutive
quarters, with the current reporting period ending March 31, 2000 realizing a
net income of $621,448.
The increased revenues from new gas production from Maverick Basin gas wells
placed on production during 1999 and the first quarter of Calendar Year 2000,
combined with improved prices for its gas and oil production, continue to
significantly enhance the Company's ability to meet ongoing operating cash
obligations and development plans. Management continues to actively pursue
financing arrangements with various domestic and foreign based sources of debt
and equity financing that could provide favorably structured funding and which
would serve to complement the Company's internal capacity to generate working
capital from operations. Management remains confident that financial resources
will remain available, enabling the Company to continue the rapid development of
its gas and oil properties, and to continue to meet its normal debt service
obligations. If Management's efforts to raise additional debt or equity capital
are not successful or if realized gas and oil prices for the growing new gas
production from the Maverick Basin or existing Williston Basin oil production
are substantially less than expected, the Company's financial condition and
liquidity could be adversely affected. Should this occur, Management retains its
ability to extend the timing of currently planned development activities to
match available working capital, while maintaining its current operating
obligations on a timely basis.
Forward-looking statements in this 10-Q are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation, the costs of exploring and developing new oil and
natural gas reserves, the price for which such reserves can be sold,
environmental concerns effecting the drilling of oil and natural gas wells, as
well as general market conditions, competition and pricing. Please refer to
TXCO's Securities and Exchange Commission filings, copies of which are available
from the Company without charge, for additional information.
PAGE 7
RESULTS OF OPERATIONS
The increase by 68% in gas and oil sales for the three month period ending March
31, 2000 over the same period last year is attributable to increased production
from its Maverick Basin gas wells. The increase was enhanced by improved gas and
oil prices realized during the 1st quarter of 2000. The increases in other
income, lease operating expense and production taxes are directly related to and
increased proportionately with increases in gas and oil production compared to
the previous period.
Exploration expense increased due to accelerated exploration levels initiated
during the period. Current period exploration expenses include $253,000 of dry
hole costs consisting of $128,000 incurred in drilling the Kincaid #1-258, plus
an additional dry hole provision of $125,000 for current drilling activity,
while the prior year period contained no significant dry hole charges. The
increase in impairment expense reflects an additional $125,000 provision for
marginal producing properties, in addition to the existing provision for lease
expirations scheduled for the period, compared to a lower lease expiration rate
experienced in the prior period. Depreciation, depletion and amortization
increased by 7% over the prior period. This increase was due primarily to the
increase in depletion caused by increased production levels and to a higher
depletion rate over the same period last year due to revised reserve estimates.
General & administrative expense increased by 16% over the prior period,
reflecting the higher sustained level of Company operations. Interest income
increased by 104% over the prior period reflecting increased cash reserve levels
while interest expense decreased $71,500 reflecting the lower outstanding
balance of borrowings under the Range financing agreement during the current
period.
During the quarter ending March 31, 2000, the Company successfully completed a
private equity funding for $2,810,248 net of offering costs, with Swisspartners
Investment Network AG, a private investment firm based in Zurich, Switzerland.
Swisspartners received 1,333,333 shares of the Company's common stock at a
purchase price of $2.25 per share. Also included were warrants for 1,371,429
shares with a five-year term exercisable at $3.00 per share.
Also during the quarter, the Company closed a significant leasehold acquisition
of 95,000 acres on the Farias Ranch contiguous to Blue Star Oil and Gas, Ltd's
Chittim Ranch Lease and southeast of the Company's existing Maverick Basin
acreage block. The Farias Ranch Lease was granted by the Ewing Halsell
Foundation giving the Company a 100-percent working interest. There are no
drilling obligations for six years and initial geologic interpretation indicates
that multi-zone production potential exists, including a deep Jurassic structure
below 16,000 feet.
The Company initiated the drilling of three new wells and re-entered two
existing wells during the current period. The Kincaid #1-258 (57.5% WI) was
drilled to a total depth of 6,391 feet. This step-out well was located
approximately five miles south of the Company's closest Glen Rose production.
Subsequently, the Paloma E #5-84 (62.5% WI) was drilled to a total depth of
5,536 feet. Unfortunately, electric logs indicated neither well would be
economically productive in the Glen Rose interval. The Kincaid #1-258 was
plugged and abandoned while casing was cemented across the shallower Georgetown
interval on the Paloma E #5-84 which awaits completion in that interval.
The Company next drilled the Briscoe-Saner #1-25 (25 % carried WI), an
exploratory test well drilled to a total depth of 6,040 feet, as the second well
under the joint venture agreement with Castle Exploration Company, Inc., a
wholly owned subsidiary of Castle Energy Corporation (Nasdaq: CECX). The well
encountered water at the Glen Rose interval and was plugged and abandoned. This
step-out well was five miles north of the closest Glen Rose, Prickly Pear
production. Initial results from two horizontal, short lateral re-entries in the
Georgetown interval were prospective for oil production. The wells continue
undergoing production evaluation as Company engineers wait for production levels
to stabilize.
PAGE 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 10, 2000, the Company held the Annual Meeting of
Shareholders at the Petroleum Club of San Antonio, pursuant to the
notice mailed to shareholders of record on January 24, 2000. The
following matters were submitted for approval by vote at the meeting.
All matters were approved by the shareholders vote and the results of
the voting is shown below for each matter.
1. Election of Five Directors:
Nominee For Against
------- ------ -------
Stephen M. Gose, Jr. 11,376,969 271,959
Thomas H. Gose 11,377,069 271,859
James E. Sigmon 11,381,069 267,859
Michael Pint 11,381,069 267,859
Robert L. Foree, Jr. 11,381,069 267,859
There were no changes in Directors of the Company
2. Proposal for ratification of the adoption of Akin, Doherty,
Klein & Feuge, P.C., as independent Auditors for the Company
for the year 2000.
For Against Abstain
--- ------- -------
11,634,939 1,332 12,657
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE EXPLORATION COMPANY
(Registrant)
/s/ Roberto R. Thomae
Roberto R. Thomae,
Chief Financial Officer
(Signing on behalf of the
Registrant and as chief
accounting officer)
Date: May 8, 2000
PAGE 9