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.
June 30, 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 July 28, 2000.
COMMON STOCK $0.01 PAR VALUE 17,421,849
(Class of Stock) (Number of Shares)
Total number of pages is 11
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
Assets June 30, 2000 December 31, 1999 August 31, 1999
- ------ ------------- ----------------- ---------------
Current Assets
Cash $ 3,285,168 $ 3,381,793 $ 968,516
Accounts receivable, net 2,130,069 1,939,136 2,253,349
Prepaid expenses 118,028 122,475 256,334
-------------- ------------- -------------
Total Current Assets 5,533,265 5,443,404 3,478,199
Property and Equipment
Gas and oil properties, net of impairment 20,315,471 17,768,590 17,892,488
Other equipment 383,455 271,674 268,325
Less accumulated depreciation, depletion
and amortization (6,107,186) (5,204,354) (4,532,761)
------------ ------------ -------------
14,591,740 12,835,910 13,628,052
Other Assets 356,564 368,564 447,564
-------------- ----------- -------------
Total Assets $ 20,481,569 $ 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.
2
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
Liabilities and Stockholders' Equity June 30, 2000 December 31, 1999 August 31, 1999
------------- ----------------- ---------------
Current Liabilities
Accounts payable and accrued expenses $ 665,476 $ 1,279,238 $ 678,478
Due to joint interest owners 1,500,420 2,479,776 1,760,248
Current portion of long term debt 488,369 1,476,730 2,565,067
------------- ------------- -------------
Total Current Liabilities 2,654,265 5,235,744 5,003,793
Long-term Liabilities
Long-term debt, net of current portion 71,288 203,206 529,742
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 June 30, 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 (26,305,686) (27,601,901) (28,790,549)
------------- ------------ ------------
Total Stockholders' Equity 17,756,016 13,208,928 12,020,280
------------- ------------ ------------
Total Liabilities and Stockholders' Equity $ 20,481,569 $ 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.
3
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months
Ended Ended
June 30, 2000 June 30, 1999
-------------- --------------
Revenues:
Gas and oil sales $ 2,660,600 $ 2,111,830
Other income 213,073 154,076
------------ -----------
2,873,673 2,265,906
Costs and Expenses:
Lease operations 386,317 219,088
Production taxes 189,317 145,576
Exploration expenses 369,609 115,886
Impairment of mineral properties 390,000 116,667
Depreciation, depletion and amortization 424,375 462,335
General and administrative 428,787 378,687
------------- ------------
Total costs and expenses 2,188,405 1,438,239
------------- ------------
Income from operations 685,268 827,667
Other Income (Expense):
Interest income 78,634 9,647
Interest expense (19,217) (145,034)
Loan fee amortization (9,000) (3,000)
------------- -------------
50,417 (138,387)
------------- -------------
Net Income before provision for
Income taxes 735,685 689,280
Provision for income taxes 60,918 -0-
------------- ------------
Net income $ 674,767 $ 689,280
============= ============
Amounts Per Common Share:
Basic and diluted income per common share $ 0.04 $ 0.04
============= ============
See notes to financial statements.
4
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
-------------- -------------
Revenues:
Gas and oil sales $ 5,220,809 $ 3,639,783
Other income 456,371 263,404
------------ -------------
5,677,180 3,903,187
Costs and Expenses:
Lease operations 747,686 471,471
Production taxes 366,824 257,433
Exploration expenses 708,243 186,978
Impairment of mineral properties 755,000 166,667
Depreciation, depletion and amortization 902,832 908,930
General and administrative 838,567 732,918
------------- ------------
Total costs and expenses 4,319,152 2,724,397
------------- ------------
Income from operations 1,358,028 1,178,790
Other Income (Expense):
Interest income 111,770 25,921
Interest expense (100,665) (298,023)
Loan fee amortization (12,000) (6,000)
-------------- ------------
(895) (278,102)
-------------- ------------
Net Income before provision for
Income taxes 1,357,133 900,688
Provision for income taxes 60,918 -0-
------------- ------------
Net income $ 1,296,215 $ 900,688
============= ============
Amounts Per Common Share:
Basic and diluted income per common share $ 0.08 $ 0.06
============= ============
See notes to financial statements.
5
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
Operating Activities:
Net income $ 1,296,215 900,688
Adjustments to reconcile net loss to net cash
provided by operating activities:
Impairment of mineral properties 755,000 166,667
Depreciation, depletion and amortization 914,832 914,930
Changes in operating assets and liabilities:
Receivables (190,933) (800,855)
Prepaid expenses and other 4,447 36,485
Accounts payable and accrued expenses (1,593,118) 57,301
------------ -----------
Net cash provided in operating activities 1,186,443 1,275,216
Investing Activities:
Development and purchases
of gas and oil properties (2,861,254) (1,170,885)
Purchase of other equipment (111,783) (28,228)
------------- -------------
Net cash (used) in investing activities (2,973,037) (1,199,113)
Financing Activities:
Issuance of common stock, net of offering costs 2,810,248 -0-
Proceeds from debt obligations 137,448 21,837
Payments on debt obligations (1,257,727) (1,400,349)
------------ -------------
Net cash provided (used) in financing activities 1,689,969 (1,378,512)
------------ -------------
Change in cash and equivalents (96,625) (1,302,409)
Cash and equivalents at beginning of period 3,381,793 2,112,890
------------ ------------
Cash and equivalents at end of period $ 3,285,168 $ 810,481
============ =============
See notes to financial statements
6
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 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 June 30, 2000, the Company had outstanding and exercisable warrants
and options to purchase 3,025,229 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 2009.
Basic income per share is computed based on the weighted average number of
common shares outstanding during the periods presented as follows:
Three Months Six Months
------------ ----------
June 30, 2000 17,421,849 17,056,281
June 30, 1999 15,613,516 15,613,516
Diluted income per share is computed in accordance with FASB 128, and resulted
in a less than $.0015 change to basic earnings per share for the periods ended
June 30, 2000 and June 30, 1999.
3. DEBT AND SUBSEQUENT EVENT
During the period the Company retired its long-term debt under its existing
financing agreement with Range Energy Finance Corporation (NYSE:RRC) a publicly
held energy company ("Range").
Subsequent to the end of the period, the Company entered into a lease purchase
agreement to finance the purchase of two natural gas compressors at a cost of
$1,012,404. The lease term is for 60 months with monthly payments of $22,404
which include interest at 12.6%.
7
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 most recently 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 $1,186,443 for the six months ended June 30, 2000.
Additionally during the period, cash provided from debt obligations of $137,448
and cash obtained through a private placement of common stock of $2,810,248 net
of offering costs, resulted in total working capital of $7,515,932 available for
use in meeting the Company's ongoing operational and development needs.
During the first quarter, 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.
During the current quarter ended June 30, 2000, additional portions of this
capital were used to fund payments on debt totaling $419,617 and related
interest of $19,217. The Company applied $513,406 to fund the expansion and
ongoing development of its gas and oil producing properties. These expenditures
included $397,000 in drilling and completion costs for wells drilled or
completed during the period and $47,000 for the purchase of an option to lease
an additional 150,000 acres of the Chittim Ranch contiguous to the Company's
Maverick Basin lease block.
As a result of these activities, the Company's working capital balance
significantly increased to $2,879,000 at June 30, 2000 from $207,660 at December
31, 1999, while its current ratio improved to 2.08 to 1 as compared to 1.04 to 1
for the respective periods. The Company has now achieved quarterly profitability
for seven consecutive quarters. Net income for the current quarter was $674,767
while reaching a record $1,296,215 for the six months ended June 30, 2000.
In July, the Company completed a $1.3 million upgrade of its existing gathering
facilities including the purchase of two natural gas compressors and an
additional 2.5 miles of 6 inch pipeline to its Paloma lease gathering system.
This expansion will allow the Company to re-establish gas production levels of
over 18 Mmcf per day as experienced prior to recent production declines due to
natural decline rates and gathering system capacity constraints. In addition,
the Paloma #3-83 was placed on line in July adding 2 Mmcf of gas production per
day. The Company has realized natural gas prices ranging from $2.92 per Mcf in
April, increasing to $4.70 per Mcf for its July production. During the same
period, oil prices increased from $22.34 per Bbl in April to $29.88 per Bbl in
June for its Texas oil sales. These improved prices, combined with production
increases, continue to significantly enhance the Company's ability to meet its
ongoing operating cash obligations and development plans.
8
Management continues to review alternative financing sources and arrangements
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 obtain additional working capital are not successful or
if realized gas and oil prices for gas production from the Maverick Basin or oil
production from the Williston Basin 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.
RESULTS OF OPERATIONS
The increase by 26% and 43% respectively, in gas and oil sales for the second
quarter and year-to-date period of year 2000 over the same periods in year 1999
is primarily attributable to improved gas and oil prices. This increase was
partially offset by a 22% and 13% decline in production volumes from the
respective periods of the prior year due to natural decline rates and gathering
system constraints. The increases in other income, lease operating expenses and
production taxes are directly related to and increased proportionately with gas
and oil sales levels compared to the previous periods.
Exploration expense increased due to accelerated exploration levels initiated
during the three and six month period June 30, 2000, as compared to the prior
year periods. Current period exploration expenses include $209,000 of dry hole
costs consisting of $59,000 incurred for wells under evaluation in prior
periods, plus an additional dry hole provision of $150,000 for current drilling
activity, while the respective prior year periods contained no significant dry
hole charges. The increase in current period impairment expense to $390,000
reflects an additional $150,000 provision for marginal producing properties, in
addition to the existing provision for lease expirations scheduled for the
period. This compares to a lower lease expiration rate experienced in the
respective periods of the prior year. Depreciation, depletion and amortization
decreased by 8% and 1% over the respective prior periods. These decreases were
due primarily to the decrease in depletion caused by decreased production levels
offset by higher depletion rates over the same periods last year due to revised
reserve estimates.
General & administrative expense increased by 13% and 14% respectively over the
prior periods, reflecting the higher sustained level of Company operations.
Included in the increase are $35,000 for costs associated with corporate
development activities and $54,000 related to increases in staffing and pay rate
levels over the respective prior year periods. Interest income increased over
respective prior periods reflecting higher cash balances due to increased
internally generated working capital plus the cash proceeds from the private
equity placement closed in February, 2000. Interest expense decreased $126,000
and $197,000 respectively for the current quarter and six month period,
reflecting the decreasing balance due and final retirement in April, 2000 of the
Range Energy obligation.
9
During the first quarter the Company 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.
In March, the Company closed a significant leasehold acquisition of 95,000 acres
(100% WI) 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. Initial geologic interpretation indicated multi-zone production
potential, including a deep Jurassic structure below 16,000 feet. During July
the Company began drilling operations and has scheduled seven wells to test the
Olmos and San Miguel formations, anticipating their completions by year-end.
During the first quarter the Company initiated the drilling of three new wells
and re-entered two existing wells. 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. Electric
logs indicated neither well was 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 its 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.
During the current quarter the Company drilled four additional wells in the
Maverick Basin. In April, the Chittim #1-130 (28.1% WI) was drilled to a depth
of 1,881 feet and completed in the Austin Chalk formation. The Company is
currently evaluating completion alternatives to maximize oil production from the
well. In May the Company next drilled the Kincaid #1-201 (50% WI) to a depth of
4,750 feet and was completed as an oil well in the Chittim/Georgetown formation.
Also in May, the Company drilled the Burr #1-23 (25% carried WI), an exploratory
Glen Rose test well drilled to a total depth of 5,617 feet, as the third well
under its joint venture agreement with Castle. The well did not encounter
hydrocarbons and was plugged and abandoned. In June the Paloma #3-83 (62.5% WI)
was drilled to a depth of 5,452 feet and was completed as a Glen Rose reef gas
well located in the Company's Prickly Pear field. The well was placed on
production in July at an initial producing rate of 2 Mmcf per day.
OTHER MATTERS
On May 25, 2000 the Company's Board of Directors voted to expand the number of
board members to six and elected an additional outside director, Mr. Alan L.
Edgar of Dallas, Texas.
10
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A Form 8-K was filed on June 29, 2000 by the Company announcing that it
had adopted a Stockholders Rights Plan and had declared a dividend of
one right for each outstanding share of Common Stock, payable to
stockholders of record as of the close of business on July 19, 2000.
The Plan is intended to protect the Company and its stockholders
against unfair or coercive takeover tactics. The Plan is similar to
stockholder rights plans adopted by many other public companies. The
rights agreement does not in any way change the Company's financial
position or interfere with or affect reported earnings per share, is
not taxable to the Company or its stockholders, and will not change the
way in which the Company's share are traded.
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: August 4, 2000
11