UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission File No. 0-9120
February 28, 1999
THE EXPLORATION COMPANY
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-0793089
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
500 NORTH LOOP 1604 E., SUITE 250 78232
(Address of principal executive offices) (Zip Code)
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 12, 1999.
Common Stock $0.01 par value 15,613,516
(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 Feb 28, 1999 Aug 31, 1998
- ------ ------------ ------------
Current Assets
Cash $ 962,754 $ 2,329,236
Accounts receivable-net 2,095,985 861,666
Prepaid expenses 53,642 17,738
------------ -----------
Total Current Assets 3,112,381 3,208,640
Property and Equipment
Oil and gas properties, net of impairment 16,250,025 14,576,057
Other equipment 236,839 236,839
Less accumulated depreciation, depletion
and amortization (2,952,852) (2,206,468)
------------ -----------
13,534,012 12,606,428
Other Assets
Deferred financing fees, net of amortization 12,000 18,000
Other assets 431,564 431,564
------------ -----------
443,564 449,564
------------ -----------
Total Assets $ 17,089,957 $ 16,264,632
============= ============
See notes to financial statements.
Page 2
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
Liabilities and Stockholders' Equity Feb 28, 1999 Aug 31, 1998
- ------------------------------------ ------------ ------------
Current Liabilities
Accounts payable and accrued expenses $ 1,805,246 $ 845,564
Current portion of long term debt 2,035,526 1,846,383
------------ ------------
Total Current Liabilities 3,840,772 2,691,947
Long-term Liabilities
Long-term debt, net of current portion 2,220,436 2,977,544
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 200,000,000 shares;
issued and outstanding 15,613,516 shares
at February 28, 1999 and at August 31, 1998 156,135 156,135
Additional paid-in capital 40,161,100 40,161,100
Accumulated deficit (29,288,486) (29,722,094)
------------- -------------
Total Stockholders' Equity 11,028,749 10,595,141
------------- -------------
Total Liabilities and Stockholders' Equity $ 17,089,957 $ 16,264,632
============= =============
See notes to financial statements.
Page 3
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months
Ended Ended
Feb 28, 1999 Feb 28, 1998
------------ ------------
Revenues:
Oil and gas sales $ 1,523,149 $ 624,353
Other income 88,047 40,703
------------ -------------
1,611,196 665,056
Costs and Expenses:
Lease operating expenses 173,086 145,938
Production taxes 112,668 41,077
Exploration expenses 28,175 1,074,648
Impairment of properties 50,000 50,000
Depreciation, depletion and amortization 412,604 146,245
General and administrative expenses 330,740 352,635
------------ -------------
Total costs and expenses 1,107,273 1,810,543
------------ -------------
Income (loss) from operations 503,923 (1,145,487)
Other Income (Expense):
Interest income 18,701 9,401
Interest expense (157,686) (24,332)
Loan fee amortization (3,000) (170,000)
Loss on currency translation -0- -0-
------------ -------------
(141,985) (184,931)
------------ -------------
Net income (loss) $ 361,938 $ (1,330,418)
============ =============
Amounts Per Common Share:
Basic and diluted income (loss) per common share $ 0.02 $ (0.09)
============ =============
See notes to financial statements.
Page 4
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Six Months
Ended Ended
Feb 28, 1999 Feb 28, 1998
------------ ------------
Revenues:
Oil and gas sales $ 2,664,242 $ 1,153,592
Other income 177,928 80,495
----------- ------------
2,842,170 1,234,087
Costs and Expenses:
Lease operating expenses 328,325 345,398
Production taxes 190,929 51,561
Exploration expenses 65,898 1,148,399
Impairment of properties 100,000 100,000
Depreciation, depletion and amortization 746,467 292,495
General and administrative expenses 680,715 638,541
--- ------- ------------
Total costs and expenses 2,112,334 2,576,394
------------ ------------
Income (loss) from operations 729,836 (1,342,307)
Other Income (Expense):
Interest income 51,773 79,483
Interest expense (342,001) (96,841)
Loan fee amortization (6,000) (180,000)
Loss on currency translation -0- (47,545)
----------- ------------
(296,228) (244,903)
----------- ------------
Net income (loss) $ 433,608 $ (1,587,210)
=========== ============
Amounts Per Common Share:
Basic and diluted income (loss) per common share $ 0.03 $ (0.11)
=========== ============
See notes to financial statements.
Page 5
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Six Months
Ended Ended
Feb 28, 1999 Feb 28, 1998
------------ ------------
Operating Activities:
Net income (loss) $ 433,608 $ (1,587,210)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Impairment of properties 100,000 100,000
Depreciation, depletion and amortization 752,467 472,495
Changes in operating assets and liabilities:
Receivables (1,234,319) (128,563)
Prepaid expenses and other (35,904) 36,542
Accounts payable and accrued expenses 959,682 1,317,251
------------ -----------
Net cash provided in operating activities 975,534 210,515
Investing Activities:
Development and purchases
of oil and gas properties (1,774,051) (5,144,890)
Purchase of property and equipment -0- (10,787)
Other assets -0- (19,999)
------------ -----------
Net cash (used) in investing activities (1,774,051) (5,175,676)
Financing Activities:
Issuance of common stock, net of expenses -0- 20,000
Proceeds from debt obligations 529,358 -0-
Payments on debt obligations (1,097,323) (949,959)
------------ -----------
Net cash (used) in financing activities (567,965) (929,959)
------------ -----------
Decrease in cash and equivalents (1,366,482) (5,895,120)
Cash and equivalents at beginning of period 2,329,236 6,198,069
------------ -----------
Cash and equivalents at end of period $ 962,754 $ 302,949
============ ============
See notes to financial statements
Page 6
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS FOR
THE PERIODS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998 (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 audited financial
statements contained in the Company's annual report on Form 10-K.
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, 1998, which is incorporated herein by reference. Certain
amounts for fiscal year 1998 have been reclassified for comparative purposes to
fiscal year 1999.
2. COMMON STOCK AND BASIC INCOME OR LOSS PER SHARE
As of February 28, 1999, the Company had outstanding and exercisable warrants
and options to purchase 2,101,906 shares of common stock at prices ranging from
$1.25 to $6.60 per share. The warrants and options expire at various dates
through September 2008.
Basic income or loss per share is computed based on the weighted average number
of common shares outstanding during the periods presented as follows:
Three Months Six Months
------------ ----------
February 28, 1999 15,613,516 15,613,516
February 28, 1998 15,320,695 15,039,947
Diluted income or loss per share is computed in accordance with FASB 128, and
resulted in a less than $.005 change to basis earnings per share for each period
presented.
3. DEBT
During the first quarter ended November 30, 1998, the Company obtained the
remaining $500,000 available under its $4,000,000 financing agreement with Range
Energy Finance Corporation (NYSE:RRC) a publicly held energy company. The
Company received the funds on a non-recourse basis, in exchange for a limited
term overriding royalty interest related to specified depths underlying certain
of its oil and gas leases in Maverick County, Texas. The override will terminate
upon 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.
Page 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, and with the Company's audited financial
statements and notes thereto for the fiscal year ended August 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash reserves of $2,329,236 at August 31,1998 were increased by cash provided
from operating activities of $975,534 resulting in a total of $3,304,770 in
working capital available for use in meeting the Company's ongoing operational
and development needs during the six month period ended February 28, 1999.
Additionally, $500,000 was obtained during the first quarter under the existing
Range Energy Finance Corporation (Range) financing agreement.
During the first quarter of fiscal 1999 portions of this working capital were
used to fund payments on current portions of debt and capital leases of $740,728
and interest on debt of $184,315. An additional $1,135,385 was invested in the
development of the Company's oil and gas properties, including the drilling and
completion of five Maverick Basin gas wells on the Company's acreage in south
Texas.
During the second quarter ended February 28, 1999, ongoing payments on current
portions of debt and capital leases totaled $356,595, with payments of interest
on debt of $157,686. Most significantly, $638,666 was invested in the continuing
development of the Company's oil and gas properties, including the drilling and
or completion of four additional Maverick Basin gas or oil wells in south Texas.
As a result of these activities, the Company ended the second quarter of fiscal
1999 with negative working capital of $728,391 and a current ratio of .81 to 1.
This compares to a positive working capital of $516,693 and a current ratio of
1.19 to 1 at August 31, 1998. The Company's working capital position weakened
during the first two quarters of fiscal 1999 primarily due to cash outlays for
its ongoing development activities and for payments under the Range limited term
overriding royalty interest obligation. However, the Company maintained its
profitability for two consecutive quarters for the first time in its history.
Net Income grew to $433,608 for the six months ended February 28, 1999 while
positive cash flow from operating activities increased to $975,534.
The increased revenues from new gas production from Maverick Basin gas wells
placed on production during the first half of fiscal year 1999 continue to
significantly improve the Company's ability to meet its ongoing operating cash
expenses and development plans. Except for statutory, intangible (non-cash)
expenses required for compliance reporting purposes, including impairment,
depreciation, depletion and amortization totaling $846,467 and exploration
expenses of $65,898, actual operating activities for the six month period ended
February 28, 1999 resulted in income from producing operations of $1,642,201.
Management is actively pursuing additional financing arrangements with various
domestic and foreign parties, including banks, pension funds, institutions,
public and private companies and individuals. Based on it's improving ability to
generate working capital from operations and its fundraising results to date,
Management remains confident it will continue to be successful in obtaining the
required levels of favorably structured capital to fund the development of its
extensive drilling prospects on a timely basis. 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 is 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 8
RESULTS OF OPERATIONS
The increase by over 140% and 130%, respectively, in oil and gas sales for the
second quarter and six month year to date period of fiscal year 1999 over the
same periods in fiscal year 1998 is attributable to increased production from
the completion of six new Maverick Basin gas wells subsequent to the prior
periods. Additionally, gas sales volumes were significantly enhanced by the
completion of the new gas gathering system addition placed in service during
fiscal year 1998. While positive, the increases were significantly offset by the
dramatic drop in realized oil and gas prices subsequent to November 1997.
Depreciation, depletion and amortization for the second quarter and year to date
periods increased by $266,359 and $453,972, respectively, over the same periods
of the prior fiscal year. The increase is due primarily to the proportionate
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
required by the lower realized oil and gas prices for the current periods. The
decrease in loan fee amortization expense for both fiscal 1999 periods as
compared to fiscal 1998 reflects the non-recurring nature of the prior period's
recognition of $180,000 in previously capitalized prepaid loan fees due to the
conversion of a $4,000,000 debenture effective January 1, 1998. Fiscal 1998 loan
fee amortization expense has been reclassified for comparative purposes with
current year expense.
Interest expense increased $133,354 and $245,160, respectively, for the second
quarter and six month year to date period of fiscal 1999 over the same periods
in fiscal year 1998, primarily reflecting the addition of the Range financing
agreement in the last quarter of fiscal year 1998.
During the first quarter of fiscal 1999, the Company drilled, completed and/or
commenced marketing gas production from four new wells located in the Prickly
Pear (Glen Rose) Field on the Company's Paloma lease in the Maverick Basin in
South Texas: the Paloma #2-66, the Paloma #4-51, the Paloma #1-65 and the Paloma
#1-64. These four Prickly Pear Field wells, were the 4th through 7th consecutive
new discoveries in the field. Having encountered between 40 and 72 feet of
productive Glen Rose reefs and tested at absolute open flow rates of between
10,000,000 and 121,000,000 cubic feet of gas per day (cfd), these new wells were
placed on production late in the first quarter or early in the second quarter of
fiscal 1999, with gross daily production volumes ranging from 1,000,000 to
4,000,000 cfd per well.
During the second quarter of fiscal 1999, the Company completed the Paloma "E"
#2-52, its 8th consecutive new Prickly Pear (Glen Rose) Field gas well. The
well, which encountered 58 feet of gas-productive reef, tested at the absolute
open flow rate of 10,750,000 cfd, and is currently producing at a gross daily
production rate of 2,600,000 cfd. Also during the second quarter, the Company
participated with Exco Resources, in drilling the Barclay #2-106, a gas prospect
located on a portion of the Paloma Ranch contiguous to TXCO's Paloma lease, but
not covered by the latest, more intensive 3-D seismic survey data used in
locating the latest 8 Prickly Pear Field gas wells. The well encountered 68 feet
of low permeability (non-productive) Glen Rose reef. It was subsequently
completed in the lower Georgetown interval as an oil well and is currently being
evaluated for further stimulation techniques.
Consistent with Management's strategy of extending the known limits of its
primary producing area, the Company has proceeded with its evaluation of its
newly acquired interest in 21,600 additional acres contained in two new mineral
leases offsetting the Paloma lease. Initial drilling during the first quarter of
fiscal 1999 on the 8,800 acre block located west of the Paloma lease used older
available 3-D surveys and resulted in the completion of the Alkek #1-232 during
October 1998. While the lower Glen Rose reef interval contained water, the well
was completed in the overlying upper Georgetown interval and was placed on
production in November 1998. During the second quarter of fiscal 1999, the
Company commenced drilling the Chittim #1-102 on the 12,800 lease located east
of its Paloma lease. The Company set casing on the well and is currently
evaluating completion alternatives.
Subsequent to the end of the second quarter of fiscal 1999, the Company drilled
the Alkek #2-233 on a separate section of the 8,800 acre lease, again using
older 3-D data. A completion attempt is currently underway. Management continues
to evaluate its recently completed Georgetown interval wells' production
profiles and is currently designing a fracturing program to further stimulate
oil and gas production from the Georgetown interval.
Page 9
During the second quarter of fiscal 1999, the Company's new 50% joint venture
partners in the Company's existing 17,000 acre Kincaid lease completed field
data acquisition and final processing work on the new 27 square miles 3-D
seismic acquisition program. Company engineers and geologists are in advanced
stages of interpreting the newly obtained 3-D seismic data and have identified
significant additional Glen Rose gas-bearing patch reef drilling prospects for
future development. Interpretation work also continues on the new 3-D seismic
data enhancing the Company's deep Jurassic interval prospect underlying the
17,000 acre lease.
Management expects that revenues from all of its new gas and oil wells will have
a significant ongoing positive impact reflected in the operating results for the
third and fourth quarters of fiscal 1999. Pending gas and oil price stability
and or improvements, operating results should reflect a continuing positive
trend in increased net revenues and positive cash flows from operations, while
allowing the Company to extend its ongoing profitability through the balance of
fiscal year 1999 and beyond.
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 February 26, 1999, 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 8, 1999. 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 ........................ 14,060,208 93,637
Thomas H. Gose ............................. 14,060,143 93,702
James E. Sigmon ............................ 14,060,208 93,637
Michael Pint ............................... 14,060,208 93,637
Robert L. Foree, Jr ........................ 14,059,698 94,147
There were no changes in Directors of the Company
2. Proposal for an amendment of the Company's 1995 Flexible Incentive Plan:
For Against Abstain Non-Voted
7,890,220 804,415 109,465 5,349,745
3. Proposal for the re-incorporation of the Company by changing state of
incorporation of the Company from Colorado to Delaware.
For Against Abstain Non-Voted
8,665,755 252,566 9,798 5,225,726
4. Proposal for ratification of the adoption of Akin, Doherty, Klein &
Feuge, P.C., as independent Auditors for the Company for the fiscal
year 1999.
For Against Abstain
14,111,145 34,530 8,170
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
Page 10
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: April 12, 1999
Page 11