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
May 31, 1999
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 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 July 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 May 31, 1999 Aug 31, 1998
- ------ ------------ ------------
Current Assets
Cash $ 460,525 $ 2,329,236
Accounts receivable-net 1,948,505 861,666
Prepaid expenses 50,162 17,738
------------ ------------
Total Current Assets 2,459,192 3,208,640
Property and Equipment
Oil and gas properties, net of impairment 16,812,776 14,576,057
Other equipment 244,994 236,839
Less accumulated depreciation, depletion
and amortization (3,419,395) (2,206,468)
------------ ------------
13,638,375 12,606,428
Other Assets
Deferred financing fees, net of amortization 19,000 18,000
Other assets 431,564 431,564
------------ ------------
450,564 449,564
------------ ------------
Total Assets $ 16,548,131 $ 16,264,632
============ ============
See notes to financial statements.
Page 2
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
Liabilities and Stockholders' Equity May 31, 1999 Aug 31, 1998
- ------------------------------------ ------------ ------------
Current Liabilities
Accounts payable and accrued expenses $ 1,578,110 $ 845,564
Current portion of long term debt 2,051,299 1,846,383
------------ ------------
Total Current Liabilities 3,629,409 2,691,947
Long-term Liabilities
Long-term debt, net of current portion 1,567,998 2,977,544
Stockholders' Equity
Preferred stock, par value $.01 per share;
authorized 10,000,000 shares; none issued
Common stock, par value $.01 per share;
authorized 50,000,000 shares; issued and
outstanding 15,613,516 shares at May 31, 1999
and at August 31, 1998 156,135 156,135
Additional paid-in capital 40,161,100 40,161,100
Accumulated deficit (28,966,511) (29,722,094)
------------ ------------
Total Stockholders' Equity 11,350,724 10,595,141
------------ ------------
Total Liabilities and Stockholders' Equity $ 16,548,131 $ 16,264,632
============ ============
See notes to financial statements.
Page 3
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months
Ended Ended
May 31, 1999 May 31, 1998
------------ ------------
Revenues:
Oil and gas sales $ 1,792,935 $ 901,571
Other income 127,050 63,842
----------- ------------
1,919,985 965,413
Costs and Expenses:
Lease operating expenses 246,369 206,418
Production taxes 124,331 59,010
Exploration expenses 155,978 1,139,211
Impairment of properties 100,000 50,000
Depreciation, depletion and amortization 466,544 176,245
General and administrative expenses 360,567 347,582
----------- ------------
Total costs and expenses 1,453,789 1,978,466
----------- ------------
Income (loss) from operations 466,196 (1,013,053)
Other Income (Expense):
Interest income 11,905 5,663
Interest expense (153,083) (24,508)
Loan fee amortization (3,000) -0-
Loss on currency translation -0- -0-
------------ ------------
(144,178) (18,845)
------------ ------------
Net income (loss) $ 322,018 $ (1,031,898)
============ ============
Amounts Per Common Share:
Basic and diluted income (loss) per common share $ 0.02 $ (0.07)
============ =============
See notes to financial statements.
Page 4
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
May 31, 1999 May 31, 1998
------------ ------------
Revenues:
Oil and gas sales $ 4,457,177 $ 2,055,163
Other income 304,978 144,337
----------- -----------
4,762,155 2,199,500
Costs and Expenses:
Lease operating expenses 574,694 551,816
Production taxes 315,260 110,571
Exploration expenses 221,876 2,287,610
Impairment of properties 200,000 150,000
Depreciation, depletion and amortization 1,213,011 468,740
General and administrative expenses 1,041,282 986,123
----------- -----------
Total costs and expenses 3,566,123 4,554,860
----------- -----------
Income (loss) from operations 1,196,032 (2,355,360)
Other Income (Expense):
Interest income 63,678 85,146
Interest expense (495,084) (121,349)
Loan fee amortization (9,000) (180,000)
Loss on currency translation -0- (47,545)
----------- -----------
(440,406) (263,748)
----------- -----------
Net income (loss) $ 755,626 $(2,619,108)
=========== ===========
Amounts Per Common Share:
Basic and diluted income (loss) per common share $ 0.05 $ (0.17)
=========== ===========
See notes to financial statements.
Page 5
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
May 31, 1999 May 31, 1998
------------ ------------
Operating Activities:
Net income (loss) $ 755,626 $ (2,619,108)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Impairment of properties 200,000 150,000
Depreciation, depletion and amortization 1,222,011 648,740
Changes in operating assets and liabilities:
Receivables (1,086,839) (386,519)
Prepaid expenses and other (32,424) 12,741
Accounts payable and accrued expenses 732,546 1,630,472
----------- -----------
Net cash provided (used) in operating activities 1,790,920 (563,674)
Investing Activities:
Development and purchases
of oil and gas properties (2,436,846) (4,527,579)
Purchase of property and equipment (8,155) (40,981)
Other assets (10,000) (19,999)
----------- -----------
Net cash (used) in investing activities (2,455,001) (4,588,559)
Financing Activities:
Issuance of common stock, net of expenses -0- 20,000
Proceeds from debt obligations 551,195 454,605
Payments on debt obligations (1,755,825) (1,016,727)
----------- -----------
Net cash (used) in financing activities (1,204,630) (542,122)
----------- -----------
Decrease in cash and equivalents (1,868,711) (5,694,355)
Cash and equivalents at beginning of period 2,329,236 6,198,069
----------- -----------
Cash and equivalents at end of period $ 460,525 $ 503,714
=========== ===========
See notes to financial statements
Page 6
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS FOR
THE PERIODS ENDED MAY 31, 1999 AND MAY 31, 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 May 31, 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 Nine Months
------------ -----------
May 31, 1999 15,613,516 15,613,516
May 31, 1998 15,613,516 15,613,516
Diluted income or loss per share is computed in accordance with FASB 128, and
resulted in a less than $.005 change to basic 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. As of May 31, 1999, this indebtedness had been reduced to
approximately $2,687,000.
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 $1,790,920 resulting in a total of $4,120,156 in
working capital available for use in meeting the Company's ongoing operational
and development needs during the nine month period ended May 31, 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. An additional, $638,666 was invested in the continuing
development of the Company's oil and gas properties, including the drilling and
or completion of four Maverick Basin gas or oil wells in south Texas.
During the third quarter ended May 31, 1999, ongoing payments on current
portions of debt and capital leases totaled $658,502, with payments of interest
on debt of $153,083. More significantly, $662,795 was invested in the
development of the Company's oil and gas properties, including current quarter
drilling costs for one new well during the quarter, in addition to completion
costs related to five wells in process from previous quarters.
As a result of these activities, the Company ended the third quarter of fiscal
1999 with negative working capital of $1,170,217 and a current ratio of .68 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 three 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 continued its
profit growth, having maintained its profitability for three consecutive
quarters for the first time in its history. Net Income grew to $755,626 for the
nine months ended May 31, 1999 while positive cash flow from operating
activities increased to a record $1,790,920.
The increased revenues from new gas production from Maverick Basin gas wells
placed on production during the first half of fiscal year 1999, combined with
improved prices for its gas and oil production, 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 $1,413,011 and period exploration expenses of
$221,876, actual operating activities for the nine month period ended May 31,
1999 resulted in income from producing operations of $2,830,919.
Management continues its pursuit of additional financing arrangements with
various parties, including banks, pension funds, public and private companies
and individuals. Based on its strongly improved 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 99% and 117%, respectively, in oil and gas sales for the
third quarter and nine month year-to-date period of fiscal year 1999 over the
same periods in fiscal year 1998 is primarily attributable to increased
production from the completion of seven new Maverick Basin gas wells subsequent
to the prior periods. Additionally, gas sales volumes were 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, with
continuing price weakness through the first half of the current fiscal year.
Exploration expenses decreased for the third quarter and year to date periods by
86% and 90%, respectively, compared to the same periods of the prior fiscal
year. Fiscal 1999 activity, reflects the high success rate of current year
drilling results in Texas compared to multiple North Dakota dry holes drilled
and written off during the prior fiscal year periods.
Depreciation, depletion and amortization for the third quarter and year to date
periods increased by $290,299 and $744,271, 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 $128,575 and $373,735, respectively, for the third
quarter and nine 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. Each 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. It 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 water-bearing (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.
Subsequent to the end of the third quarter, the Company drilled and completed
the Paloma "E"#1-52, its 9th consecutive Prickly Pear (Glen Rose) Field gas well
discovery utilizing its new 3-D seismic data. The well encountered 80 feet of
gas productive reef and is currently being completed. Based on analysis of
electric logs, Company engineers expect the well will be produced at a gross
daily production rate of 2,000,000 cfd.
Page 9
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, the Alkek and Chittim leases. 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 in the Lower
Georgetown interval. During the third 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 production
profiles and is currently designing a fracturing program to further stimulate
oil and gas production from the Georgetown and Eagleford intervals.
During the second quarter of fiscal 1999, the Company's 50% joint venture
partners in the 17,000 acres Kincaid lease completed field data acquisition and
final processing work on the new 27 square miles 3-D seismic program. Company
engineers and geologists completed their initial interpretation of the newly
obtained 3-D seismic data and have identified significant additional Glen Rose,
gas-bearing, patch reef prospects. The Company is currently drilling its first
Kincaid lease Glen Rose prospect, the Kincaid #1-198, based on the new 3-D data.
Pending additional weather delays, drilling should be completed prior to the end
of the fourth quarter of fiscal year 1999. Interpretation work also continues on
the extensive new 3-D seismic data, enhancing the Company's deep Jurassic
interval prospect underlying its Maverick Basin acreage position.
During the third quarter, the Company continued to expand its Maverick Basin
holdings by entering into a joint venture agreement with Castle Exploration
Company, Inc., a public company listed on the Nasdaq Stock Market. Under the
terms of the agreement, Castle will provide up to $5,300,000 in working capital
to lease additional Maverick Basin oil and gas acreage, acquire new 3-D seismic
and drill up to 12 Glen Rose gas prospects over the course of the next 12 to 18
months. TXCO is named as operator for the venture and has contributed its
interest in the 8,800 acres Alkek lease in exchange for a 25% carried interest
in the initial 12 wells drilled, with rights to participate with up to a 50%
interest in all additional future wells to be drilled.
Management expects that improved revenues from all of its new gas and oil wells
will have a significant ongoing positive impact reflected in the operating
results for the fourth quarter of fiscal 1999. Pending continued gas and oil
price stability and improvement, 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
None
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: July 12, 1999
Page 11