SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Commission file number: 0-12633
TEXOIL, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0177083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 SMITH STREET
SUITE 4000
HOUSTON, TEXAS 77002
(Address of principal executive offices)
(713) 652-5741
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,574,923 shares of common stock,
$.01 par value, issued and outstanding at August 1, 1997.
Transitional Small Business Disclosure Format (check one):
YES [_] NO [X]
TEXOIL, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of June 30, 1997..............................3
Consolidated Statement of Income (Loss) and Retained Earnings
(Deficit) for the three months ended June 30, 1997 and 1996.............4
Consolidated Statement of Cash Flows for the three months
ended June 30,1997 and 1996.............................................5
Notes to Consolidated Financial Statements..................................6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................9
PART II. OTHER INFORMATION................................................14
Page 2 of 16
TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
JUNE 30, 1997
------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 101,145
Accounts receivable ...................................... 444,426
Other current assets ..................................... 51,606
------------
Total current assets .................................. $ 597,177
------------
Property and equipment, at cost:
Oil and gas properties, net (on
the basis of full cost accounting) .................... 5,005,996
Other equipment, net ..................................... 2,354
Other Assets ............................................... 50,222
------------
$ 5,655,749
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................. $ 913,979
Notes payable - Current Portion .......................... 1,925,924
------------
Total current liabilities ................................ $ 2,839,903
Notes payable - long term liabilities ...................... 1,650,000
Other long-term liabilities ................................ 144,534
Stockholders' equity:
Series A preferred stock, $.01 par; redeemable
and convertible with liquidation preference
of $100 per share 10,000,000 shares
authorized; 23,000 shares issued and
outstanding ........................................... 2,300,000
Common stock, $.01 par; 50,000,000 shares
authorized; 4,574,923 shares issued and
outstanding ........................................... 45,750
Additional paid-in capital ............................... 7,405,818
Deficit .................................................. (8,730,256)
------------
1,021,312
------------
$ 5,655,749
============
Page 3 of 16
TEXOIL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
(unaudited)
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
Revenues:
Oil and gas sales ............................. $ 240,656 $ 175,270 $ 515,152 $ 450,224
------------ ------------ ------------ ------------
Costs and expenses:
Lease operating expenses ...................... 43,719 34,767 90,489 84,226
Depreciation, depletion and amortization ...... 119,423 133,231 260,511 267,484
Production taxes .............................. 18,895 17,881 44,075 40,193
General and administrative expenses, net ...... 105,746 93,229 258,640 223,229
Other (income) expenses:
Interest expense .............................. 27,489 94,516 67,321 155,754
Non-cash interest expense ..................... -- 293,215 -- 753,978
Interest income and other ..................... (106) (80,841) (490) (80,841)
------------ ------------ ------------ ------------
315,166 585,998 720,546 1,444,024
------------ ------------ ------------ ------------
Loss before income taxes ......................... (74,510) (410,727) (205,394) (993,799)
Provision for income taxes ....................... -- -- -- --
------------ ------------ ------------ ------------
Net loss ......................................... (74,510) (410,727) (205,394) (993,799)
Dividends on preferred stock ..................... (69,000) -- (138,000) --
------------ ------------ ------------ ------------
Net loss applicable to common stock .............. (143,510) (410,727) (343,394) (993,779)
Retained earnings (deficit), beginning of period . $ (5,469,493) $ (8,319,529) $ (5,269,609) $ (7,736,457)
------------ ------------ ------------ ------------
Retained earnings (deficit), end of period ....... $ (5,613,003) $ (8,730,256) $ (5,613,003) $ (8,730,256)
============ ============ ============ ============
Net loss per share of common stock .............. $ (0.03) $ (0.09) $ (0.08) $ (0.23)
============ ============ ============ ============
Average number of shares outstanding ............. 4,157,073 4,487,423 4,151,774 4,343,673
============ ============ ============ ============
Page 4 of 16
TEXOIL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
For the six months ended June 30,
1996 1997
----------- -----------
Operating activities:
Net loss ........................................................... $ (205,394) $ (993,799)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization ........................... 260,511 267,484
Non-cash compensation expense ...................................... 28,860 2,550
Non-cash interest expense .......................................... -- 753,978
Decrease (increase) in accounts receivable ......................... (746,896) 27,733
Decrease (increase) in other current assets ........................ (66,121) 6,852
Increase (decrease) in accounts payable ............................ 910,987 (1,811)
Increase (decrease) in advances from joint interest owners ......... -- --
Increase (decrease) in other long-term liabilities ................. (100,225) (61,826)
Decrease (increase) in the other assets/net ........................ -- --
----------- -----------
Net cash provided by (used in) operating activities .......... $ 81,722 $ 1,161
----------- -----------
Investing activities:
Capital expenditures ............................................... (634,422) (632,958)
Proceeds from sales of prospects ................................... -- --
----------- -----------
Net cash used in investing activities ........................ $ (634,422) $ (632,958)
----------- -----------
Financing activities:
Proceeds from borrowings ........................................... 1,137,500 731,130
Payments on borrowings ............................................. (228,000) --
Preferred stock dividends paid ..................................... (138,000) --
----------- -----------
Net cash provided by (used in) financing activities .......... $ 771,500 $ 731,130
----------- -----------
Net increase (decrease) in cash and cash equivalents ................... 218,800 99,333
Cash and cash equivalents at beginning of period ....................... 2,414 1,812
----------- -----------
Cash and cash equivalents at end of period ............................. $ 221,214 $ 101,145
=========== ===========
Page 5 of 16
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - ACCOUNTING POLICIES:
Texoil, Inc., (the "Company") and its wholly owned subsidiary, Texoil
Company ("Texoil"), are engaged in the exploration for, and the production of,
oil and natural gas, primarily in South Louisiana, and to a lesser extent in
Texas. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to interim financial reporting as
prescribed by the Securities and Exchange Commission. All adjustments, which, in
the opinion of management, are necessary for a fair presentation of the results
for the interim periods, have been reflected in the accompanying unaudited
financial statements. For further information regarding accounting policies,
refer to the Company's audited financial statements for the years ended December
31, 1995 and 1996 included in its 1996 Annual Report on Form 10-KSB. The average
number of shares outstanding, reflected in the net loss per share of common
stock for the three and six months periods ended June 30, 1997 gives effect to
the conversion of $300,000 in debt into 375,000 shares of the Company's common
stock ("Common Stock"), par value $0.01, effective April 22, 1997 (See NOTE 3 -
CONVERTIBLE NOTES below).
NOTE 2 - GOING CONCERN UNCERTAINTY AND MANAGEMENT PLANS:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring operating losses and has a working capital deficit that raise
substantial doubt about its ability to meet future expenditure obligations
necessary to fully evaluate and develop its oil and gas properties and to
continue as a going concern. The consolidated financial statements do not
reflect any adjustments that might result from the outcome of these
uncertainties. In this regard the Company entered into the financing
arrangements described in NOTE 3 in order to meet its working capital
requirements and to pursue its exploration opportunities. Despite the Company's
successful efforts to obtain initial financing for its 1997 exploratory drilling
program there can be no assurance that such financing will be sufficient to
fully fund the drilling program or that the results of drilling operations will
be successful. Accordingly, the Company will continue to seek additional sources
of financing as may be necessary.
NOTE 3 - NOTES PAYABLE:
EXCHANGEABLE NOTES
EXISTING RIMCO FINANCING: On September 6, 1996, Texoil entered into a Note
Purchase Agreement (the "RIMCO Agreement") with four limited partnerships of
which Resource Investors Management Company Limited Partnership ("RIMCO") is the
controlling general partner (collectively, the "RIMCO Purchasers"). Under the
RIMCO Agreement, the RIMCO Purchasers will provide up to $8,000,000 in two
separate financings:
(a) The first financing under the RIMCO Agreement is in the form of Senior
Exchangeable General Obligation Notes issued by Texoil in the maximum
amount of $3,000,000 (the "Tranche A Notes"). Amounts advanced under the
Tranche A Notes accrue interest at a fixed, annual rate of 10%, with
interest payable monthly and all outstanding principal plus all accrued
and unpaid interest due and payable at maturity. Indebtedness outstanding
under the Tranche A Notes is exchangeable, in whole or in part at any
time, for Common Stock at an initial per share price equal to $.80,
subject to anti-dilution adjustments. Texoil can require the RIMCO
Purchasers
Page 6 of 16
to make such an exchange if they have funded at least $2,800,000 under the
Tranche A Notes and the average trading price of the Common Stock for any
consecutive 20-day trading period is $3.00 or more. The Company granted
the RIMCO Purchasers certain registration rights in respect of shares of
Common Stock issuable upon exchange of debt under the Tranche A Notes. As
of June 30, 1997 Texoil had borrowed a total of $1,925,924 under the
Tranche A Notes, of which $284,330 was borrowed during the three months
ended June 30, 1997.
(b) The second financing is in the form of Senior Secured General
Obligation Notes (the "Tranche B Notes") issued by Texoil in the maximum
amount of $5,000,000. After $2,800,000 in principal has been advanced
under the Tranche A Notes, Texoil may borrow under the Tranche B Notes
until September 1, 1999, provided that Texoil can maintain an agreed upon
borrowing base. Since Texoil's ability to maintain the agreed upon
borrowing base will depend upon the extent to which its exploratory
drilling program adds to its reserves, there can be no assurance that it
will be able to maintain the necessary borrowing base. The Tranche B Notes
will mature September 1, 2002. Amounts advanced under the Tranche B Notes
will accrue interest at a fixed, annual rate of 10%, with interest and
principal paid monthly from certain revenues generated by the assets
pledged to the RIMCO Purchasers to secure the Tranche A and Tranche B
Notes. At June 30, 1997 no advances had been made under the Tranche B
Notes.
At June 30, 1997, the Company was in default of one of the Tranche A loan
covenants regarding the current assets to current liabilities ratio. The Company
requested and obtained a waiver of this violation from RIMCO effective through
September 30, 1997. Accordingly, the debt has been classified as current at June
30, 1997 in the accompanying consolidated balance sheet. The Company's ability
to satisfy the requirements of the RIMCO Agreement covenant(s) is dependent on
results of its exploratory drilling program. If the Company is unable to meet
the requirements of the RIMCO Agreement covenant(s) it will again seek a waiver
from RIMCO. The Company can give no assurance that successful drilling results
will be achieved or that a request for waiver will be granted.
NEW RIMCO FINANCING: On May 21, 1997, Texoil entered into an Amended and
Restated Note Purchase Agreement with the RIMCO Purchasers ("Amended RIMCO
Agreement"). Under the Amended RIMCO Agreement, the RIMCO Purchasers will
provide an additional $1,500,000 in a new financing and continue to provide the
up to $8,000,000 agreed upon under the RIMCO Agreement. Under the new financing,
Texoil will issue 10% Senior Secured Exchangeable General Obligation Notes in
the principal amount of up to $1,500,000 to the RIMCO Purchasers in various
amounts (collectively, the "Tranche C Notes"). Texoil intends to borrow funds
under the Tranche C Notes if it is unable to borrow funds under the Tranche B
Notes because borrowing base requirements are unsatisfied. After $3,000,000 in
principal has been advanced under the Tranche A Notes, Texoil may borrow under
the Tranche C Notes to pay for the Company's share of drilling and completion
costs for the initial well to be drilled on each of Raceland Prospect and the
Green's Lake Prospect (or for such other purpose as may be consented to in
writing by the RIMCO Purchasers). The Tranche C Notes will mature September 1,
1999. Amounts advanced under the Tranche C Notes will accrue interest at a
fixed, annual rate of 10%, with interest paid monthly and all outstanding
principal plus all accrued and unpaid interest due and payable at maturity.
Indebtedness outstanding under the Tranche C Notes is exchangeable, in whole or
in part at any time, for Common Stock at an initial per share price equal to
$1.50, subject to anti-dilution adjustments. Texoil can require the RIMCO
Purchasers to make such an exchange if they have funded at least $1,350,000
under the Tranche C Notes and the average trading price of Common Stock for any
consecutive 20-day trading period is $3.00 or more. The Company granted the
RIMCO Purchasers certain registration rights in respect of shares of Common
Stock issuable upon exchange of debt under the Tranche C Notes. At June 30, 1997
no advances had been made under the Tranche C Notes.
Under the RIMCO Agreement, the proceeds of the Tranche B Notes could be
used to pay the Company's share of costs to drill, test, complete, equip,
deepen, sidetrack and/or recomplete any well located on the Green's Lake
Prospect, the Laurel Grove Prospect and the Raceland Prospect other than the
first well to be drilled by or on behalf of the Company on either of the Green's
Lake Prospect or the Raceland Prospect. The Amended RIMCO Agreement expands this
use of proceeds to permit Tranche B Proceeds to be used to pay the
Page 7 of 16
Company's share of costs to drill, test, complete, equip, deepen, side track
and/or recomplete the first well to be drilled on the Raceland Prospect.
CONVERTIBLE NOTES
In conjunction with the RIMCO Agreement on September 6, 1996, the Company
replaced previously existing convertible notes held by three of its directors
with replacement convertible notes (the "Replacement Notes") in the aggregate
amount of $900,000. Amounts owed under the Replacement Notes accrue interest at
a fixed, annual rate of 12%, with interest payable monthly and all outstanding
principal plus all accrued and unpaid interest due and payable at maturity.
Indebtedness outstanding under the Replacement Notes is convertible, in whole or
in part at any time, for Common Stock at an initial per share price equal to
$.80, subject to anti-dilution adjustments. The Company can require the lending
directors to make such a conversion if the average trading price of the Common
Stock for any consecutive 20-day trading period is $3.00 or more. The Company
granted certain registration rights in respect of shares of Common Stock
issuable upon conversion of the Replacement Notes.
Two directors elected to convert $300,000 of the debt evidenced by the
Replacement Notes into 375,000 shares of Common Stock effective April 22, 1997.
Mr. T.W. Hoehn, Jr., holder of $550,000 in Replacement Notes, converted $260,000
of debt into 325,000 shares of Common Stock. Mr. T.W. Hoehn, III, holder of
$300,000 in Replacement Notes converted $40,000 of debt into 50,000 shares of
Common Stock. Giving effect to the $300,000 debt conversion, the Replacement
Notes aggregate unpaid principle balance of $600,000 is now held by Mr. T.W.
Hoehn, Jr. in the sum of $290,000, Mr. T.W. Hoehn, III in the sum of $260,000
and Mr. William F. Seagle in the sum $50,000.
OTHER AFFILIATE NOTES
The Company has two subordinated notes from a Company director and his
affiliate in the aggregate amount of $1,050,000. There are $1,000,000 in loans
from Mr. T.W. Hoehn, Jr. evidenced by a promissory note which matures upon the
earlier to occur of October 1, 2002, and 30 days after the RIMCO debt has been
paid in full in cash or by exchange for common stock. The note accrues interest
at a variable rate equal to 2% plus the prime rate announced by Wells Fargo Bank
(Texas), N.A., is payable to the T.W. Hoehn, Jr. and Betty Jo Hoehn Revocable
Trust, and is subordinate to the RIMCO financing. Monthly interest payments are
due on the 10th day of each month and scheduled quarterly principal payments may
be made if certain liquidity conditions are satisfied and after the first
$2,800,000 of the RIMCO loans have been funded. Unpaid quarterly principal
payments are cumulative and amounts in excess of the scheduled quarterly
payments may be paid if the liquidity conditions are satisfied. A $50,000 loan
from Opal Air, Inc., a company owned by T. W. Hoehn, Jr., is evidenced by a
promissory note from the Company to Opal Air, Inc.; said note matures on the
same date and is otherwise subject to substantially the same terms as the
Company's $1,000,000 note to the T. W. Hoehn, Jr. and Betty Jo Hoehn Revocable
Trust.
The Replacement Notes and other affiliate notes described above were made
expressly subordinate to financings under the RIMCO Agreement. In connection
with the execution of the Amended RIMCO Agreement, all such indebtedness
previously made expressly subordinate to the Tranche A Notes and the Tranche B
Notes was also made expressly subordinate to the Tranche C Notes.
Page 8 of 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company uses the full cost method of accounting for its investment in
oil and gas properties. Under the full cost method, all costs of acquisition,
exploration and development of oil and natural gas reserves are capitalized into
a "full cost pool" for each cost center (generally defined as a country). Oil
and gas properties in the pool are depleted and charged to operations using the
unit of production method based on the ratio of current production to total
proved recoverable oil and natural gas reserves. Under the full cost method, to
the extent that capitalized costs (net of depreciation, depletion and
amortization) exceed the future net revenues of estimated proved oil and natural
gas reserves on an after-tax basis, such excess costs are charged to operations
as additional depreciation, depletion and amortization expense. Certain costs
associated with the acquisition and evaluation of unproved properties may,
however, be excluded from amortization until it is determined whether or not
proved reserves can be assigned to the properties.
At June 30, 1997, the Company's estimated discounted future net revenues
from estimated proved reserves on an after-tax basis approximate the net
capitalized costs in the Company's full cost pool. So long as this condition
continues, any excess of the company's full cost pool over the discounted future
net revenues from proved reserves on an after-tax basis may result in charges to
the Company's operations. Such excesses could result from writedowns of proved
reserve quantities or declines in oil and gas prices. Certain events and
conditions that may cause such charges cannot be reasonably predicted by the
Company. Once incurred, a writedown of oil and gas properties cannot be reversed
at a later date even if reserve quantities are subsequently increased or oil and
gas prices subsequently rise.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED
TO THREE MONTHS ENDED JUNE 30,1997
The Company recorded net losses of $74,510 and $410,727 in the three
months ended June 30, 1996 and 1997, respectively and $205,394 and $993,799 in
the six months ended June 30, 1996 and 1997, respectively. The $336,217 increase
and $788,405 increase in the Company's comparative net losses for the three and
six months ended June 30, respectively, resulted primarily from the following
factors:
Decrease (Increase) in net loss
-------------------------------
Three months ended Six months ended
June 30, June 30,
---------- ----------
(Increase) in non-cash interest expense ............ $ (293,215) $ (753,978)
Decrease in net general and administration expenses 12,517 35,411
(Increase) in interest expense ..................... (67,027) (88,433)
(Increase) in loss due to reduced oil and gas
production income: revenues less lease
operating expenses, production taxes and DDA ..... (69,228) (61,756)
Decrease in loss due to interest income and other .. 80,735 80,351
---------- ----------
$ (336,217) $ (788,405)
========== ==========
Page 9 of 16
The increase of $753,978 in non-cash interest expense comes as a result of
the Securities and Exchange Commission staff's position on accounting for
convertible debt instruments, which are convertible at a discount to the market
price. Pursuant to this position, the excess of the fair value of the Company's
common stock over the conversion prices stipulated in the debt instruments is
considered an additional return on those debt instruments. In this case the
stipulated conversion price of the Company' s common stock was below the closing
price of the Company's common stock, as listed by NASDAQ, on the date the debt
instruments closed. Accordingly, the Company has recorded the excess amount of
$753,978 as a non cash, non recurring interest expense, and as additional paid
in capital in 1997. This non recurring interest expense contributed a
significant portion of the reported net loss per share of $0.23.
The aggregate of all other factors contributing to the comparative
increase in net loss is $34,427 and is comprised of the following factors. The
decrease in net general and administration expenses is comprised primarily of
salary reductions due to the reduction in number of employees subsequent to
March 31, 1996. The increase in interest expense is primarily due to borrowings
from the RIMCO Agreement. Oil and gas production income was down this quarter
due to normal decline in production volumes, lower oil and gas product prices,
and a one time non-recurring charge of $41,152 for payment of gas imbalances
with Louisiana Interstate Gas at the Main Pass Block 4 field. The decrease in
loss due to interest income and other is a result of a reversal of $80,841 in
overaccruals of certain well costs from prior years.
LIQUIDITY AND CAPITAL RESOURCES
GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLANS
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring operating losses and has a working capital deficit that raise
substantial doubt about its ability to meet future expenditure obligations
necessary to fully evaluate and develop its oil and gas properties and to
continue as a going concern. The consolidated financial statements do not
reflect any adjustments that might result from the outcome of these
uncertainties. In this regard the Company entered into certain financing
arrangements in order to meet its working capital requirements and to pursue its
exploration opportunities. Despite the Company's successful efforts to obtain
initial financing for its 1997 exploratory drilling program, there can be no
assurance that such financing will be sufficient to fully fund the drilling
program or that the results of drilling operations will be successful.
Accordingly, the Company will continue to seek additional sources of financing
as may be necessary.
CASH FLOW FROM OPERATIONS
The Company's net cash flow from operations produced a cash surplus of
$218,800 and $99,334 for the six month periods ended June 30, 1996, and 1997,
respectively. This $119,466 comparative decrease in the Company's net cash flow
is primarily attributable to a decrease of $40,370 in net proceeds from
additional borrowings, a $38,399 reduction of long-term liabilities and reduced
oil and gas revenues as stated above in Results of Operations.
CASH FLOW FROM FINANCING
EXCHANGEABLE NOTES
EXISTING RIMCO FINANCING: On September 6, 1996, Texoil entered into a Note
Purchase Agreement (the "RIMCO Agreement") with four limited partnerships of
which Resource Investors Management Company Limited Partnership ("RIMCO") is the
controlling general partner (collectively, the "RIMCO Purchasers"). Under the
RIMCO Agreement, the RIMCO Purchasers will provide up to $8,000,000 in two
separate financings:
(a) The first financing under the RIMCO Agreement is in the form of Senior
Exchangeable General Obligation Notes issued by Texoil in the maximum
amount of $3,000,000 (the "Tranche A Notes").
Page 10 of 16
Amounts advanced under the Tranche A Notes accrue interest at a fixed,
annual rate of 10%, with interest payable monthly and all outstanding
principal plus all accrued and unpaid interest due and payable at
maturity. Indebtedness outstanding under the Tranche A Notes is
exchangeable, in whole or in part at any time, for Common Stock at an
initial per share price equal to $.80, subject to anti-dilution
adjustments. Texoil can require the RIMCO Purchasers to make such an
exchange if they have funded at least $2,800,000 under the Tranche A Notes
and the average trading price of the Common Stock for any consecutive
20-day trading period is $3.00 or more. The Company granted the RIMCO
Purchasers certain registration rights in respect of shares of Common
Stock issuable upon exchange of debt under the Tranche A Notes. As of June
30, 1997 Texoil had borrowed a total of $1,925,924 under the Tranche A
Notes, of which $284,330 was borrowed during the three months ended June
30, 1997.
(b) The second financing is in the form of Senior Secured General
Obligation Notes (the "Tranche B Notes") issued by Texoil in the maximum
amount of $5,000,000. After $2,800,000 in principal has been advanced
under the Tranche A Notes, Texoil may borrow under the Tranche B Notes
until September 1, 1999, provided that Texoil can maintain an agreed upon
borrowing base. Since Texoil's ability to maintain the agreed upon
borrowing base will depend upon the extent to which its exploratory
drilling program adds to its reserves, there can be no assurance that it
will be able to maintain the necessary borrowing base. The Tranche B Notes
will mature September 1, 2002. Amounts advanced under the Tranche B Notes
will accrue interest at a fixed, annual rate of 10%, with interest and
principal paid monthly from certain revenues generated by the assets
pledged to the RIMCO Purchasers to secure the Tranche A and Tranche B
Notes. At June 30, 1997 no advances had been made under the Tranche B
Notes.
At June 30, 1997, the Company was in default of one of the Tranche A loan
covenants regarding the current assets to current liabilities ratio. The Company
requested and obtained a waiver of this violation from RIMCO effective through
September 30, 1997. Accordingly, the debt has been classified as current at June
30, 1997 in the accompanying consolidated balance sheet. The Company's ability
to satisfy the requirements of the RIMCO Agreement covenant(s) is dependent on
results of its exploratory drilling program. If the Company is unable to meet
the requirements of the RIMCO Agreement covenant(s) it will again seek a waiver
from RIMCO. The Company can give no assurance that successful drilling results
will be achieved or that a request for waiver will be granted.
NEW RIMCO FINANCING: On May 21, 1997, Texoil entered into an Amended and
Restated Note Purchase Agreement with the RIMCO Purchasers ("Amended RIMCO
Agreement"). Under the Amended RIMCO Agreement, the RIMCO Purchasers will
provide an additional $1,500,000 in a new financing and continue to provide the
up to $8,000,000 agreed upon under the RIMCO Agreement. Under the new financing,
Texoil will issue 10% Senior Secured Exchangeable General Obligation Notes in
the principal amount of up to $1,500,000 to the RIMCO Purchasers in various
amounts (collectively, the "Tranche C Notes"). Texoil intends to borrow funds
under the Tranche C Notes if it is unable to borrow funds under the Tranche B
Notes because borrowing base requirements are unsatisfied. After $3,000,000 in
principal has been advanced under the Tranche A Notes, Texoil may borrow under
the Tranche C Notes to pay for the Company's share of drilling and completion
costs for the initial well to be drilled on each of Raceland Prospect and the
Green's Lake Prospect (or for such other purpose as may be consented to in
writing by the RIMCO Purchasers). The Tranche C Notes will mature September 1,
1999. Amounts advanced under the Tranche C Notes will accrue interest at a
fixed, annual rate of 10%, with interest paid monthly and all outstanding
principal plus all accrued and unpaid interest due and payable at maturity.
Indebtedness outstanding under the Tranche C Notes is exchangeable, in whole or
in part at any time, for Common Stock at an initial per share price equal to
$1.50, subject to anti-dilution adjustments. Texoil can require the RIMCO
Purchasers to make such an exchange if they have funded at least $1,350,000
under the Tranche C Notes and the average trading price of Common Stock for any
consecutive 20-day trading period is $3.00 or more. The Company granted the
RIMCO Purchasers certain registration rights in respect of shares of Common
Stock issuable upon exchange of debt under the Tranche C Notes. At June 30, 1997
no advances had been made under the Tranche C Notes.
Page 11 of 16
Under the RIMCO Agreement, the proceeds of the Tranche B Notes could be
used to pay the Company's share of costs to drill, test, complete, equip,
deepen, sidetrack and/or recomplete any well located on the Green's Lake
Prospect, the Laurel Grove Prospect and the Raceland Prospect other than the
first well to be drilled by or on behalf of the Company on either of the Green's
Lake Prospect or the Raceland Prospect. The Amended RIMCO Agreement expands this
use of proceeds to permit Tranche B Proceeds to be used to pay the Company's
share of costs to drill, test, complete, equip, deepen, side track and/or
recomplete the first well to be drilled on the Raceland Prospect.
CONVERTIBLE NOTES
In conjunction with the RIMCO Agreement on September 6, 1996, the Company
replaced previously existing convertible notes held by three of its directors
with replacement convertible notes (the "Replacement Notes") in the aggregate
amount of $900,000. Amounts owed under the Replacement Notes accrue interest at
a fixed, annual rate of 12%, with interest payable monthly and all outstanding
principal plus all accrued and unpaid interest due and payable at maturity.
Indebtedness outstanding under the Replacement Notes is convertible, in whole or
in part at any time, for Common Stock at an initial per share price equal to
$.80, subject to anti-dilution adjustments. The Company can require the lending
directors to make such a conversion if the average trading price of the Common
Stock for any consecutive 20-day trading period is $3.00 or more. The Company
granted certain registration rights in respect of shares of Common Stock
issuable upon conversion of the Replacement Notes.
Two directors elected to convert $300,000 of the debt evidenced by the
Replacement Notes into 375,000 shares of Common Stock effective April 22, 1997.
Mr. T.W. Hoehn, Jr., holder of $550,000 in Replacement Notes, converted $260,000
of debt into 325,000 shares of Common Stock. Mr. T.W. Hoehn, III, holder of
$300,000 in Replacement Notes converted $40,000 of debt into 50,000 shares of
Common Stock. Giving effect to the $300,000 debt conversion, the Replacement
Notes aggregate unpaid principle balance of $600,000 is now held by Mr. T.W.
Hoehn, Jr. in the sum of $290,000, Mr. T.W. Hoehn, III in the sum of $260,000
and Mr. William F. Seagle in the sum $50,000.
OTHER AFFILIATE NOTES
The Company has two subordinated notes from a Company director and his
affiliate in the aggregate amount of $1,050,000. There are $1,000,000 in loans
from Mr. T.W. Hoehn, Jr. evidenced by a promissory note which matures upon the
earlier to occur of October 1, 2002, and 30 days after the RIMCO debt has been
paid in full in cash or by exchange for common stock. The note accrues interest
at a variable rate equal to 2% plus the prime rate announced by Wells Fargo Bank
(Texas), N.A., is payable to the T.W. Hoehn, Jr. and Betty Jo Hoehn Revocable
Trust, and is subordinate to the RIMCO financing. Monthly interest payments are
due on the 10th day of each month and scheduled quarterly principal payments may
be made if certain liquidity conditions are satisfied and after the first
$2,800,000 of the RIMCO loans have been funded. Unpaid quarterly principal
payments are cumulative and amounts in excess of the scheduled quarterly
payments may be paid if the liquidity conditions are satisfied. A $50,000 loan
from Opal Air, Inc., a company owned by T. W. Hoehn, Jr., is evidenced by a
promissory note from the Company to Opal Air, Inc.; said note matures on the
same date and is otherwise subject to substantially the same terms as the
Company's $1,000,000 note to the T. W. Hoehn, Jr. and Betty Jo Hoehn Revocable
Trust.
The Replacement Notes and other affiliate notes described above were made
expressly subordinate to financings under the RIMCO Agreement. In connection
with the execution of the Amended RIMCO Agreement, all such indebtedness
previously made expressly subordinate to the Tranche A Notes and the Tranche B
Notes was also made expressly subordinate to the Tranche C Notes.
Page 12 of 16
CAPITAL EXPENDITURES
Texoil's net capital expenditures totaled $634,422 and $632,958 in the six
month periods ended June 30, 1996 and 1997, respectively. The latter amount is
comprised primarily of leasehold and seismic acquisition costs totaling
$389,922, on the Company's operated Raceland 3-D seismic exploration project in
Lafourche Parish, Louisiana, $155,305 on the Greens Lake 3-D seismic exploration
project in Galveston County, Texas operated by Burlington Resources, and $11,084
on the Laurel Grove 3-D seismic exploration project in Lafourche Parish,
Louisiana operated by Phillips Petroleum. The remaining $76,647 is in
capitalized general and administrative costs and capitalized workover costs at
the Company's Main Pass Block 3 field.
FUTURE CAPITAL REQUIREMENTS
The Company anticipates making additional capital expenditures to drill
the initial well on the Raceland Prospect. A drilling rig is presently in route
to commence drilling operations in August 1997. The Company owns a 29.26%
working interest and its share of the estimated capital drilling costs is
approximately $550,000. If the well is completed, the Company's estimated
capital completion cost share will be approximately $140,000.
The Company also expects to make capital expenditures in 1997 related to
the Laurel Grove Prospect. It also expects to make capital expenditures with
respect to certain exploratory prospects currently in its inventory and possible
new prospects to be evaluated. These capital expenditures are expected to
include costs for further geological and geophysical evaluation of the
prospects, including 3-D seismic surveys where warranted and leasehold
acquisition and other costs necessary for the Company to obtain working interest
participants in the prospects. The Company will continue to evaluate acquiring
or generating new prospects and its participation rights related to the
prospects it sold to Texas Meridian Resources Corporation in an agreement dated
December 31, 1992.
In connection with future capital requirements the Company will continue
to seek additional sources of financing as may be necessary. There can be no
assurance that the Company's drilling program or efforts to obtain future
financing, as may be necessary, will be successful. The extent to which the
Company may make other expected capital expenditures will depend on the results
of these efforts.
SUBSEQUENT EVENTS
An initial test well was drilled and completed and subsequently plugged
and abandoned on the Greens Lake Prospect in Galveston County, Texas. The
Company owns a non-operated 30% working interest. In tests completed in July,
1997 the well flowed non-commercial quantities of oil and gas and formation salt
water from Frio sand perforations at 10,436 to 10,948 feet. The operator of the
Prospect recommended that the well be plugged and abandoned and the Company
consented to do so. Other prospective areas within the 22 square mile survey
area are presently being evaluated. The Company's estimated net capital cost
share for this initial test well was approximately $750,000.
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-QSB contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this report including,
without limitation, statements regarding the Company's business strategy, plans,
objectives and beliefs of management for future operations are forward looking
statements. Although the Company believes the expectations and beliefs reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectation will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are discussed in this report.
Page 13 of 16
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings - None
Item 2 - Changes in Securities
The May 1997 issuances of the Tranche C Notes to the RIMCO
Purchasers and 375,000 shares of Common Stock upon conversion of
Replacement Notes discussed above under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" were made pursuant to negotiated
transactions with sophisticated persons in accordance with exemption
from registration requirements under Section 4(2) of the Securities
Act of 1933.
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) Exhibits
10.1 Amended and Restated Note Purchase Agreement dated as of May
21, 1997, among Texoil Company, Texoil, Inc., and RIMCO Partners,
L.P., RIMCO Partners L.P. II, RIMCO Partners, L.P. III and RIMCO
Partners, L.P. IV (collectively, the "RIMCO
Purchasers")(incorporated by reference to Exhibit 10.1 to
Registrant's Form 8-K, dated May 21, 1997).
10.2 Form of 10% Senior Secured Exchangeable General Obligation
Notes, each dated as of May 21, 1997, issued by Texoil Company to
the RIMCO Purchasers (incorporated by reference to Exhibit 10.2 to
Registrant's Form 8-K, dated May 21, 1997).
10.3 Amended and Restated Guaranty and Exchange Agreement among
Texoil, Inc., Texoil Company and the RIMCO Purchasers dated as of
May 21, 1997 (incorporated by reference to Exhibit 10.3 to
Registrant's Form 8-K, dated May 21, 1997).
10.4 First Amendment to Pledge Agreement dated as of May 21, 1997,
executed by Texoil, Inc. for the benefit of the RIMCO Purchasers
(incorporated by reference to Exhibit 10.4 to Registrant's Form 8-K,
dated May 21, 1997).
10.5 First Amendment to Stock Ownership and Registration Rights
Agreement dated as of May 21, 1997, by and among Texoil Company,
Texoil, Inc. and the RIMCO Purchasers (incorporated by reference to
Exhibit 10.5 to Registrant's Form 8-K, dated May 21, 1997).
10.6 First Amendment to Subordination Agreement dated as of May 21,
1997, among Texoil Company, Texoil, Inc., the RIMCO Purchasers and
Opal Air, Inc. (incorporated by reference to Exhibit 10.6 to
Registrant's Form 8-K, dated May 21, 1997).
10.7 First Amendment to Subordination Agreement dated as of May 21,
1997, among Texoil Company, Texoil, Inc., the RIMCO Purchasers and
T.W. Hoehn, Jr. and Betty Joe
Page 14 of 16
Hoehn Revocable Trust (incorporated by reference to Exhibit 10.7 to
Registrant's Form 8-K, dated May 21, 1997).
10.8 First Amendment to Subordination Agreement dated as of May 21,
1997, among Texoil Company, Texoil, Inc., the RIMCO Purchasers and
T.W. Hoehn, Jr. (incorporated by reference to Exhibit 10.8 to
Registrant's Form 8-K, dated May 21, 1997).
10.9 First Amendment to Subordination Agreement dated as of May 21,
1997, among Texoil company, Texoil, Inc. the RIMCO Purchasers and
T.W. Hoehn, III (incorporated by reference to Exhibit 10.9 to
Registrant's Form 8-K, dated May 21, 1997).
10.10 First Amendment and Subordination Agreement dated as of May
21, 1997, among Texoil Company, Texoil, Inc., the RIMCO Purchasers
and William F. Seagle (incorporated by reference to Exhibit 10.10 to
Registrant's Form 8-K, dated May 21, 1997).
10.11 First Amendment and Supplement to Mortgage, Assignment of
Production, Security Agreement and Financing Statement dated as of
May 21, 1997, from Texoil Company to the RIMCO Purchasers
(incorporated by reference to Exhibit 10.11 to Registrant's Form
8-K, dated May 21, 1997).
10.12 Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated as of May 21, 1997, from
Texoil Company to the RIMCO Purchasers (incorporated by reference to
Exhibit 10.12 to Registrant's Form 8-K, dated May 21, 1997).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K, dated May 21, 1997, reporting the RIMCO
financing,Tranche C.
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.
TEXOIL, INC.
Date: AUGUST 14, 1997 By: /S/ RUBEN MEDRANO
Ruben Medrano
President and CEO
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