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 SEPTEMBER 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 November 1, 1997.
Transitional Small Business Disclosure Format (check one):
YES NO |X|
TEXOIL, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1997.........................3
Consolidated Statement of Income (Loss) and Retained Earnings
(Deficit) for the nine months ended September 30, 1997 and 1996.........4
Consolidated Statement of Cash Flows for the nine months
ended September 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...........................................................................10
PART II. OTHER
INFORMATION...............................................................................................16
TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
SEPTEMBER 30,
1997
ASSETS
Current assets:
$
Cash and cash equivalents 263,211
Accounts receivable 534,932
Other current assets 15,558
---------------
Total current assets $ 813,161
---------------
Property and equipment, at cost:
Oil and gas properties, net (on the basis of
full cost accounting) 4,099,707
Other equipment, net 2,161
Other Assets 50,222
---------------
$ 4,965,251
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $1,242,596
Notes payable - Current Portion 3,000,000
---------------
Total current liabilities $4,242,596
Notes payable - long term liabilities 1,650,000
Other long-term liabilities 142,623
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 8,513,459
Deficit (11,929,176)
---------------
(1,069,967)
===============
$ ,4,965,251
===============
TEXOIL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
(unaudited)
For the three months For the nine months
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1997 1996 1997
Revenues:
$ $ $ $
Oil and gas sales 232,048 146,386 747,200 596,610
------------ ----------- ------------ ------------
Costs and expenses:
Lease operating expenses 41,320 60,919 131,809 145,145
Depreciation, depletion and
amortization 139,056 1,987,195 399,567 2,254,679
Production taxes 19,157 16,862 63,232 57,055
General and administrative
expenses, net 189,407 88,066 448,047 311,295
Other (income) expenses:
Interest expense 71,527 84,641 138,848 240,395
Non-cash interest expense - 1,107,641 - 1,861,619
Interest income and other (2,607) (19) (3,097) ( 80,859)
------------ ----------- ------------ ------------
457,860 3,345,306 1,748,406 4,789,330
------------------------- ------------ ------------
Loss before income taxes (225,812) (3,198,920) (431,206) (4,192,720)
Provision for income taxes - - - -
------------ ----------- ------------ ------------
Net loss (225,812) (3,198,920) (431,206) (4,192,720)
Dividends on preferred stock (69,000) - (207,000) -
------------ ----------- ------------ ------------
Net loss applicable to common
stock (294,812) (3,198,920) (638,206) (4,192,720)
Retained earnings (deficit),
beginning of period $(5,613,003) $(11,929,177) $(5,269,609) $(11,929,177)
------------ ----------- ------------ ------------
Retained earnings (deficit), end $ $ $ )
of period (5,907,815) (11,536,103) (5,907,815) $(11,536,103
============ =========== ============ ============
Net loss per share of common stock $ (0.07) $ (0.70) $ (0.15) $ (0.95)
============ =========== ============ ============
Average number of shares
outstanding 4,157,073 4,574,923 4,153,553 4,421,890
============ =========== ============ ============
TEXOIL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
For the nine months ended
September 30,
1996 1997
----------- -----------
Operating activities:
Net loss $ (431,206) $(4,192,720)
Adjustments to reconcile net loss to
net cash
provided by (used in)
operating activities:
Depreciation, depletion and
amortization 399,567 2,254,679
Non-cash compensation expense 28,860 2,550
Non-cash interest expense -- 1,861,619
Decrease (increase) in accounts
receivable (653,015) (62,233)
Decrease (increase) in other current
assets (5,261) 42,900
Increase (decrease) in accounts payable 1,063,718 326,806
Increase (decrease) in advances from
joint interest owners -- --
Increase (decrease) in other long-term
liabilities 514,742 (63,737)
Decrease (increase) in the other
assets/net -- --
----------- -----------
Net cash provided by (used in)
operating activities $ 917,405 $ 169,864
----------- -----------
Investing activities:
Capital expenditures (1,268,988) (1,713,671)
Proceeds from sales of prospects -- --
----------- -----------
Net cash used in investing
activities (1,268,988) (1,713,671)
----------- -----------
Financing activities:
Proceeds from borrowings 887,500 1,805,206
Payments on borrowings (228,000) --
Preferred stock dividends paid (207,000) --
----------- -----------
Net cash provided by (used in)
financing activities $ 452,500 $ 1,805,206
----------- -----------
Net increase (decrease) in cash and cash
equivalents 100,917 261,399
Cash and cash equivalents at beginning of
period 2,416 1,812
============== =============
$ $
Cash and cash equivalents at end of period 103,333 263,211
============== =============
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 nine months periods ended September 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 4 - 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 4 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.
NOTE 3 - OIL AND GAS PROPERTIES:
In the third quarter of 1997, the Company made a non-cash writedown of the
recorded cost of its domestic oil and gas properties in the amount of
$1,738,900. This writedown was made in accordance with the Securities and
Exchange Commission regulations for "full cost" reporting companies and was
required as a result of the unsuccessful results of drilling and completing the
initial test well on the Greens Lake Prospect, a decline in equivalent oil
prices of approximately $5.27 per Barrel of Oil Equivalent ("BOE") at the end of
the third quarter of 1997 as compared to December 31, 1996 and reduced
non-producing proved reserve quantities for one of the Company's properties.
NOTE 4 - 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 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 September 30, 1997 Texoil had borrowed a total of
$3,000,000 under the Tranche A Notes, of which $1,074,076 was borrowed
during the three months ended September 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 September 30, 1997 no advances had been made under the Tranche B
Notes.
At September 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 December 31, 1997. Accordingly, the debt has been classified as current
at September 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 September 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 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.
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 ("DDA") 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 September 30, 1997, the Company's estimated discounted future net revenues
from estimated proved reserves on an after-tax basis were less than the net
capitalized costs in the Company's full cost pool and as a result the Company
took a non-cash charge of $1,738,900 to the Company's operations. (See RESULTS
OF OPERATIONS)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30,1997
The Company recorded net losses of $225,812 and $3,198,920 in the three months
ended September 30, 1996 and 1997, respectively and $431,206 and $4,192,720 in
the nine months ended September 30, 1996 and 1997, respectively. The $2,973,108
increase and $3,761,514 increase in the Company's comparative net losses for the
three and nine months ended September 30, respectively, resulted primarily from
the following factors:
Decrease (Increase) in net loss
-----------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(Increase) in non-cash interest
expense $(1,107,641) $(1,861,619)
Decrease in net general and
administrative expenses 101,341 136,752
(Increase) in interest expense (13,114) (101,547)
(Increase) in loss due to
reduced oil and gas
production income:
revenues less lease
operating expenses,
production taxes and DDA
(including writedown) (1,951,105) (2,012,861)
Decrease in loss due to
interest income and other (2,589) 77,761
----------- -----------
$(2,973,108) $(3,761,514)
=========== ===========
The increase of $1,107,641 in non-cash interest expense in the third
quarter of 1997, for an aggregate of $1,861,619 through the first nine months of
1997, 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 $1,861,619 as a non-cash, non
recurring interest expense, and as additional paid in capital in 1997. This
non-recurring non-cash interest expense contributed $0.42 of the reported net
loss per share of $0.95.
The aggregate of all other factors results in a decrease in net loss of
$85,638 and $112,966 for the three and nine month periods ending September 30,
respectively. The decrease in net general and administrative expenses was
essentially offset by the increase in cash interest expenses. The decrease of
$136,752 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 of $101,547 in interest expense is primarily due to
borrowings from the RIMCO Agreement (See LIQUIDITY AND CAPITAL RESOURCES) .
Oil and gas income, comprised of revenues less lease operating expenses,
production taxes and DDA, decreased from $152,592 at September 30, 1996 to
($1,860,269) at September 30, 1997. This comparative net loss of $2,012,861 is
due primarily to a non-cash writedown in the recorded cost of the Company's oil
and gas properties in the amount of $1,738,900 in the third quarter of 1997. The
balance of the comparative net loss of $273,961 is comprised of lower oil and
gas revenues due to declines in production volumes and product prices, and an
increase in DDA rates due to the increase in capitalized costs associated with
the Company's exploration drilling expenditures. The $1,738,900 non-cash
writedown in the recorded cost in the Company's domestic oil and gas properties
was primarily due to the unsuccessful results of drilling and completing the
initial test well on the Green's Lake Prospect and a decline in average oil and
gas prices of approximately $5.27 per Barrel of Oil Equivalent ("BOE") at the
end of the third quarter as compared to December 31, 1996. The capitalized cost
of the unsuccessful Green's Lake test well contributed some $798,000 and the
lower price per BOE resulted in a reduction of approximately $768,000 in the
estimated discounted future net revenues from estimated proved reserves. There
was also a reduction in proved non-producing reserve quantities for one of the
Company's properties. The writedown expense total of $1,738,900 contributed
$0.39 of the reported net loss per share of $0.95.
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.
CASH FLOW FROM OPERATIONS
The Company's net cash flow from operations produced a cash surplus of
$103,333 and $263,211 for the nine month periods ended September 30, 1996, and
1997, respectively. This $159,878 comparative increase in the Company's net cash
flow is primarily attributable to a increase of $1,352,706 in net proceeds from
additional borrowings, an increase of $444,683 in capital expenditures, a net
$578,479 reduction of long term liabilities, and a net decrease of $169,666 from
the aggregate of accounts receivable, current assets and accounts payable, and
cash equivalents.
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"). 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 September 30, 1997 Texoil had borrowed a total of
$3,000,000 under the Tranche A Notes, of which $1,074,076 was borrowed
during the three months ended September 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 September 30, 1997 no advances had been made under the Tranche B
Notes.
At September 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 December 31, 1997. Accordingly, the debt has been classified as current
at September 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 September 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 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.
CAPITAL EXPENDITURES
Texoil's net capital expenditures totaled $1,268,988 and $1,713,671 in the nine
month periods ended September 30, 1996 and 1997, respectively. The latter amount
is comprised primarily of leasehold and seismic acquisition costs totaling
$414,116, $226,158 of drilling costs on the Company's operated Raceland 3-D
seismic exploration project in Lafourche Parish, Louisiana, $965,098 on the
Green's Lake 3-D seismic exploration project in Galveston County, Texas operated
by Burlington Resources, and $26,084 on the Laurel Grove 3-D seismic exploration
project in Lafourche Parish, Louisiana operated by Phillips Petroleum. The
remaining $82,515 is in capitalized general and administrative costs and
capitalized workover costs at the Company's Main Pass Block 3 field.
An initial test well was drilled and completed and subsequently plugged
and abandoned on the Green's 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.
An initial test well, named the Sabine Corp. La. Royalty Trust No.1, was
commenced in August 1997 on the Raceland Prospect in Lafourche Parish, Louisiana
to a permitted depth of 13,400 feet. This test well was drilled to a depth of
12,078 feet but experienced a casing failure while running the intermediate
casing string. After repeated unsuccessful attempts to salvage the wellbore, the
initial test wellbore was plugged and abandoned and a replacement well was
commenced in October 1997 with the unanimous approval of the Company and its
partners. As described later in SUBSEQUENT EVENTS, the well named the Sabine
Corp. La. Royalty Trust No. 2 ("Sabine No. 2"), reached its objective depth and
was recommended to be plugged and abandoned when the objective zone was found to
be non-productive of oil and gas.
FUTURE CAPITAL REQUIREMENTS
The Company has made additional capital expenditures for its exploration
drilling program on the Raceland Prospect. The Company owns a 29.26% working
interest and its share of the estimated capital drilling costs of the initial
and replacement well will be approximately $1,055,000. A second prospective
area, located some 2.5 miles east of the Sabine No. 2, will be tested by a new
well, named the Shore Oil No. 1, permitted to a depth of 17,000 feet. The
Company's share of estimated capital drilling costs for the Shore Oil No. 1 will
be approximately $1,230,000.
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 these future capital requirements the Company continues
to seek additional sources of financing . There can be no assurance that the
Company's drilling program or efforts to obtain future financing 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:
The Sabine No.2 well was drilled and is now being plugged and abandoned on
the Raceland Prospect, Lafourche Parish, Louisiana. The well reached a total
depth of 13,350 feet and was found non-productive of oil and gas by open hole
log analysis. The objective sand was penetrated between 13,178 to 13,260 feet in
a structurally high position as interpreted by the 3-D Seismic mapping but log
analysis indicated the sand was wet. The Company recommended that the well be
plugged and abandoned and its partners unanimously approved the recommendation.
Operations to plug the well are in progress.
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.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings - None
Item 2 - Changes in Securities
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
27.1 Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXOIL, INC.
Date: NOVEMBER 14, 1997 By: /S/ RUBEN MEDRANO
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Ruben Medrano
President and CEO