SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported):
March 16, 1998 (December 31, 1997)
TEXOIL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
88-0177083
NEVADA 0-12633 (IRS EMPLOYER
(STATE OF INCORPORATION) (COMMISSION FILE NUMBER) IDENTIFICATION NO.)
110 CYPRESS STATION DRIVE, SUITE 220
HOUSTON, TEXAS 77066
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(281) 537-9920
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
1600 SMITH STREET, SUITE 4000
HOUSTON, TEXAS 77002
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
This Current Report on Form 8-K/A-1 is made to file historical and pro
forma financial statements omitted from the Registrant's initial Current Report
on form 8-K (filed January 9, 1998), Item 2, pertaining to the Registrant's
acquisition of Cliffwood Oil & Gas Corp., as permitted by Item 7 of Form 8-K.
FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
An index of financial information of the businesses acquired included in
this current report is presented on Page 3. Such financial information includes
the consolidated balance sheets of Cliffwood Oil & Gas Corp. as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the years then ended.
PRO FORMA FINANCIAL INFORMATION
An index of unaudited pro forma financial information included in this
report is presented on Page 3.
2
TEXOIL, INC.
CURRENT REPORT ON FORM 8-K/A - 1
INDEX TO FINANCIAL INFORMATION
1. BUSINESS ACQUIRED - CLIFFWOOD OIL & GAS CORP., AUDITED FINANCIAL
STATEMENTS:
Report of Independent Public Accountants............................. 4
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996.................................................. 5
Consolidated Statements of Income for the years ended
December 31, 1997 and 1996......................................... 6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1996............................. 7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996......................................... 8
Notes to Consolidated Financial Statements........................... 9
2. UNAUDITED TEXOIL, INC., PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
Introduction.........................................................19
Unaudited Pro Forma Consolidated Condensed
Balance Sheet as of December 31, 1997..............................20
Unaudited Pro Forma Consolidated Condensed
Statement of Operations for the year ended
December 31, 1997..................................................21
Notes to Unaudited Pro Forma
Consolidated Condensed Financial Statements........................22
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Texoil, Inc.:
We have audited the accompanying consolidated balance sheets of Cliffwood Oil
& Gas Corp (a Texas Corporation acquired by Texoil, Inc. on December 31, 1997)
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cliffwood Oil & Gas Corp. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
March 13, 1998
4
CLIFFWOOD OIL & GAS CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996
-------- -------
ASSETS
Current Assets:
Cash and cash equivalents ............................ $ 67 $ 287
Accounts receivable and other ........................ 2,912 1,792
Accounts receivable-related party .................... 60 186
Other current assets ................................. 65 --
-------- -------
Total current assets ........................ 3,104 2,265
Property, plant and equipment, at cost:
Oil and natural gas properties (full-cost method)
Evaluated properties ............................ 14,383 5,507
Unevaluated properties .......................... 1,636 --
Office and other equipment ........................... 424 181
-------- -------
16,443 5,688
Less - accumulated depreciation,
depletion and amortization ......................... (1,370) (182)
-------- -------
Net property, plant and equipment ....................... 15,073 5,506
-------- -------
Other assets ............................................ 463 29
-------- -------
TOTAL ASSETS ................................. $ 18,640 $ 7,800
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........ $ 3,151 $ 901
Accounts payable - related party ................ -- 192
Revenue royalties payable ....................... 1,638 1,312
-------- -------
Total current liabilities .................... 4,789 2,405
-------- -------
Long-term debt .......................................... 5,008 2,629
-------- -------
Deferred income taxes ................................... 558 152
-------- -------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - $.01 par value,
10,000,000 shares authorized, none
issued and outstanding at
December 31, 1997 or 1996 .......................... -- --
Class A Common stock - $.01 par value;
20,000,000 shares authorized; 3,442,657
and 2,258,300 shares issued and outstanding
at December 31, 1997 and 1996, respectively ....... 34 23
Class B Common stock (non-voting) - $.01
par value, 5,000,000 shares authorized;
333, 334 and none issued and outstanding at
December 31, 1997 and 1996, respectively .......... 3 --
Additional paid-in capital ........................... 7,242 2,223
Retained earnings ................................... 1,006 368
-------- -------
TOTAL STOCKHOLDERS' EQUITY ...................... 8,285 2,614
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .......................... $ 18,640 $ 7,800
======== =======
The accompanying notes are an integral part of these
consolidated financial statements.
5
CLIFFWOOD OIL & GAS CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
------- -------
REVENUES
Oil and gas sales ............................... $ 6,367 $ 1,461
Operator and management fees .................... 683 724
Interest and other .............................. 73 220
------- -------
Total revenues ............................. 7,123 2,405
------- -------
COSTS AND EXPENSES
Lease operating ................................. 2,809 545
Workover ........................................ 294 128
Production taxes ................................ 321 78
General and administrative ...................... 1,056 816
Depreciation, depletion and amortization ........ 1,249 182
Interest ........................................ 368 98
------- -------
Total expenses .................................. 6,097 1,847
------- -------
INCOME BEFORE INCOME TAXES ...................... 1,026 558
PROVISION FOR INCOME TAXES
Current .................................... -- (38)
Deferred ................................... (388) (152)
------- -------
TOTAL PROVISION FOR INCOME TAXES ................ (388) (190)
------- -------
NET INCOME ......................................... $ 638 $ 368
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
6
CLIFFWOOD OIL & GAS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
CLASS A COMMON STOCK CLASS B COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ------- -------- -----
Balance at December 31, 1995 ......... 1 $ 1 -- $- $ 149 $ -- $ 150
Issuance of shares ................... 2,257 22 -- - 1,678 -- 1,700
Issuance of warrants ................. -- -- -- - 396 -- 396
Net income ........................... -- -- -- - -- 368 368
----- --- --- -- ------ ------ ------
Balance at December 31, 1996 ......... 2,258 23 -- - 2,223 368 2,614
Issuance of shares ................... 1,185 11 333 3 4,900 -- 4,914
Issuance of warrants ................. -- -- -- - 119 -- 119
Net income ........................... -- -- -- - -- 638 638
----- --- --- -- ------ ------ ------
Balance at December 31, 1997 ......... 3,443 $34 333 $3 $7,242 $1,006 $8,285
===== === === == ====== ====== ======
The accompanying notes are an integral part of these
consolidated financial statements.
7
CLIFFWOOD OIL & GAS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 638 $ 368
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization ....... 1,249 182
Deferred income taxes .......................... 388 152
Accounts receivable ............................ (1,120) (1,792)
Accounts receivable - related party ............ 126 (186)
Other assets ................................... (499) (29)
Accounts payable and accrued liabilities ....... 1,761 901
Accounts payable - related party ............... (192) 192
Revenue royalties payable ...................... 326 1,312
------- -------
Net cash provided by operating activities ...... 2,677 1,100
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties ............ (7,647) (5,132)
Other additions ................................ (243) (181)
------- -------
Net cash used in investing activities ..... (7,890) (5,313)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ......... 2,614 1,871
Proceeds from long-term debt and other ......... 9,200 2,629
Repayments of long-term debt ................... (6,821) --
------- -------
Net cash provided by financing activities . 4,993 4,500
------- -------
Net increase (decrease) in cash and cash
equivalents .................................. (220) 287
Cash and cash equivalents - beginning of
period ....................................... 287 -0-
Cash and cash equivalents - end of year ........ $ 67 $ 287
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during year for:
Interest ............................ $ 368 $ 76
======= =======
Income taxes ........................ $ 28 $ 3
======= =======
Oil and gas properties purchased by issuance
of Class A common stock ...................... $ 2,300 $ --
======= =======
Warrants .................................. $ 119 $ 375
======= =======
Warrants issued for services provided .......... $ 70 $ --
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
8
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cliffwood Oil & Gas Corp. is engaged in the acquisition, development and
production of, and exploration for, crude oil, natural gas and related products
primarily in Texas and Louisiana. The accompanying consolidated financial
statements include the accounts of Cliffwood Oil & Gas Corp. and its
wholly-owned subsidiaries, Cliffwood Energy Company ("CEC"), Cliffwood
Production Co. (CPC), and Cliffwood Exploration Co. ("CEXCO"), all collectively
referred to herein as "Cliffwood" or the "Company", unless otherwise specified.
A predecessor entity was initially incorporated in 1993 and was solely owned by
Mr. Frank A. Lodzinski. No significant operations commenced until February 1996,
with the acquisition of CEC and, effective May 1, 1996, the predecessor entity
was recapitalized and changed its name to Cliffwood Oil & Gas Corp.
On December 31, 1997, all of the outstanding Cliffwood common stock was
acquired by Texoil, Inc. ("Texoil"), a Nevada corporation, pursuant to the terms
of a definitive Agreement and Plan of Merger. The shareholders of Cliffwood
exchanged each common share for 6.74 shares of Texoil common stock and,
accordingly, Cliffwood became a wholly-owned subsidiary of Texoil. Cliffwood
shareholders were issued 25,450,619 Texoil shares, representing about 70% of the
post-merger shares outstanding. The management of Cliffwood survived the merger
and replaced Texoil management. As a result, this transaction was accounted as a
reverse acquisition of Texoil by Cliffwood using the purchase method of
accounting.
The accompanying financial statements include the financial position and
results of operations as of and for the years ended December 31, 1997 and 1996
of Cliffwood Oil & Gas Corp. and subsidiaries, the business acquired by Texoil.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Intercompany accounts and transactions have been
eliminated. The Company accounts for its investment in an associated oil and gas
partnership (See Note 7) using the proportionate consolidation method, whereby
the Company's proportionate share of the partnership's assets, liabilities,
revenues and expenses is included in the appropriate classifications in the
accompanying consolidated financial statements.
PRIOR YEAR RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of demand deposits and funds invested in
highly liquid instruments with an original maturity of three months or less.
OIL AND NATURAL GAS PROPERTIES
The Company follows the full-cost method of accounting whereby all costs
associated with property acquisition, exploration and development activities are
capitalized. Included in capitalized costs for 1997 are $340,000 of payroll and
related costs of technical personnel which are directly attributable to the
Company's oil and gas acquisition, exploration and development activities. The
amount of similar costs capitalized in 1996 was not significant. Costs
associated with evaluated properties or projects are amortized using the
units-of-production method based on petroleum engineers' estimates of
unrecovered proved oil and natural gas reserves. The costs of unevaluated
properties are excluded from amortization until the properties are fully
evaluated. Interest is capitalized on oil and natural gas properties which are
not subject to amortization and are in the process of being evaluated. Included
in capitalized costs for 1997 are interest costs of $70,000; none were
capitalized in 1996. Proceeds from the sale of properties are accounted for as
reductions to capitalized costs unless such sales result in a significant change
in the relationship between capitalized costs and proved reserves, in which case
a gain or loss is recognized.
9
Impairment of capitalized costs of oil and gas properties is assessed for
each cost center, determined on a country-by-country basis. The Company's only
active cost center since inception has been the United States of America. To the
extent that capitalized costs of oil and gas properties, net of accumulated
depreciation, depletion and amortization and related deferred income taxes,
exceed the discounted future net revenues of estimated proved oil and gas
reserves plus the lower of cost or fair value of unevaluated properties, net of
income tax effects, such excess is charged to operations as an impairment of oil
and gas properties. No such write-downs were required during 1997 or 1996.
OFFICE AND OTHER PROPERTY
Acquisitions, renewals, and improvements of office and other property are
capitalized; maintenance and repairs are expensed. Depreciation deductions are
calculated using the straight-line method over the assets' estimated useful
lives of five years.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Reference is made to Note 3,
"Stock Options, Performance Awards and Stock Warrants," for a summary of the pro
forma effects of SFAS No. 123, "Accounting for Stock Based Compensation" on the
Company's results of operations for 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable and
payable and revenue royalties payable are estimated to approximate their fair
values due to the short maturities of these instruments. All of the Company's
long-term debt obligations bear interest at floating market rates, so carrying
amounts and fair values are approximately the same.
INCOME TAXES
The Company provides for income taxes using the asset and liability method,
under which a deferred income tax liability or asset is recognized by applying
the enacted statutory rates to differences between the financial reporting basis
and the tax basis of assets and liabilities. The effect on deferred income taxes
of a change in tax laws or tax rates is recognized during the period of
enactment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, if any, at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Oil and gas
reserve estimates, which are the basis for units-of-production depletion and
limitations on capitalized costs, are inherently imprecise and are expected to
change as future information becomes available.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statements requires the reporting of
comprehensive income which includes net income plus all other non-owner changes
in equity during the period. This statement is required to be adopted for fiscal
years beginning after December 15, 1997. The Company intends to adopt this
statement during its fiscal year ending December 31, 1998. The Company does not
believe the adoption of this statement will have a material effect on its
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This
statement requires the reporting of expanded information of a company's
operating segments. It also expands the definition of what constitutes an
entity's operating segments. This statement is required to be adopted for fiscal
years beginning after December 15, 1997. The Company intends to adopt this
statement during its fiscal year ending December 31, 1998. The Company does not
believe the adoption of this statement will have a material effect on its
consolidated financial statements.
10
NOTE 2: LONG-TERM DEBT
In September 1996, the Company entered into a revolving credit agreement
(Credit Agreement) with a bank to finance property acquisitions and for
temporary working capital requirements. The Credit Agreement, as amended,
provides up to $25,000,000 in available borrowings, limited by a borrowing base
(as defined in the Credit Agreement) which was $11,800,000 and $3,750,000 at
December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996,
borrowings outstanding under the Credit Agreement were $5,000,000 and
$2,600,000, respectively. The borrowing base is redetermined annually (or more
frequently at the option of the Company) and is reduced over a five-year period
on a straight-line basis.
The Credit Agreement provides for an annual facility fee of 1/4% of the
initial borrowing base and on any increases thereto, and it also provides for
monthly interest payments at the lender's prime rate plus 1/2%. The average
interest rate paid to the lender was 9% in 1997 and 1996. The Company has
granted first mortgages, assignments of production, security agreements and
other encumbrances on its oil and gas properties to the lender, as collateral,
pursuant to the Credit Agreement.
Under the terms of the Credit Agreement, up to $500,000 is available under
the borrowing base for the issuance of letters of credit. At December 31, 1997,
$124,955 was reserved for the issuance of letters of credit. No amounts were
reserved for the issuance of letters of credit at December 31, 1996.
The Credit Agreement contains covenants which, among other things, restrict
the payment of dividends on any security, limit the amount of consolidated debt,
limit the Company's ability to make certain loans and investments, and require
that the Company remain in compliance with certain covenants of the Credit
Agreement.
Estimated maturities of long-term debt, assuming the present borrowing base
is unchanged, as of December 31, 1997, are $-0- in 1998 and 1999, $1,033,272 in
2000, $2,600,000 in 2001 and $1,375,000 in 2002.
NOTE 3: STOCK OPTIONS, PERFORMANCE AWARDS AND STOCK WARRANTS
STOCK OPTIONS AND PERFORMANCE AWARDS
During 1997, the Company adopted an Incentive Stock Option Plan and a
Non-employee Director Stock Option Plan. On August 12, 1997, pursuant to these
plans, the Board granted to certain employees and non-employee directors of the
Company options for 428,000 and 125,000 shares of Class A Common Stock,
respectively. On December 8, 1997, the Board granted to an employee of the
Company options for 10,000 shares of Class A Common Stock. All options granted
during 1997 have an exercise price of $3.50 and vest over a three-year period
beginning January 1, 1997. In addition, pursuant to the Incentive Stock Option
Plan, in August of 1997, the Board granted to certain employees of the Company,
26,500 performance awards for Class A Common Stock. Each award vests over a
three-year period beginning January 1, 1997. There were no employee stock
options granted or outstanding during 1996.
The following summarizes information with regard to the stock option plans
for the year ended December 31, 1997 (shares in thousands):
1997
--------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Outstanding at beginning of year .................... -- $--
Granted .......................................... 590 3.34
Exercised ........................................ -- --
Forfeited ........................................ -- --
--- ----
Outstanding at end of year .......................... 590 3.34
=== ====
Options exercisable at end of year .................. 197 $3.34
11
The following table summarizes information for the options outstanding at
December 31, 1997 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
NUMBER OF WEIGHTED WEIGHTED NUMBER OF WEIGHTED
OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 LIFE IN YEARS PRICE AT 12/31/97 PRICE
- ------------------------ ----------- ------------- ----- ----------- -----
$ 0.00 -- $ 3.50 590 3 3.34 197 3.34
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock-based compensation plans. APB Opinion 25 does not require
compensation costs to be recorded on options which have exercise prices at least
equal to the fair value of the underlying common stock on the date of grant. The
26,500 performance awards granted are compensatory under APB 25. Therefore, the
Company will recognize approximately $93,000 of compensation expense related to
these options, $31,000 of which was recognized in 1997. No such performance
awards were granted or outstanding during 1996.
Had compensation costs for the remainder of the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans, consistent with the optional accounting method
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's $638,000 reported net income would have been reduced to approximately
$522,000.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for 1997:
risk-free interest rates ranging from 5.9% to 6.1%; dividend yield of 0%; 0%
stock price volatility due to the non-public status of the Company during 1997;
and an expected option life of three years. The weighted-average fair value of
options granted during 1997 was $3.62 per option.
STOCK WARRANTS
In connection with the formation of Cliffwood Acquisition 1996 Limited
Partnership ("CALP 96" or the "Partnership"; see Note 7), and concurrent with
the joint acquisition of certain oil and gas properties, on September 27, 1996,
the Company issued warrants to certain limited partners of CALP 96 for the
purchase of 300,000 shares of Cliffwood Common Stock, at an exercise price of
$1.25 per share. The fair value of the warrants was estimated by management to
be $396,000, based on a valuation of partnership reversionary interests and
further corroborated by a valuation of the Company's common stock, immediately
before and after the subject transaction, with each such valuation calculated by
management using common industry methodologies. This warrant value is reflected
as an addition to proved oil and natural gas properties and additional paid-in
capital in the accompanying consolidated financial statements.
Cliffwood issued warrants to purchase common stock in connection with certain
financing activities and purchases of assets consummated in 1997. The table set
forth below lists such warrants, the exercise prices and the dates of issuance.
All warrants issued and outstanding expire five years after the date of
issuance.
EXERCISE DATE OF FMV AT DATE
WARRANTS PRICE ISSUANCE OF GRANT
-------- ----- -------- --------
First Union Capital Markets, Inc. 167,500 $4.25 June 1, 1997 .42
Lincoln National Life Insurance Co. 261,250 $4.25 August 4, 1997 .36
V & C Energy Limited Partnership 50,000 $4.50 August 5, 1997 .36
Belleview Capital Corp. 13,750 $4.25 August 4, 1997 .36
The fair value of each warrant grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for
1997: risk-free interest rates ranging from 6.1% to 6.5%; dividend yield of
0%; 0% stock price volatility due to the non-public status of the Company
during 1997; and an
12
expected warrant life of five years. The weighted-average fair value of warrants
granted during 1997 was $3.62 per option, for warrants granted at fair market
value. The values of all warrants, except those warrants issued to First Union
Capital Markets, Inc. (First Union) are reflected as an addition to evaluated
oil and natural gas properties and additional paid-in capital in the
accompanying consolidated financial statements. The warrants issued to First
Union were issued in exchange for broker services received from First Union and
are recorded within additional paid-in capital.
No stock options, performance awards or warrants were exercised during 1997
or 1996.
NOTE 4: INCOME TAXES
The following table shows the components of the Company's income tax
provision (in thousands):
1997 1996
---- ----
Current:
Federal ......................................... $-- $ --
State ........................................... -- 38
---- ----
-- 38
---- ----
Deferred:
Federal ......................................... 358 152
State ........................................... 30 --
---- ----
$388 $190
==== ====
The following table shows the components of the Company's net deferred tax
liability (in thousands):
AS OF DECEMBER 31,
-----------------
1997 1996
----- -----
Deferred tax liabilities:
Tax over book depreciation ............................... $ 216 $ 95
Oil and gas property costs expensed for tax, but
capitalized for financial reporting ................... 442 57
----- -----
Deferred tax liability ................................... $ 658 $ 152
----- -----
Deferred tax asset:
Net operating loss carryforward ....................... (100) (--)
----- -----
Net deferred tax liability ............................... $ 558 $ 152
===== =====
A reconciliation of taxes computed at the corporate federal income tax rate
to the reported income tax provision is as follows (in thousands):
1997 1996
---- ----
Statutory federal income tax provision.................... 358 $190
State income tax provision ............................... 30 --
---- ----
Income taxes as reported ................................. $388 $190
==== ====
At December 31, 1997, the company had U.S. federal and state income tax net
operating loss carryforwards of approximately $380,000 which will expire in
periods beginning in the year 2008.
NOTE 5: CONCENTRATIONS OF CREDIT RISK
Credit risk represents the accounting loss which the Company would record if
its customers failed to perform pursuant to the contractual terms. The Company's
two largest customers consist of large multinational companies.
13
In addition, the Company transacts business with independent oil producers,
crude oil trading companies and a variety of other entities. The Company's
credit policy and the relatively short duration of receivables mitigate the risk
of uncollected receivables.
Accounts receivable for oil and natural gas sales from five customers
amounted to 58% and 58% of the outstanding balance at December 31, 1997 and
1996, respectively. Sales to three and four customers accounted for 50% and 63%
of oil and natural gas revenues for 1997 and 1996, respectively. No other
purchaser of the Company's products accounted for as much as 10% of total sales
during 1997 or 1996.
NOTE 6: COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Minimum future lease commitments in connection with office space and
equipment leased by the Company are: 1998 - $69,432, 1999 - $69,432, 2000 -
$5,786, and zero thereafter. Rental payments made under the terms of agreements
totaled $61,945 and $22,035 in 1997 and 1996, respectively. The Company has
entered into various commitments and operating agreements related to
substantially all of its oil and natural gas properties. It is management's
belief that such commitments will be met without a significant adverse impact on
the Company's financial position or results of operations.
CONTINGENCIES
No legal proceedings are pending against the Company and the Company is
unaware of any potential claims or lawsuits involving environmental, operating
or corporate matters which are expected to have a material effect on the
Company's financial position or results of operations.
NOTE 7: RELATED-PARTY TRANSACTIONS
INVESTMENT IN PARTNERSHIP
In September 1996, in connection with the acquisition of certain properties,
CEC became the General Partner of CALP 96. The Partnership is a limited
partnership formed to acquire interests in oil and gas properties. Partnership
capitalization was approximately $5.2 million and $3.2 million at December 31,
1997 and 1996, respectively. Generally, CEC funds ten percent (10%) of the
Partnership's capital requirements and may earn up to seventy percent (70%) of
Partnership cash flows, predicated upon achieving the recovery of invested funds
and a specified rate of return for the limited partners. In accordance with
certain agreements, Cliffwood must offer the Partnership 25% of future
acquisitions sponsored by the Company, up to the Partnership capital limit of
$10.0 million.
The Company, through Cliffwood Production Co., operates properties for CALP
96. Accordingly, amounts reflected in the accompanying financial statements as
accounts receivable or accounts payable, to or from related parties, represent
amounts associated with operations for this entity.
MANAGEMENT
The Company entered into certain transactions with management, including
Frank A. Lodzinski, President, and Jerry M. Crews, Executive Vice President.
A summary of related-party transactions is as follows:
Energy Resource Associates, Inc. ("ERA"), a Texas corporation, is solely
owned and controlled by Mr. Lodzinski. ERA is also the General Partner of the
V & C Energy Limited Partnership ("V&C") which has participated with
Cliffwood in several of its acquisitions, at cost. In September 1997, V & C
sold certain oil & gas properties to the Company for $2.5 million in cash,
100,000 shares of Cliffwood stock and 50,000 warrants to purchase Cliffwood
common stock at a price of $4.50 per share.
Mr. Lodzinski was paid a cash fee of $40,250 upon closing of certain
acquisitions for the Company.
The Company had an agreement with Mr. Crews that he would earn 33,000 shares
of common stock based on his agreement to provide services without
compensation for a period of about six months. Mr. Crews also earned a fee of
$57,250 based on his success in generating and closing acquisitions. In
addition, he was issued 55,000 common shares for his contribution of cash and
certain equipment to the Company.
14
CLIFFWOOD OIL & GAS CORP.
SUPPLEMENTARY OIL & GAS INFORMATION
COSTS INCURRED IN OIL & GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
YEARS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
------- ------
(000's)
Acquisition of properties:
Evaluated .............................. $ 7,941 $5,536
Unevaluated ............................ 1,636 --
Exploration costs ........................... -- --
Development costs ........................... 906 --
------- ------
Total costs incurred ................... $10,483 $5,536
======= ======
CAPITALIZED COSTS RELATING TO OIL & GAS PRODUCING ACTIVITIES
DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
------- ------
(000's)
Evaluated properties .......................... $14,383 $5,536
Unevaluated properties ........................ 1,636 --
------- ------
16,019 5,536
Less: Accumulated depreciation,
depletion and Amortization................... 1,292 164
------- ------
Net capitalized costs .................... $14,727 $5,372
======= ======
Unevaluated properties and associated costs not currently being amortized and
included in oil and gas properties were $1,636,000 at December 31, 1997, all of
which had been incurred in 1997. The projects represented by these costs were
undergoing exploration or development activities or are projects in which the
Company intends to commence such activities in the future. The Company will
begin to amortize these costs when proved reserves are established or an
impairment is determined. The Company believes this determination will occur in
24 to 36 months.
See accompanying notes to supplementary information.
15
CLIFFWOOD OIL & GAS CORP.
SUPPLEMENTARY OIL & GAS INFORMATION
RESERVE QUANTITY INFORMATION
YEARS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
----------------- -----------------
OIL GAS OIL GAS
MBBL MMCF MBBL MMCF
------ ------ ------ ------
Proved reserves:
Beginning of year ............. 1,684 4,622 -- --
Acquisitions .............. 2,555 4,972 1,731 4,815
Extensions, discoveries
and improved recovery ... 136 302 -- --
Revisions of
previous estimates ...... 340 (133) -- --
Production ................ (255) (707) (47) (193)
------ ------ ------ ------
End of year .................. 4,460 9,056 1,684 4,622
====== ====== ====== ======
Proved developed reserves
End of year ................... 3,937 6,421 1,684 4,622
====== ====== ====== ======
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOW RELATING TO PROVED OIL & GAS RESERVES
DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
------- -------
($000's)
Future cash inflows .............................. $95,394 $56,038
Future production and development costs
Production costs and taxes ................. 50,304 27,420
Development and abandonment ................. 4,188 208
Future income tax expenses ....................... 9,415 7,963
------- -------
Future net cash flows ............................ 31,487 20,477
Discount at 10% per annum ........................ 12,788 7,688
------- -------
Standardized measure of discounted
future net cash flow ........................ $18,699 $12,759
======= =======
Standardized measure before income taxes ......... $24,290 $17,743
======= =======
See accompanying notes to supplementary information.
16
CLIFFWOOD OIL & GAS CORP.
SUPPLEMENTARY OIL & GAS INFORMATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AND CHANGES THEREIN RELATING
TO PROVED OIL AND GAS RESERVES
YEARS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
The following are the principal sources of change in the standardized measure of
discounted future net cash flows during 1997 and 1996:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
-------- --------
($000)
Standardized measure of discounted future net cash flows, beginning of year .. $ 12,759 $ --
Purchases of reserves ........................................................ 12,001 13,469
Extensions, discoveries and improved recovery, net of costs .................. 1,095 --
Revisions of previous quantity estimates ..................................... 2,575 --
Net changes in prices and production costs ................................... (7,228) --
Changes in estimated future development costs ................................ (228) --
Development costs incurred during period that reduced future
development costs ....................................................... 208 --
Sales of oil and gas produced during period, net of production costs ......... (2,874) (710)
Net change in income taxes ................................................... (612) --
Accretion of discount ........................................................ 1,774 --
Other (changes in production rates, timing and other) ........................ (776) --
-------- --------
Standardized measure of discounted future net cash flows, end of year ........ $ 18,694 $ 12,759
======== ========
See accompanying notes to supplementary information.
17
CLIFFWOOD OIL & GAS CORP.
NOTES TO SUPPLEMENTARY OIL & GAS INFORMATION
(UNAUDITED)
1. PRESENTATION AND RESERVE DISCLOSURE INFORMATION
Reserve disclosure information is presented in accordance with the provisions
of Statement of Financial Accounting Standards No. 69 ("SFAS 69"),
Disclosures About Oil and Gas Producing Activities.
2. DETERMINATION OF PROVED RESERVES
The estimate of the Company's proved reserves was determined by an
independent petroleum engineer in accordance with the provisions of SFAS 69
and applicable rules of the Securities and Exchange Commission. The estimates
of proved reserves are inherently imprecise and are continually subject to
revision based on production history, results of additional exploration and
development and other factors. Estimated future cash flows were computed by
applying prices of oil and gas received by the Company at the end of the
indicated periods to estimated future production of proved reserves, less
estimated future development and production costs, which were estimated based
on current costs.
3. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves and the changes in standardized measure of
discounted future net cash flows relating to proved oil and gas reserves were
prepared in accordance with the provisions of SFAS 69. Future cash inflows
are computed as described in Note 2 above by applying current prices to
year-end quantities of proved reserves. Future production and development
costs are computed estimating the expenditures to be incurred in developing
and producing the oil and gas reserves at year-end, based on year-end costs
and assuming continuation of existing economic conditions.
Future income tax expenses are calculated by applying the year-end U.S. tax
rate to future pre-tax cash inflows relating to proved oil and gas reserves,
less the tax basis (including any applicable net operating loss
carryforwards) of oil and gas properties involved. Future income tax expenses
give effect to permanent differences and tax credits and allowances relating
to the proved oil and gas reserves.
Future net cash flows are discounted at a rate of 10% annually to derive the
standardized measure of discounted future net cash flows. This calculation
does not necessarily represent an estimate of fair value or the present value
of such cash flows since future prices and costs can vary substantially from
year-end and the use of a 10% discount figure is arbitrary.
18
TEXOIL, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
INTRODUCTION
On December 31, 1997, pursuant to the terms of a definitive plan of merger,
and a new financing arrangement, Texoil, Inc., ("Texoil" or the "Company"), a
Nevada Corporation, acquired all of the outstanding common shares of Cliffwood
Oil & Gas Corp. ("Cliffwood"), a Texas corporation, in exchange for 25,450,179
shares of previously authorized but unissued shares of Texoil common stock. For
financial reporting purposes, the transaction described above will be accounted
for as a reverse acquisition of Texoil by Cliffwood. The acquired Texoil assets
existing immediately prior to the acquisition ("Texoil Net Assets") will be
recorded at fair value using the purchase method of accounting on December 31,
1997, as required by generally accepted accounting principles. Such assets
consisted of cash, oil & gas properties, certain mineral leases, options and 3-D
seismic data. Management believes the resultant valuation of the Texoil Net
Assets included in the accompanying Unaudited Pro Forma Consolidated Condensed
Financial Statements is more appropriate than amounts which would result if the
market price of Texoil shares on December 31, 1997 were used for the valuation,
because (1) the fair value of underlying net assets acquired can be readily
determined, with reasonable precision, using valuation procedures common in the
oil & gas industry, (2) there is limited trading activity in Company shares, (3)
common stock issued to effect the business combination and recapitalization
substantially exceeds the trading volume of shares in the marketplace and the
number of shares outstanding prior to the business combination, (4) shares
issued are restricted in their marketability, (5) limitations on capitalized
costs exist for proved oil & gas properties would otherwise be exceeded in the
purchase price allocation, and (6) costs allocated to unevaluated properties
should not exceed their underlying fair values.
The Unaudited Pro Forma Consolidated Condensed Balance Sheet includes the
accounts of Cliffwood and Texoil as if the Texoil net assets were acquired on
December 31, 1997, while the Unaudited Pro Forma Consolidated Condensed
Statement of Income for the year ended December 31, 1997 is presented as if the
Texoil net assets were acquired on January 1, 1997. The accompanying statements
should be read in connection with all the disclosures and information contained
in the financial statements of Cliffwood Oil & Gas Corp. included in this 8-K/A1
filing, and Texoil quarterly and annual filings with the Securities and Exchange
Commission. Reference should also be made to the assumptions and explanations of
pro forma adjustments, discussed in the accompanying notes. The pro forma
consolidated financial position and results of operations reflected herein are
not necessarily indicative of actual financial statements and results of
operations for the combined companies had the transaction occurred at the dates
indicated. However, management believes that the assumptions provide a
reasonable basis for presenting the significant effects of the transactions as
contemplated and that the proforma adjustments give appropriate effect to these
assumptions and are properly applied in the proforma financial information.
Further, such pro forma financial statements are not necessarily indicative of
the future financial performance of the combined entities.
19
TEXOIL, INC./CLIFFWOOD OIL & GAS CORP.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AT DECEMBER 31, 1997
(In thousands)
CLIFFWOOD TEXOIL PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
--------- ---------- ---------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 67 $ 28 $ 3,964 (b) $ 4,059
Accounts receivable 2,972 532 3,504
Other current assets 65 71 (71)(c) 65
--------- ---------- ---------- ---------
Total current assets 3,104 631 3,893 7,628
--------- ---------- ---------- ---------
Property and equipment, at cost:
Oil and gas properties, net 14,727 5,888 (1,268)(c) 19,347
Other equipment, net 346 346
Other Assets 463 50 (50)(c) 463
Total Assets $ 18,640 $ 6,569 $ 2,575 $ 27,784
========= ========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,151 $ 1,092 $ (36)(b) $ 4,207
Revenues/royalties payable 1,638 249 1,887
Notes Payable 4,500 (4,500)(a) -
Deferred Rent 14 (14)(c)
Current portion of long-term debt
--------- ---------- ---------- ---------
Total current liabilities 4,789 5,855 (4,550) 6,094
--------- ---------- ---------- ---------
Long-term debt 5,008 1,650 (600)(a) 58
(1,050)(b)
(4,950)(b)
Other long term liabilities 28 (28)(c)
Deferred income taxes 558 (343)(c) 215
Convertible subordinated notes 10,000 (b) 10,000
Stockholders' Equity:
Preferred Stock 2,300 (2,300)(a)
Common Stock 7,279 10,106 7,400 (a) 10,411
(14,374)(d)
Retained earnings 1,006 (13,370) (1,004)(c) 1,006
14,374 (d)
--------- ---------- ---------- ---------
Total shareholders' equity 8,285 (964) 4,096 11,417
--------- ---------- ---------- ---------
Total Liabilities & Stockholders' Equity $ 18,640 $ 6,569 $ 2,575 $ 27,784
========= ========== ========== =========
20
TEXOIL, INC./CLIFFWOOD OIL & GAS CORP.
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands)
CLIFFWOOD TEXOIL PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
--------- ---------- --------- --------
Revenues:
Oil and gas sales $ 6,367 $ 813 $ 7,180
Operator and management fees 683 683
Other 73 474 547
--------- ---------- --------- --------
Total Revenues 7,123 1,287 - 8,410
--------- ---------- --------- --------
Expenses:
Lease operating expenses 2,809 203 3,012
Workover expenses 294 294
Production taxes 321 76 397
General and administrative 1,056 511 (176)(e) 1,391
Depreciation, depletion and amortization 1,249 2,389 (2,197)(f) 1,441
Interest expense 368 333 (49)(g) 652
Non-cash interest expense 3,409 (3,409)(h) -
--------- ---------- --------- --------
Total Expenses 6,097 6,921 (5,831) 7,187
--------- ---------- --------- --------
Earnings before income taxes 1,026 (5,634) 5,831 (i) 1,223
Provision for income taxes 388 28 (j) 416
Net earnings (loss) $ 638 $ (5,634) $ 5,803 $ 807
========= ========== ========= ========
Basic earnings (loss) per share $ (1.26) $ 0.02
Basic weighted average shares outstanding 4,459 36,526
Diluted earnings (loss) per share $ (1.26) $ 0.02
Diluted weighted average shares outstanding 4,459 40,772
21
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For financial reporting purposes, the combination of Texoil, Inc., and
Cliffwood Oil & Gas Corp. is presented as a reverse acquisition of Texoil by
Cliffwood with the net assets of Texoil being recorded at fair value on December
31, 1997 using the purchase method of accounting in accordance with generally
accepted accounting principles. Accordingly, the accompanying Unaudited Pro
Forma Consolidated Condensed Balance Sheet includes the historical accounts of
Cliffwood Oil & Gas Corp. and the allocated fair values of Texoil net assets as
of December 31, 1997. For purposes of the Unaudited Pro Forma Consolidated
Condensed Income Statements for the year ended December 31, 1997, it is assumed
that the Texoil net assets were acquired January 1, 1997.
As more fully described in the Company's Form 8-K filed on January 9, 1997,
the Company was recapitalized pursuant to the terms of a definitive plan of
merger ("Merger Agreement") as a condition to closing the acquisition of
Cliffwood Oil & Gas Corp. The recapitalization resulted in $5.1 million of
convertible debt and $2.3 million of convertible preferred stock being converted
to Texoil common shares. In addition, the Company entered into a Note Purchase
Agreement with four limited partnerships affiliated with Resource Investors
Management Co. ("RIMCO"), and issued 7 7/8% Convertible Subordinated General
Obligation Notes in the principal amount of $10.0 million to such partnerships.
The proceeds of the issuance were used to repay $1,050,000 of Texoil long-term
debt to certain pre-combination directors and to repay substantially all
outstanding Cliffwood bank debt.
Adjustments to the Unaudited Pro Forma Consolidated Condensed Balance Sheet
at December 31, 1997, are as follows:
(a) To convert $5.1 million ($4.5 million current, $600,000 non-current) of
Texoil convertible debt and $2.3 million of Texoil convertible preferred
stock to $7.4 million of Texoil common shares pursuant to the terms of
the Merger Agreement.
(b) To reflect the issuance of $10.0 million of 7 7/8% convertible
subordinated general obligation notes, and the repayment of $4,950,000
million of Texoil bank debt, $1,050,000 million of other Texoil debt
owed to certain former directors and related interest of $36,000.
(c) To adjust Texoil's net historical cost balances to the allocated
purchase price of Texoil Net Assets. The resultant basis of Texoil oil
and gas properties is approximately $4,620,000, comprised of $1,685,000
for proprietary 3-D seismic data, $1,296,000 for unevaluated mineral
leases and options and $1,982,000 for evaluated oil & gas properties.
Also, to give effect to Texoil book and tax basis differences.
(d) To eliminate Texoil's historical accumulated deficit consistent with the
recapitalization of the Company and purchase accounting.
Adjustments to the Unaudited Pro Forma Consolidated Condensed Income
Statements for the year ended December 31, 1997 are as follows:
(e) To reduce general and administrative expenses for the effects of actual
personnel reductions implemented subsequent to the business combination.
(f) To recalculate depreciation, depletion and amortization based on the
combined reserves and production of Texoil and Cliffwood and to
eliminate the provision for impairment of oil and gas properties
recorded in 1997 by Texoil.
(g) To adjust interest expense related to debt issued in connection with the
acquisition.
(h) To eliminate interest expense on convertible debt which was converted as
a result of the business combination.
(i) To eliminate preferred dividends on securities converted to common stock
as a condition of the business combination. No preferred stock dividends
by Texoil were declared subsequent to June 30, 1996.
22
(j) To recalculate the provision for income taxes.
23
SIGNATURE
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 hereunto duly authorized.
Date: March 13, 1998
TEXOIL, INC.
/s/ FRANK A. LODZINSKI
Frank A. Lodzinski,
Chief Executive Officer