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, 1998
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 (I.R.S. EMPLOYER
OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
110 CYPRESS STATION DRIVE
SUITE 220
HOUSTON, TEXAS 77090-1629
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 537-9920
(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: 39,285,094 shares of common
stock, $.01 par value, issued and outstanding at November 6, 1998.
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, 1998............. 3
Consolidated Statements of
Operations
for the three and nine months
ended September 30, 1998 and
1997 (unaudited)............... 4
Consolidated Statements of Cash
Flows
for the nine months ended
September 30, 1998 and 1997
(unaudited).................... 5
Notes to Consolidated Financial
Statements (unaudited)......... 6
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS..................... 10
PART II. OTHER INFORMATION.......... 20
2
TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30,
1998
-------------
Assets:
Current Assets:
Cash and cash equivalents.......... $ 482
Accounts receivable and other...... 1,706
Other current assets............... 1,363
-------------
Total current assets.......... 3,551
-------------
Property, plant and equipment, at cost:
Oil and natural gas properties
(full-cost method):
Evaluated properties.......... 25,629
Unevaluated properties........ 4,278
Office and other equipment.............. 587
-------------
30,494
-------------
Less -- accumulated depletion,
depreciation and amortization......... (4,007)
-------------
Net property, plant and equipment....... 26,487
-------------
Other assets............................ 590
-------------
Total assets.................. $30,628
=============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued
liabilities....................... $ 1,573
Accounts payable-related party..... 1,002
Revenue and royalties payable...... 803
-------------
Total current liabilities..... 3,378
-------------
Long-term debt.......................... 16,050
-------------
Stockholders' equity:
Series A preferred stock -- $.01
par value with liquidation
preference of $100 per share,
10,000,000 shares authorized, none
issued and outstanding............ --
Common stock -- $.01 par value;
60,000,000 shares authorized;
39,285,094 shares issued and
outstanding....................... 393
Additional paid-in capital.............. 10,782
Retained earnings....................... 25
-------------
Total stockholders' equity.... 11,200
-------------
Total liabilities and
stockholders' equity......... $30,628
=============
The accompanying notes are an integral part of these consolidated financial
statements.
3
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues:
Oil and gas sales............... $ 1,932 $ 1,664 $ 6,164 $ 4,268
Operator and management fees.... 243 205 724 536
Interest and other.............. 13 35 86 104
-------------- -------------- -------------- --------------
Total revenues............. 2,188 1,904 6,974 4,908
-------------- -------------- -------------- --------------
Costs and Expenses:
Lease operating................. 1,241 672 3,383 1,807
Workover........................ 10 71 119 314
Production taxes................ 111 74 337 223
General and administrative...... 286 275 1,113 726
Depletion, depreciation and
amortization.................. 555 511 1,489 859
Write-down of oil and gas
properties.................... -- -- 1,208 --
Interest........................ 242 150 521 288
-------------- -------------- -------------- --------------
Total expenses............. 2,445 1,753 8,170 4,217
-------------- -------------- -------------- --------------
Income (loss) before income taxes.... (257) 151 (1,196) 691
Provision for deferred income
taxes.............................. -- (52) 215 (235)
-------------- -------------- -------------- --------------
Net income (loss).................... $ (257) $ 99 $ (981) $ 456
============== ============== ============== ==============
Basic net income (loss) per share.... $ (.01) $ -- $ (.03) $ .02
============== ============== ============== ==============
Basic weighted average shares........ 39,285,094 23,279,379 38,108,921 18,598,000
============== ============== ============== ==============
Diluted net income (loss) per
share.............................. $ (.01) $ -- $ (.02) $ .02
============== ============== ============== ==============
Diluted weighted average shares...... 41,507,054 24,485,207 41,583,045 20,871,323
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income (loss)....................... $ (981) $ 456
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depletion, depreciation and
amortization...................... 1,489 859
Write-down of oil and gas
properties........................ 1,208 --
Deferred income taxes.............. (215) 235
Accounts receivable................ 1,739 (1,080)
Accounts receivable -- related
party............................. 60 176
Other assets....................... (1,486) (970)
Accounts payable and accrued
liabilities....................... (2,634) 677
Accounts payable -- related
party............................. 1,002 --
Revenue royalties payable.......... (1,084) 929
--------- ---------
Net cash provided by (used in)
operating activities........ (902) 1,282
--------- ---------
Cash flows from investing activities:
Additions to oil and gas
properties........................ (8,504) (9,747)
Other equipment additions.......... (163) (92)
--------- ---------
Net cash used in investing
activities.................. (8,667) (9,839)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common
stock............................. -- 2,465
Proceeds from long-term debt and
other............................. 6,000 6,280
Repayments of long-term debt....... (8) --
--------- ---------
Net cash provided by financing
activities.................. 5,992 8,745
--------- ---------
Net increase (decrease) in cash and cash
equivalents........................... (3,577) 188
Cash and cash equivalents -- beginning
of period............................. 4,059 287
--------- ---------
Cash and cash equivalents -- end of
period................................ $ 482 $ 475
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest...................... $ 703 $ 238
========= =========
Income taxes.................. $ -- $ 25
========= =========
Oil and gas properties purchased by
issuance of common stock.............. $ 763 $ 2,300
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
BUSINESS COMBINATION
On December 31, 1997, pursuant to the terms of a definitive plan of merger
("Merger Agreement" or "Merger") and a financing arrangement, Texoil, Inc.
("Texoil" or the "Company"), a Nevada corporation, through a wholly-owned
subsidiary, acquired all of the outstanding common shares of Cliffwood Oil & Gas
Corp. ("Cliffwood"), a Texas corporation. As a result of the Merger, former
stockholders of Cliffwood acquired 70% (and voting control) of Texoil
outstanding common stock. The pre-merger stockholders of Texoil retained 30% of
such common stock. Accordingly, for financial reporting purposes, the Merger has
been accounted for as a reverse acquisition of Texoil by Cliffwood. The Texoil
assets ("Texoil Net Assets"), existing on December 31, 1997, have been
recorded at fair value using the purchase method of accounting, as required by
generally accepted accounting principles.
PRO FORMA RESULTS OF OPERATIONS
Selected results of operations for the three and nine month periods ended
September 30, 1997, on a pro forma basis giving effect to the Merger, as if it
took place on January 1, 1997, are as follows (in thousands, except per share
data):
SEPTEMBER 30, 1997
----------------------------
THREE MONTHS NINE MONTHS
------------ -----------
Revenues............................. $ 2,050 $ 5,585
============ ===========
Net Income........................... $ 190 $ 621
============ ===========
Basic income per share............... $ .01 $ .03
============ ===========
Basic weighted average shares
outstanding........................ 23,279,379 18,598,000
============ ===========
Diluted income per share............. $ .01 $ .03
============ ===========
Diluted weighted average shares
outstanding........................ 25,464,848 20,898,017
============ ===========
Adjustments to the historical results to estimate the pro forma results of
operations for the three and nine months ended September 30, 1997, include
adjustments to (1) reduce general and administrative expenses for the effects of
actual personnel reductions implemented subsequent to the Merger, (2)
recalculate depletion, depreciation and amortization based on the combined
reserves and production of Texoil and Cliffwood and to eliminate the historical
write-down of oil and gas properties recorded in 1997 by Texoil, (3) adjust
interest expense related to debt issued in connection with the Merger, (4)
eliminate preferred dividends on securities converted to common stock as a
condition of the merger and (5) recalculate the provision for income taxes. The
unaudited pro forma amounts do not purport to be indicative of the results of
operations which would have been reported had the reverse acquisition occurred
as of January 1, 1997, or that may be reported in the future.
ORGANIZATION AND BASIS OF PRESENTATION
Texoil is engaged in the acquisition, development, production of and
exploration for crude oil, natural gas and related products primarily in Texas
and Louisiana. The accompanying consolidated financial statements include the
historical accounts of Cliffwood and its wholly-owned subsidiaries. Texoil,
Cliffwood and subsidiaries are all collectively referred to herein as "Texoil"
or "The Company", unless otherwise specified. Although Texoil was the legal
acquirer, all events described or referred to as prior to December 31, 1997,
relate to Cliffwood, as the accounting acquirer.
6
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The financial statements included herein have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, the statements reflect all
adjustments (which consist solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
results for interim periods. Certain information and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-KSB for the year-ended December 31,
1997, filed with the SEC.
NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share", effective for interim and annual reporting periods
ending after December 15, 1997. This statement replaces primary net income per
common share with a newly defined basic net income per common share and modifies
the computation of diluted net income per common share. The Company adopted this
statement effective for the fiscal year ending December 31, 1997. All prior
period net income per common share amounts have been restated.
Basic net income (loss) per common share is computed based on the weighted
average shares of common stock outstanding. Net income (loss) per share
computations to reconcile basic and diluted net income (loss) for the three and
nine month periods ended September 30, 1998 and 1997 consist of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Net Income (Loss).................... $ (257) $ 99 $ (981) $ 456
Basic weighted average shares........ 39,285,094 23,279,379 38,108,921 18,598,000
Effect of dilutive securities (1):
Warrants........................ 677,850 1,205,828 1,948,955 2,273,323
Options......................... 1,544,110 -- 1,525,169 --
Awards.......................... -- -- -- --
Convertible notes............... -- -- -- --
Diluted weighted average shares...... 41,507,054 24,485,207 41,583,054 20,871,323
Per common share net income (loss):
Basic........................... $ (.01) $ -- $ (.03) $ .02
Diluted......................... $ (.01) $ -- $ (.02) $ .02
- ------------
(1) A weighted average year-to-date number of warrants and options to purchase
shares of common stock were outstanding during the three months and nine
months ended September 30, 1998, in the amounts of 1,800,000 and 175,000,
respectively, which were not included in the computation of diluted per
common share net income because the exercise prices were greater than the
average market price of the common shares.
NOTE 2: NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The statement requires (a) classification of items of other comprehensive income
by their nature in a financial statement and (b) display of the accumulated
balance of other
7
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprehensive income separate from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for interim periods beginning after December 15, 1997. For the
quarters ended September 30, 1998 and 1997, there is no difference between the
Company's "traditional" and "comprehensive" net income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which establishes standards
for reporting information about operating segments in annual financial
statements and requires that selected information be reported about the
operating segments in interim financial reports issued to the shareholders. It
also establishes standards for related disclosure about products and services,
geographic areas, and major customers. The Company has concluded that it does
not meet the criteria which require business segment reporting.
NOTE 3: CREDIT AGREEMENT
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 for up to $25,000,000 in available borrowings, limited by a borrowing
base calculated according to the properties and projected cash flows of the
Company (as defined in the Credit Agreement). The borrowing base was $8,500,000
at September 30, 1998. Borrowings outstanding under the Credit Agreement were
$6,050,000 as of September 30, 1998. See Note 5, "Subsequent Event" below. 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%. Alternatively, the
Company may elect a London Interbank Offering Rate ("LIBOR") option at 2.25%
over the LIBOR rate, prior to any redetermination including 1998 acquisitions.
The average interest rate paid to the lender was 8.6% for the nine months ended
September 30, 1998. 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 September 30, 1998, the
Company reserved $115,855 for the issuance of letters of credit. 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.
NOTE 4: WRITE-DOWN OF OIL & GAS PROPERTIES
As a direct result of the continued decline of oil prices in 1998, the
Company recorded a write-down of oil and gas properties, in the second quarter,
in the amount of $1,208,000. The write-down is reflected as a non-cash operating
expense for the nine months ended September 30, 1998, and reduced net oil and
gas properties to the "full-cost ceiling", as required by the rules of the
SEC. Under the SEC rules, the full-cost ceiling is a limitation on capitalized
costs and is calculated as (1) the estimated present value of future net
revenues, from proved reserves after operating expenses and capital costs,
discounted at 10% per annum, using current oil and gas prices and costs held
constant over the life of the properties, (2) the lower of cost or fair value of
unevaluated oil and gas properties, and (3) related income tax effects.
The write-down was the result of several factors including, the impact of
the significant reduction in oil and gas prices, the transfer of certain
unevaluated property costs to evaluated properties and current market
conditions, both offset by additional quantities of proved reserves recorded as
a result of the Company's acquisition program and technical evaluation of its
properties. Oil and gas reserve estimates, which are the basis for calculating
limitations on capitalized costs are inherently imprecise and are expected to
change as
8
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future information becomes available. The Company did not incur a write-down in
the third quarter of 1998 due primarily to a modest increase in the price of
crude oil as of September 30, 1998.
NOTE 5: SUBSEQUENT EVENT
On October 30, 1998, the Company closed the acquisition of nine producing
oil & gas fields located in South Texas and Louisiana from Sonat Exploration
Company ("Sonat"). The acquisition price, as specified in the purchase and
sale agreement, is approximately $17.4 million, net of estimated post-closing
adjustments. Texoil, through its wholly-owned operating subsidiary, will operate
seven of the fields. The Company financed the acquisition with borrowings under
its Credit Agreement, which was redetermined, increased and amended as part of
the transaction.
The Credit Agreement was amended to provide up to $50 million in available
borrowings, limited to a borrowing base, predicated on the bank's engineering
evaluation of Company producing properties, as defined by the Credit Agreement.
The borrowing base was increased to $28.0 million as of November 1, 1998. The
annual facility fee is 3/4% and the interest rate is 1/2% over the lender's
prime rate. In addition, the Company arranged a LIBOR option providing for an
interest rate of LIBOR plus 1.75% to 2.25%, at different borrowing levels.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes thereto, included elsewhere
in this 10-QSB.
MERGER
As discussed in the Notes to the Consolidated Financial Statements included
elsewhere in this quarterly report, the Company underwent a substantial change
in ownership, management, voting control, assets and business strategy, all
effective December 31, 1997. These significant changes occurred as a result of
the merger with Cliffwood and a recapitalization of Texoil, pursuant to a
definitive Plan and Agreement of Merger. For financial reporting purposes, the
Merger is accounted for as a reverse acquisition of Texoil by Cliffwood.
Accordingly, the historical Consolidated Financial Statements are those of
Cliffwood, and management's discussion and analysis of financial condition and
results of operations presented herein relate to Cliffwood. Both reflect the
acquisition of Texoil net assets (existing immediately prior to the Merger) at
fair value, using purchase accounting, on December 31, 1997, as required by
generally accepted accounting principles. As a condition of the Merger, a
majority of Board positions and all management positions were replaced with
Cliffwood Board appointees and personnel.
GENERAL
Texoil is an independent oil & gas company engaged in the acquisition and
development of oil and gas reserves through an active and diversified program
which includes purchases of reserves, re-engineering, development and
exploration activities, currently focused in Texas, South Louisiana and the
Texas Gulf Coast.
As further discussed herein, future growth in assets, earnings, cash flows
and share values are dependent upon the Company's ability to discover, acquire
and/or develop commercial quantities of oil and gas reserves that can be
produced at a profit and build an oil and gas reserve base with a market value
exceeding its finding and production costs. Product prices, particularly the
price of crude oil, have dropped significantly during 1998 and, in the opinion
of management, cannot be reasonably expected to increase significantly in the
short-term. The industry-wide reduction in prices has adversely affected
revenues and net cash flows of the Company, as well as most companies in the
industry, particularly those whose assets were concentrated in oil reserves.
Furthermore, reduced cash flows have adversely affected the capital budgets of
major oil companies and large independents. Such depressed industry conditions
have led to certain contractions among many companies including, among others,
work force reductions, reorganizations, reductions in drilling participations
with third parties and elimination or deferral of new ventures. Such industry
conditions may adversely affect Texoil's ability to solicit industry partners to
participate in projects originated by Texoil on a promoted basis, whereby Texoil
earns a greater interest in reserves than its proportionate capital commitment.
However, in the opinion of Texoil management, current industry conditions
may result in opportunities for companies that can effectively compete for
cost-efficient capital and deploy an effective business and management strategy,
which results in growth through the acquisition, discovery, development and
production of reserves. Costs of labor and certain drilling and field products
and services have declined from levels existing in 1997. In addition, major
companies and large independents may continue and, in fact, expand divestitures
of properties as they reorganize or focus on "core" areas and attempt to
streamline business operations. Smaller companies may be forced to sell assets
that were acquired predicated upon higher product prices and high cost capital
or upon development activities which may not be economically attractive at
current price levels. Lastly, companies may choose or be forced to liquidate,
consolidate, or merge to reduce costs and improve shareholder value.
Accordingly, Texoil's management has developed a definitive corporate
action plan which is intended to facilitate growth, contain operating and
administrative costs, continue to acquire, discover and develop oil and gas
reserves, and aggressively pursue corporate acquisitions and mergers. The plan
is merely an
10
expansion and adaptation of the business plan which was conceived and
implemented by management in early 1996, and which has resulted in significant
growth to date. See "Impact of Changing Prices and Costs" and "Corporate
Efforts to Offset Declining Prices" below. Other elements of the action plan
are as follows:
1) Diversify and enhance the portfolio of properties with a short-term
focus on natural gas reserves and expected resultant favorable impact
on cash flows.
2) Expand the Company's drilling and development programs and increase its
direct participation in such activities, but continue to solicit
industry or institutional partners on a promoted basis.
3) Continue cost-containment efforts directed toward operating and general
and administrative costs.
4) Selectively seek asset or corporate acquisitions and mergers for cash
and/or Texoil shares.
5) Increase equity and long-term financing through available means,
including corporate mergers, private placements and when able, a
secondary public offering.
6) Selectively employ additional technical and management personnel (as
earnings and cash flows permit) with a reasonable incentive program
based on achievement of goals.
While the impact and success, if any, of this action plan cannot be
predicted with any accuracy, management's goal is to replace production and
further increase its reserve base, at an acquisition or finding cost which will
yield current revenues, cash flows and profits, and will further position the
Company for growth when prices recover.
PROPERTY ACQUISITION
As discussed in Note 5 to the Consolidated Financial Statements, the
Company closed a purchase of nine (9) proved oil and gas fields from Sonat
Exploration Company ("Sonat") on October 30, 1998. In the opinion of
management, the acquisition is a significant event for the Company, consistent
with its business strategy and action plan discussed above. The acquisition
increases estimated oil reserves 25% and gas reserves by 148%. Current cash
flows from Company properties are estimated to increase approximately $600,000
per month. The estimated increase in cash flows is approximately 220% of
pre-acquisition levels. The properties were acquired as proved producing
properties with anticipated future development and drilling potential. Texoil
will be the operator of seven fields and receive certain operating fees in
addition to cash flows from production. The expected increase in production
income is higher than the increase in reserves, due to a greater percentage of
gas production and the deliverability characteristics of gulf coast reservoirs.
The acquisition favorably impacts the Company's oil to gas reserve ratio from
approximately 75% oil to 65% and more favorably impacts the oil to gas
production ratio from 75% oil to about 56%, based on independent engineering
reports and expected production. Management believes the positive, post-closing,
impact on reserves and cash flows from Company properties will improve the
short-term earnings outlook, even with continued low oil prices and increased
financing costs.
OIL AND GAS PROPERTIES
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 gas reserves are capitalized separately
for each cost center (generally defined as a country). Capitalized balances are
referred to as the "Full-Cost Pool" and are further classified as evaluated or
unevaluated. Evaluated costs are those where proved reserves have been
determined or where the property has been impaired or abandoned. Such costs are
subject to depletion, depreciation and amortization expense (DD&A). Unevaluated
costs are not subject to DD&A and generally require additional geological,
geophysical and/or engineering evaluation prior to management's decision to
drill, develop or abandon such properties. When such properties are evaluated,
capitalized costs will be transferred to an evaluated status and included in the
calculation of DD&A. Depletion expense is calculated using the units 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 accumulated DD&A) exceed the discounted
future net revenues of estimated proved oil and natural gas reserves, using
current oil and gas prices and costs, held constant over the life of
11
the properties, plus the lower of cost or fair value of unevaluated properties,
both on an after-tax basis, such excess costs are charged to operations as an
additional write-down of oil and gas properties.
Included in capitalized costs subject to amortization for the three and
nine month periods ended September 30, 1998, are $163,000 and $428,000,
respectively, 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 for the
comparable periods of 1997 was not significant. The Company capitalizes interest
attributable to oil and natural gas properties which are not subject to
amortization and are in the process of being evaluated. Included in unevaluated
capitalized costs for the three and nine month periods ended September 30, 1998,
are interest costs of $65,000 and $267,000, respectively. No such costs were
capitalized for the comparable periods in 1997.
At the end of the second quarter of 1998, the Company's net evaluated
capitalized costs exceeded the estimated discounted future net revenues from
estimated proved reserves by approximately $1,208,000. A resulting write-down
was recorded in the second quarter and is reflected in the nine months ended
September 30, 1998. During 1998, decreases in the discounted present value of
proved reserves resulting from price reductions were offset by additional
quantities of proved developed and undeveloped reserves recorded as a result of
the Company's acquisition and development program and the technical evaluation
of unevaluated properties. Net capitalized costs could exceed discounted future
net revenues in future periods due to downward revisions to estimates of proved
reserve quantities, further declines in oil and gas prices, increases in
operating costs, unsuccessful exploration and development activities or other
factors which cannot be reasonably predicted by the Company. Once recorded, a
write-down of oil and gas properties cannot be reversed at a later date even if
estimated reserve quantities or oil and gas prices subsequently increase.
Management believes that current reserve estimates, which represent the basis
for calculating limitations on capital costs, are reasonable under present
operating conditions and circumstances. However, reserve estimates and forecasts
are inherently imprecise and, therefore, subject to significant future changes.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
The Company recorded a net loss of $257,000 and net income of $99,000 for
three months ended September 30, 1998 and 1997, respectively. The $356,000
decrease in the Company's comparative third quarter net income resulted
primarily from the following factors:
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
-----------------------
(000'S)
Oil and gas sales....................... $ 268
Lease operating expenses................ (508)
Production taxes........................ (37)
Depletion, depreciation and amortization
expense ("DD&A")...................... (44)
General and administrative
expenses -- net......................... (11)
Interest expense -- net................. (92)
Other income -- net..................... 16
Provision for income taxes.............. 52
-----------------------
$ (356)
=======================
The following discussion applies to the changes shown above. Comments
applicable to both the comparative three month and nine month ended periods are
presented only for the comparative nine month periods, discussed in the
following section.
12
The $268,000 or 16% increase in net oil and gas sales is primarily
attributable to the increase in production volumes resulting from the
acquisition and development of producing properties. The increase in production
volume was offset by a significant decrease in oil prices as shown in the table
presented immediately below.
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
Oil Production (Bbls)................... 124,501 76,945
========== ==========
Gas Production (Mcf).................... 246,432 193,495
========== ==========
Average Price Oil (per Bbl)............. $ 11.66 $ 17.40
========== ==========
Average Price Gas (per Mcf)............. $ 1.93 $ 2.01
========== ==========
Lease operating expenses and workover costs increased $508,000 or 68% due
to the acquisition and development of oil and gas properties since September 30,
1997. On a barrel of oil equivalent ("BOE") basis, production volumes
increased 52% over the comparable period of the prior year. Accordingly, lease
operating expenses have increased as a result of additional production volumes.
Production taxes increased by $37,000 or 50%, due to increased production
volumes and revenues.
The $44,000 or 9% increase in DD&A expenses is primarily due to the
increase of oil and gas production volumes, reserves and capitalized balances
subject to DD&A, offset by the effect of increased estimated recoverable
reserves, resulting from the acquisition and development of producing
properties.
The $11,000 or 4%, increase in net general and administrative expenses
results from increases in management and administrative staffing associated with
the Company's rapid growth offset by cost containment measures as discussed
below.
Interest expense increased by $92,000 primarily due to the increased
long-term debt used to finance acquisitions and prospects.
Other income increased $16,000 or 7%, in 1998 principally due to increased
administrative overhead reimbursements on operated properties, engineering
consulting fees and interest income.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
The Company recorded a net loss of $981,000 and net income of $456,000 for
nine months ended September 30, 1998 and 1997, respectively. Excluding the
write-down of oil and gas properties, which occurred in the second quarter, net
income through the third quarter of 1998 would have been approximately $7,000.
Thus, the year-to-date net loss is due almost entirely to the write-down. The
$1,437,000 decrease in the Company's comparative net income resulted primarily
from the following factors:
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
-----------------------
(000'S)
Oil and gas sales $ 1,896
Lease operating and workover costs... (1,381)
Production taxes..................... (114)
Depletion, depreciation and
amortization expense ("DD&A")...... (630)
Write-down of oil and gas
properties........................... (1,208)
General and administrative
expenses -- net...................... (387)
Interest expense -- net.............. (233)
Other income -- net.................. 170
Provision for income taxes........... 450
-----------------------
$(1,437)
=======================
13
The $1,896,000 or 44% increase in net oil and gas sales is primarily
attributable to the increase in production volumes resulting from the
acquisition and development of producing properties. Production volumes
increased significantly for the nine months ended September 30, 1998, as
compared to 1997, while prices for oil decreased significantly as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
Oil Production (Bbls)................ 356,471 180,740
========== ==========
Gas Production (Mcf)................. 767,698 487,575
========== ==========
Average Price Oil (per Bbl).......... $ 12.84 $ 18.10
========== ==========
Average Price Gas (per Mcf).......... $ 2.05 $ 1.98
========== ==========
Lease operating expenses and workover costs increased $1,381,000 or 65% due
to the acquisition and development of oil and gas properties since September 30,
1997. On a barrel of oil equivalent ("BOE") basis, production volumes
increased 85% over the comparable period of the prior year. Accordingly, lease
operating expenses have increased as a result of additional production volumes.
Production taxes increased by $114,000 or 51%, due to increased production
volumes and revenues.
The $630,000 or 73%, increase in DD&A expenses is primarily due to the
increase of oil and gas production volumes and capitalized balances subject to
DD&A, offset by increases in estimated recoverable reserves, resulting from the
acquisition and development of producing properties. Capitalized costs included
in the Full-Cost Pool and subject to DD&A were $25,633,568 and $14,820,895 at
September 30, 1998 and 1997, respectively. In addition, estimated future
development costs associated with proved undeveloped reserves in the amount of
$5,289,300 and $414,300 at September 30, 1998 and 1997, respectively, were
included in the DD&A calculations.
The write-down of oil and gas properties in the amount of $1,208,000
represents a non-cash charge to operating expenses, required pursuant to SEC
rules. This write-down was largely the result of a significant downward movement
in oil prices in the second quarter of 1998. The write-down reduces the carrying
cost of assets to the full-cost ceiling as prescribed by SEC rules. Although
management and most industry participants believe the current price environment
is temporary, such current prices, without the benefit of anticipated price
recovery, must be used in calculations. See "Impact of Changing Prices and
Costs" below.
The $387,000 or 53%, increase in net general and administrative expenses is
comprised primarily of increases in management, operating and administrative
staffing associated with the Company's growth. The Company is the operator of
the majority of its properties and, accordingly, must attract and retain
competent technical and administrative personnel to fulfill its contractual
obligations. Although the operator is allowed certain "overhead
reimbursements" pursuant to the terms of applicable operating agreements
(reflected as "operator and management fees" in the Consolidated Statements of
Operations), such reimbursements may not recover the full amount of Company
expenditures. Furthermore, the Company's growth requires competent senior
management and staff to further the Company's goals. The Company plans to
continue efforts to attract capital and investors and seek acquisitions or
merger partners in order to grow and increase shareholder value.
Interest expense increased by $233,000 primarily due to the increased
long-term debt used to finance acquisitions.
Other income decreased $170,000 in 1998 principally due to decreased
engineering consulting fees and interest income.
The provision for income taxes decreased by $450,000 due to the recognition
of a net loss before tax in 1998. For the nine months ended September 30, 1998,
the Company recorded a tax benefit of $215,000 or 18% of the pre-tax loss. The
Company did not recognize a deferred tax asset in 1998 (which would have the
effect of reducing the reported net loss), as the future realization of such
benefits, if any, was not probable
14
considering only those assets and operations of the Company, which existed on
September 30, 1998, and the condition of the industry. However, with the Sonat
property purchase, management expects to record a deferred tax asset, in the
fourth quarter, absent other events which would preclude such recognition.
IMPACT OF SONAT PROPERTY ACQUISITION
The purchase of the oil and gas properties from Sonat is expected to
increase revenues by approximately $7.3 million in 1999, and net cash flows from
the properties by approximately $5.5 million, based on average estimated prices
of approximately $14.00 per barrel of oil and $2.10 per thousand cubic feet of
natural gas. These estimates are exclusive of any projected cash flows from
development and drilling activities. Estimates are based on independent reserve
reports prepared by third parties in connection with financing the acquisition.
The Company does not expect to increase general and administrative expenses
significantly in 1999, as a result of the acquisition. The anticipated increase
in direct general and administrative expenses is approximately $400,000 per
year. This amount will be offset by operator's fees received from non-operating
partners. While direct increases in net general and administrative expenses are
expected to be minimal in relation to the increase in cash flows, the Company
may choose to expand its staff and restore certain salary reductions in order to
pursue additional acquisitions (or mergers), accelerate efforts to effectively
develop its properties and further expand its drilling activities. The Company
financed the acquisition with bank debt; and accordingly, gross interest expense
is expected to increase by approximately $1.3 million on an annual basis.
Based on independent engineering studies, cash flows could be increased
appreciably as a result of the development of non-producing reserves through
workovers, recompletions and enhancements to production facilities and through
development drilling. In addition, net cash flows could be favorably affected by
price improvements and reduction of operating costs. No assurance can be given,
however, that the Company will be able to successfully and economically develop
additional reserves.
IMPACT OF CHANGING PRICES AND COSTS
Texoil's revenues and the carrying value of its oil and gas properties are
subject to significant change due to changes in oil and gas prices. Oil prices
have declined appreciably during 1998 and remained at low historical levels
during the third quarter of 1998. As explained above, Texoil's revenues have
increased despite these significant reductions in prices. Should prices continue
to fall or fail to increase to levels which will facilitate repayment of debt
and reinvestment of cash flow to replace current production, the Company could
experience difficulty in continuing its growth, developing its assets and
attracting additional capital. The Company believes that oil prices have
bottomed out and could rebound somewhat within the next year. The Company has
maintained positive net revenues, notwithstanding its leverage and
administrative costs, but not considering DD&A and the write-down of oil and gas
properties, required pursuant to SEC rules. Oil and natural gas prices are
subject to substantial seasonal, political and other fluctuations which are
beyond the ability of Texoil to control or accurately predict.
Low oil prices have caused many in the industry to reduce capital spending,
which in turn affects the Company's ability to attract partners for Company
sponsored exploration and development activities and the terms of such
participation. Thus far, the Company has been able to attract partners and
experts to participate in the drilling of up to five additional wells by early
1999. Prolonged low prices could adversely affect certain projects and the
Company may be required to withdraw certain prospects from the market.
Although prices have declined to levels which have not existed in the past
decade, the costs of field labor and services have not declined proportionately.
While the Company has benefited by some general industry cost declines, such
costs could increase in the future.
CORPORATE EFFORTS TO OFFSET DECLINING PRICES
Early in the second quarter of 1998, in an effort to mitigate the adverse
effect of low oil prices, the Company implemented numerous cost-saving programs
designed to reduce operating and administrative
15
costs and enhance net revenues during this difficult period in the industry.
Rather than impose staff reductions of technical and other personnel, the
Company chose to implement a salary reduction program and retain its current
level of staffing. As a result, the Company has not lost any of its staff. In
addition, the Company has taken steps to reduce certain occupancy and office
expenses. While the reductions have been difficult, staff morale remains high
and the Company has remained committed to its goals.
In addition to general and administrative savings, the Company has further
implemented programs designed to reduce operating expenses and has deferred
certain expenditures associated with lower revenue producing activities and
projects. The Company has continued, however, to pursue projects that can add
economic producing reserves, enhance current production levels and lower
recurring operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to finance its future growth, resulting from its
acquisition, development and exploration activities, through cash flow from
operating activities, its bank credit facility, sale of non-strategic assets,
various means of project finance and ultimately through the additional issuance
of common stock. In addition, the Company intends to subsidize drilling
activities through the sale of participations to industry partners on a promoted
basis, whereby the Company will earn working interests in reserves and
production greater than its proportionate capital cost.
RIMCO FINANCING
On December 31, 1997, Texoil entered into the RIMCO Agreement which
provided $10,000,000 in new financing. Accordingly, Texoil issued 7.875%
Convertible Subordinated General Obligation Notes in the principal amount of
$10,000,000 to the RIMCO Lenders ("Convertible Notes"), which will mature
December 31, 1999, or upon a change in control, subject to certain extensions
pursuant to the terms of the RIMCO Agreement. At any time prior to the maturity
date, outstanding indebtedness is convertible by the holders, in whole or in
part, into Texoil Common Stock at an initial per share conversion price equal to
$1.75, subject to anti-dilution adjustments. Texoil may convert all of the
outstanding indebtedness under the Convertible Notes into Texoil Common Stock if
the average closing price per share during a period of 20 consecutive trading
days equals or exceeds 130% of the conversion price.
If on December 31, 1999, cash availability of the Company and its
subsidiaries, as defined in the RIMCO Agreement, is less than the principal and
accrued and unpaid interest outstanding under the Convertible Notes, the RIMCO
Lenders can be required to convert the outstanding principal and accrued and
unpaid interest into Texoil Common Stock, if the relationship between the
average price and the conversion price satisfies certain conditions set out in
the RIMCO Agreement. The Company granted the holders of the Convertible Notes
certain registration rights in respect of shares of Texoil Common Stock issuable
upon conversion of debt under the Convertible Notes.
The indebtedness under the RIMCO Agreement is subject to the terms of a
subordination agreement among the RIMCO Lenders, Comerica Bank -- Texas, N.A.
(as agent for itself and another lender), Cliffwood Oil & Gas Corp., Cliffwood
Energy Company and Cliffwood Production Co., whereby indebtedness under the
RIMCO Agreement is subordinated in right of payment and the RIMCO Lenders are
subject to restrictions on their right to exercise remedies under the RIMCO
Agreement. The subordination provisions do not affect the ability to convert
indebtedness under the RIMCO Agreement into Common Stock of Texoil.
CREDIT FACILITY
At September 30, 1998, the Company had available borrowing capacity of
$2,450,000, in accordance with a revolving credit agreement ("Credit
Agreement") with a bank, which can be used to finance property acquisitions and
temporary working capital requirements. The borrowing base is redetermined
annually, or more often, at the request of the Company. Acquisitions and
production increases which have occurred since the last redetermination in
December 1997, have resulted in a higher borrowing base. As of November 1, 1998,
exclusive of the Sonat acquisition, the borrowing base was estimated at
approximately $14.0 million. Including the Sonat acquisition, a $28.0 million
borrowing base was established as of
16
November 1, 1998. The Company currently has $3.0 million of availability and
estimates that it will have $4.0 million of availability, net of post-closing
adjustments as specified in the purchase and sale agreement.
The Company intends to refinance its bank debt through a corporate offering
of debt and equity securities in early 1999 that may provide longer term
financing than presently available under its credit facility. No assurance can
be given, however, that the Company will be able to refinance its debt.
CASH FLOW FROM OPERATING ACTIVITIES
For the nine months ended September 30, 1998, the Company's net cash flow
used in operating activities was $902,000, down $2,184,000 from the comparable
period in 1997. These decreases are directly attributable to the reduction in
oil and gas prices and the use of cash to reduce current liabilities.
CAPITAL EXPENDITURES
The Company's net oil & gas capital expenditures for the three and nine
month periods ended September 30, 1998, are as follows:
CAPITAL EXPENDITURES
FOR THE PERIODS
ENDED
SEPTEMBER 30, 1998
--------------------
THREE NINE
MONTHS MONTHS
------- -------
($000'S)
Evaluated properties................. $ 80 $ 7,678
Unevaluated properties............... 447 1,590
------- -------
$ 527 $ 9,268
======= =======
The capital expenditures for the nine months ended September 30, 1998, were
financed principally with the proceeds of the RIMCO financing obtained on
December 31, 1997, and additional bank borrowings. On October 30, 1998, the
Company closed an acquisition of oil and gas properties from Sonat for
approximately $17.4 million. The Company does not expect significant
expenditures for the remainder of 1998, as many expenditures are discretionary;
however, the Company expects to make approximately $260,000 of development
expenditures associated with proved properties owned as of September 30, 1998.
In addition, the Company expects to make additional capital expenditures during
1998 to complete the interpretation of 3-D seismic data in its Raceland, Greens
Lake and Laurel Grove prospects and to maintain and acquire additional leases.
Together these capital costs are estimated to total approximately $150,000 in
1998. The Company also expects to make capital expenditures in 1998 in
connection with its joint venture with Bechtel Exploration Company. In addition,
the Company expects to incur $240,000 for drilling of such prospects. Cost of
completion and facilities would be in addition to the net drilling costs. The
Company will fund approximately 7-10% of net drilling and completion
expenditures. The Company will enjoy a larger share of well ownership as a
result of interests earned in connection with the sale of prospects. Generally
carried and reversionary interests will increase ownership to more than 25%.
Pending incremental cash flows or financing, the Company may obtain additional
interests or elect to drill additional prospects.
In summary, estimated net expenditures to maintain and develop existing
assets are as follows for the next three months:
Property Development and Prospect
Maintenance........................ $ 410,000
Bechtel Joint Venture................ 120,000
Drilling............................. 240,000
----------
$ 770,000
==========
In early 1998, management has set a goal of acquiring at least $10.0
million of proved producing properties in 1998. Toward that goal, in May 1998,
the Company acquired all of the oil & gas assets of an affiliated limited
partnership ("Partnership"), for $4,430,000 and 898,000 shares of Texoil
common stock. In addition, as discussed in the "Notes to Consolidated Financial
Statements", the Company closed an
17
acquisition of producing properties on October 30, 1998, for the net estimated
amount of $17.4 million, pending post-closing adjustments.
CAPITAL EXPENDITURES -- 1999
The Company cannot predict with accuracy, the level of capital expenditures
it may incur in 1999 in connection with acquisitions and development of new
producing properties, however, management has set a goal of at least $20.0
million for new acquisitions.
Based on its existing portfolio of properties and projects, including the
recent acquisitions of the Sonat properties, the Company expects to incur $10.0
million of capital expenditures in 1999 as follows:
($000'S)
---------
Texoil prospects
Land, geological &
geophysical..................... $ 750
Drilling........................ 1,000
Bechtel Joint Venture prospects
Land, geological &
geophysical..................... 1,400
Drilling........................ 1,550
Development of proved properties
Workover and recompletions &
facilities...................... 1,800
Drilling........................ 3,400
Other........................... 100
---------
$ 10,000
=========
The Company believes that it will have sufficient capital available from
its credit facility, cash flows from operating activities, sale of certain
proved properties, sale of drilling participations to industry partners and
project financing available in the industry to fund its capital obligations.
Certain of the above projected capital expenditures are discretionary and can be
deferred, reduced or eliminated. Many development opportunities are held by
producing leases and can be deferred indefinitely, while certain prospects are
subject to lease maintenance requirements which, if not drilled, could result in
additional land costs or potential losses of leases. However, management
believes projected expenditures will result in increased production and cash
flows and increases in reserve value and will further expose the Company to
potentially significant upside from exploration. In addition, the Company has
set a goal of acquiring $20.0 million of additional proved properties in 1999.
In connection with the acquisition of Partnership properties in May of
1998, the Company amended and restated the Partnership Agreement to increase
available Partnership capital to $15.0 million for acquisition and development
activities. The Company has a Partnership interest equal to 15%. Capital
available from the Partnership, with capital available directly to the Company,
results in a greater ability to compete for acquisitions. In addition, the
Company believes that funds available from traditional sources of equity, debt,
and project finance and from its demonstrated ability to acquire industry
partners will further expand its ability to pursue strategic corporate and
property acquisitions. No assurance can be given, however, that the Company will
attract the capital necessary to accomplish these stated goals.
YEAR 2000 COMPLIANCE
The Company has conducted a review of and will continue to review its
software applications for Year 2000 issues. None of the software applications
utilized by the Company were developed internally and all have been acquired and
routinely updated since early 1996. The Company uses a PC based networked
hardware configuration with widely utilized, accepted and supported software
productions for its basic operating and office support functions. The primary
software applications used by the Company for its oil & gas activities are its
accounting, land, production management, engineering, and interpretative
exploration software. All such systems were purchased from third party vendors,
who are responsible for their maintenance and support, pursuant to the terms of
license and use agreements. The most critical systems
18
referred to above are the accounting, land and production systems. Other systems
are primarily analytical tools which facilitate and support engineering and
geological projects. Based on reviews and inquiries conducted by Company
personnel and resultant representations by software vendors, the Company
believes its primary software applications are Year 2000 compliant. Accordingly,
the Company does not expect to incur any material costs to modify, upgrade or
replace its basic business systems over and above ongoing requirements to expand
systems, as required by growth and operations. However, the Company is not able,
nor does it possess the technical expertise to conduct a comprehensive review of
programs and systems purchased from and supported by third parties; and
therefore, the Company cannot guarantee that it will not incur problems with
such software and business applications.
Although the Company does not expect Year 2000 issues to have a material
impact on its internal operations, it is possible that such issues could
adversely affect customers, suppliers and joint venture partners, with the
possibility of an adverse impact on the Company. Major issues include, (i) the
ability of the Company's customers to accurately and timely measure and pay for
quantities of oil and gas production delivered, (ii) the ability of the
Company's vendors and suppliers to accurately invoice for services and products
and to properly process and account for payments received, (iii) the ability of
non-operating partners in Company operated properties to process and pay their
share of joint interest billings, as rendered and due, and (iv) the ability of
operators, where the Company is a non-operating participant, to disburse net
revenue and render joint interest billings to the Company. As part of its basic
operating practices, the Company believes it currently has adequate internal
controls and procedures in place to account for and monitor material aspects of
the above described activities. As Year 2000 approaches, the Company intends to
take additional steps to determine the Year 2000 readiness of third parties and
to implement additional procedures as it deems reasonably necessary, to account
for and take actions necessary to minimize potential problems resulting from
third party customers, vendors and partners, outside of the control of the
Company. In the opinion of management, the single most significant issue is the
timely receipt of payment for oil and gas volumes sold. The majority of the
Company's production is from operated properties where the Company sells field
production to a relatively small number of purchasers. The Company can readily
account for production volumes and prices and aggressively pursue collection,
which will be dependent upon the purchasers' ability to make proper and timely
payment. The effect of problems associated with third parties, if any, cannot be
controlled by the Company and the potential financial impact cannot be estimated
with any accuracy. Such matters could have a material impact on the Company.
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. All statements included in this report regarding the
impact of the Sonat acquisition on the Company are forward-looking statements
and are based on management's best projections. Although the Company believes
the expectations and beliefs reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations are discussed elsewhere in this
report. Forward-looking statements are not guarantees of future performance and
actual results, developments and business decisions may differ from those
envisioned by such forward-looking statements.
19
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings -- On October 5, 1998, Texoil was sued for the
amount of $33,400 by a former landlord in connection with leased
offices occupied by Texoil prior to the Merger with Cliffwood. The
Company intends to defend against claims and, in fact, counter-sue for
damages. No material changes have occurred in other legal proceedings
reported in Registrant's Form 10-KSB for the fiscal year ended
December 31, 1997.
Item 2 -- Change in Securities -- None
Item 3 -- Defaults Upon Senior Securities -- None
Item 4 -- Submission of Matters to a Vote of Security Holders -- None
Item 5 -- Other Information -- None
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits -- None
(b) Reports on Form 8-K -- On September 30, 1998, the Company filed a
report on Form 8-K, including Item 5, Significant Event, related
to a definitive agreement with Sonat Exploration Company to
acquire producing oil and gas properties.
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 12, 1998 By: /s/FRANK A. LODZINSKI
FRANK A. LODZINSKI
PRESIDENT AND CEO
20