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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-9120
THE EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0793089
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 NORTH LOOP 1604 EAST, SUITE 250, SAN ANTONIO, TEXAS 78232
(Address of principal executive offices)
Registrant's telephone number, including area code: (210) 496-5300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant is $20,178,814
based upon the average of the high and low bid price of such stock as reported
by the Nasdaq Small-Cap Market under the symbol TXCO on November 8, 1996.
The number of shares outstanding of the Registrant's Common Stock as of
November 8, 1996, was 9,890,044 of which 8,496,343 shares were held by
non-affiliates.
Documents Incorporated by Reference: None
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INDEX AND
CROSS REFERENCE SHEET
PART I Page
Item 1. Business................................................... 3
Item 2. Properties................................................. 14
Item 3. Legal Proceedings.......................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........ 17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................ 18
Item 6. Selected Financial Data.................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 19
Item 8. Financial Statements and Supplementary Data ............... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 24
PART III
Item 10. Directors and Executive Officers of the Registrant......... 25
Item 11. Executive Compensation..................................... 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 27
Item 13. Certain Relationships and Related Transactions............. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................ 29
Signatures............................................................ 31
Audited Financial Statements......................................... F-1
Audited Financial Statements of ExproFuels, Inc....................... S-1
Financial Data Schedule............................................... Exhibit
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Exploration Company (the "Company") was incorporated in the State of
Colorado on May 16, 1979, for the purpose of engaging in oil and gas
exploration, development and production. The Company became publicly held
through an offering of its common stock in November, 1979. During 1984 the
corporate offices of the Company were moved to San Antonio, Texas.
Throughout its history, the Company's primary focus has been oil and gas and
mineral exploration. Its business strategy has been to acquire undeveloped
mineral interests, develop drilling prospects internally and to selectively
participate with industry partners in prospects generated by other parties in
their exploration activities, and, from time to time, to offer portions of its
developed and undeveloped mineral interests for sale.
The Company finances its activities through a combination of debt financing,
equity offerings and internally generated cash flow. The Company also may use
its equity securities as all or part of the consideration for the operating
investments it may make. Through 1992, the Company's revenues were derived
principally from the sale of natural gas and oil production from working,
royalty and mineral interests, as well as the sale of the mineral interests it
acquires through its leasing activities.
In order to provide the Company downstream opportunities, management entered
the alternative fuels vehicles (AFV) conversion business through the creation
of its own alternative fuels division, ExproFuels, in late 1992. The
alternative fuels division's focus includes the conversion of internal
combustion engines to run alternately on Liquefied Petroleum Gas (LPG),
Compressed Natural Gas (CNG) or Liquefied Natural Gas (LNG), and the design,
installation and operation of alternate fuel refueling stations. The ExproFuels
division initiated ongoing operations in Texas and Arizona, while actively
pursuing international opportunities in Europe, Asia and Latin America. Since
1994, gross revenues from the ExproFuels division have surpassed gross revenues
from oil and gas operations, although profitable operating levels have not been
attained.
In late 1996, management determined it was in the Company's best interest to
refocus its resources in its core oil and gas industry. Accordingly, the
ExproFuels division was incorporated in August, 1996, and the Subsidiary was
spun-off in early September, 1996, with the Company retaining approximately a
40% interest in its previously wholly-owned subsidiary.
PRINCIPAL AREAS OF ACTIVITY
OIL AND GAS OPERATIONS
The Company has been actively evaluating mineral interests in major oil and gas
producing basins in South Texas, North Dakota and Montana, acquiring leasehold
acreage for its ongoing exploration programs and participating in the drilling
of oil and gas wells.
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South Texas - Maverick County / Zavala County
Paloma Ranch Glen Rose/Rodessa Interval: The Company has owned at least a fifty
percent leasehold interest in approximately 50,000 contiguous acres in Maverick
County, Texas since 1989. The property is on the Chittim Anticline, a large
regional structure, under which hydrocarbons have been found in as many as six
separate horizons. One of these zones is the Lower Glen Rose or Rodessa
interval. It is a carbonate formation that has produced billions of cubic feet
of natural gas from patch reefs within the zone on or near the anticline. Past
development of the field was halted because of the inability of operators to
accurately predict the location of these porosity-bearing reefs. The Company
applied a different processing method to the seismic available in the area and
discovered what appeared to be a method of determining the location of these
porosity intervals. Further investigation revealed that every well drilled in
the vicinity of existing seismic lines with a good porosity zone had a certain
signature pattern on the seismic processing while every well which lacked the
porosity zone did not have this pattern.
Through 1993, the Company participated in the drilling of five wells to test
theories of being able to locate the patch reef using 2-D seismic. In all cases
the Company was successful in predicting the presence of, or absence of,
porosity-bearing patch reefs using the new seismic interpretations. Although
only one of the wells, the Paloma #1-84, was a successful gas producer, the
Company used the information gained from each well to refine its interpretation
and model of the patch reefs depositional environment.
In 1993, the Company ran 3-D seismic over 21.5 square miles (approximately
13,500 acres) of the Company's lease position. The extensive seismic grid
involved over 150 miles of seismic lines that have now been processed and
reviewed by the Company. The Company was pleased that the seismic analysis
identified numerous patch reefs on the 13,500 acres that represent only a third
of the potentially productive 50,000 acres. The 3-D seismic delineated the
shape and aerial extent of the patch reefs and confirmed that previous wells
drilled using only 2-D technology were not drilled in structurally favorable
positions.
Using this newly acquired 3-D seismic information, the Company drilled its
first well using 3-D seismic, the Paloma #1-107, in the third quarter of 1994.
The well, which had nearly 50 feet of gas-bearing porosity, tested at rates in
excess of two million cubic feet per day and had an absolute open flow
potential of 44,000,000 cubic feet per day. The Company has been able to
produce the well at a rate of 1.25-1.5 million cubic feet per day, with
cumulative production of 1,017 mmcf to date. The Company has identified over
twenty separate patch reefs that are on the 3-D seismic area. During 1995, the
Company drilled its next two Glen Rose wells, the Paloma #1-133, and the Paloma
#1-89 on reefs identified using 3-D data. Although both wells confirmed the
accuracy of the 3-D seismic information by locating excellent reefs, they were
both filled with water and not hydrocarbons. After modifying its interpretation
of the seismic data, the Company drilled the Paloma #2-112 in early 1996 and
encountered a gas-bearing reef. The well was produced at rates of 2.5 million
cubic feet per day and had a calculated absolute open flow potential of
20,000,000 cubic feet per day. During the last half of fiscal 1996, the well
has produced 272 mmcf of gas. The next well drilled during the year was the
Paloma #1-108 and again encountered excellent reef; however, it also contained
water. At year end, the Company was completing the Paloma #2-108 which again
was successful in locating the patch reef. The well appears to have a 10 foot
gas column on top of 130 feet of reef that is filled with water. While the
Company's engineers and geologists are 100% successful in locating Glen Rose
patch reefs, Company management continues to review technical data gained with
the drilling of each well to improve its ability to distinguish between
water-filled reefs versus gas-filled reefs. The Company continues to believe it
has large development possibilities on its 50,000 acres because it has
successfully demonstrated that the new 3-D seismic modeling can accurately
predict the presence of porosity and gas bearing zones within the Lower Glen
Rose formation. After the close of the year, management purchased a personal
computer work station to enable it to analyze the 3-D seismic concurrently with
geophysical consultants. Based upon the seismic that has been run to date, the
Company expects to have numerous porosity bearing patch reefs scattered across
its extensive acreage position but the Company must develop a method to
differentiate between water bearing reefs and those that contain hydrocarbons.
Paloma Ranch Georgetown Interval: In addition to locating patch reefs, the
investment in the 3-D seismic data has proved to be valuable to the Company in
locating faults and fractures associated with production from the other five
potentially productive zones under the Maverick County leases. From its review
of the data from other strata, the Company has identified numerous drill sites
targeting various productive horizons. The Austin Chalk, Georgetown and
Pearsall intervals all produce on the lease from faults and fractures which
have been further defined using the
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comprehensive seismic data. Consequently, the Company participated in drilling
two wells into the Georgetown formation during 1995. The Paloma #1-89 was
drilled to test the Glen Rose but was plugged back to the Lower Georgetown
interval and while initially productive with gas, the well is currently
shut-in. The second Georgetown test was a horizontal well, the Paloma #83-1H,
drilled under a farmout agreement with Edco Energy, Inc. and was completed in
the Upper Georgetown. While productive with gas, the #83-1H was damaged during
drilling operations and only produces approximately 50 mcfd. The Company's
engineers believe that future horizontal Georgetown wells can be drilled
without damaging the formation.
Paloma Ranch Austin Chalk Interval: The Company and its partners reprocessed
the 3-D seismic during the last part of the year. Under the terms of the Paloma
Ranch lease, the Company needed to drill a well prior to being able to evaluate
the newly processed seismic. In order to avoid undo expense, the Company
decided to drill a shallow Austin Chalk test based upon surface anomalies. An
effort was made to intersect a fault that could be detected at the surface at
the Austin Chalk interval. Three older wells had attempted to intersect the
fault and had good shows of oil. The Company was unsuccessful in its attempt to
complete a well in the upper Austin Chalk interval with the Paloma #1-73 but was
able to preserve the lease by drilling the well.
Paloma Ranch Jurassic Interval: In September of 1994, the Company entered into
an agreement with TransTexas Gas Corporation to develop the deep Jurassic
formation under the Company's 50,000 acres. Under the terms of the agreement,
TransTexas was to drill a well of sufficient depth to test the Jurassic
(18,000'+/-) by September, 1995. The agreement expired during fiscal year 1996
without a well being drilled. Company management continues to believe that this
type of arrangement provides an affordable avenue to participate in the
development of an extremely expensive drilling project, as well as an excellent
opportunity to increase its technical understanding of its mineral interests.
Management is continuing to review its development options while seeking new
industry partners to develop the deep Jurassic formation under mutually
favorable terms.
Gorman Ranch Escondido Interval: At year-end, the Company had approximately
1,500 acres under lease in Zavala County. The lease is held by production, with
no additional lease rental payments due in fiscal year 1997. In August, 1996
the Company commenced drilling the Gorman #2-4, a gas prospect testing the
Escondido formation at a target depth of 3650 ft. Drilling had reached the
target formation at year end and, while testing continues, it does not appear
this well will be completed as a producing well as of the date of this report.
Although the zone of interest was encountered as predicted, it appears that
older wells approximately one-quarter mile from the well have depleted the zone
at this particular location. However, prospects for additional wells on the
block have been generated by the Company's geologist that are further away from
the older wells and that should not have been drained by the older wells.
Montana/North Dakota - Williston Basin
Lodgepole Formation: During 1996, the Company completed the purchase of an
undivided 20% interest in oil and gas leases covering 56,858 gross acres,
28,258 net acres, in the Williston basin in North Dakota and Montana. The
Company purchased the interest from a group associated with the Company's
investment banker who originally purchased the leases from an affiliate of the
Company's largest shareholder. The Company continues to retain an option to
purchase a 20% interest in an additional 141,289 gross acres, 81,352 net acres.
The purchase included access to over 13,500 miles of seismic lines across the
basin covering many of the purchased leases and identified numerous possible
Waulsortian mounds in the Lodgepole formation.
Ongoing area discoveries by major and independent oil exploration companies
have supported testimony before the North Dakota Industrial Commission of flows
at rates in excess of 8,000 barrels of oil per day from the reef-like mounds
near Dickinson, North Dakota. Several new wells in the Dickinson area have been
drilled with mixed results during the past year. Additional wells have been
permitted farther from the original discoveries and closer to the Company's
acreage position. The geophysics that the Company purchased included seismic
across the productive mounds which allowed the Company's geologists and
geophysicists to predict where additional mounds may be located. The seismic
indicated potentially productive mounds in many areas where the Company
continues to hold oil and gas leases. Published geological studies have
projected that a successful well in this type of formation could ultimately
deliver over 50 million dollars to its working interest owners, net of
operating costs and royalties. Management continues to review its growing
information base in the area hopeful that its leasehold will ultimately
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contain several wells which would increase the Company's cash flow
considerably. Significantly more geologic and geophysical analysis needs to be
applied to the current information before making initial steps to drill
locations as identified by the Company. Management continues to believe this
acquisition can have a significant and positive impact on the Company's value
if initial assessments prove to be conclusive.
Red River Formation: During the last quarter of 1996, the Company purchased a
25% interest in 131,860 net acres in Bowman, Slope, Stark, Billings, Golden
Valley and Hettinger counties of North Dakota and Richland, Fallon and Wibaux
counties of Montana that the Company feels is prospective for horizontal
drilling in the Red River "B" formation. The Red River "B" is a fractured
carbonate reservoir whose porosity development gives it the storage capacity to
hold large volumes of oil. The reservoir lends itself to being drilled
horizontally since it is fractured and is trapped stratigraphically. Over 400
wells have been permitted to be drilled in the area during the last two years.
Published information reveals that to date there are 116 producing wells and
only one dry hole. The producing wells have rates varying from 100 to over 500
barrels of oil per day with average wells producing approximately 250 barrels.
Available data indicates that the wells should have reserves of 500,000 barrels
to 600,000 barrels per well. The Company has filed for permits to drill eight
wells in North Dakota and two wells in Montana. Management believes that it
will begin drilling its first well in the area in December of 1996.
Canada - Alberta Leasehold
The Company continues to maintain its ownership in 3,793 acres in
Alberta, Canada approximately 75 miles northwest of Edmonton, Alberta.
Mineral Properties
The Company owns a 50% mineral interest in 3,804 acres with a net basis of
$306,564 in Uvalde and Kinney Counties of Texas called the Holmgreen Ranch that
contains large quantities of rock asphalt. The property adjoining the ranch has
produced rock asphalt paving material since the late 1800's. Management
commissioned a market study in 1989 that concluded there was a market for an
additional rock asphalt mine but it would be marginally economic at that time.
The study was based upon oil prices of $20.00 per barrel of oil and the
corresponding rock asphalt equivalent price for synthetically manufactured
material. As oil prices increase and achieve stability at higher levels, the
profit margin on an operation of this nature should be improved. The Company
will pursue the possibility of developing a rock asphalt mine on the property
once oil prices have stabilized at this higher price. Management continues to
review its development options by monitoring the development of industry
techniques and processes that may allow the development of the asphalt as light
oil. In December, 1995, the Company exchanged with its Chairman and a
corporation affiliated with him, a 32.5% interest in the Holmgreen Ranch for
certain unproved oil and gas leasehold acreage located in the Williston Basin
Lodgepole formation valued at $225,000, the relief of a $100,000 note payable
to the corporation and certain other assets valued at $73,403. No gain or loss
was recognized as a result of this transaction.
EXPROFUELS OPERATIONS
During fiscal 1996, Company Management concluded it should refocus its
attention on its core oil and gas industry, as energy prices begin to rise and
stabilize. Accordingly, Management decided it could best achieve its goal by
reducing its ownership in its ExproFuels division. The reduction in ownership
was also intended to enhance current shareholder values by providing new
opportunities for attracting equity funding, as two separate public entities
would provide investment alternatives better fitting the diversity of potential
investors looking for traditional energy investments versus alternative fuels
development projects. To accomplish this goal, the division was incorporated as
a wholly-owned subsidiary by The Exploration Company on August 15, 1996. On
August 30, 1996, 10% of the common stock of the new corporation, ExproFuels,
Inc., was distributed to its three directors and officers for prior services
rendered to it. On September 3, 1996, the Board of Directors voted to
distribute additional shares of ExproFuels, Inc. common stock to The
Exploration Company shareholders of record as of September 13, 1996. The
distribution of 1 new share of ExproFuels, Inc. common stock for each 5 shares
of Company stock held effectively reduced The Exploration Company's ownership
in ExproFuels, Inc. to approximately 40%.
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While a division, ExproFuels' focus included the conversion of internal
combustion engines to run alternatively on Liquefied Petroleum Gas (LPG),
Compressed Natural Gas (CNG) or Liquefied Natural Gas (LNG), and the
installation and design of alternative fuel refueling stations.
During its three and one-half years as a division of the Company, ExproFuels'
business strategy was to:
1- Provide state of the art internal combustion engine conversions
utilizing three natural gas based alternative fuels on a worldwide
basis: CNG, LNG or LPG.
2- Provide turnkey refueling solutions for the convenient and safe
delivery of alternative fuels.
3- Position the Company to participate in the ongoing business of
supplying alternative fuels to its expanding conversion customer
base.
4- Maintain an alternative fuel and equipment neutral position,
allowing the Company's marketing function complete flexibility in
responding to the diverse market opportunities with the "best fit"
fuel mix and equipment configuration available, as demanded by an
extremely specialized and constantly changing market place.
5- Establish a strong presence in selected U.S. markets prior to 1996
when many more strenuous Environmental Protection Agency and
Department of Energy mandates were originally scheduled to come into
effect.
The combination of expertise in vehicle conversions, refueling station
construction and fuel sales formed the basis of an additional potentially
effective market niche: financing conversions and/or fuel stations through
savings generated using the selected alternative fuel. ExproFuels provided
alternative fuel vehicles conversions to a growing number of private fleets as
well as the large mandated governmental markets at a reasonable and competitive
cost and followed up these conversions with superior, ongoing service and
maintenance.
ExproFuels also offered a cost-free AFV (alternatively fueled vehicles)
conversion program to qualified fleets in exchange for long-term fuel
contracts. This program was intended to initiate the heaviest fuel consumers
into alternative fuels use in the least painful manner possible, while
providing ExproFuels a base from which to expand its fuel service capabilities.
Through detailed cost and savings analysis, ExproFuels outlined a cost-savings
plan for fleets which qualified for ExproFuels' long-term fuel contract program
and would assure the fleet operator's compliance with current laws and
anticipated standards. The programs were set up so that the customer's fuel
price could be based on either a percentage of unleaded gasoline, assuring a
fixed fuel cost savings, or various other fuel pricing scenarios. ExproFuels
also provided clients with information regarding tax credits, tax deductions,
pollution credits and other incentives being offered by various federal and
state programs.
ExproFuels actively solicits vehicle conversions, maintenance contracts and
fuel service contracts from fleets that are either mandated to comply in the
various alternative fuels and clean air legislation initiatives or choose to
convert their fleet for various economic and environmental benefits.
In its first 3 full years of operation, the Company's customers have come to
include the U.S. Government, the Governments of Uzbekistan and Colombia,
several U.S. state agencies including the Texas Department of Transportation,
the Railroad Commission of Texas, the General Services Commission of Texas, the
Department of Transportation of the State of Louisiana (through Ecogas, Inc.),
and the Department of Administration for the State of Arizona. Additionally,
ExproFuels converts vehicles and builds refueling stations for parishes, school
districts, transit systems, utilities, municipalities, private fleets and light
industrial users.
Texas Operations
San Antonio Facilities: The first conversion center operated by the Company was
opened in May, 1993, in San Antonio. Since its opening, the center has
converted over 400 vehicles to LPG, including buses, vans, forklifts,
industrial engines, and assorted automobiles and trucks. At August 31, 1996,
ExproFuels' vehicle conversion backlog under contract stood at 111 units. The
facility has designed and installed 24 private use LPG fuel stations since its
opening, with six opened during the current fiscal year. 19 of these fuel
stations are owned and operated by ExproFuels. Monthly LPG motor fuel sales
from all facilities has grown from 340 gallons during December, 1994 to over
36,000 gallons during August, 1996, with an annual volume of over 231,000
gallons for the current fiscal year.
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Based on recent monthly activity, annual fuel sales are expected to increase by
at least 100% in fiscal year 1997. Current year construction activity included
a compressed natural gas fuel station contract at Kelly AFB, in San Antonio.
The fueling facility is one of the largest in the region, valued at over
$260,000. In fiscal year 1997, the Company expects to increase the volume of
CNG conversion maintenance and repair work it now performs for the expanding
Kelly AFB and Lackland AFB natural gas vehicle fleets.
Dallas Facilities: The Dallas conversion center opened in May, 1994. Since its
opening, the center has converted over 50 vehicles, while its ongoing customers
include four municipalities and three commercial fleets. The Company was
recently selected as the ongoing preferred contractor for the City of Plano for
80 additional LPG conversions and a two year LPG fuel supply contract. The
final award of the contract is pending the finalization of current lease
negotiations for a second fuel station location on Texas Utilities property in
the Plano area. The Company expects to continue the development of its network
of fueling sites for new fleet customers as well as for the existing
alternative fuel-powered vehicles in the Dallas Metroplex. During the current
fiscal year, the Dallas facility was awarded a service contract by the Texas
Department of Transportation involving the testing of CNG cylinders on existing
vehicles over a two year contract period. The contract is valued at over
$75,000 and compliments the ongoing fleet repair and maintenance business
performed in the Dallas facility. Current year sales reached approximately
$158,000, including $90,000 in fuel sales. Based on recent activity, the
Company expects a significant increase in overall sales volumes for fiscal year
1997 at the Dallas center.
Arizona Operations
ExproFuels entered the Arizona market during 1995, with the opening of
affiliated centers in Phoenix and Tucson to convert vehicles and supply
conversion kits under a contract that it had been awarded by the State of
Arizona. The Company began offering its services through existing, locally
owned automotive repair facilities under a management agreement with
Arizona-based Environmental Fuel Systems. The existing facilities provided
traditional automotive repair services to the motoring market place while
remaining available to the Company when needed for conversions. ExproFuels has
converted over 70 vehicles since opening in Arizona through conversion
contracts with 5 municipalities, the state of Arizona, school districts and
Davis Monthan AFB. Subsequent to August, 1996, the Company successfully
contracted for the conversion of 28 new vehicles to LNG for the use of the City
of Phoenix Department of Transportation. While state legislative changes
enacted during fiscal year 1996 have encouraged ExproFuels to maintain its
presence in the Arizona market, ongoing overhead reduction strategies will
continue until significant, continuous contracting opportunities are identified
and successfully developed. The Company is actively seeking more bidding
opportunities to expand its conversion and fueling business in Arizona.
Louisiana Operations
In early 1994, ExproFuels was selected as a subcontractor for Ecogas, Inc., a
Texas based Company holding a contract to convert up to 25% of the State of
Louisiana's vehicles to CNG. ExproFuels was selected to convert approximately
one-half of these vehicles and opened a conversion facility in New Orleans, as
required under its agreement with EcoGas. Unfortunately, Ecogas was never able
to meet the conversion rates established in the contract and the number of
state vehicles submitted for conversion were not sufficient to maintain
profitable operations. A total of 94 vehicles were eventually converted to CNG
at the Company's facilities prior to the suspension of operations during the
2nd quarter of 1995. ExproFuels successfully subleased the New Orleans
conversion center to an unrelated business on a noncancellable basis, with
sublease base terms extending through the base period of the Company's original
building lease.
International Operations
Throughout fiscal year 1995 and 1996, the Company expanded its support of
existing projects as well as initiated new activities in various international
alternative fuels programs. As a recognized leader in this emerging industry,
the Company continues to come to the attention of foreign-based public and
private entities interested in bringing ExproFuels' expertise to their
countries. It is the Company's continuing challenge to identify and
successfully participate in those foreign opportunities that offer new,
profitable markets for our proven technologies.
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Uzbekistan: During 1995, the Company signed a participation agreement with
American Technical Institute (ATI) and American Engineering, Inc., both of
Memphis, Tennessee to provide project management, technical evaluation and
additional assistance in the development of various joint ventures with the
government of Uzbekistan.
The purpose of the joint ventures with the Government of Uzbekistan is to
participate with that nation, on a profitable basis, in the conversion of a
majority of government owned motor vehicles to operate on CNG and to develop,
own and operate the CNG fueling infrastructure throughout that nation. The
venture will participate in the development of a manufacturing industry for
primary conversion components within Uzbekistan. Detailed in-country studies
conducted during 1995 and 1996 support estimates of over 200,000 vehicle
conversions and 300 CNG refueling stations to be built during the first 5 years
of the venture. Revenue projections from a portion of the scheduled conversions
and fuels station operations approximate the potential revenues to be in excess
of $200,000,000 to the American parties to the joint venture.
Thoughout fiscal year 1996, ExproFuels has continued to provide significant
support to the joint venture projects in Uzbekistan, while maintaining its
equity stake in the American portion of the venture at 10.82%. Significant
progress made throughout the current year include the following items: the
successful conclusion to the ExproFuels led feasibility study and pilot CNG
conversion project including the conversion of 15 Uzbek government vehicles;
the acceptance and approval of study results by all affected Uzbek government
agencies, including the National Bank of Uzbekistan; the official signing of
the Uzbek Cabinet of Ministers decree by Uzbek President Karimov authorizing
the American partners, led by American Engineering, Inc., as the official
partner to join with the Uzbek government to convert a large portion of that
country's vehicle fleet to operate on CNG; the signing of the definitive joint
venture agreements between American parties and Uzbek parties in the U.S.
Capital Building in August, 1996; and the opening of joint venture offices in
Tashkent, the capital city of Uzbekistan shortly thereafter. Subsequent to year
end, final startup activities continue, with initial vehicle conversions
scheduled for the 2nd quarter of fiscal year 1997.
Latin America: During the current year the Company has continued to participate
in the development of various Latin American programs relative to its expertise
and the public and private contacts it has gained over the last two years. Many
of these countries or regions are in the early stages of the introduction of
alternative fuels to their general public. The ongoing privatization of
state-owned oil and gas industries in most of these countries offers a special
window of opportunity for the Company to participate in the development of
in-country alternative fuels infrastructure, conversions and associated
operations. Currently, a proposal remains pending with Ecopetrol, the
state-owned oil company of Colombia, for an extensive training program for the
safe use and development of LPG and CNG as motor fuels. Ecopetrol's alternative
fuels program has failed to develop at the rate the Colombian government
originally indicated. During fiscal 1996, the Company participated in two trade
exhibitions in Colombia which generated approximately $12,000 in conversion
equipment and fuel station parts sales to Ecopetrol, and is currently pursuing
in-country investors and developing local market knowledge for the
establishment of an alternative fuels products distribution company. The
Company is also participating in industry trade shows, technical symposiums and
other opportunities to introduce itself to the marketplace in these developing
markets. The Company is currently in the process of establishing strategic
alliances or joint ventures with key industry participants in various countries
and feels strongly that significant revenue producing opportunities, currently
being developed, will be confirmed during the 2nd quarter fiscal year 1997 and
initiated within the current fiscal year.
PRINCIPAL PRODUCTS AND COMPETITION
The Company's current principal products are natural gas and crude oil, and
through August, 1996, included alternative fuels vehicles conversions. The
production and marketing of oil and gas are affected by a number of factors
which are beyond the Company's control, the effect of which cannot be
accurately predicted. These factors include crude oil imports, actions by
foreign oil-producing nations, the availability of adequate pipeline and other
transportation facilities, the marketing of competitive fuels and other matters
affecting the availability of a ready market, such as fluctuating supply and
demand. The Company sells all of its oil and gas under short term contracts
that can be terminated with less than 30 days notice. None of the Company's
production is sold under long-term contracts with specific purchasers.
Consequently, the Company is able to market its oil and gas production to the
highest bidder each month. The Company operates and directs the drilling of oil
and gas wells. It contracts service companies, such as
9
<PAGE> 10
drilling contractors, cementing contractors, etc., for specific tasks. In some
wells, the Company only participates as a working interest or overriding
royalty interest owner.
During 1996, one purchaser of the Company's oil and gas production accounted
for 71% of that division's total oil and gas sales. In the event this major
customer declined to purchase future production, the Company believes that
alternative purchasers could be found for such production at comparable prices.
The oil and gas industry is highly competitive in the search for and
development of oil and gas reserves. The Company competes with a substantial
number of major integrated oil companies and other companies having materially
greater financial resources and manpower than the Company. These competitors,
having greater financial resources than the Company, have a greater ability to
bear the economic risks inherent in all phases of this industry. In addition,
unlike the Company, many competitors produce large volumes of crude oil which
may be used in connection with their operations. These companies also possess
substantially larger technical staffs which puts the Company at a significant
competitive disadvantage compared to others in the industry.
During 1996, the Company, through its former alternative fuels division,
ExproFuels, converted gasoline-powered vehicles to run on LPG, CNG and LNG.
ExproFuels also built fuel stations and contracted to deliver fuel to clients.
Several other companies compete with ExproFuels in some or all of these
markets. The former division's revenues, profitability and future rate of
growth are substantially dependent on its ability to increase its sales level
primarily by winning bids from various state, federal and local governmental
agencies, municipalities and school districts that have been mandated by
various legislation to convert their vehicle fleets to alternative fuels.
A few of these competitors are considerably larger than ExproFuels and have a
distinct advantage in bearing the economic risks which are inherent to this new
industry. Its ability to compete for the conversion of private fleets depends
on its ability to reduce costs and finance conversions for the customer.
ExproFuels' size allows it to control its cost of conversion; however, its
relatively small size limits its ability to finance clients. Although the
market is increasing, not many companies are involved in financing conversions.
ExproFuels has become more active in the conversion market by keeping its costs
low and being awarded bids in the mandated market.
During 1996, three purchasers of the ExproFuels' alternative fuels vehicles
conversion services and products accounted for 25%, 8% and 8%, respectively, of
that division's total sales. In the event any or all these customers do not
continue as customers, the Company believes that additional customers will
continue to be found for such services and products at comparable prices. See
Notes to the Financial Statements.
EMPLOYEES
As of August 31, 1996, The Exploration Company employed 16 full-time employees
including management. With the spin-off of ExproFuels, Inc. in September, 1996,
the full time employees were reduced to 4 while consultants are employed by the
Company on a continuing basis. The Company believes its relations with its
employees are good.
None of the Company's employees are covered by union contracts.
GENERAL REGULATIONS
The extraction, production, transportation and sale of oil, gas and minerals as
well as the conversion of alternative fuels vehicles are regulated by both
state and federal authorities. The executive and legislative branches of
government at both the state and federal levels, have in the past and, it
appears, will continue to periodically propose and consider proposals for
establishment of controls on the development and use of alternative fuels,
energy conservation, environmental protection, taxation upon crude oil imports,
limitation of crude oil imports, as well as various other related programs. If
any proposals relating to the above subjects were to be enacted, the Company is
unable to predict what effect, if any, implementation of such proposals would
have upon the Company's operations. A listing of the more significant current
state and federal statutory authority for regulation of the Company's current
operations and business are provided herein below.
10
<PAGE> 11
Federal Regulatory Controls
Oil and Gas Operations: Historically, the transportation and sale for resale of
natural gas in interstate commerce have been regulated pursuant to the Natural
Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA")
and the regulations promulgated thereunder by the Federal Energy Regulatory
Commission ("FERC"). Maximum selling prices of certain categories of natural
gas sold in "first sales," whether sold in interstate or intrastate commerce,
were regulated pursuant to the NGPA. On July 26, 1989, the Natural Gas Wellhead
Decontrol Act (the "Decontrol Act") was enacted, which removed, as of January
1, 1993, all remaining federal price controls from natural gas sold in "first
sales." The FERC's jurisdiction over natural gas transportation was unaffected
by the Decontrol Act.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A and 636-B
(collectively "Order No. 636"), which required interstate pipelines to provide
transportation separate, or "unbundled," from the pipelines' sales of gas.
Although Order No. 636 did not directly regulate the Company's activities, it
fostered increased competition within all phases of the natural gas industry.
In December 1992, the FERC issued Order No. 547, governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. The order applies to non-first sales that remain subject
to the FERC's NGA jurisdiction. The FERC Order No. 547, in tandem with Order
No. 636, has fostered a competitive market for natural gas by giving natural
gas purchasers access to multiple supply sources at market-driven prices. Order
No. 547 has increased competition in markets in which the Company's natural gas
is sold. The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by the FERC and Congress will continue.
ExproFuels: The Clean Air Act of 1970, as amended, requires that the
concentration of pollutants in exhaust gases from the nation's cars, trucks and
buses fall below prescribed pollution limits. Emission standards for different
types of vehicles were established for carbon monoxide, hydrocarbons and
nitrogen oxides. The Clean Air Act authorized the Environmental Protection
Agency (EPA) to establish maximum concentration levels for the designated
pollutants to protect public health. The EPA subsequently established these
levels for six pollutants: carbon monoxide, nitrogen oxides, ozone, particulate
matter, sulfur dioxide and lead. The Act requires that states, where the
concentrations exceed the standards, develop plans to control these emissions
and to reduce these contaminates. States which do not comply face possible bans
on new source construction, freezes on federal grants and reduction in highway
funds. If states fail to implement an adequate plan, the EPA may implement its
own control measures which include downtown parking restrictions, staggered
working hours, and gasoline rationing, as well as many other actions.
The Clean Air Act Amendments of 1990 clarified how areas would be designated as
non-attainment areas for ozone, carbon monoxide and particulate matter in
accordance with the severity of the air pollution problem. In November 1991,
the EPA identified 98 non-attainment areas for ozone, 42 areas for carbon
monoxide and 71 areas for particulate matter. Additional areas may be added if
their air quality declines below the standards. Because automobiles, trucks and
buses are one of the biggest contaminators, the Company has recognized the need
for businesses and state and local governments to convert their vehicles to run
on clean fuels such as liquefied petroleum gas (LPG), compressed natural gas
(CNG) or liquefied natural gas (LNG). The Company believes that these
regulations will be strong motivators to these entities to convert their
vehicles thereby increasing activity in this newly emerging industry in which
the Company is participating through its alternative fuels division,
ExproFuels. For example, beginning with 1998 models, fleets with 10 or more
vehicles capable of being centrally refueled in the 22 smoggiest cities (the
serious, severe and extreme ozone nonattainment areas plus Denver, Colorado for
carbon monoxide nonattainment) must begin to buy clean fuel vehicles. Beginning
in the model-year 1998, 30 percent of new passenger cars and most categories of
light trucks and vans bought for these fleets must be clean fuel vehicles. The
percentage rises to 50 percent in 1999 and 70 percent in 2000. For heavy-duty
vehicles including school buses and delivery vans, the phase-in stays a
constant 50 percent of new purchases beginning in 1998. Past history has shown
that mandates of this type are generally met by the purchase of new gasoline or
diesel vehicles and converting them to run on alternative fuels. Also under the
amendments to the Clean Air Act are mandates for the Environmental Protection
Agency (EPA) which began testing urban bus fleets in 1994. If it is found that
the buses are not meeting the new standards in use, the EPA may mandate a
switch to cleaner fuels in 48 cities with populations of more than 750,000.
11
<PAGE> 12
The Energy Policy Act of 1992 also provides federal mandates for AFV's. The
primary aim of the Act is to reduce dependence of the United States on crude
oil imports. The Act directly affects light-duty federal, state and some
private fleets of at least 20 vehicles that can be centrally refueled and are
operated in metropolitan areas with populations of 250,000 or more. The minimum
federal fleet requirements for light-duty AFV are as follows: 5,000 in 1993;
7,500 in 1994; 10,000 in 1995; 25% in 1996; 33% in 1997; 50% in 1998; and 75%
for 1999 and thereafter. In addition, federal fleets are mandated to use
commercial fueling facilities that offer alternative fuels to the public as
much as practicable. Purchases of light-duty vehicles by state governments are
required to be AFV in the following amounts: 10% in 1996; 15% in 1997; 25% in
1998; 50% in 1999; and 75% in 2000 and thereafter. Private sector companies
that make alternative fuels, such as natural gas, electric and LPG producing
companies, are required to introduce AFV's into their fleets as follows: 30% in
1996; 50% in 1997; 70% in 1998; and 90% in 1999 and thereafter. Executive Order
12844, issued in April 1993, requires federal agencies to acquire, subject to
the availability of funds and life-cycle costs, AFV's in numbers that exceed by
50% the requirements for 1993 through 1995 set forth in the Energy Policy Act
of 1992.
State Regulatory Controls
Oil and Gas Operations: In each state where the Company conducts or
contemplates conducting oil and gas activities, such activities are subject to
various regulations. In general, the regulations relate to the extraction,
production, transportation and sale of oil and natural gas, the issuance of
drilling permits, the methods of developing new production, the spacing and
operation of wells, the conservation of oil and natural gas reservoirs and
other similar aspects of oil and gas operations. In particular, the State of
Texas (where the Company has conducted the majority of its oil and gas
operations to date) regulates the rate of daily production allowable from both
oil and gas wells on a market demand or conservation basis. At the present
time, none of the Company's production has been curtailed due to reduced
allowables. The Company knows of no newly proposed regulations which will
significantly curtail its production. The Company is expanding its operations
to the states of North Dakota and Montana. Upon reviewing these states oil and
gas regulations, it is anticipated that increased regulations will delay
drilling activities slightly but will not have a significant impact upon
drilling operations.
ExproFuels: The Clean Air Act Amendments of 1990 have caused at least sixteen
states to pass legislation requiring the purchase or conversion of vehicles to
run on clean fuels. Most of these require certain percentages of the state's
own vehicle fleet to be converted by various dates. In addition, some states
have mandated that school buses and metro transit systems convert percentages
of their fleets within given time frames. Texas, for example, has legislated
that school districts which operate more than 50 buses, state agencies with
more than 15 vehicles and local transit authorities are not allowed to purchase
or lease vehicles which cannot operate on an approved alternative fuel after
September 1, 1993. By September 1, 1997, 50% of these fleets must be converted;
and by September 1, 2001, 90% must be operating on alternative fuels. In
addition, Texas Senate Bill 769 requires that local government fleets of more
than 15 vehicles and private fleets of more than 25 vehicles in non-attainment
areas must convert their vehicles. Under HB 2575, Arizona has mandated that 40%
of the state's fleet of vehicles must be converted to alternative fuels by
December 31, 1995 and 90% by December 31, 1997. Additionally, large cities are
required to convert city-owned vehicles and school buses under the following
schedule: 18% by 1996; 25% by 1997; 50% by 1999; and 75% by 2001. In Louisiana,
Acts 927 and 954 require that 30% of the state's vehicles be converted to
alternative fuels by September 1, 1994; 50% by September 1, 1996; and 80% by
September 1, 1998. Many states have similar legislation which either legislates
that conversions occur or gives incentives to help with the conversions
although punitive actions have not always followed non-compliance.
In March, 1995 SB 200 was passed by the Texas Legislature which significantly
affects certain sectors of the alternative fuels industry. The bill
reclassified reformulated gasoline as an alternative fuel, in recognition of
its cleaner, less polluting attributes. While effectively diminishing the
effect of upcoming deadlines on state regulatory mandates on some public and
private sector fleets operating in Texas, it established higher standards of
allowable emissions for certain public fleets, such as state agencies and
public transportation fleets. The Company believes that this legislation will
not significantly impact its alternative fuel division, ExproFuels, which is
actively involved in helping these public sector entities convert their
vehicles to meet these mandated quotas. Additionally, the Company is closely
monitoring the legislative developments in Arizona where it also operates. HB
2002 was passed by the Arizona Legislature in late 1996 and includes numerous
beneficial provisions intended to encourage the use of LPG and CNG by various
categories of vehicle owners. Incentives include special reduced rates for AFV
license plates, special permission
12
<PAGE> 13
allowing AFVs to use HOV lanes regardless of number of occupants, and the
repeal of an $0.18 per gallon use fuel tax on alternative fuels. The Company
believes these incentives, together with other incentives targeted at the
public sector will allow alternative fuel conversions to be justified
economically more readily by many fleets throughout the State. As of year end,
the Company was not aware of any Arizona legislation which would significantly
dilute that state's mandate and related deadlines effecting the alternative
fuel vehicles industry, while there is no assurance that new legislation will
not be forthcoming in some future date which could adversely effect the
Company's ability to conduct its business in Arizona.
Environmental Regulation
Oil and Gas Operations: The Company's extraction, production and drilling
operations are subject to environmental protection regulations established by
federal, state and local agencies. To the best of its knowledge, the Company
presently believes that it is in compliance with the applicable environmental
regulations established by the agencies with jurisdiction over its operations.
The Company is acutely aware that the applicable environmental regulations
currently in effect could have a material detrimental effect upon its earnings,
capital expenditures or prospects for profitability. The Company's competitors
are subject to the same regulations and therefore, the existence of such
regulations does not appear to have any material effect upon the Company's
position with respect to its competitors. The Texas Legislature has mandated a
regulatory program for the management of hazardous wastes generated during
crude oil and natural gas exploration and production, gas processing, oil and
gas waste reclamation and transportation operations. The disposal of these
wastes, as governed by the Railroad Commission of Texas, is becoming an
increasing burden on the industry and could severely impact the ability of the
Company to continue as an operator in the future. The Company's proposed
operations in Montana and North Dakota will be subject to additional
environmental regulations including archeological and botanical surveys as some
of its leases are on federal and state lands.
ExproFuels: The Clean Air Act of 1970 and the Clean Air Act Amendments of 1990
have made improving the air quality in the United States a major goal. To this
end, the EPA has established maximum permitted levels for six major air
pollutants: carbon monoxide, nitrogen oxide, ozone, particulate matter, sulfur
dioxide and lead. Certain metropolitan areas have been designated as
non-compliance areas. These areas have been classified as marginal, moderate or
severe depending upon the level of contamination. The EPA has established a
time schedule for each of these classifications to be brought within compliance
with the Act. ExproFuels, the Company's former alternative fuels division, is
converting vehicles to run on LPG, CNG or LNG which lowers the level of the
pollutants being emitted in the non-attainment area because these alternative
fuels are much cleaner-burning fuels than gasoline. ExproFuels is,
consequently, subject to the EPA standards for emissions from vehicles which
have been converted. Some states have adopted their own standards; most of
these have adopted those of the California Air Resources Board (CARB) which has
been a leader in defining acceptable limits for pollutants. ExproFuels must
also comply with the applicable state regulations regarding the conversion of
vehicles and the sale of alternative fuels.
Federal and State Tax Considerations
Oil and Gas Operations: Income from oil and gas production is subject to
taxation by the state in which the production occurred. In Texas, the state
receives a severance tax of 4.6% for oil production and 7.5% for gas
production. North Dakota production taxes typically range from 9.0% to 11.5%
while Montana's taxes range up to 17.2%. These high percentage state taxes can
have a significant impact upon the economic viability of marginal wells that
the Company may produce and require plugging of wells sooner than would be
necessary in a less arduous taxing environment. Although the Company is subject
to federal income taxes on the oil and gas produced, its net operating loss
should be sufficient to shelter a substantial amount of production. See Notes
to the audited financial statements.
ExproFuels: In October of 1992, Congress passed the Comprehensive National
Energy Policy Act which encourages the use of natural gas by providing a
deduction for a portion of the incremental cost of motor vehicles that are
propelled by clean burning fuels. The amount of the deduction depends on the
gross vehicle weight and ranges from $50,000 for heavy trucks and buses, $5,000
for medium weight trucks and $2,000 for other motor vehicles. The Act also
allows a deduction for the cost of qualified clean fuel vehicle refueling
property, defined as property used to refuel clean-fuel vehicles at the point
where the fuel is delivered. The aggregate cost that may be taken into account
in determining the amount of the deduction may not exceed $100,000 at any
location. The deductions apply to properties placed in service after June 30,
1993. At least twenty-four states have enacted their own legislation to give
additional incentives to
13
<PAGE> 14
companies desiring to convert or purchase natural gas vehicles. These
incentives vary considerably from state to state. Arizona reduces the license
tax and gives a tax credit of $1,000 for alternative fuel vehicles purchased in
1994, 1995 and 1996. Oklahoma gives a state income tax credit of up to $1,500
and has provided interest free loans of up to $1,500,000 to local government
and school districts to convert vehicles. Louisiana provides that 20% of the
conversion costs can be deducted as a tax credit. Texas has legislated that
propane and natural gas are exempt from the recent increase of $0.05 per gallon
motor fuels tax.
ITEM 2. PROPERTIES
PHYSICAL PROPERTIES
The Company's administrative offices are located at 500 North Loop 1604 East,
Suite 250, San Antonio, Texas. These offices, consisting of approximately 5,700
square feet, are leased through February 28, 1997 at $5,756 per month.
In addition, its former alternative fuels division, ExproFuels leases four
facilities, as follows:
<TABLE>
<CAPTION>
Approximate Monthly
Location Type Square Feet Rental Expiration
-------- ---- ----------- ------ ----------
<S> <C> <C> <C> <C>
San Antonio, Texas conversion 5,000 $2,500 May 1999
New Orleans, Louisiana conversion 15,000 4,200 February 1997
Dallas, Texas conversion 7,000 1,900 May 1997
Dallas, Texas fueling 8,200 400 July 1998
</TABLE>
The New Orleans facility has been closed by the Company, and the facility has
been subleased under a noncancellable lease for $4,500 per month expiring
February, 1997.
Management believes the facilities are suitable to accommodate anticipated
growth of the ExproFuels division in these cities over the next several fiscal
years. While no additional conversion center locations are anticipated to be
leased in other cities during the next fiscal year, the Company is seeking
additional fuel station sites.
Oil and Gas Properties
All the Company's oil and gas properties, reserves and activities are located
onshore in the continental United States, except for 3,794 acres of undeveloped
oil and gas leases in Canada. There are no quantities of oil or gas subject to
long-term supply or similar agreements with foreign government authorities.
Proved Reserves, Future Net Revenue and
Present Value of Estimated Future Net Revenues
The following unaudited information as of August 31, 1996, relates to the
Company's estimated proved oil and gas reserves, estimated future net revenues
attributable to such reserves and the present value of such future net revenues
using a 10% discount factor. Estimates of proved developed oil and gas reserves
attributable to the Company's interest at August 31, 1996, 1995 and 1994 are
set forth in Note 9 of the audited financial statements included in this Annual
Report on Form 10-K.
14
<PAGE> 15
Present Value of Estimated Future Net Revenues from proved developed oil and
gas reserves as of August 31, 1996, are as follows:
<TABLE>
<CAPTION>
Present Value of
Years Ending Estimated Future
August 31 Net Revenues
------------ ----------------
<S> <C>
1997 $ 435,000
1998 386,000
1999 343,000
2000 306,000
2001 271,000
Thereafter 459,000
-----------
TOTAL $ 2,200,000
===========
</TABLE>
The present value of estimated future net revenues is computed in accordance
with SEC requirements. These amounts were computed by applying current prices
for oil and gas, giving effect only to those escalations in prices of gas which
are currently contractually defined, and deducting estimated future
expenditures to develop and produce the proved reserves and applying a discount
factor of 10%.
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas liquids and natural gas which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed
oil and gas reserves are reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. No reserve
estimates have been filed with or included in reports to any federal or foreign
government authority or agency, other than the Securities and Exchange
Commission, since the Company's latest Form 10-K filing.
Production
The following table summarizes the Company's net oil and gas production,
average sales prices and average production costs per unit of production for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended August 31
1996 1995 1994
----- ------ -----
<S> <C> <C> <C>
Oil:
Production in Barrels 2,862 2,598 2,479
Average sales price per Barrel $18.03 $16.89 $ 14.55
Gas:
Production in MCF 215,274 177,238 82,656
Average Sales Price per MCF $1.79 $1.62 $ 2.23
Average cost of production per equivalent Barrel (1) $ 1.93 $ 1.32 $ 1.80
</TABLE>
(1) Oil and gas were combined by converting gas to barrel equivalent on
the basis of 6 MCF of gas = 1 barrel of oil. Production costs
include direct lease operations and production taxes.
15
<PAGE> 16
Producing Properties - Wells and Acreage
The following table sets forth the Company's producing wells and developed
acreage assignable to such wells at August 31, 1996:
<TABLE>
<CAPTION>
Productive Wells
-------------------------------------------------------
Developed Acreage Oil Gas Total
- ----------------- ------------- ------------- ---------------
Gross Net Gross Net Gross Net Gross Net
- ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C>
2,240 533 5 .86 9 2.14 14 3
</TABLE>
Productive wells consist of producing wells and wells capable of production,
including shut-in wells and wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities.
A "gross well" or "gross acre" is a well or acre in which a working interest is
held. The number of gross wells or gross acres is the total number of wells or
acres in which working interest are owned. A "net well" or "net acre" is deemed
to exist when the sum of fractional ownership interest in gross wells or gross
acres equals one. The number of net wells or net acres is the sum of fractional
working interests owned in gross wells or gross acres expressed as whole
numbers and fractions thereof.
Undeveloped Acreage
As of August 31, 1996, the Company owned, by lease or in fee, the following
undeveloped acres, all of which are located in the Continental United States or
Canada, as follows:
<TABLE>
<CAPTION>
Est. FY 1997
United States Gross Acres Net Acres Delay Rentals
------------- ----------- --------- -------------
<S> <C> <C> <C>
Texas 57,063 49,874 $ 0
North Dakota 181,438 38,334 4,612
Montana 7,280 83 180
Canada
Alberta 3,794 3,794 4,079
------- ------ ---------
Totals 249,575 92,085 $ 8,871
======= ====== =========
</TABLE>
A Texas lease containing approximately 33,000 acres also has a requirement to
drill a well every 90 days to keep the lease in effect since the primary term
of the lease has expired. The Company is presently drilling under the terms of
the lease and hopes to be able to keep the lease in force by continuous
development during the year.
Drilling Activity
The Company participated in the drilling of four exploratory wells in Texas
during the 1996 fiscal year with three located on the Paloma Ranch in Maverick
County, and one in Zavala County. The Paloma "B" #2-112 was drilled starting in
late November, 1995, using the Company's 3-D seismic to test the Glen Rose
formation. The well found over 50 feet of porosity bearing reef and was flowed
at rates in excess of 2.5 million cubic feet of gas per day and 30 barrels of
condensate per day, with an absolute open flow potential of approximately
20,000,000 cubic feet of gas per day. In April, 1996, the Company drilled the
Paloma "C" #1-108, the second Glen Rose test of the year. Although the reef was
present, it was full of water and not hydrocarbons, so the well was plugged and
abandoned. In August, 1996, the Company drilled the Paloma "D" #1-73, an Austin
Chalk formation test, with a target depth of 1935 ft. The
16
<PAGE> 17
location was selected using Lansat imaging and seismic records which indicated
the presence of a surface fault on the Paloma lease. The shallow prospect served
to meet the annual drilling requirements of the underlying lease, but,
unfortunately the formation was not productive in hydrocarbons and the well was
plugged and abandoned. Management is continuing to evaluate the information it
has obtained in drilling on the Paloma lease during the 1996 fiscal year and has
reprocessed selected seismic information. Management remains confident that it
will be able to identify additional productive drilling prospects in the 1997
fiscal year. The Company's fourth drilling attempt of the year was an Escondido
formation gas test well on its Zavala County leasehold. The Gorman #2-4 was
drilling at year end, had reached the oil bearing Escondido formation. Although
it is currently being evaluated, it appears that the well may be depleted by
offsetting older production. If so, the well will be plugged and abandoned.
Mineral Properties
The Company owns an 50% mineral interest and leases 50% of the minerals and
100% of the surface interest related to mining operations in and to the 3,809
acres Holmgreen Ranch in Kinney and Uvalde Counties of Texas. Delay rental
costs are expected to be $3,809 in 1997. This property contains significant
tonnage of rock asphalt which is used as road building material in the area. A
marketing study which the Company commissioned in 1989 indicates that the
property is marginally economic at current oil prices. Increased oil prices or
increased asphalt markets would make the reserves very valuable to the Company.
Management has visited with companies who are interested in developing the
reserves either by conventional mining of rock asphalt or by the use of
technologies and processes which may allow the production of the asphalt as
light oil.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the
fourth quarter of the fiscal year ended August 31, 1996.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following is a range of high and low bid prices for the Company's common
stock for each quarter of the last two years based upon bid prices reported by
the National Association of Securities Dealers Quotations system under the call
symbol "TXCO":
<TABLE>
<CAPTION>
Range of Bid Prices
---------------------
Quarter ended: High Low
-------------- ------ ----
<S> <C> <C>
August 1996 $ 2.63 $ 1.86
May 1996 2.38 1.56
February 1996 2.63 1.63
November 1995 2.88 2.06
August 1995 $ 3.59 $ 2.50
May 1995 4.00 2.75
February 1995 2.93 2.37
November 1994 3.31 2.56
</TABLE>
As of September 13, 1996, there were approximately 1,808 holders of record of
the Company's Common Stock. The transfer agent for the Company is Boston
EquiServe, Boston, Massachusetts. The Company has not paid any cash dividends
on its Common Stock and does not expect to do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information is derived from and qualified in
its entirety by the Financial Statements of the Company and the Notes thereto
as set forth in this Annual Report on Form 10-K commencing on page F-1.
<TABLE>
<CAPTION>
Years Ended August 31
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 1,567,994 $ 1,064,604 $ 1,058,073 $ 116,716 $ 144,761
Loss from continuing operations (1,880,389) (2,153,365) (1,550,953) (2,277,144) (1,337,992)
Loss per common share from
continuing operations (2) (0.31) (0.44) (0.36) (0.64) (0.44)
Total Assets(1) 8,433,434 4,111,980 2,262,283 2,447,785 2,788,497
Long-term obligations(1) 2,462,197 2,429,697 630,111 632,442 215,105
Shareholders' equity 5,670,688 1,377,747 1,613,121 1,214,297 1,974,440
Weighted average shares
outstanding (1) 6,140,176 4,863,961 4,267,363 3,533,973 3,016,922
</TABLE>
(1) Amounts reflect adjustments in 1995, 1994 and 1993 for the
reclassification of ExproFuels as an equity investment due to its
spin-off in 1996.
(2) Amounts reflect 1 for 50 reverse common stock split as of March 29, 1993.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition and results
of operations. This discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto.
CAPITAL RESOURCES AND LIQUIDITY (1)
In fiscal year 1996, the Company successfully raised funds under an agreement
with Comstar BioCapital, Inc., a foreign entity, through an offering of the
Company's common stock to foreign investors. The Company raised $2,100,000 in
exchange for 1,175,000 shares of the Company's common stock pursuant to
Regulation S of the Securities Act of 1933, as amended. The Company also
realized $602,000 from the payment of an outstanding note receivable, received
$55,000 due to the expiration of a drilling option and obtained $132,500 as
proceeds from long-term borrowings during the year. Proceeds were utilized to
fund the Company's cash loss from operations of $1,375,000, including the
payment of interest of $378,000, payments on current portion of debt and
capital leases of $40,100 and for capital expenditures of $182,000. The capital
expenditures included approximately $55,000 to develop oil and gas properties,
$80,000 for equipment purchases for use in U.S. operations of ExproFuels, and
$41,000 for purchases of other assets. Additional capital investments and
advances totaling $442,000 were made by ExproFuels in CNG International, LLC.
At August 31, 1996, the Company had current assets of $1,039,425 and current
liabilities of $1,073,049. However, its current assets included $967,838 in
cash, and its current liabilities included a $500,000 convertible note payable
not due until May, 1997 (which is discussed below as part of the Company's
plans for fiscal 1997). This compared to a cash position of only $78,655 at
August 31, 1995.
In fiscal year 1995, the Company successfully raised funds under a convertible
note payable and indenture of trust agreement which was initially started in
the 4th quarter of fiscal 1994. During fiscal 1995, the Company raised
$1,689,697 in funds under this long term debt agreement, increasing to
$1,764,697 the total amount raised under this agreement. Although the
debentures offering raised a significant amount of needed capital for the
Company, the funds were not received as timely as was projected. The delay in
obtaining the funds reduced management's ability to initiate its intended
development activities as planned. The Company also raised $508,000 from sales
of Common Stock in fiscal 1995 and $261,000 from the sale of oil and gas
properties. Proceeds were utilized to fund the Company's cash loss from
operations of $2,030,000, payment of interest of $180,000, payments on current
portion of debt and capital leases of $142,000 and for capital expenditures of
$545,000. The capital expenditures included approximately $290,000 to develop
oil and gas properties in Maverick County, $105,000 for equipment purchases for
use in the U.S. operations of ExproFuels, and $150,000 for ExproFuels growing
participation in international operations through its joint venture investment
in CNG, International, LLC.
At August 31, 1995, the Company had current assets of $841,024 and current
liabilities of $469,545, resulting in $371,479 in working capital, as compared
to a working capital deficit of $360,000 at August 31, 1994. However, the
Company had a deficit of "quick" assets (cash and receivables) to current
liabilities of $266,392 at year end 1995 compared to a deficit of $554,000 at
year end 1994.
In fiscal year 1994, the Company's investment advisor, KRI Growth Stocks,
successfully completed a $1,000,000 private placement which it had begun
earlier during the 1993 fiscal year by raising an additional $330,000. The
Company also received $673,000 through a Regulation S offering, and issued
$500,000 of convertible debentures. Further, existing shareholders exercised
outstanding warrants for 97,500 shares of stock which raised $244,000 in cash,
and a private placement of 86,000 shares of stock raised $248,000 in cash. In
summary, the Company was successful in raising $1,995,000 (net of expenses)
during the 1994 fiscal year. Proceeds were utilized to fund the Company's 1994
cash loss from operations of $1,017,000, to retire long-term debt of $380,021
and for capital expenditures of $593,000. The capital expenditures included
$363,000 spent to develop the Company's oil and gas properties in Maverick
County and $230,000 for equipment purchases in the expanding ExproFuels
division. At August 31, 1994, the Company had current assets of $464,000 and
current liabilities of $824,000, resulting in a working capital deficit of
$360,000.
(1) Amounts for 1995 and 1994 have been adjusted for reclassifications of
ExproFuels division as an equity investment due to its spin-off in 1996.
19
<PAGE> 20
The major components of the Company's plans, and the requirements for
additional capital at August 31, 1996, include the following:
Oil and Gas Division
Texas Activity: To accelerate development of its 50,000 acre Maverick County
leasehold interest by drilling approximately 20 well sites that have been
identified using 3-D seismic data. During fiscal 1997, the Company plans to
drill a minimum of 3 additional wells, in keeping with lease renewal
requirements, with the first well, the Paloma "C" #2-108, having been spudded
in the 1st quarter of fiscal 1997. The Company's share of the cost of each well
is approximately $240,000 for a completed well and $120,000 for a dry hole.
Montana/North Dakota Activity: The Company has filed permits to drill 10
horizontal wells in the Red River "B" formation in the Williston Basin on its
131,869 acre leasehold in which it holds a 25% interest during fiscal 1997.
Eight wells have been filed in North Dakota and two in Montana. The Company's
share of the cost of each well is approximately $250,000 for a completed well,
with drilling scheduled to commence in December, 1996. The Company is
participating in one Lodgepole well currently drilling in North Dakota on a
prospect including a very small portion of its acreage. While the Company's
share in the drilling well is not significant, it continues to review, and
expects to join in additional opportunities to participate in drilling
Lodgepole wells on its acreage under farmout agreements or other acceptable
terms with industry operators experienced in the area.
Delay rentals required to maintain the Company's interest in all of its
undeveloped leasehold acreage are estimated to be $8,900 in 1997.
ExproFuels Division
The Exploration Company advanced ExproFuels, Inc. $40,000 in September, 1996,
following its spin-off from the Company. Management does not anticipate making
significant advances to its former division on an ongoing basis. Capital
requirements to sustain ExproFuels' growth are projected to be at least $
250,000 in capital expenditures and an additional $750,000 in working capital
needs for funding ongoing operating costs and maintaining optimum inventory
levels. These plans provide for additional company owned fuel station
installations to be opened during fiscal year 1997, as well as continuing
international marketing and development efforts in Asia and Latin America.
These expenditures will be in the form of capital investments in foreign joint
ventures or in general and administrative expenditures in support of such
activities. Management is considering various potential domestic acquisition
alternatives with the goal of reaching operational efficiencies enabling
ExproFuels to reduce current per unit costs of purchasing, storage and
distribution of alternative fuels. Besides significantly enhancing existing net
operating margins, such acquisitions could enable ExproFuels to improve its
competitive stance in existing markets while facilitating expansion into new
markets. Management continues to pursue adequate sources of equity and debt
financing for funding the acquisition of established operating business units,
assuming they will provide positive operating cash flows to ExproFuels within
an acceptable timeframe.
Summary of Capital Resources and Liquidity
The Exploration Company
Management believes The Exploration Company has identified the sources that
will be able to provide the funds required to meet its current obligations
during fiscal year 1997. Subsequent to year end, the Company successfully
enhanced its capital position by the completion of two significant
transactions. In September, 1996, $433,480 of the Company's convertible notes
payable was converted into 173,392 shares of its common stock. This conversion
reduced the Company's interest payment scheduled for fiscal 1997 by $50,000 and
also reduced the debt principal payment scheduled for fiscal 1998. The Company
also was successful in obtaining a $1,000,000 line of credit designed to cover
its share of drilling costs on its leasehold acreage during fiscal 1997. The
credit agreement was implemented with Luzerner Katonalbank of Luzern,
Switzerland. Management is also actively pursuing the conversion of the
$500,000 in notes payable due in May, 1997, into the Company's common stock, as
provided for under the original debt agreement.
20
<PAGE> 21
The Company also believes the incorporation and spin-off of its ExproFuels
division will significantly reduce its annual cash requirements. Although
$40,000 was advanced to ExproFuels, Inc. subsequent to August 31, 1996,
Management believes further cash advances, if any, will be limited. In
addition, Management is confident oil and gas revenues should continue to
increase in light of current drilling plans and the expected continued
stability or moderate strengthening of domestic crude oil and natural gas
prices in fiscal 1997.
ExproFuels, Inc.
At August 31, 1996, ExproFuels had positive working capital of $49,000 and
equity of $908,179. However, its positive initial financial position was
primarily due to the cumulative, inception to date, contributions of operating
capital of $3,526,136 from its former parent, The Exploration Company. For
1997, ExproFuels must continue to seek additional sources of debt and equity
financing, and ultimately reach ongoing, profitable operations. Following its
spin-off from The Exploration Company in September 1996, ExproFuels has
successfully raised $200,000 in long-term, convertible debt financing, which
matures in fiscal year 2000. The Company continues to seek additional sources
of operating capital while it is proceeding with plans for the filing of an
Information Statement on Form 10 with the SEC to register the Company's
outstanding common stock. However, no assurance may be made as to the Company's
ability to continue to operate, or its ability to successfully accomplish some,
or all, of these or other alternatives and ultimately to attain profitable
operations.
RESULTS OF OPERATIONS
1996 Compared to 1995
Oil and Gas Division
Revenues from oil and gas sales increased by 50% in 1996 to $455,000 from
$304,000 in 1995, primarily as a result of higher gas sales due to the
successful completion of the Paloma "B" #2-112 during 1996 and the first full
year of production from the Paloma #1-107 and the Paloma "A"#83-1H.
Additionally, gas prices increased an average of 10% during 1996 over 1995
levels. Lease operating expenses for 1996 increased to $75,634 from $41,225 in
1995 reflecting a higher number of operated properties and overall higher costs
in operating certain producing wells. Exploration expenses increased by
$526,000 due to the drilling of two dry holes during the year, the Paloma
"C"#1-108 and the Paloma "D"#1-73. Additionally, during 1996, the Company
expensed the costs incurred in 1995 in drilling the Paloma #1-89, which
remained shut in at the end of 1995 pending its final evaluation. Depletion per
equivalent barrel of production increased to $4.12 in 1996 from $3.17 in 1995,
resulting in an overall increase of $58,000 depletion expense for the year.
Other costs included an increase in interest expense to $378,000 from $285,000
in 1995 attributable to interest accruing for a full year in 1996 versus a
partial year in 1995 on the Company's primary convertible note payable which
had an outstanding balance of $1,764,000 at August 31, 1996.
ExproFuels Division
ExproFuels division revenue increased by 35% in 1996 to $1,046,000 from
$773,000 in 1995, primarily due to an increase of $204,000 in construction
sales and a $90,000 increase in alternative fuel sales. The fuel sales increase
reflects the growing number of company owned fuel stations and fleet fuel
customers. Gross profit margins improved from 16% in 1995 to 28% in 1996
reflecting less incidents of price cutting by industry competitors, thereby
allowing the company to set favorable sales prices for its conversions and
construction services. Overall general and administrative expenses decreased by
approximately $100,000 in 1996 from prior year levels due to ongoing cost
control efforts conducted at all levels of the Company.
Overall, the ExproFuels Division was generally able to maintain its fixed costs
at or under prior year levels, while sales and marketing efforts achieved
significant gross sales increases.
21
<PAGE> 22
Summary
In total, revenues increased $463,000 or 42%, from $1,065,000 in 1995 to
$1,568,000 in 1996. Costs of sales, including general and administrative,
depreciation, depletion and amortization, increased only $207,000, thereby
resulting in a net decrease to prior year losses from operations of $255,000.
Other income and expense, in total, decreased by $17,000, with an increase in
interest expense of $93,000 being partially offset by an increase in interest
income of $58,000 and an increase in sublease income of $52,000. As a result,
the Company's net loss decreased to ($1,880,000) in 1996 from ($2,153,000) in
1995.
1995 Compared to 1994
Oil and Gas Division
Revenues from oil and gas sales in 1995 increased to $304,000 from $209,000 in
1994, primarily as a result of the Paloma #1-107 gas well having production for
a full year. Exploration expenses increased by $93,000 from 1994 to 1995 due to
the drilling of one dry hole during the year, the Paloma #1-133, plus the write
off of the portion of the drilling cost of the Paloma #1-89 below its final
completion horizon in the Upper Georgetown interval. Depletion increased by
$52,000 from 1994 to 1995 due to increased production volumes from the first
full year of the Paloma # 1-107, as mentioned above. Depletion per equivalent
barrel of production remained almost unchanged, increasing to $3.17 per barrel
in 1995 from $3.14 per barrel in 1994. The Company recognized an impairment of
$171,505 on its Holmgreen Ranch mineral interest.
General and administrative costs increased by $288,000 from 1994 to 1995. The
significant components of the increase included a $200,000 one time charge in
1995 for marketing services, and increases in public expense of $26,000 and
consulting fees expense of $31,000.
ExproFuels Division
ExproFuels division revenues experienced a net decrease of $48,000 from 1994 to
1995. Components of this net decrease were a $49,000 decrease in conversion
sales and a $65,000 decrease in fuel station construction that was partially
offset by a $66,000 increase in alternative fuel sales. Lower conversion sales
were primarily the result of the closing of the New Orleans conversion
facilities. Lower fuel station construction revenues reflect the Company's
decision to build more Company owned fuel stations to support its growing fuel
sales. Alternative fuels sales increased significantly due to the first full
year of operation of Company owned fuel stations in Plano and Dallas, as well
as additional fuel stations being placed in operation during 1995 under the
Texas Department of Transportation contract.
Costs of sales increased by $361,000 from 1994 to 1995 due to higher than
expected costs associated with the New Orleans location operations, both while
it was in operation and in association with its closing. Additionally, higher
start-up cost in the Arizona operations are reflected entirely in 1995 while
revenues have been limited to date in this new market.
Other costs included a decrease of $145,000 due to the one time charge in 1994
for writing off of the Company's previously acquired technological rights.
General and administrative expense decreased by $146,000 from 1994 to 1995.
Included in this change are declines in consulting services of $18,000, rent
expenses of $32,000, general shop supplies, tools and equipment maintenance of
$42,000 and payroll overhead of $30,000.
Summary
In total, revenues from operations increased by $46,000 from 1994 to 1995. This
slight revenue increase was significantly offset by the increase in total costs
and expenses of $544,000 from 1994 to 1995 resulting in the overall increase in
loss from operation of $460,000 for the year.
Other non-operating expense changes consisted primarily of an increase in
interest expense of $154,000 from 1994 to 1995 due directly to the completion
during the year of borrowings under the convertible note payable and indenture
of trust; such borrowings increased by $1,690,000 from 1994 to 1995. As a
result of the above, net losses from continuing operations increased by
$603,000 for the year ended August 31, 1995 from the similar period in 1994.
22
<PAGE> 23
1994 Compared to 1993
Oil and Gas Division
Oil and gas sales increased during fiscal year 1994 to $209,000, an increase of
$148,000 over 1993. This significant increase is primarily attributable to the
production from the Paloma #1-107 as well as from the Paloma #1-84 which was
completed during 1993 and had a full year of production during 1994. The
decrease in exploration expenses for 1994 to $58,000 compared to $187,000 in
1993 reflects that no dry holes were drilled during 1994, no significant
seismic expenses were incurred, and delay rentals were reduced by approximately
$34,000 on the Paloma leasehold as production requirements were achieved by the
Company under terms of its lease. Depletion expense for 1994 increased by
approximately $45,000 due to the Company's increased production volumes during
the year. Abandoned leases and equipment decreased from $1,305,000 in 1993 to
$31,000 in 1994. This significant decrease is due to the fact that only 1,265
acres of the Company's Canadian leases were dropped during 1994 as opposed to
significant abandonments in Canada and Zavala and Maverick County, Texas during
1993.
Because the Company's efforts to economically develop its Holmgreen Ranch
mineral property have been unsuccessful to date, coupled with the uncertainty
of when economic conditions may allow the Company to do so, the carrying value
of the Holmgreen mineral property was reduced in 1994 by recording an
impairment expense of $171,000. No oil and gas properties were impaired by the
Company during 1994.
ExproFuels Division
Due to the fact that the ExproFuels division commenced its operations during
the final part of the fiscal year ended August 1993, a direct comparison of
1994 operating results to 1993 is not meaningful. Following are the significant
operating results of the ExproFuels division for its year ending August 31,
1994.
Two new conversion facilities were opened during 1994, one in New Orleans,
Louisiana and one in Dallas, Texas. The New Orleans facility was opened
primarily as a result of the Company being selected as a subcontractor for
Ecogas, Inc., who was awarded a contract to convert up to 25% of the state's
vehicles to CNG. Revenue from this location was approximately $182,000 for
fiscal year 1994.
The Dallas, Texas, conversion facility was opened during May of 1994 primarily
to convert a private fleet of approximately thirty vehicles to LPG. The
customer is refueling its vehicle fleet at the Company's LPG refueling station
constructed during the year near Love Field Airport in Dallas.
The San Antonio, Texas, conversion facility, which was the first conversion
facility opened during 1993, continued to grow during fiscal 1994 as conversion
sales from this facility grew to approximately $400,000 for the year. In
addition, two refueling construction contracts totaling $162,603 were completed
by the San Antonio conversion personnel.
During the second half of 1994, the Company became increasingly dissatisfied
with the progress made by Greenway Environmental Research related to the
development and technology rights to convert diesel engines acquired by the
Company during 1993. Accordingly, its Development and Licensing Agreement with
Greenway was terminated effective August 31, 1994. The carrying value of the
technological rights and its related obligation were written off resulting in a
charge to current years operations of $144,000.
The ExproFuels division continued to invest heavily in sales and promotional
activities during the 1994 fiscal year. These activities, as well as the
increased overhead expenses associated with its new conversion facilities
opened during the year, resulted in total general and administrative expenses
within the division increasing to approximately $700,000 for the year. Major
components of general and administrative expenses include $117,000 for
promotional related expenses, $108,000 for occupancy related expenses, and
$357,000 for salaries, wages and consulting services. The overall loss from
operations for the ExproFuels division was $835,543 for the year ended August
31, 1994.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Notes thereto are set out in this Form 10-K
commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
24
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and
executive officers of the Company, as of November 8, 1996:
<TABLE>
<CAPTION>
Name Position Age
---- -------- ---
<S> <C> <C>
Stephen M. Gose, Jr. Chairman of the Board of Directors 66
Thomas H. Gose Director and Secretary 41
James E. Sigmon President and Director 48
</TABLE>
Stephen M. Gose, Jr., has served as Chairman of the Board of Directors of the
Company since July, 1984. He has been active for more than thirty-five years in
exploration and development of oil and gas properties, in real estate
development, and in ranching through the operations of Cibolo Properties, Inc.,
its predecessors and affiliates. Mr. Gose also serves as Chairman of the Board
of Directors of ExproFuels, Inc.
Thomas H. Gose is the sole Director, CEO and President of Cibolo Properties,
Inc. He formerly served as President of Spectrum Resources, Inc. (a majority
shareholder of the Company) since 1987. Since February, 1989, he has also
served as Director of the Company and as Secretary of the Company since January
2, 1992. He is the President and a Director of ExproFuels, Inc. Thomas H. Gose
is the son of Stephen M. Gose, Jr.
James E. Sigmon has served as the Company's President since February 1985. He
has been a Director of the Company since July 27, 1984. and is also a Director
of ExproFuels, Inc.
Each of the aforementioned Executive Officers and/or Directors have been
elected to serve for one year or until his successor is duly elected.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Information: The following table contains certain
information for each of the fiscal years indicated with respect to the chief
executive officer and those executive officers of the Company as to whom the
total annual salary and bonuses exceed $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Other Annual Long-term All other
Principal Position Year Salary Bonuses Compensation Compensation Compensation
- ------------------ ---- ------ ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James E. Sigmon 1996 $ 72,000 $ 0 $12,498 $ 0 $7,500
President & CEO 1995 72,000 0 0 0 0
1994 88,958 0 0 0 0
</TABLE>
25
<PAGE> 26
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Recognizable
% of Total Options Value at Assumed
# Options Granted to Employees Exercise Price Expiration Annual Rates
Name Granted (1) in Fiscal Year per Share Date 5% 10% 20%
-------- --------- -------------------- -------------- ---------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
No options were granted during the year ended August 31, 1996
to executive officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
# Shares Value Options/SARs Options/SARs
Name Exercised Realized August 31, 1996 August 31, 1996
--------- --------- -------- --------------------- ------------------
<S> <C> <C> <C> <C>
James E. Sigmon - - 150,000 $ 20,500
</TABLE>
All of Mr. Sigmon's unexercised options were exercisable as of August 31, 1996.
COMPENSATION OF DIRECTORS
Members of the Board of Directors of the Company are not compensated for any
services provided as a director. However, during 1996, shares of common stock
in ExproFuels, Inc. were awarded to the members of the Board of directors in
recognition of services previously rendered. The shares had an appraised value
of approximately $0.075 per share, with 250,000 shares issued to Thomas H.
Gose, 100,000 shares issued to James E. Sigmon, and 50,000 shares issued to
Steven M. Gose, Jr.
EMPLOYMENT CONTRACTS
The Company has an employment agreement with its president, Mr. James E.
Sigmon, which sets his salary at a minimum of $120,000 annually. The agreement
is cancelable with 90 days notice by the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee. During the year ended
August 31, 1996, the following officers participated in deliberations of the
Company's Board of Directors concerning executive officer compensation: Mr.
James E. Sigmon, Mr. Thomas H. Gose and Mr. Stephen M. Gose, Jr.
26
<PAGE> 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth beneficial ownership of the Company's common
stock, its only class of equity security. The percent owned is based on
9,890,044 shares outstanding and 11,340,450 fully diluted shares which includes
1,450,406 shares under options and warrants as of November 8, 1996.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning all persons known to the
Company to beneficially own 5% or more if its common stock.
<TABLE>
<CAPTION>
Percent Owned
----------------------------
Name and Address of Number of Shares Fully Primary Shares
Beneficial Owner Beneficially Owned Diluted Outstanding
------------------- ------------------ ------- --------------
<S> <C> <C> <C>
Thomas H. Gose 1,193,701 10.53% 12.07%
500 North Loop 1604 East
Suite 250
San Antonio, TX 78232
Comstar BioCapital, Inc. 508,603 4.45% 5.14%
Lexham House
Hill Avenue, Amersham
Buckinghamshire, PH65DW, United Kingdom
TransEuro Capital, Inc. 508,603 4.45% 5.14%
Flacherstrasse 10
Lupfig 5242
Switzerland
Pan Pacific Investments, Inc. 508,603 4.45% 5.14%
57A Palmerson St.
Mosman Park
West Perth, Western Australia, Australia
Sorbus Investments, Inc. 508,603 4.45% 5.14%
Laubenhof 9A
Metallstrasse
Zug 603, Switzerland
John L. Hales 508,603 4.45% 5.14%
Residence Ambassadeur 3
1884 Villars Sur Ollen
Vaud, Switzerland
Finanzverwaltung des Kanton St. Gallen 500,000 4.41% 5.05%
Davidstrasse 35
9001 St. Gallen, Switzerland
</TABLE>
27
<PAGE> 28
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of common stock
beneficially owned as of November 8, 1996 by each director, each executive
officer named in the Summary Compensation Table and by all directors and
executive officers as a group. Information provided is based on the Form 4's
obtained from stock records of the Company and the Company's transfer agent.
<TABLE>
<CAPTION>
Name Beneficially Owned Owned
---- ------------------ -----
<S> <C> <C>
Thomas H. Gose 1,193,701 10.53%
James E. Sigmon 200,000 1.76%
Stephen M. Gose, Jr. 100,000 .88%
All Directors and Executive
Officers as a group (3 persons) 1,493,701 13.17%
</TABLE>
Information provided is based on Form 4's, stock records of the Company and the
Company's transfer agent.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August, 1996, 10% of the outstanding common stock of ExproFuels, Inc.,
previously a wholly-owned subsidiary, was given as consideration to the
Directors of ExproFuels, Inc. for services rendered.
During 1996, the Company exchanged, with its investment banking group,
2,637,736 shares of its unregistered common stock for 131,860 gross acres
(32,965 net acres) of undeveloped oil and gas properties. The undeveloped
properties were valued $4,450,000, which was the investment bankers approximate
original cost basis.
In December, 1995, the Company exchanged with a corporation affiliated with its
Chairman a 32.5% mineral property interest, with a basis of $398,403, for
certain unproved oil and gas leasehold acreage valued at $225,000, the relief
of a $100,000 note payable to the corporation and certain other assets valued
at $73,403.
28
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are being filed as part of this annual report
on Form 10-K after the signature page, commencing on page F-1.
(1) Financial Statements:
Independent Auditors' Reports.
Balance Sheets, August 31, 1996 and 1995
Statements of Operations, Years Ended August 31, 1996, 1995 and
1994. Statements of Stockholders' Equity, Years Ended August 31,
1996, 1995 and 1994. Statements of Cash Flows, Years Ended August
31, 1996, 1995 and 1994.
Notes to Financial Statements.
(2) Financial Statement Schedule for the years ended
August 31, 1996, 1995 and 1994:
Schedule II - Valuation and Qualifying Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are omitted as the required information is inapplicable or the
information is presented in the Financial Statements or Notes
thereto.
(3) Exhibits:
** 3.1 Articles of Incorporation of the Registrant filed
as Exhibit 3(B) to the registration statement on
Form S-1; Reg. No. 2-65661.
** 3.2 Articles of Amendment to Articles of Incorporation
of The Exploration Company, dated July 27, 1984, filed
as Exhibit 3.2 to Registrant's Annual report on Form
10-K, dated February 4, 1985.
** 3.3 Articles of Amendment to the Articles of Incorporation
of the Exploration Company dated April 2, 1985.
** 3.4 By-Laws of the Registrant filed as Exhibit 5(A)
to the Registration Statement on Form S-1; Reg.
2-65661.
** 3.5 Amendment to By-Laws of registrant, dated
September 1, 1985.
** 3.6 Articles of Amendment to the Articles of
Incorporation of The Exploration Company dated April
6, 1990.
** 10.2 Employment Agreement between the Registrant
and James E. Sigmon, dated October 1, 1984.
** 10.3 Registrant's Amended and Restated 1983 Incentive Stock
Option Plan filed as Exhibit A to registrant's
definitive Proxy Statement, dated February 20, 1985.
** 10.4 Registrant's 1995 Flexible Incentive Plan, filed as
Exhibit A to registrant's definitive Proxy Statement,
dated April 28, 1995
** 10.5 Registrant's Form S-8 Registration Statement for its
1995 Flexible Incentive Plan, dated November 26, 1996
21.1 Financial Statements of ExproFuels, Inc. (Beginning on
page S-1)
27.1 Financial Data Schedule
** Previously filed
29
<PAGE> 30
(B) Reports on Form 8-K:
A Form 8-K was filed on June 14, 1996, in order to report the Company
had reached an agreement with several foreign investors for the
acquisition of an interest in certain oil and gas leases in exchange
for the Company's common stock, and to report the sale of additional
common stock to said investors for cash.
A Form 8-K was filed on September 17, 1996, in order to report the
completion of several transactions including: 1) the exchange of
2,543,015 shares of common stock issued pursuant to Regulation S for a
25% interest in 131,860 acres of oil and gas leases, 2) the sale of
1,300,000 shares of common stock issued pursuant to Regulation S for
$2,275,000 cash, 3) the issuance of 173,394 shares of common stock
pursuant to the terms of an outstanding convertible debenture reducing
the Company's debt under the debenture by $433,484 and 4) the decision
by the Board of Directors to the spin-off of the Company's ExproFuels
Subsidiary, reducing its ownership to approximately 40%.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE EXPLORATION COMPANY
Registrant
November 26, 1996 By: /s/ JAMES E. SIGMON
--------------------------
James E. Sigmon, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ STEPHEN M. GOSE, JR.
- ------------------------
Stephen M. Gose, Jr. Chairman of the Board of Directors November 26, 1996
/s/ THOMAS H. GOSE
- ------------------------
Thomas H. Gose Director and Secretary November 26, 1996
/s/ JAMES E. SIGMON
- ------------------------
James E. Sigmon President and Director
(Principal Executive Officer) November 26, 1996
/s/ ROBERTO R. THOMAE
- ------------------------
Roberto R. Thomae Chief Financial Officer November 26, 1996
31
<PAGE> 32
THE EXPLORATION COMPANY
INDEX TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS Page
<S> <C>
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
SUPPORTING SCHEDULE
Schedule II - Valuation and Qualifying Reserves F-20
</TABLE>
F-1
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Exploration Company
We have audited the balance sheets of The Exploration Company as of August 31,
1996 and 1995, and the related statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended August 31, 1996.
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 The Exploration Company as of
August 31, 1996 and 1995, and the results of its operations and cash flows for
each of the three years in the period ended August 31, 1996, in conformity with
generally accepted accounting principles.
We have also audited Schedule II of The Exploration Company for each of the
three years in the period ended August 31, 1996. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
- ----------------------------------
Akin, Doherty, Klein & Feuge, P.C.
San Antonio, Texas
November 8, 1996
F-2
<PAGE> 34
THE EXPLORATION COMPANY
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 967,838 $ 78,655
Accounts receivable, less allowance for doubtful accounts of
$9,973 in 1996 and 1995:
Joint interest owners 11,587 9,802
Oil and gas production 60,000 42,500
Affiliates -- 72,196
Note receivable -- 602,528
Prepaid expenses and other -- 35,343
----------- -----------
Total current assets 1,039,425 841,024
Property and Equipment:
Oil and gas properties (successful efforts),
less accumulated depreciation, depletion and
amortization of $422,240 in 1996 and $267,503 in 1995 6,599,996 1,902,912
Other property and equipment:
Mineral properties 306,564 704,967
Transportation and other equipment 79,453 48,122
Less accumulated depreciation and amortization (38,891) (27,835)
----------- -----------
Net property and equipment 6,947,122 2,628,166
Other Assets:
Net assets of ExproFuels 363,271 361,098
Option to acquire oil and gas properties -- 166,667
Other assets 83,616 115,025
----------- -----------
446,887 642,790
----------- -----------
Total Assets $ 8,433,434 $ 4,111,980
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE> 35
THE EXPLORATION COMPANY
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 264,018 $ 200,764
Due to joint interest partners 12,224 69,209
Accrued payroll and taxes 24,307 34,563
Current portion of long-term debt 772,500 165,009
------------ ------------
Total current liabilities 1,073,049 469,545
Long-term Debt, net of current portion 1,689,697 2,264,688
Stockholders' Equity:
Common stock, par value $ .01 per share; authorized 200,000,000 shares;
issued and outstanding 9,426,650 and 5,527,970 shares
at August 31, 1996 and 1995, respectively 94,266 55,280
Additional paid-in capital 23,482,432 17,348,088
Accumulated deficit (17,906,010) (16,025,621)
------------ ------------
Total stockholders' equity 5,670,688 1,377,747
------------ ------------
Total Liabilities and Stockholders' Equity $ 8,433,434 $ 4,111,980
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE> 36
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 455,221 $ 304,342 $ 209,194
Other operating income 66,372 26,911 27,246
----------- ----------- -----------
521,593 331,253 236,440
Costs and Expenses:
Lease operations 75,634 41,225 27,863
Production taxes 28,357 21,312 16,900
Exploration expenses 677,170 151,142 57,927
Abandoned leases and equipment -- 21,000 31,245
Impairment of mineral properties -- 171,505 171,505
Depreciation, depletion and amortization 170,525 106,200 53,594
General and administrative 513,896 730,711 524,729
----------- ----------- -----------
Total costs and expenses 1,465,582 1,243,095 883,763
----------- ----------- -----------
(943,989) (911,842) (647,323)
ExproFuels operations:
Revenues 1,046,401 773,351 821,633
Costs and expenses (1,727,226) (1,742,240) (1,657,176)
----------- ----------- -----------
(680,825) (968,889) (835,543)
----------- ----------- -----------
Loss from operations (1,624,814) (1,880,731) (1,482,866)
Other Income (Expense):
Sublease rental income 58,500 6,750 --
Interest income 63,928 6,348 1,567
Interest expense (378,003) (285,732) (69,654)
----------- ----------- -----------
(255,575) (272,634) (68,087)
----------- ----------- -----------
Loss before extrordinary item (1,880,389) (2,153,365) (1,550,953)
Extraordinary item-gain on cancellation
of debt -- -- 322,492
----------- ----------- -----------
Net loss $(1,880,389) $(2,153,365) $(1,228,461)
=========== =========== ===========
Amounts per common share:
Loss from continuing operations $ (0.31) $ (0.44) $ (0.36)
Extraordinary item -- -- .07
----------- ----------- -----------
Net loss $ (0.31) $ (0.44) $ (0.29)
=========== =========== ===========
Weighted average number of common
shares outstanding 6,140,176 4,863,961 4,267,363
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE> 37
THE EXPLORATION COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1993 3,862,750 $ 38,628 $ 13,819,464 $(12,643,795) $ 1,214,297
Issuance of common stock
for cash 570,687 5,707 1,142,066 -- 1,147,773
Issuance of common stock
in exchange for oil and
gas properties 60,150 602 232,479 -- 233,081
Issuance of common stock
warrants with convertible debt -- -- 2,681 -- 2,681
Common stock warrants exercised 97,500 975 242,775 243,750
Net loss for the year -- -- -- (1,228,461) (1,228,461)
------------ ------------ ------------ ------------ ------------
Balance at August 31, 1994 4,591,087 45,912 15,439,465 (13,872,256) 1,613,121
Issuance of common stock
for cash 299,056 2,990 504,937 -- 507,927
Issuance of common stock
in exchange for oil and
gas properties 350,227 3,502 710,240 -- 713,742
Conversion of debt to
common stock 267,600 2,676 599,852 -- 602,528
Issuance of common stock
warrants with convertible stock -- -- 33,794 -- 33,794
Common stock warrants exercised 20,000 200 59,800 -- 60,000
Net loss for the year -- -- -- (2,153,365) (2,153,365)
------------ ------------ ------------ ------------ ------------
Balance at August 31, 1995 5,527,970 55,280 17,348,088 (16,025,621) 1,377,747
Issuance of common stock
for cash 1,175,000 11,750 2,088,250 -- 2,100,000
Issuance of common stock
in exchange for oil and
gas properties 2,723,680 27,236 4,578,502 -- 4,605,738
Issuance of common stock
warrants -- -- 12,500 -- 12,500
Spin-off of ExproFuels, Inc. -- -- (544,908) -- (544,908)
Net loss for the year -- -- -- (1,880,389) (1,880,389)
------------ ------------ ------------ ------------ ------------
Balance at August 31, 1996 9,426,650 $ 94,266 $ 23,482,432 $(17,906,010) $ 5,670,688
============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE> 38
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,880,389) $(2,153,365) $(1,228,461)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 256,630 198,502 131,137
Cancellation of debt -- -- (322,492)
Abandoned leases, equipment and other 220,805 21,000 175,926
Impairment of properties -- 171,505 171,505
ExproFuels operations (80,284) (121,330) (160,853)
Changes in operating assets and liabilities:
Receivables 52,911 (98,246) (27,041)
Prepaid expenses and other 35,343 27,043 (58,098)
Accounts payable and accrued expenses 76,402 101,246 246,902
Due to joint interest owners (56,985) (179,530) 52,558
----------- ----------- -----------
Net cash (used) in operating activities (1,375,567) (2,033,175) (1,018,917)
INVESTING ACTIVITIES:
Development of oil and gas properties (55,484) (289,980) (163,376)
Purchase of transportation and other equipment (86,277) (104,644) (230,012)
Proceeds from sale of oil and gas properties -- 261,242 --
Increase in note receivable -- (602,528) --
Proceeds from note receivable 602,528 -- --
Investments in and advances to venture (442,426) (150,000) --
Purchase of option to acquire oil and gas property -- -- (200,000)
Other assets 41,509 (98,304) (36,809)
----------- ----------- -----------
Net cash provided (used) in investing activities 59,850 (984,214) (630,197)
FINANCING ACTIVITIES:
Issuance of common stock, net of expenses 2,112,500 1,204,249 1,394,203
Proceeds from long-term debt obligations 132,500 1,935,664 690,317
Payments on long-term obligations (40,100) (142,914) (380,021)
----------- ----------- -----------
Net cash provided by financing activities 2,204,900 2,996,999 1,704,499
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 889,183 (20,390) 55,385
Cash and equivalents at beginning of year 78,655 99,045 43,660
----------- ----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR $ 967,838 $ 78,655 $ 99,045
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-7
<PAGE> 39
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1996
The Company issued 2,723,680 shares of its common stock in exchange for oil and
gas properties (valued at the market price per share for unregistered stock).
The Company exchanged a 32.5% mineral property interest, with a basis of
$398,403, for certain oil and gas properties valued at $225,000, the relief of
a $100,000 note payable and certain other assets valued at $73,403.
The Company paid interest on debt of $295,360.
1995
The Company issued 186,731 shares of its common stock to an affiliate in
exchange for $300,000 of oil and gas properties (valued at the historical cost
basis of the common-control affiliate for unregistered stock).
The Company issued 163,496 shares of its common stock in exchange for $413,743
of oil and gas properties (valued at the market price per share for
unregistered stock).
The Company issued 61,212 shares of its common stock to a Director for cash of
$85,731 and a receivable for $72,196. The receivable was fully collected on
November 8, 1995.
The Company paid interest on debt of $179,635.
1994
The Company issued 60,150 shares of its common stock in exchange for $233,081
in oil and gas properties (valued at the market price per share).
The Company issued warrants for the purchase of 10,725 shares of its common
stock in conjunction with issuance of certain convertible debt (valued at $.25
per warrant).
The Company paid interest on debt of $74,468.
SEE NOTES TO FINANCIAL STATEMENTS.
F-8
<PAGE> 40
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
The financial statements include the accounts of The Exploration Company (the
Company). Subsequent to year end, the Company's investment in ExproFuels was
reduced to 40% through the spin-off of its common stock; as such, financial
position and results of operations have been reported for all years presented
in accordance with disposal of a line of business with a significant retained
interest. See Note 11.
The Exploration Company is engaged in the business of acquiring, exploring and
developing oil and gas properties. The Company's oil and gas operations are
located primarily in Texas, North Dakota and Montana. In 1993, the Company
commenced operations in the alternative fuels industry through ExproFuels.
ExproFuels converts vehicle engines that use gasoline for combustion to propane
or natural gas, supplies alternative fuels to customers and constructs
alternative fuels refueling facilities. Customers are primarily located in
Texas and Arizona. ExproFuels also has a substantial investment through CNG
International, L.L.C. for alternative fuel operations being developed in
Uzbekistan.
Cash and Equivalents
Cash and cash equivalents consist of all demand deposits and funds invested in
short-term investments with original maturities of three months or less.
Mineral Properties
The Company expenses costs associated with identifying prospective mineral
properties, while the costs of acquiring and developing unproven mining
properties are capitalized. All costs associated with the development of an
extracting process or to determine the economic feasibility of a project are
expensed as incurred. The Company has not incurred any development or
production costs on its mining properties.
Oil and Gas Properties
The Company uses the successful efforts method of accounting for its oil and
gas activities. Costs to acquire mineral interests in oil and gas properties,
to drill and equip exploratory wells that find proved reserves, and to drill
and equip development wells are capitalized. Costs to drill exploratory wells
that do not find proved reserves, geological and geophysical costs, and costs
of carrying and retaining unproved properties are expensed as incurred.
Depreciation, depletion and amortization (DD&A) of oil and gas properties are
computed using the unit-of-production method based upon recoverable reserves as
determined by Company engineers. Oil and gas properties are periodically
assessed for impairment, and if the unamortized capitalized costs are in excess
of the discounted present value of future cash flows relating to proved
reserves, an impairment charge is recorded.
Other Property and Equipment
Transportation and other equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets ranging from five to fifteen years. Major renewals and betterments are
capitalized while repairs are expensed as incurred.
F-9
<PAGE> 41
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Federal Income Taxes
The Company has adopted the provisions of Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance is provided against net deferred
assets for which realization is doubtful.
Net Loss Per Share
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents are not considered in the computation of net loss per common
share as their effect is anti-dilutive.
Financial Instruments with Off-Balance-Sheet Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and accounts
receivables. The Company places its temporary cash investments with financial
institutions and limits the amount of credit exposure to any one financial
institution. The Company's raw materials are readily available and the Company
is not dependent on a single supplier or a few suppliers.
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 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.
Reclassifications
Certain amounts for 1995 and 1994 have been reclassified for comparative
purposes to 1996. The financial position and results of operations of
ExproFuels, Inc., previously consolidated in 1995 and 1994, have been
reclassified and reported as discontinued operations.
NOTE 2. NOTE RECEIVABLE
During 1995 the Company exchanged certain marketable securities for a $602,528
promissory note receivable. The 9% secured promissory note was collected in
full during the year ended August 31, 1996.
NOTE 3. INVESTMENT IN VENTURE
Through its ExproFuels division, the Company invested $150,000 at August 31,
1995 in CNG International, L.L.C., a Tennessee limited liability company formed
for the purpose of converting motor vehicles to operate on alternative fuels,
manufacturing and selling of related component equipment and to develop the
necessary infrastructure to support operation of motor vehicles on alternative
fuels primarily in Uzbekistan, a former Soviet Republic.
During the years ended August 31, 1996 and 1995, the Company sold equipment and
provided services to CNG International in the amount of $133,505 and $110,611.
F-10
<PAGE> 42
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 4. LONG TERM DEBT
Long-term debt consists of the following at August 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Convertible note payable to Trust, with interest
at 11.50%, and principal due beginning August 1997;
secured by certain oil and gas properties. See below $ 1,764,697 $ 1,764,697
Convertible note payable to partnership, with interest
at 10%, and principal due in May 1997. See below 500,000 500,000
Notes payable to individual, with interest at 12%, due
currently, and secured by certain common stock of the Company 197,500 165,000
----------- -----------
Total long-term debt 2,462,197 2,429,697
Less current portion (772,500) (165,009)
----------- -----------
Long-term portion of debt $ 1,689,697 $ 2,264,688
=========== ===========
</TABLE>
Convertible $500,000 Note Payable:
On May 25, 1994, the Company issued a three year, convertible promissory note
payable to a partnership in exchange for $500,000. The terms of the note
include interest at 10% per annum, payable quarterly, and a conversion option
at $3.00 per common share of stock. The note is callable at the option of the
Company in the event the closing bid price of the Company's common stock
averages $7.00 for a period of forty-five days.
Convertible $1,764,697 Note Payable:
On August 2, 1994, the Company entered into a master note payable and indenture
of trust agreement for up to $2,000,000 principal amount. The terms of the
master note provided for partial cash advances to be made by the lender. The
terms of each advance include interest at 11.50%, payable semi-annually on
January 1 and July 1, and a conversion option at $2.50 per common share of
stock. The Company may force the conversion at the same price per share in the
event the closing bid price of the Company's common stock has closed at $6.00
per share for fifteen consecutive days. Prior to exercising this right, the
Company must register the common stock to be received by the lender under the
Securities and Exchange Act. The principal amount of each advance is due three
years from original date of the advance, and may not be prepaid by the Company
before twelve months. The indebtedness under the master note payable is secured
by certain oil and gas properties with a book basis of approximately $258,000
at August 31, 1996.
F-11
<PAGE> 43
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 4. LONG TERM DEBT (CONTINUED)
Subsequent Payoff of Debt to Individual:
Subsequent to year end the $197,500 balance of the notes to individual, plus
accrued interest, was fully paid off.
Subsequent Conversion of Debt to Equity:
Subsequent to year end, a total of $433,480 of the $1,764,697 convertible note
payable was converted into 173,392 shares of the Company's common stock, at the
option price of $2.50 per share.
The following is a schedule of principal maturities of long-term debt as of
August 31, 1996:
<TABLE>
<CAPTION>
Before After
Year Conversion Conversion
---- ---------- ----------
<S> <C> <C>
1997 $ 772,500 $ 772,500
1998 1,689,697 1,256,217
---------- ----------
$2,462,197 $2,028,717
========== ==========
</TABLE>
Line of Credit:
On October 3, 1996, the Company entered into a $1,000,000 line of credit to
cover the Company's share of drilling wells on its leasehold acreage. The
credit is through Luzerner Katonalbank, Luzern, Switzerland, with interest at
the banks market rate (6.5% on October 3, 1996). The line of credit is
available for an undefined time period, and is available in $250,000 increments
as wells are drilled and completed.
NOTE 5. STOCKHOLDERS' EQUITY
At August 31, 1996, the Company has outstanding and exercisable options to
purchase 229,800 shares of its common stock at prices ranging from $2.00 to
$3.91 per share, of which 129,800 were issued pursuant to the Company's prior
incentive plan, and 100,000 were issued under the Company's 1995 incentive plan
(see below). The Company also has outstanding warrants to purchase 1,160,606
shares of its common stock at prices ranging from $2.00 to $6.00 per share. The
options expire at various dates from July, 1999 through February, 2005. The
warrants expire on various dates through August, 2006.
The Company's 1995 Flexible Incentive Plan provides incentive stock options for
granting to its officers, directors and management, under which options for the
purchase of 400,000 shares of common stock have been reserved. Options for the
purchase of 100,000 shares of common stock were granted under the plan in 1995.
In December 1994, the President of the Company exercised options to acquire
50,000 shares of common stock under the terms of the Company's prior incentive
plan.
For the year ended August 31, 1996, earnings (loss) per share would have been
reduced to $(0.30) per share from $(0.31) per share if the subsequent
conversion of $433,480 of debt into 173,392 shares of common stock had occurred
on September 1, 1995.
F-12
<PAGE> 44
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 6. LEASES
Real Estate:
The Company leases its primary office space for $5,756 per month through
February 28, 1997. In addition, ExproFuels, Inc. leases its conversion
facilities and a fuel station location under noncancellable leases with terms
from one to three years. The Company also has a sublease, through ExproFuels,
Inc., on one of its conversion facilities, from which it receives $4,500 per
month through January, 1997.
For the years ended August 31, 1996, 1995 and 1994, the Company incurred rent
expense of $182,288, $180,841 and $131,918, respectively and received sublease
rental income through ExproFuels, Inc. of $58,500 in 1996 and $6,750 in 1995.
As of August 31, 1996, future minimum rentals under all noncancellable real
estate leases, including those of ExproFuels, Inc. guaranteed by the Company,
are as follows:
<TABLE>
<S> <C>
1997 $ 110,094
1998 34,400
1999 22,500
---------
Future minimum rentals 166,994
Less sublease income (22,500)
Net future minimum rentals $ 144,494
=========
</TABLE>
NOTE 7. FEDERAL INCOME TAXES
The Company has incurred losses for both financial statement and income tax
purposes. A valuation allowance equal to the net deferred tax asset has been
recorded due to the uncertainty of the realization of the asset. The following
items give rise to the deferred tax assets and liabilities at August 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 16,321,000 $ 14,725,000
Impairment of oil and gas and mineral properties 434,000 534,000
Other temporary differences - net 3,000 3,000
------------ ------------
Gross deferred tax assets 16,758,000 15,262,000
Statutory tax rate 34% 34%
------------ ------------
5,967,720 5,189,080
Unused investment tax credits 30,000 30,000
------------ ------------
Net deferred tax assets 5,997,720 5,219,080
Less valuation allowance (5,997,720) (5,219,080)
------------ ------------
Deferred income tax asset recorded $ -0- $ -0-
============ ============
</TABLE>
F-13
<PAGE> 45
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 7. FEDERAL INCOME TAXES - CONTINUED
The net operating loss carryforwards available at August 31, 1996, and the
related expiration dates are as follows:
<TABLE>
<CAPTION>
Expires
August 31 Amount
--------- -------------
<S> <C>
1997 $ 1,083,000
1998 443,000
1999 131,000
2000 480,000
2001 1,200,000
2002 to 2006 4,006,000
2007 to 2011 8,978,000
-------------
$ 16,321,000
=============
</TABLE>
NOTE 8. RELATED PARTY TRANSACTIONS
In August, 1996, 10% of the outstanding common stock of ExproFuels, Inc.,
previously a wholly-owned subsidiary, was given as consideration for services
rendered to the Directors of ExproFuels, Inc. See also Note 11.
During 1996, the Company exchanged with its investment banking group 2,637,736
shares of its unregistered common stock for 131,860 gross acres (32,965 net
acres) of undeveloped oil and gas properties. The undeveloped properties were
valued at approximately $4,450,000, the investment banking group's original
cost basis.
In December, 1995, the Company exchanged with its Chairman a 32.5% mineral
property interest, with a basis of $398,403, for certain unproved oil and gas
leasehold acreage valued at $225,000, the relief of a $100,000 note payable to
the Chairman and certain other assets valued at $73,403.
In August, 1995, an affiliated company loaned the Company $50,000. The loan
was repaid in full on August 31, 1995.
During 1995, the Company acquired from an affiliate unproved oil and gas
leasehold acreage with a basis of $300,000, for 186,731 shares of the Company's
common stock.
In February, 1994 a corporation in which a former employee of the Company owned
an interest entered into a drilling joint venture with the Company to drill a
gas well in Maverick County, Texas. The corporation contributed $100,000 to the
joint venture in exchange for a 25% working interest in the gas well, and
options for a 2.5% working interest in four additional gas wells. In May, 1994,
the Company acquired 80% of the 25% working interest (net 20% working interest)
for 30,075 shares of common stock.
In February, 1994, the Company reached an agreement with its president to
restructure his employment compensation. The Company's president agreed to
reduce his annual salary from $109,000 per year to $72,000, and was granted a
one percent (1%) overriding royalty interest in the Paloma and Kincaid leases
in Maverick County, Texas, in which the Company has an interest.
During the year ended August 31, 1994, a former officer of the Company
represented certain persons, including himself, who have joint ventured with
the Company in certain oil and gas properties. The former officer was paid
$25,100 for legal services in the year ended August 31, 1994.
F-14
<PAGE> 46
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 8. RELATED PARTY TRANSACTIONS (CONTINUED)
Effective November 30, 1993, the president of the Company canceled accrued
payroll in the amount of $322,492 due to him from previous years under his
employment agreement. The Company has accounted for this extinguishment of debt
as an extraordinary item for the year ended August 31, 1994.
NOTE 9. OIL AND GAS PRODUCING ACTIVITIES AND PROPERTIES
Capitalized Costs and Costs Incurred Relating to Oil and Gas Activities
The Company's investment in oil and gas properties is as follows at August 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Proved properties $ 936,694 $ 1,136,468
Less reserve for impairment (90,850) (190,847)
----------- -----------
Net proved properties 845,844 945,621
Unproved properties 6,176,392 1,224,794
----------- -----------
Total oil and gas properties 7,022,236 2,170,415
Less accumulated depreciation,
depletion and amortization (422,240) (267,503)
----------- -----------
Net capitalized cost $ 6,599,996 $ 1,902,912
=========== ===========
</TABLE>
Costs incurred, capitalized, and expensed in oil and gas producing activities
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs, unproved $4,951,598 $ 748,321 $ --
Property development and exploration costs 732,654 511,944 454,384
Depreciation, depletion and amortization 160,000 102,000 51,065
Depletion per equivalent barrel of production 4.12 3.17 3.14
</TABLE>
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited)
The following estimates of proved developed and undeveloped reserve quantities
and related standardized measure of discounted net cash flow are estimates
only, and do not purport to reflect realizable values or fair market values of
the Company's reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of currently producing oil and gas properties. Accordingly, these
estimates are expected to change as future information becomes available.
F-15
<PAGE> 47
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 9. OIL AND GAS PRODUCING ACTIVITIES AND PROPERTIES (CONTINUED)
Proved reserves are estimates of crude oil (including condensate and natural
gas liquids) and natural gas that geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed
reserves are those expected to be recovered through existing well, equipment
and operating methods. The estimates have been prepared by the Company's
in-house reserve engineer.
<TABLE>
<CAPTION>
Oil Gas
(Barrels) (MCF)
---------- ----------
<S> <C> <C>
RESERVES AT AUGUST 31, 1993 51,298 362,371
Discoveries 4,780 477,995
Revisions of previous estimates (45,305) 211,308
Production (2,479) (82,656)
---------- ----------
RESERVES AT AUGUST 31, 1994 8,294 969,018
Discoveries -- 55,709
Revisions of previous estimates 8,428 495,027
Production (2,598) (177,238)
---------- ----------
RESERVES AT AUGUST 31, 1995 14,124 1,342,516
Discoveries 5,710 525,000
Revisions of previous estimates 3,598 241,248
Production (2,862) (215,274)
---------- ----------
RESERVES AT AUGUST 31, 1996 20,570 1,893,490
========== ==========
</TABLE>
All of the Company's proved reserves are developed and are located in the
continental United States.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (Unaudited)
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (Standardized Measure) presented below is computed
in accordance with SFAS No. 69. The Standardized Measure does not purport to
present the fair market value of a company's proved oil and gas reserves. This
would require consideration of expected future economic and operating
conditions, which are not taken into account in calculating the Standardized
Measure.
Under the Standardized Measure, future cash inflows were estimated by applying
year-end prices, adjusted for fixed determinable escalations, to the estimated
future production and development costs based on year-end costs to determine
pre-tax cash inflows. Future income taxes were computed by applying the
statutory tax rate to the excess of pre-tax cash inflows over the company's
basis in the associated proved oil and gas properties. Tax credits, permanent
differences and net operating loss carryforwards were also considered in the
future income tax calculations, thereby reducing the expected tax expense to
zero.
F-16
<PAGE> 48
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 9. OIL AND GAS PRODUCING ACTIVITIES AND PROPERTIES (CONTINUED)
Set forth below is the Standardized Measure relating to proved oil and gas
reserves at August 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Future cash inflows $ 4,658,670 $ 2,144,655 $ 2,040,727
Future production and development costs (680,120) (250,943) (390,629)
----------- ----------- -----------
Future net cash inflows before income tax 3,978,550 1,893,712 1,650,098
Future income tax expense -- -- --
----------- ----------- -----------
Future net cash flows 3,978,550 1,893,712 1,650,098
10% annual discount to reflect
timing of net cash flows (1,778,810) (671,672) (600,640)
----------- ----------- -----------
Standardized Measure of discounted future
net cash flows relating to proved reserves $ 2,199,740 $ 1,222,040 $ 1,049,458
=========== =========== ===========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves (Unaudited)
The following is an analysis of the changes in the Standardized Measure:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Standardized Measure, beginning of year $ 1,222,040 $ 1,049,458 $ 693,366
Discoveries 613,500 36,106 600,004
Sales and transfers, net of production costs (362,947) (261,805) (164,431)
Revisions in quantity and price estimates 849,351 503,227 (148,818)
Accretion of discount (122,204) (104,946) 69,337
----------- ----------- -----------
Standardized Measure, end of period $ 2,199,740 $ 1,222,040 $ 1,049,458
=========== =========== ===========
</TABLE>
F-17
<PAGE> 49
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 10. SEGMENT INFORMATION AND MAJOR CUSTOMERS
Through August 31, 1996, the Company operated in two principal industries: oil
and gas exploration and the alternative fuels industry. Operations in the oil
and gas industry consist of acquiring, exploring and developing oil and gas
properties. Operations in the alternative fuels industry were conducted through
the Company's ExproFuels division. This division converts internal combustion
engines to propane or natural gas, supplies alternative fuels to customers and
constructs alternative fuels refueling facilities.
Loss from operations is total revenue less operating expenses. Identifiable
assets include assets identified with those operations. General and
administrative expenses of a corporate nature as well as corporate assets such
as cash and unamortized financing fees are included with those of the oil and
gas industry.
Segment information is presented below:
<TABLE>
<CAPTION>
Oil and
Gas ExproFuels Total
----------- ----------- -----------
<S> <C> <C> <C>
AUGUST 31, 1996:
Sales $ 521,593 $ 1,046,401 $ 1,567,994
Loss from operations (943,989) (680,825) (1,624,814)
Identifiable assets 8,070,163 1,249,527 9,319,690
Capital expenditures 5,144,508 75,594 5,220,102
AUGUST 31, 1995:
Sales $ 331,253 $ 773,351 $ 1,104,604
Loss from operations (911,842) (968,889) (1,880,731)
Identifiable assets 3,979,679 613,213 4,592,892
Capital expenditures 853,722 104,644 958,366
AUGUST 31, 1994:
Sales $ 236,440 $ 821,633 $ 1,058,073
Loss from operations (647,323) (835,543) (1,482,866)
Identifiable assets 2,599,255 553,733 3,152,988
Capital expenditures 414,623 211,846 626,469
</TABLE>
The Company's oil and gas sales include amounts sold to three major purchasers
in the three years ended August 31, as follows:
<TABLE>
<CAPTION>
Purchaser 1996 1995 1994
--------- -------- -------- --------
<S> <C> <C> <C>
A $371,560 $191,962 $ --
B 31,710 30,119 96,258
C 24,843 27,486 10,893
</TABLE>
F-18
<PAGE> 50
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 10. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
Sales in the ExproFuels division include amounts sold to major customers as
follows:
<TABLE>
<CAPTION>
Customer 1996 1995 1994
-------- --------- ---------- ----------
<S> <C> <C> <C>
A $ 259,438 $ - $ -
B 86,110 110,612 -
C 83,663 60,820 231,184
D 42,356 208,938 -
E - 62,227 183,941
</TABLE>
NOTE 11. EXPROFUELS, INC. OPERATIONS AND SPIN-OFF
On September 3, 1996, the Company's Board of Directors voted for a spin-off of
the assets of ExproFuels, Inc. by the distribution of additional ExproFuels
common stock directly to the shareholders of TXCO (the beneficial owners of 90%
of ExproFuels). The direct distribution of stock reduced the Company's
ownership in ExproFuels, Inc. to 40%.
ExproFuels, Inc. is proceeding with plans for filing an Information Statement
on Form 10 with the Securities and Exchange Commission to register its
outstanding common stock.
Summary operating results of ExproFuels was as follows for the years ended
August 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 1,046,401 $ 773,351 $ 821,633
Costs and expenses (1,727,226) (1,742,240) (1,657,176)
----------- ----------- -----------
Loss from operations (680,825) (968,889) (835,543)
Other income (expense) 35,811 (16,992) (37,364)
----------- ----------- -----------
Net loss $ (645,014) $ (985,881) $ (872,907)
=========== =========== ===========
</TABLE>
Summary financial condition of ExproFuels was as follows at August 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current assets $ 338,885 $ 358,066
Property and equipment 274,895 280,523
Other assets 635,747 203,418
----------- -----------
$ 1,249,527 $ 842,007
=========== ===========
Current liabilities $ 289,854 $ 395,751
Long-term debt 51,494 85,158
Advances and investments from parent -- 2,334,041
Stockholders equity (deficit) 908,179 (1,972,943)
----------- -----------
$ 1,249,527 $ 842,007
=========== ===========
</TABLE>
F-19
<PAGE> 51
THE EXPLORATION COMPANY
SCHEDULE II - VALUATION AND QUALIFYING RESERVES
FOR THE THREE YEARS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
Balance Charges to Balance
Beginning Costs and End of
of Period Expense Write-offs Period
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996
Allowance for doubtful accounts -
trade accounts $ 9,973 $ -- $ -- $ 9,973
======= ========== ========= =======
YEAR ENDED AUGUST 31, 1995
Allowance for doubtful accounts -
trade accounts $ 9,973 $ -- $ -- $ 9,973
======= ========== ========= =======
YEAR ENDED AUGUST 31, 1994
Allowance for doubtful accounts -
trade accounts $50,860 $ -- $ 40,887 $ 9,973
======= ========== ========= =======
</TABLE>
F-20
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------
<S> <C>
** 3.1 Articles of Incorporation of the Registrant filed
as Exhibit 3(B) to the registration statement on
Form S-1; Reg. No. 2-65661.
** 3.2 Articles of Amendment to Articles of Incorporation
of The Exploration Company, dated July 27, 1984, filed
as Exhibit 3.2 to Registrant's Annual report on Form
10-K, dated February 4, 1985.
** 3.3 Articles of Amendment to the Articles of Incorporation
of the Exploration Company dated April 2, 1985.
** 3.4 By-Laws of the Registrant filed as Exhibit 5(A)
to the Registration Statement on Form S-1; Reg.
2-65661.
** 3.5 Amendment to By-Laws of registrant, dated
September 1, 1985.
** 3.6 Articles of Amendment to the Articles of
Incorporation of The Exploration Company dated April
6, 1990.
** 10.2 Employment Agreement between the Registrant
and James E. Sigmon, dated October 1, 1984.
** 10.3 Registrant's Amended and Restated 1983 Incentive Stock
Option Plan filed as Exhibit A to registrant's
definitive Proxy Statement, dated February 20, 1985.
** 10.4 Registrant's 1995 Flexible Incentive Plan, filed as
Exhibit A to registrant's definitive Proxy Statement,
dated April 28, 1995
** 10.5 Registrant's Form S-8 Registration Statement for its
1995 Flexible Incentive Plan, dated November 26, 1996
21.1 Financial Statements of ExproFuels, Inc. (Beginning on
page S-1)
27.1 Financial Data Schedule
</TABLE>
** Previously filed
<PAGE> 1
EXPROFUELS, INC.
INDEX TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995
AUDITED FINANCIAL STATEMENTS Page
----
Independent Auditors' Report S-2
Balance Sheets S-3
Statements of Operations S-5
Statements of Stockholders' Equity S-6
Statements of Cash Flows S-7
Notes to Financial Statements S-8
SUPPORTING SCHEDULE
Schedule II - Valuation and Qualifying Reserves S-13
S-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ExproFuels, Inc.
We have audited the balance sheets of ExproFuels, Inc. as of August 31, 1996
and 1995, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended August 31, 1996.
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 ExproFuels, Inc. as of August
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended August 31, 1996, in conformity with
generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2 to the financial
statements, the Company is fully dependent on its former parent, has suffered
recurring losses from operations since inception, has a deficiency of quick
assets to current liabilities of $114,282 and an accumulated deficit in
retained earnings of $2,617,957 at August 31, 1996, all of which raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We have also audited Schedule II of ExproFuels, Inc. for each of the three
years in the period ended August 31, 1996. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
- ----------------------------------------
Akin, Doherty, Klein & Feuge, P.C.
San Antonio, Texas
November 8, 1996
S-2
<PAGE> 3
EXPROFUELS, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and equivalents $ 20,871 $ 7,263
Accounts receivable, less allowance for doubtful accounts of
$35,000 in 1996 and $0 in 1995 154,701 221,476
Inventories 143,967 103,956
Prepaid expenses and other 19,346 25,371
----------- ---------
Total current assets 338,885 358,066
Property and Equipment:
Transportation and other equipment 146,473 145,282
Equipment under capital leases 93,326 93,326
Fuel stations 238,484 159,729
Less accumulated depreciation and amortization (203,388) (117,814)
----------- ---------
Net property and equipment 274,895 280,523
Other Assets:
Investments in and advances to venture 592,426 150,000
Other assets 43,321 53,418
----------- ---------
635,747 203,418
----------- ---------
Total Assets $ 1,249,527 $ 842,007
=========== =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
S-3
<PAGE> 4
EXPROFUELS, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 247,652 $ 349,279
Accrued payroll and taxes 8,532 6,370
Current portion of long-term debt 13,744 23,409
Current portion of capital lease obligations 19,926 16,693
----------- -----------
Total current liabilities 289,854 395,751
Long-term Liabilities:
Long-term debt 21,684 35,427
Capital lease obligations 29,810 49,731
----------- -----------
Total long-term liabilities 51,494 85,158
Investments and advances by parent - 2,334,041
Stockholders' Deficit:
Common stock, par value $ .01 per share;
authorized 50,000,000 shares; issued
and outstanding 4,000,000 shares
at August 31, 1996 40,000 -
Additional paid-in capital 3,486,136 -
Accumulated deficit (2,617,957) (1,972,943)
----------- -----------
Total stockholders' equity 908,179 (1,972,943)
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,249,527 $ 842,007
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
S-4
<PAGE> 5
EXPROFUELS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Conversion sales $ 557,641 $ 578,362 $ 627,366
Fuel station construction sales 301,115 97,241 162,603
Alternative fuel sales 187,645 97,748 31,664
---------- ----------- ----------
1,046,401 773,351 821,633
Costs and Expenses:
Cost of sales 752,024 646,078 701,198
Shop general and administrative 484,920 415,944 302,647
Depreciation and amortization 85,574 92,302 77,543
Abandonment of technological rights - - 144,681
General and administrative 404,708 587,916 431,107
---------- ----------- ----------
Total costs and expenses 1,727,226 1,742,240 1,657,176
---------- ----------- ----------
Loss from operations (680,825) (968,889) (835,543)
Other Income (Expense):
Sublease rental income 58,500 6,750 -
Interest income 959 818 3
Interest expense (23,648) (24,560) (37,367)
---------- ----------- ----------
35,811 (16,992) (37,364)
---------- ----------- ----------
Net loss $ (645,014) $ (985,881) $ (872,907)
========== =========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
S-5
<PAGE> 6
EXPROFUELS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock
---------------------------------- Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
-------------- --------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1993 - $ - $ - $ (114,155) $ (114,155)
Net loss for the year - - - (872,907) (872,907)
---------- -------- ----------- ------------ ----------
Balance at August 31, 1994 - - - (987,062) (987,062)
Net loss for the year - - - (985,881) (985,881)
---------- -------- ----------- ------------ ----------
Balance at August 31, 1995 - - - (1,972,943) (1,972,943)
Issuance of common stock
by parent 4,000,000 40,000 (40,000) - -
Contribution of advances by
parent company - - 3,526,136 - 3,526,136
Net loss for the year - - - (645,014) (645,014)
---------- -------- ----------- ------------ ----------
Balance at August 31, 1996 4,000,000 $ 40,000 $ 3,486,136 $ (2,617,957) $ 908,179
========== ======== =========== ============ ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
S-6
<PAGE> 7
EXPROFUELS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (645,014) $ (985,881) $ (872,907)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 85,574 92,302 77,543
Changes in operating assets and liabilities:
Receivables 66,775 (142,948) 26,481
Inventory (40,011) 17,915 (119,480)
Prepaid expenses and other 6,025 31,314 (53,467)
Accounts payable and accrued expenses (99,465) (127,745) 254,802
------------ ------------ ------------
Net cash (used) in operating activities (626,116) (1,115,043) (687,028)
INVESTING ACTIVITIES:
Purchase of property and equipment (79,946) (101,165) (230,012)
Investments in and advances to venture (442,426) (150,000) -
Other assets 10,097 151,507 (36,809)
------------ ------------ ------------
Net cash (used) in investing activities (512,275) (99,658) (266,821)
FINANCING ACTIVITIES:
Advances from parent company 1,192,095 1,224,085 882,566
Proceeds from long-term debt obligations - 30,967 94,293
Payments on long-term obligations (40,096) (37,799) (21,408)
------------ ------------ ------------
Net cash provided by financing activities 1,151,999 1,217,253 955,451
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 13,608 2,552 1,602
Cash and equivalents at beginning of year 7,263 4,711 3,109
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR $ 20,871 $ 7,263 $ 4,711
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 22,636 $ 24,328 $ 35,409
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
S-7
<PAGE> 8
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
ExproFuels, Inc. (the Company), formerly a division of The Exploration Company
(TXCO), began operating as a wholly-owned subsidiary of TXCO August 15, 1996,
following the issuance of 4,000,000 shares of its common stock. TXCO is
registered with the Securities and Exchange Commission (SEC) and its stock
traded publicly on the National Association of Securities Dealers (NASD)
exchange.
On August 30, 1996, 10% of the outstanding common stock of ExproFuels, Inc. was
exchanged as consideration for services rendered to its Directors, thereby
reducing TXCO's ownership interest from 100% to 90%. On September 3, 1996, the
Company's Board of Directors voted for a distribution of ExproFuels common
stock directly to the shareholders of TXCO (the beneficial owners of 90% of
ExproFuels). The direct distribution of stock reduced TXCO's ownership in the
Company to 40%.
ExproFuels, Inc. is proceeding with plans for filing an Information Statement
on Form 10 with the Securities and Exchange Commission to register its
outstanding common stock.
The financial statements include the accounts of ExproFuels while operated as a
division of TXCO (inception through August 14, 1996) and as a subsidiary of
TXCO (period August 15, 1996 and subsequent). The Company converts vehicle
engines that use gasoline for combustion to propane or natural gas, supplies
alternative fuels to customers and constructs alternative fuels refueling
facilities. Customers are primarily located in Texas and Arizona. The Company
also has a substantial investment, through CNG International, L.L.C., for
alternative fuel operations being developed in Uzbekistan.
Cash and Equivalents
Cash and cash equivalents consist of all demand deposits and funds invested in
short-term investments with original maturities of three months or less.
Inventories
Inventories, consisting principally of finished goods (parts), are valued at
the lower of cost or market using the first-in, first-out method of accounting.
Property and Equipment
Transportation and other equipment, equipment reported under capitalized leases
and fuel stations are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets ranging from
five to fifteen years. Major renewals and betterments are capitalized while
repairs are expensed as incurred.
Federal Income Taxes
For financial reporting purposes, the Company has adopted the provisions of
Financial Accounting Standards Board Statement No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. A valuation allowance
is provided against net deferred assets for which realization is doubtful.
Financial Instruments with Off-Balance-Sheet Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and accounts
receivables. The Company places its temporary cash investments with financial
institutions and limits the amount of credit exposure to any one financial
institution. The Company's raw materials are readily available and the Company
is not dependent on a single supplier or a few suppliers.
S-8
<PAGE> 9
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 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.
NOTE 2. GOING CONCERN UNCERTAINTY AND REGISTRATION OF COMMON STOCK
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Since its inception, the Company
has been substantially reliant on its parent company to fund its cash
requirements. As shown in the financial statements, the Company has suffered
recurring losses, has a deficiency of quick assets to current liabilities of
$114,282 and an accumulated deficit in retained earnings of $2,617,957 at August
31, 1996. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
going concern.
Management is exploring alternatives, including raising additional debt or
equity financing. The Company has raised $200,000 in debt financing since year
end. See Note 4. The Company is also proceeding with plans for filing an
Information Statement on Form 10 with the SEC to register the Company's
outstanding common stock. The Company's ability to continue to operate is
dependent upon its ability to successfully accomplish some or all of these or
other alternatives, and ultimately to attain profitable operations.
NOTE 3. INVESTMENTS IN AND ADVANCES TO VENTURE
The Company has invested $592,426 in CNG International, L.L.C., a Tennessee
limited liability company formed for the purpose of converting motor vehicles
to operate on alternative fuels, manufacturing and selling of related component
equipment and to develop the necessary infrastructure to support operation of
motor vehicles on alternative fuels primarily in Uzbekistan, a former Soviet
Republic. At August 31, 1996, the Company had acquired an equity interest of
approximately 11% in the venture.
During the years ended August 31, 1996 and 1995, the Company sold equipment and
provided services to CNG International in the amount of $133,505 and $110,611,
respectively.
S-9
<PAGE> 10
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 4. LONG TERM DEBT
Long-term debt consists of the following at August 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes payable to financial institutions, with interest rates
from 8.50% to 12%,due in monthly installments of $1,950
and secured by certain vehicles. $ 35,428 $ 58,836
Less current portion (13,744) (23,409)
-------- --------
Long-term portion of debt $ 21,684 $ 35,427
======== ========
</TABLE>
Subsequent Proceeds from Convertible Debt:
On September 18, 1996, the Company received $200,000 from the issuance of an
unsecured 6% convertible note payable. The note requires interest only
payments quarterly, with the balance due on September 18, 1999. The note is
convertible into one share of $.01 par value common stock for each $1 of debt
outstanding, subject to adjustment in certain circumstances.
The following is a schedule of principal maturities of long-term debt as of
August 31, 1996:
<TABLE>
<CAPTION>
Before After
Fiscal Year Ended Subsequent Subsequent
August 31 Proceeds Proceeds
----------------------- ---------- ----------
<S> <C> <C>
1997 $ 13,744 $ 13,744
1998 13,738 13,738
1999 5,839 5,839
2000 2,107 202,107
-------- ---------
$ 35,428 $ 235,428
======== =========
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
1996 Flexible Incentive Plan:
The Company's 1996 Flexible Incentive Plan provides incentive stock options for
granting to its officers, directors and management, under which options for the
purchase of 400,000 shares of common stock have been reserved. Options for the
purchase of 300,000 shares of common stock were granted under the plan on
September 4, 1996, vesting 50% in one year and 100% in two years. The options
are exercisable at 110% of the fair market value of the common stock on the
date of grant and expire ten years from the date of grant, or upon termination
of employment, if earlier. An appraisal of the common stock fair value is
currently being obtained.
Preferred Stock:
The Company has authorized 10,000,000 shares of preferred stock, none of which
is issued. Terms and rights of the stock have not been established by the
Board of Directors.
S-10
<PAGE> 11
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 6. LEASES
Real Estate:
The Company shares office space with its parent company and pays to them, on a
month to month basis, approximately $4,000 per month for the use of office
space and equipment. In addition, the Company leases its conversion facilities
and a fuel station location under noncancellable leases with terms from one to
three years. The Company also has a sublease on one of its conversion
facilities, from which it receives $4,500 per month through January, 1997.
For the years ended August 31, 1996, 1995 and 1994, the Company incurred rent
expense of $141,996, $140,549 and $91,626, respectively and received sublease
rental income of $58,500 in 1996 and $6,750 in 1995. As of August 31, 1996,
future minimum rentals under all noncancellable real estate leases, are as
follows:
<TABLE>
<S> <C>
1997 $ 69,802
1998 34,400
1999 22,500
----------
Future minimum rentals 126,702
Less sublease income (22,500)
----------
Net future minimum rentals $ 104,202
==========
</TABLE>
Capitalized Equipment Leases:
The Company leases certain equipment located at its conversion facilities under
leases accounted for as capital leases. As of August 31, 1996, future minimum
rentals under all capital leases are as follows:
<TABLE>
<S> <C>
1997 $ 28,211
1998 24,829
1999 8,926
--------
Total minimum rentals 61,966
Less amount representing interest,
executory costs and profit (12,230)
--------
Present value of capital lease obligations $ 49,736
========
</TABLE>
S-11
<PAGE> 12
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 7. FEDERAL INCOME TAXES
The Company began operating as a corporation on August 15, 1996; accordingly,
its tax attributes began on that date. From August 15, 1996 through August 31,
1996, the Company incurred a financial and tax loss of approximately $27,000.
Deferred taxes are as follows at August 31, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 27,000
Statutory tax rate 34%
--------
Net deferred tax asset 9,180
Less valuation allowance (9,180)
--------
Deferred income tax asset recorded $ -0-
========
</TABLE>
The net operating loss carryforward of $27,000 expires in 2111.
NOTE 8. RELATED PARTY TRANSACTION
On August 31, 1996, 10% of the outstanding common stock of the Company was
given as consideration for services rendered to the Directors of ExproFuels,
Inc.
Subsequent to year end, TXCO advanced the Company $40,000.
NOTE 9. MAJOR CUSTOMERS
Amounts sold to major customers are as follows:
<TABLE>
<CAPTION>
Customer 1996 1995 1994
------------ ------------ ------------ --------
<S> <C> <C> <C>
A $ 259,438 $ - $ -
B 86,110 110,612 -
C 83,663 60,820 231,184
D 42,356 208,938 -
E - 62,227 183,941
</TABLE>
S-12
<PAGE> 13
EXPROFUELS, INC.
SCHEDULE II - VALUATION AND QUALIFYING RESERVES
FOR THE THREE YEARS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
Balance Charges to Balance
Beginning Costs and End of
of Period Expense Write-offs Period
----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1996
Allowance for doubtful accounts -
trade accounts $ - $ 35,000 $ - $ 35,000
=========== ======== ========== ========
YEAR ENDED AUGUST 31, 1995
Allowance for doubtful accounts -
trade accounts $ - $ - $ - $ -
=========== ======== ========== ========
YEAR ENDED AUGUST 31, 1994
Allowance for doubtful accounts -
trade accounts $ - $ - $ - $ -
=========== ======== ========== ========
</TABLE>
S-13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
EXPLORATION COMPANY AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH THE EXPLORATION
COMPANY FORM 10-K FOR THE YEAR ENDED AUGUST 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 967,838
<SECURITIES> 0
<RECEIVABLES> 81,560
<ALLOWANCES> 9,973
<INVENTORY> 0
<CURRENT-ASSETS> 1,039,425
<PP&E> 7,408,253
<DEPRECIATION> 461,131
<TOTAL-ASSETS> 8,433,434
<CURRENT-LIABILITIES> 1,073,049
<BONDS> 1,689,697
0
0
<COMMON> 94,266
<OTHER-SE> 5,576,422
<TOTAL-LIABILITY-AND-EQUITY> 8,433,434
<SALES> 521,593
<TOTAL-REVENUES> 521,593
<CGS> 951,686
<TOTAL-COSTS> 1,465,582
<OTHER-EXPENSES> 680,825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 378,003
<INCOME-PRETAX> (1,880,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,880,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,880,389)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> 0
</TABLE>
