<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission File No. 0-9120
MAY 31, 1996
THE EXPLORATION COMPANY
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-0793089
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
500 NORTH LOOP 1604 E., SUITE 250 78232
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (210) 496-5300
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 the number of shares outstanding of each of the issuer's classes of
common stock as of July 10, 1996.
Common Stock $0.01 par value 7,704,115 shares
(Class of Stock) (Number of Shares)
Total number of pages is 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MAY 31, 1996 AUGUST 31, 1995
- ---------- ------------ ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 60,192 $ 85,918
Accounts receivable-net 379,342 345,974
Inventory-principally raw materials 155,800 103,956
Note receivable -0- 602,528
Prepaid expenses 19,326 60,714
----------- -----------
Total Current Assets 614,660 1,199,090
PROPERTY & EQUIPMENT
Oil & gas properties-net of impairment 4,725,617 2,170,415
Mineral properties-net of impairment 306,564 704,967
Transportation and other equipment 219,772 193,404
Equipment under capital leases 93,326 93,326
Fuel stations 211,821 159,729
----------- -----------
5,557,100 3,321,841
Less accumulated depreciation, depletion
and amortization (561,554) (413,152)
----------- -----------
4,995,546 2,908,689
OTHER ASSETS
Investment & advances - CNG International 371,123 150,000
Option to acquire oil and gas properties 66,667 166,667
Other assets 134,581 168,446
----------- -----------
572,371 485,113
----------- -----------
Total Assets $ 6,182,577 $ 4,592,892
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
THE EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY MAY 31, 1996 AUGUST 31, 1995
- ------------------------------------ ------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 637,251 $ 590,975
Due to joint interest partners 12,502 69,209
Current portion of long-term debt 244,457 188,419
Current portion of capital lease obligations 16,000 16,693
------------- ---------------
Total Current Liabilities 910,210 865,296
LONG TERM LIABILITIES
Long-term debt 2,288,090 2,300,115
Capital lease obligations 38,427 49,734
------------- ---------------
2,326,517 2,349,849
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized
200,000,000 shares; issued and outstanding
6,957,686 shares at May 31, 1996
and 5,527,970 shares at August 31, 1995 69,577 55,280
Additional paid-in capital 20,019,593 17,348,088
Accumulated deficit (17,143,320) (16,025,621)
------------- ---------------
Total Stockholders' Equity 2,945,850 1,377,747
------------- ---------------
Total Liabilities and Stockholders' Equity $ 6,182,577 $ 4,592,892
============= ===============
</TABLE>
See notes to consolidated financial statements.
3
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THE EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MAY 31, 1996 MAY 31, 1995
------------- ---------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 120,955 $ 76,974
ExproFuels' sales 207,036 121,257
Other Income 55,743 11,688
------------- ---------------
383,734 209,919
COSTS AND EXPENSES:
Lease operating expenses 15,342 4,292
Production and taxes 15,409 12,619
Exploration expenses 304,591 86,630
Depreciation, depletion and amortization 70,467 154,700
Impairment of mineral properties -0- 42,877
ExproFuels' costs of sales 135,132 106,231
General and administrative expenses 339,864 381,336
------------- ---------------
880,805 788,685
------------- ---------------
Loss From Operations (497,071) (578,766)
OTHER INCOME (EXPENSE):
Interest income 46,176 3,427
Interest expense (74,564) (67,419)
------------- ---------------
(28,388) (63,992)
------------- ---------------
Net Loss $ (525,459) $ (642,758)
============= ===============
AMOUNTS PER COMMON SHARE:
Net Loss $ (0.09) $ (0.13)
============= ===============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
THE EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, 1996 MAY 31, 1995
------------- ---------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 305,528 $ 223,056
ExproFuels' sales 803,151 365,337
Other Income 126,757 20,979
------------- ---------------
1,235,436 609,372
COSTS AND EXPENSES:
Lease operating expenses 39,478 16,908
Production and taxes 41,437 35,937
Exploration expenses 315,557 195,344
Depreciation, depletion and amortization 211,401 248,600
Impairment of mineral properties -0- 128,629
ExproFuels' costs of sales 583,462 322,757
General and administrative expenses 982,495 1,208,978
------------- ---------------
2,173,830 2,157,153
------------- ---------------
Loss From Operations (938,394) (1,547,781)
OTHER INCOME (EXPENSE):
Interest income 48,237 5,841
Interest expense (227,543) (148,975)
------------- ---------------
(179,306) (143,134)
------------- ---------------
Net Loss $ (1,117,700) $ (1,690,915)
============= ===============
AMOUNTS PER COMMON SHARE:
Net Loss $ (0.20) $ (0.36)
============= ===============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
THE EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, 1996 MAY 31, 1995
------------- ---------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $ (1,117,700) $ (1,690,915)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation, depletion and amortization 211,401 248,600
Impairment of mineral properties -0- 128,628
Cash flows increased (decreased) from change
in operating assets and liabilities:
Accounts receivable (33,368) (27,459)
Inventory (51,844) (37,484)
Prepaid expenses and other 41,388 62,048
Accounts payable and accrued expenses 88,398 (52,300)
Due to joint interest partners (56,707) (224,075)
-------------- ----------------
Net Cash Used in Operating Activities (918,432) (1,592,957)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Investment in CNG International (221,123) (100,000)
Development of oil and gas properties (91,862) (158,171)
Purchase of other property & equipment (116,459) (98,232)
Sale of oil and gas properties -0- 254,749
Other assets 158,865 (226,539)
------------- ---------------
Net Cash Used in Investing Activities (270,579) (328,193)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issuance-net 447,464 400,000
Additional borrowing-net of financing fees 170,861 1,567,614
Principal payment on note receivable 602,528 -0-
Principal payments on long-term
obligations (57,568) (46,639)
------------- ---------------
Net Cash From Financing Activities 1,163,285 1,920,975
------------- ---------------
Net (Decrease) in Cash (25,726) (175)
Cash at Beginning of Period 85,918 103,756
------------- ---------------
Cash at End of Period $ 60,192 $ 103,581
============= ===============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
THE EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE PERIODS ENDED MAY 31, 1996 and MAY 31, 1995 (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company's annual report on
Form 10-K for the year ended August 31, 1995, which is incorporated herein
by reference.
2. PROPERTIES
Oil and Gas Properties: The Company uses the successful efforts method of
accounting for oil and gas producing 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.
Proved and unproved oil and gas properties are periodically assessed for
impairment of value, and loss is recognized at the time of impairment by
providing an impairment allowance. Capitalized costs of producing oil and
gas properties are depreciated and depleted by the unit-of-production
method on a property-by-property basis based on proved oil and gas reserves
as estimated by company engineers.
3. COMMON STOCK AND EARNINGS PER SHARE
During the first quarter, the Company prepared an offering pursuant to
Regulation S of the Securities Act of 1933, as amended, to raise up to
$3,000,000 by offering shares to non-U.S. persons as defined in Regulation
S. As of February 29, 1996, the Company had received $300,000 in exchange
for 150,000 shares of its common stock.
During the current quarter, the Company continued its offering of shares
pursuant to Regulation S and as of May 31, 1996, had received an additional
$50,000 in exchange for 25,000 shares of its common stock.
7
<PAGE> 8
As of May 31, 1996, the Company had outstanding and exercisable warrants
and options to purchase 1,615,406 shares of common stock at prices ranging
from $2.00 to $6.00 per share. The warrants and options expire at various
dates through February 2005.
Earnings per share are computed based on the weighted average number of
common shares outstanding during the periods presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
<S> <C> <C>
May 31, 1996 5,771,764 5,680,040
May 31, 1995 4,829,609 4,712,096
</TABLE>
4. INVESTMENT IN CNG INTERNATIONAL
During the quarter ended May 31, 1996, the Company made additional cash
investments and advances totaling $18,430 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. Additionally, the company invoiced
CNG International for services provided during the period totaling $59,795.
5. ACQUISITION OF OIL AND GAS PROPERTIES AND SUBSEQUENT EVENTS
During the quarter ended May 31, 1996, the Company entered into agreements
involving the exchange of 3,498,485 shares of its common stock for a
twenty-five percent (25%) working interest in 129,551.12 acres of
non-producing oil and gas leases and $1,750,000 cash. The stock is to be
issued under the rules as defined under Regulation S.
As of May 31, 1996, the completed portion of the exchange for leases
totaled 59,654.54 acres and was valued at $2,013,340 for which the Company
issued 1,150,480 shares of its common stock. Concurrently, an additional
48,571 shares of common stock were issued in exchange for $85,000 cash.
Subsequent to the end of the current quarter, an additional 36,540 acres
were purchased under the terms of the ongoing agreements, in exchange for
704,695 shares of the company's common stock valued at $1,233,217.
Concurrently, an additional 737,429 shares of common stock were issued in
exchange for $1,290,500 cash.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto, and with the Company's
audited consolidated financial statements and notes thereto for the fiscal year
ended August 31, 1995.
FINANCIAL CONDITION AND CAPITAL RESOURCES
During the first quarter of fiscal 1996 the Company entered into an agreement
with Comstar BioCapital, Inc., a foreign entity, to raise up to $3,000,000
through an offering of the Company's common stock to foreign investors. The
offering was prepared pursuant to Regulation S of the Securities Act of 1933,
as amended, and was extended to several foreign parties.
During the first three quarters of fiscal 1996, the Company had received
$435,000 under this arrangement. These funds, along with the $602,000 payment
realized upon the sale of an outstanding note receivable, as well as $55,000
received from TransTexas Gas Corporation due to the expiration of a drilling
option, were used to fund the cash loss from operations for the nine months
ended of $938,394, fund for the current quarter $85,000 in capital
expenditures, including $33,000 in the ExproFuels division, and invest an
additional $18,000 in CNG International, L.L.C., the Tennessee company
directing the development of the alternative fuels project in Uzbekistan.
While management has been successful in obtaining significant commitments of
new equity capital during the current quarter, the timing of actual funding was
such that the Company's current ratio (current assets divided by current
liabilities) deteriorated for the period, from 1.38 to 1 at August 31, 1995,
to .67 to 1 at May 31, 1996.
In order to carry out management's plans to develop its Texas leaseholds,
continue evaluation of its growing acreage positions in North Dakota and
Montana, and continue expansion of the ExproFuels division, as well as to meet
the Company's obligations in the ordinary course of business, it will be
necessary for the Company to raise additional capital. Further, until such
time as the Company attains profitable operations, additional capital will be
required to fund recurring cash losses from operations. Since the end of the
third quarter, through July 10, 1996, additional operating funds have been
raised through the ongoing Regulation S offering of $1,290,500. Based on the
performance to date by the Comstar BioCapital led foreign investors under their
new funding commitments dated May 31, 1996, management anticipates additional
funding in excess of $1,000,000 will be completed within the current fiscal
year. This level of funding will allow the company to carry out current
exploration and development plans for its oil and gas interests, maintain its
participation in the Uzbekistan project, fund ongoing normal operations and
meet the Company's debt obligations. If management's efforts to raise
additional capital are not successful, the Company's financial condition and
liquidity would be materially adversely affected.
9
<PAGE> 10
RESULTS OF OPERATIONS
OIL AND GAS DIVISION
The increase in oil and gas sales and depletion expense for the third quarter
and for the nine month year-to-date period of fiscal year 1996 is primarily
attributable to steady production from the Paloma #1-107 gas well and the new
Paloma "B" #2-112 gas well which began producing during the current quarter and
the ongoing strengthening of gas prices during the past winter and the current
spring season. The increase in year-to-date exploration expenses to $315,557
compared to $195,344 in the prior period reflects the drilling of a dry hole
during the current quarter. The Company drilled and abandoned another Glen
Rose test well, the Paloma "C" #1-108 during the third quarter at a net cost of
$214,000. Although the reef was present, it contained water and not
hydrocarbons. Company engineers and geologists remain 100% successful in
locating the patch reefs on Company leaseholds, but have only a 1 in 3 success
ratio in finding reefs productive in hydrocarbons. Management is reviewing the
information it has obtained while drilling these reefs and is reprocessing its
seismic data to improve its success ratio to an acceptable level by improving
its ability to distinguish between water-filled versus gas-filled reefs. Based
upon the seismic that has been run to date, the Company is further assured to
have numerous porosity-bearing patch reefs scattered across its extensive
acreage position, and is scheduled to commence additional drilling on its
Paloma lease in the fourth quarter of this year.
The Company continues its evaluation of the available 2-D and 3-D seismic over
its growing leasehold position in the Lodgepole and Red River plays in North
Dakota. Third quarter and subsequent period leasehold acquisitions of over
90,000 net acres of paid up, non-producing leases assure extensive exploration
opportunities in the coming years. Independent geophysicists have determined
that the Company has numerous anomalies on the acreage that appear to be
Lodgepole waulsortian reefs in addition to horizontal Red River formation
possibilities. Several blocks of the leaseholds which are prospective for Red
River production are currently directly offset by locations that are permitted
to be horizontally drilled by other operators. Management expects to identify
numerous locations to be drilled horizontally in the Red River formation as
these offsetting locations are successfully drilled. Multiple requests by
other operators to explore company acreage under farmout agreements offer
additional exploration options which are currently under consideration by
management.
EXPROFUELS DIVISION
Sales for the third quarter and the nine month period ended May 31, 1996
increased by approximately 70% and 120%, respectively, over the same periods of
fiscal 1995. Changes in cost of sales levels followed the sales increases,
with gross margins improving in the third quarter of fiscal 1996.
Contributing significantly to the sales increase and improved margins was the
success of the Company's ongoing marketing efforts which allow it to identify
and obtain favorably priced vehicle conversion and fuel station construction
contracts with numerous state and local governments and school districts in its
San Antonio, and Dallas, Texas marketplace.
10
<PAGE> 11
ExproFuels' U.S. based revenues, profitability and future rate of growth are
dependent on its ability to increase its sales level primarily by winning bids
from various governmental agencies as well as from private fleets which have
been mandated by various legislation to convert their vehicle fleets to
alternative fuels. In the event ExproFuels is unsuccessful in the
competitive bidding process, or legislative changes significantly reduce or
delay the mandates for vehicle conversions, the Company's revenues and ability
to achieve profitability would be materially adversely affected.
During the third quarter of fiscal 1996, the Company made additional cash
advances of $18,000 and provided technical services valued at $59,000 to CNG
International, L.L.C., continuing the Company's plan, together with this
Tennessee based company, to develop the joint goal of converting a national
fleet of motor vehicles to operate on alternative fuels, manufacturing and
selling related component equipment and developing the necessary refueling
infrastructure to support the operation of motor vehicles on alternative fuels,
in Uzbekistan, a former Soviet Republic. The Company, together with CNG
International, is actively involved in negotiating with various international
banking organizations and numerous Uzbek ministries, and on June 6, 1996 was
rewarded with the issuance of that country's Presidential decree giving the
final approval to the implementation phase of the venture between that country
and CNG International. Company officials were present at the U.S. Capital, in
Washington D.C. where, on June 26, 1996, the President of Uzbekistan and the
U.S. Secretary of Energy officially witnessed the signing of definitive joint
venture agreements between various Uzbek government ministries and CNG
International representatives.
During the third quarter, the Company continued its review of other former
Soviet Republics interested in initiating similar, national scale projects in
their respective countries and is pursuing advanced discussions with the
appropriate parties. Management continues to believe that opportunities
currently being pursued in Latin America may develop into attractive ventures
for the Company. Accordingly, the ExproFuels division has continued to invest
in sales and promotional activities during the nine months ended May 31, 1996.
CORPORATE DIVISION
The increase in interest expense for the current quarter and the nine month
year-to-date period is directly attributable to the increase in long-term debt
over amounts in previous periods. The reduction in impairment of mineral
properties reflects the Company's position that the remaining carrying value of
the mineral properties are properly stated.
Other Income for the third quarter and nine month period ended May 31, 1996
increased by over $100,000 over the same periods of fiscal 1995, primarily due
to insurance premium refunds of approximately $26,000, sales of seismic data
of $22,000, a gains realized upon the sale of other assets of $14,000. The
ongoing decline of general and administrative expenses reflects the Company's
continuing efforts to keep staffing levels and office expenses at a minimum,
resulting in reduced insurance costs associated with lower payrolls and
significant rate reductions, and the drop in office expenses related to
operating efficiencies after closing the marginal conversion facilities in
fiscal 1995.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
1. Exhibit (27) - Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K filed on June 14, 1996 . Item 2. Acquisition or
Disposition of Assets: Relating to agreements effective May
31,1996 with several foreign investors involving the exchange of
3,498,485 shares of the Company's common stock for a twenty-five
percent (25%) interest in 129,551.12 acres of oil and gas leases
and $1,750,000 cash.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE EXPLORATION COMPANY
(Registrant)
/s/ Thomas H. Gose
-------------------------------------
Thomas H. Gose
Secretary
(Signing on behalf of the
Registrant and as chief
accounting officer)
Date: July 12, 1996
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
EXPLORATION COMPANY UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER PLUS 9 MONTHS
ENDED MAY 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 60,192
<SECURITIES> 0
<RECEIVABLES> 389,315
<ALLOWANCES> 9,973
<INVENTORY> 155,800
<CURRENT-ASSETS> 614,660
<PP&E> 5,557,100
<DEPRECIATION> 561,554
<TOTAL-ASSETS> 6,182,577
<CURRENT-LIABILITIES> 910,210
<BONDS> 2,326,517
<COMMON> 69,577
0
0
<OTHER-SE> 2,876,273
<TOTAL-LIABILITY-AND-EQUITY> 6,182,577
<SALES> 327,991
<TOTAL-REVENUES> 383,734
<CGS> 470,474
<TOTAL-COSTS> 880,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,564
<INCOME-PRETAX> (525,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (525,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (525,459)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
</TABLE>
