<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
NOVEMBER 30, 1995
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 January 12, 1996.
Common Stock $0.01 par value 5,676,135
(Class of Stock) (Number of Shares)
Total number of pages is 11
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS NOVEMBER 30, 1995 AUGUST 31, 1995
- ------ ----------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 106,746 $ 85,918
Accounts receivable-net 313,035 345,974
Inventory-principally raw materials 116,960 103,956
Note receivable 602,528 602,528
Prepaid expenses 27,226 60,714
--------------- -----------
Total Current Assets 1,166,495 1,199,090
PROPERTY & EQUIPMENT
Oil & gas properties-net of impairment 2,511,965 2,170,415
Mineral properties-net of impairment 704,967 704,967
Transportation and other equipment 193,932 193,404
Equipment under capital leases 93,326 93,326
Fuel stations 176,229 159,729
--------------- -----------
3,680,419 3,321,841
Less accumulated depreciation, depletion
and amortization (462,620) (413,152)
--------------- -----------
3,217,799 2,908,689
OTHER ASSETS
Investment - CNG International 331,193 150,000
Option to acquire oil and gas properties 66,667 166,667
Other assets 158,249 168,446
--------------- -----------
556,109 485,113
--------------- -----------
Total Assets $ 4,940,403 $ 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 NOVEMBER 30, 1995 AUGUST 31, 1995
- ------------------------------------ ----------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 651,448 $ 590,975
Due to joint interest partners 138,680 69,209
Current portion of long-term debt 171,640 188,419
Current portion of capital lease obligations 16,000 16,693
------------- ------------
Total Current Liabilities 977,768 865,296
LONG TERM LIABILITIES
Long-term debt 2,481,045 2,300,115
Capital lease obligations 46,562 49,734
------------- ------------
2,527,607 2,349,849
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized
200,000,000 shares; issued and outstanding
5,676,135 shares at November 30, 1995
and 5,527,970 shares at August 31, 1995 56,761 55,280
Additional paid-in capital 17,749,068 17,348,088
Accumulated deficit (16,370,801) (16,025,621)
------------- ------------
Total Stockholders' Equity 1,435,028 1,377,747
------------- ------------
Total Liabilities and Stockholders' Equity $ 4,940,403 $ 4,592,892
============= ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
THE EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDING ENDING
NOVEMBER 30, 1995 NOVEMBER 30, 1994
----------------- -----------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 82,007 $ 71,793
ExproFuels' sales 200,498 159,431
Other Income 8,217 3,504
------------- -----------
290,720 234,728
COSTS AND EXPENSES:
Lease operating expenses 5,287 4,216
Production and taxes 10,998 10,431
Exploration expenses 6,989 102,536
Depreciation, depletion and amortization 70,467 44,100
Impairment of mineral properties -0- 42,876
ExproFuels' costs of sales 135,433 144,252
General and administrative expenses 331,166 391,353
------------- -----------
560,340 739,764
------------- -----------
Income (Loss) From Operations (269,620) (505,036)
OTHER INCOME (EXPENSE):
Interest income 287 1,157
Interest expense (75,849) (31,271)
------------- -----------
(76,562) (535,150)
------------- -----------
Net Income (Loss) $ (345,180) $ (535,150)
============= ===========
AMOUNTS PER COMMON SHARE:
Net Income (Loss) $ (0.06) $ (0.12)
============= ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
THE EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDING ENDING
NOVEMBER 30, 1995 NOVEMBER 30, 1994
----------------- -----------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net Income (Loss) $ (345,180) $ (535,150)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation, depletion and amortization 70,467 44,100
Impairment of mineral properties -0- 42,876
Cash flows increased (decreased) from change
in operating assets and liabilities:
Accounts receivable 32,939 (24,601)
Inventory (13,004) 16,978
Prepaid expenses and other 33,488 36,718
Accounts payable and accrued expenses 60,473 (87,182)
Due to joint interest partners 69,471 (211,344)
----------- -----------
Net Cash Used in Operating Activities ( 91,346) (717,605)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in CNG International (181,193) -0-
Development of oil and gas properties (37,743) (24,205)
Purchase of property & equipment (17,028) (40,540)
Sale of oil and gas properties -0- 254,749
Other assets 10,197 (23,276)
----------- -----------
Net Cash Used In Investing Activities (225,767) 166,728
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issuance-net 177,655 50,000
Additional borrowing-net of financing fees 170,861 746,772
Principal payments on long-term
obligations (10,575) (27,084)
----------- -----------
Net Cash Provided From Financing Activities 337,941 769,688
----------- -----------
Net Increase in Cash 20,828 218,811
Cash at Beginning of Period 85,918 103,756
----------- -----------
Cash at End of Period $ 106,746 $ 322,567
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
THE EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE PERIODS ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994 (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 adjustments) 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.
Mineral Properties: The Company expenses costs associated with
identifying prospective mining properties while the costs of acquiring
and developing unproven mining properties are capitalized. The
Company has not incurred development or production costs on its mining
properties.
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 LOSS PER SHARE AND SUBSEQUENT EVENT
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 November 30, 1995, the Company had received
$165,000 in exchange for 82,500 shares of its common stock.
Subsequent to November 30, 1995, the Company received an additional
$135,000 pursuant to the terms of its ongoing Regulation S offering in
exchange for 67,500 shares of its common stock.
During the first quarter, the Company received full payment of $72,000
owed it by an affiliated party due to the exercise of a stock option
to purchase common stock on August 31, 1995, as reflected in the
previous year's financial statements.
6
<PAGE> 7
As of November 30, 1995, the Company had outstanding and exercisable
warrants and options to purchase 1,935,015 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.
Loss per share is computed based on the weighted average number of
common shares outstanding during the periods presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS
------------
<S> <C>
November 30, 1995 5,549,300
November 30, 1994 4,625,592
</TABLE>
4. INVESTMENT IN CNG INTERNATIONAL
During the quarter ended November 30, 1995, the Company had invested
an additional $181,193 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 Uzebekistan, a former Soviet Republic. The
investment consisted of cash in the amount of $43,000 and the issuance
of a note payable in the amount of $138,000. The note payable,
maturing in April, 1996, represents the Company's assumption of
certain outstanding obligations of CNG International, L.L.C.
5. ACQUISITION OF OIL AND GAS PROPERTIES
During the quarter ended November 30, 1995, the Company increased its
interest in certain leaseholds in Maverick County, Texas from its
existing partners through the partial exercise of a $166,667 option
and an additional exchange of Common Stock of the Company. The
transaction was valued at approximately $325,000. The Company issued
94,721 shares of Common Stock for a portion of the value. The
transaction increased the Company's leasehold interest by
approximately 2,475 net acres.
6. LEGAL PROCEEDINGS AND SUBSEQUENT EVENTS
Subsequent to the end of the first quarter, on or about December 20,
1995, the Company entered into a final settlement of the lawsuit
filed in 1992 involving its ownership interest in its Holmgreen Ranch
mineral property. The settlement provided for the Company to convey a
32.5% mineral interest in the property to the plaintiff in exchange
for compensation by the other defendants. The Company does not
believe the terms of the settlement will have a material adverse
affect on its ability to develop the lease because it continues to
own a 50% mineral interest and maintain a mineral lease over the
entire ranch property which allows it to develop the underlying
mineral deposits that it does not own. The company is currently in
negotiations with the other defendants in the lawsuit and is confident
it will be fairly compensated by said defendants for the value paid by
the Company in the original purchase of subject mineral interest.
7
<PAGE> 8
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 year 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 has been extended to several foreign
parties. At the end of the quarter, the Company had received $165,000 under
this arrangement. Management is uncertain at this time of Comstar's ability to
successfully place the Regulation S Offering in its entirety in the near future
and is investigating other financing alternatives for its ongoing capital
requirements. Additional short-term borrowing during the quarter amounted to
$32,500. These funds were used to fund the cash loss from operations of
$91,346 and $38,000 in capital expenditures in the ExproFuels division, and to
maintain the Company's liquidity by increasing its cash. As a result, the
Company's current ratio (current assets divided by current liabilities)
deteriorated slightly, from 1.39 to 1 at August 31, 1995 to 1.19 to 1 at
November 30, 1995.
Additional operating capital was secured through short term borrowing, as the
Company increased its investment in CNG International, L.L.C., through the
issuance of a short-term note payable in the amount of $138,000. This
investment has allowed the Company to continue its participation in the
development of significant opportunities for its ExproFuels division in
Uzbekistan.
In order to carry out management's plans to develop its Maverick County
leaseholds, evaluate its recently acquired Lodgepole acreage position in North
Dakota and Montana, and expand 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 first
quarter, through January 12, 1996, additional operating funds have been raised,
through the ongoing Regulation S offering of $135,000 and the receipt of
expired drilling option escrow funds from TransTexas Gas Corporation of
$55,000. Management is continuing to investigate several alternatives to raise
capital to fund ongoing normal operations and to 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.
RESULTS OF OPERATIONS
OIL AND GAS DIVISION
The increase in oil and gas sales for the first quarter of fiscal year 1996
over the same period in 1995 is attributable to increased production from the
Paloma # 1-107 gas well and new production from the Paloma A # 83-1H gas well
which was drilled during the 4th quarter of fiscal year 1995. The decrease in
year-to-date exploration expenses to $6,989 reflects the intangible drilling
costs to date on the Paloma B #2-112 well which commenced drilling during
November, 1995, while no other exploration occurred during the quarter. The
increase in interest expense for the current quarter is directly attributable
to the increase in long-term debt over last year. The increase in
depreciation, depletion, and amortization during the current quarter is
primarily attributable to increased depletion
8
<PAGE> 9
related to higher gas production and ongoing amortization of deferred financing
fees not present during the first quarter of 1995. The reduction in
impairment of mineral properties reflects the Company's position that the
remaining carrying value of the mineral properties are properly stated.
On December 31, 1995, the TransTexas Gas Corporation one-year option to drill
a deep, Jurassic test on the Company's Maverick County leasehold expired.
Pursuant to the terms of this option, the Company received net proceeds of
$55,000 for its portion of the expiration penalty fee, previously held in
escrow by a third party. The Company believes that it will be able to find
another company to agree to essentially the same terms as TransTexas to get the
deep Jurassic prospect drilled. The Company commenced drilling the Paloma B
#2-112 in November, 1995, as a Glen Rose test on its Paloma lease. Drilling
was completed in late December and completion was 0. commenced during January
1996. Preliminary tests results indicate nearly 50 feet of gas bearing
porosity within the Glen Rose formation. The well was flowed at rates in
excess of 2.5 million cubic feet of gas per day and is expected to have an
excellent absolute open flow potential although tests have not been concluded.
The success of this well is very significant as an indication of the Company's
engineers and geologists ongoing ability to distinguish between water-filled
reefs 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.
The Company has been evaluating the available 2-D seismic over its leasehold in
the Lodgepole play in North Dakota. Independent geophysicists have determined
that the Company has numerous anomalies on the acreage that appear to be
Lodgepole waulsortion reefs. The Company intends to acquire 3-D seismic over
its prospects prior to drilling.
EXPROFUELS DIVISION
Sales for the current quarter increased by approximately 25% compared to the
corresponding periods of the previous fiscal year. Contributing most
significantly to the increase was the success of the Company's ongoing efforts
to identify and obtain sales and construction contracts with the Texas
Department of Transportation, with installations extending throughout central
and east Texas, and Kelly AFB in San Antonio, Texas. Since January, 1995,
total fuel station locations, owned and non-owned, have increased from 1 to 22
stations, while propane sales have increased from 4,800 gallons per month to
over 20,000 gallons per month in December 1995. The decline of general and
administrative expenses reflects the Company's ongoing efforts to keep staff
levels and office expenses to a minimum, reduced insurance costs due to lower
payrolls, significant rate reductions and the drop in office expenses related to
operating efficiencies after the closing of the New Orleans, La. shop in the 2nd
quarter of 1995.
ExproFuels' revenues, profitability and future rate of growth continue to be
substantially dependent on its ability to increase its sales levels primarily
by winning bids from various governmental agencies as well as from private
fleets which continue to be mandated by various legislation to convert their
fleets to alternative fuels. In the event ExproFuels is unsuccessful in the
competitive bidding process, or legislative changes further reduce or delay
mandates for vehicle conversions, the Company's revenues and ability to achieve
profitability would be materially adversely affected.
An additional investment of $181,193 was made by the Company during this
quarter in CNG International, L.L.C, continuing the Company's plan, together
with this Tennessee company, to develop the joint goal of converting 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. In October, 1995, the President of Uzbekistan signed a
resolution authorizing key components required for the ongoing development of
the venture. As of January, 1996, the Uzbek government was actively
negotiating with various international banking organizations, with CNG
International's
9
<PAGE> 10
assistance, in preparation for the issuance of the Presidential Decree giving
final approval to the venture between that government and CNG International.
Because the alternative fuels industry in the United States has not grown as
fast as most experts projected, ExproFuels has continued to investigate the use
of its expertise and knowledge in several foreign countries. Management
believes that opportunities currently being pursued in Colombia, Bolivia,
Egypt, Mexico and Central America may develop into attractive ventures for the
Company. Accordingly, the ExproFuels division has continued to invest in sales
and promotional activities during the first quarter of the year.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsequent to the end of the first quarter, on or about December 20,
1995, the Company entered into a final settlement of the lawsuit
filed in 1992 involving its ownership interest in its Holmgreen Ranch
mineral property. The settlement provided for the Company to convey a
32.5% mineral interest in the property to the plaintiff, Big Four
Ranch Corporation, in exchange for compensation by the other
defendants. The Company does not believe the terms of the settlement
will have a material adverse affect on its ability to develop the
lease because it continues to own a 50% mineral interest and maintain
a mineral lease over the entire ranch property which allows it to
develop the underlying mineral deposits under the interests it does
not own. Additionally, the Company is currently in negotiations with
the other defendants in the lawsuit and is confident it will be fairly
compensated by said defendants for the value paid by the Company in
the original purchase of subject mineral interest.
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
None
10
<PAGE> 11
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/ James E. Sigmon
-----------------------------------------------
James E. Sigmon, President and Treasurer
(Signing on behalf of the Registrant and as
chief accounting officer)
Date: January 15, 1996
11
<PAGE> 12
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
EXPLORATION COMPANY UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
NOVEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 106,746
<SECURITIES> 0
<RECEIVABLES> 323,008
<ALLOWANCES> 9,973
<INVENTORY> 116,960
<CURRENT-ASSETS> 1,166,495
<PP&E> 3,680,419
<DEPRECIATION> 462,620
<TOTAL-ASSETS> 4,940,403
<CURRENT-LIABILITIES> 977,768
<BONDS> 2,527,607
<COMMON> 56,761
0
0
<OTHER-SE> 1,378,267
<TOTAL-LIABILITY-AND-EQUITY> 4,940,403
<SALES> 290,720
<TOTAL-REVENUES> 290,720
<CGS> 158,707
<TOTAL-COSTS> 560,340
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,849
<INCOME-PRETAX> (345,180)
<INCOME-TAX> 0
<INCOME-CONTINUING> (345,180)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345,180)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
