<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
FEBRUARY 28, 1997
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 March 31, 1997.
Common Stock $0.01 par value 14,759,210
(Class of Stock) (Number of Shares)
Total number of pages is 13
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS FEBRUARY 28, 1997 AUGUST 31, 1996
- ------ ----------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 10,957,718 $ 967,838
Accounts receivable 84,226 71,587
Drilling deposits & advances 537,783 -0-
------------ ------------
Total Current Assets 11,579,727 1,039,425
PROPERTY & EQUIPMENT
Oil & gas properties-net of impairment 9,926,088 7,022,236
Mineral properties-net of impairment 306,564 306,564
Other equipment 143,702 79,453
Less accumulated depreciation, depletion
and amortization (509,731) (461,131)
------------ ------------
9,866,623 6,947,122
OTHER ASSETS
Investment in and advances to ExproFuels, Inc. 336,233 363,271
Other assets 295,833 83,616
------------ ------------
632,066 446,887
------------ ------------
Total Assets $ 22,078,416 $ 8,433,434
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE> 3
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY FEBRUARY 28, 1997 AUGUST 31, 1996
- ------------------------------------ ----------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 837,899 $ 300,549
Current portion of long-term debt 150,000 772,500
Current portion of capital lease obligations 27,032 -0-
------------ ------------
Total Current Liabilities 1,014,931 1,073,049
LONG TERM LIABILITIES
Long-term debt, net of current portion 4,000,000 1,689,697
Long-term capital lease obligations, net of current portion 30,000 -0-
------------ ------------
Total Long-term Liabilities 4,030,000 1,689,697
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized
200,000,000 shares; issued and outstanding
14,759,210 shares at February 28, 1997
and 9,426,650 shares at August 31, 1996 147,592 94,266
Additional paid-in capital 36,472,610 23,482,432
Receivable due from sale of common stock (475,000) -0-
Accumulated deficit (19,111,717) (17,906,010)
------------ ------------
Total Stockholders' Equity 17,033,485 5,670,688
------------ ------------
Total Liabilities and Stockholders' Equity $ 22,078,416 $ 8,433,434
============ ============
</TABLE>
See notes to financial statements.
3
<PAGE> 4
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996
----------------- -----------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 147,212 $ 102,566
Other Income 50,338 14,523
--------- ---------
197,550 117,089
COSTS AND EXPENSES:
Lease operating expenses 18,544 18,849
Production and taxes 17,254 15,030
Exploration expenses 2,324 3,977
Depreciation, depletion and amortization 86,687 48,090
General and administrative expenses 263,823 144,680
--------- ---------
Total costs and expenses 388,632 230,626
--------- ---------
(191,082) (113,537)
ExproFuels operations:
Revenues 114,539 177,665
Costs and expenses (204,232) (203,790)
--------- ---------
(89,693) (26,125)
--------- ---------
Loss from operations (280,775) (139,662)
OTHER INCOME (EXPENSE):
Interest income 33,213 1,528
Interest expense (73,495) (69,714)
--------- ---------
(40,282) (68,186)
--------- ---------
Net loss $(321,057) $(207,848)
========= =========
AMOUNTS PER COMMON SHARE:
Net loss $ (0.03) $ (0.04)
========= =========
</TABLE>
See notes to financial statements.
4
<PAGE> 5
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996
----------------- -----------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 282,131 $ 184,573
Other Income 98,076 19,399
--------- ---------
380,207 203,972
COSTS AND EXPENSES:
Lease operating expenses 28,067 24,136
Production and taxes 33,347 26,029
Exploration expenses 172,368 10,966
Depreciation, depletion and amortization 131,987 96,180
General and administrative expenses 409,251 265,499
--------- ---------
Total costs and expenses 775,020 422,810
--------- ---------
(394,813) (218,838)
ExproFuels operations:
Revenues 220,492 259,293
Costs and expenses (394,405) (355,378)
--------- ---------
(173,913) (96,085)
--------- ---------
Loss from operations (568,726) (314,923)
OTHER INCOME (EXPENSE):
Interest income 34,706 1,557
Interest expense (127,131) (138,816)
--------- ---------
(92,425) (137,259)
--------- ---------
Net loss $(661,151) $(452,182)
========= =========
AMOUNTS PER COMMON SHARE:
Net loss $ (0.06) $ (0.08)
========= =========
</TABLE>
See notes to financial statements.
5
<PAGE> 6
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (661,151) $ (452,182)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation, depletion and amortization 131,987 96,180
Equity in loss of ExproFuels, Inc. 173,913 96,085
Changes in operating assets and liabilities:
Receivables (12,639) 30,212
Drilling deposits and advances (537,783) -0-
Prepaid expenses and other -0- 31,064
Accounts payable and accrued expenses 537,350 57,656
------------ ------------
Net cash (used) in operating activities (368,323) (140,985)
INVESTING ACTIVITIES:
Development and purchases of oil and gas properties (7,064,451) (91,862)
Advances to ExproFuels, Inc. (146,875) (515,183)
Purchases of property and equipment (64,249) (42,531)
Increase in other assets (295,604) 142,934
------------ ------------
Net cash (used) in investing activities (7,571,179) (506,642)
FINANCING ACTIVITIES:
Collection on note receivable -0- 300,000
Issuance of common stock, net of expenses 13,998,750 312,463
Other financing expenses (78,898) -0-
Proceeds from borrowings 4,756,273 118,237
Payments on borrowings (746,743) (4,131)
------------ ------------
Net cash provided from financing activities 17,929,382 726,569
------------ ------------
INCREASE IN CASH AND EQUIVALENTS 9,989,880 78,942
Cash and equivalents at beginning of period 967,838 78,655
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 10,957,718 $ 157,597
============ ============
</TABLE>
See notes to financial statements.
6
<PAGE> 7
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
PERIODS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of The Exploration Company
(TXCO or the Company) 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.
Certain amounts for the six month period ended February 29, 1996 have been
reclassified for comparative purposes to the six month period ended
February 28, 1997. The financial position and results of operations of
ExproFuels, Inc., previously consolidated in the fiscal year ended August
31, 1996, have been reclassified and reported as a disposal of a line of
business with a significant retained interest, due to its spin off
reported in the August 31, 1996 Form 10-K. See Note 5.
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 financial statements
and footnotes thereto included in the Registrant Company's annual report
on Form 10-K for the year ended August 31, 1996, 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.
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.
Proved and unproved oil and gas properties are periodically assessed for
impairment of value, and loss is recognized, if required, at the time of
impairment by providing an impairment allowance.
Mineral Properties: The Company expenses costs associated with identifying
prospective mining properties while the costs of acquiring and developing
unproved mining properties are capitalized. The Company has not incurred
development or production costs on its mining properties during the
periods covered by this report.
7
<PAGE> 8
3. COMMON STOCK AND LOSS PER SHARE
During the first quarter of fiscal 1997, the Company completed and closed
an offering pursuant to Regulation S of the Securities Act of 1933, as
amended, to raise equity capital, with the assistance of its merchant
banker, Sorbus Asset Strategies, S. A., by offering shares to non-U.S.
persons as defined in Regulation S. Through November 30, 1996, the Company
received $498,750, net of expenses, in exchange for 300,000 shares of its
common stock.
During the second quarter ended February 28, 1997, the Company completed
an additional issuance of its common stock pursuant to Regulation S, and
received $14,000,000, before expenses of $500,000, in exchange for
2,800,000 shares of its common stock. Additionally, the Company issued
699,155 shares of its common stock pursuant to the terms of its two
outstanding convertible debenture notes, retiring $1,831,212 of long term
debt and also issued 1,000,000 shares of its common stock as partial
consideration in exchange for interests in 221,330 acres of oil and gas
leases throughout the Williston basin in North and South Dakota and
Montana.
As of February 28, 1997, the Company had outstanding and exercisable
warrants and options to purchase 1,250,406 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.
The Financial Accounting Standards Board in February, 1997 issued
Statement No. 128, Earnings Per Share, effective for fiscal years ending
after December 15, 1997. Implementation of this Statement is not expected
to have a significant impact on the earnings per share calculation of the
Company.
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 SIX MONTHS
------------ ----------
<S> <C> <C>
February 28, 1997 11,279,736 10,558,708
February 29, 1996 5,717,619 5,633,924
</TABLE>
4. LONG TERM DEBT
During the second quarter of fiscal 1997, the Company obtained additional
operating funds through short term borrowings of $545,000 from various
individuals, with repayment, including interest, prior to the end of the
period.
On October 3, 1996, the Company entered into a $1,000,000 line of credit
arrangement providing funding to cover the Company's share of drilling
wells on certain of its leasehold acreage. The Company had an outstanding
balance of $150,000 under this arrangement at February 28, 1997.
On January 29, 1997, the Company borrowed $4,000,000 through the sale of a
convertible debenture which accrues interest at 6% per annum. Principal
and accrued interest are payable in 5 years, unless conversion occurs
earlier, as provided for under the terms of the agreement.
8
<PAGE> 9
5. SPIN-OFF OF EXPROFUELS, INC.
On September 3, 1996, the Company's Board of Directors voted for a
spin-off of the assets of its wholly owned subsidiary, ExproFuels, Inc. by
the partial distribution of Company-owned ExproFuels common stock directly
to the shareholders of TXCO. The distribution of stock reduced the
Company's ownership in ExproFuels, Inc. to 40%. The Company has prepared
an Information Statement concerning ExproFuels to be given to shareholders
prior to the distribution of the stock.
Management has filed a Form 10-SB with the Securities and Exchange
Commission to register ExproFuels outstanding common stock under the
Securities Act of 1934. Management is in contact with the Commission and
is awaiting the final disposition of the review process prior to effecting
the distribution and commencement of trading in the stock.
The audited financial statements of the Company as of August 31, 1996
reflected the spin-off of ExproFuels, Inc. as if it had occurred effective
that date. The prior period financial statements presented have been
reclassified so as to be comparative to current year classifications
regarding the operations of ExproFuels, Inc.
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
financial statements and notes thereto, and with the Company's audited
financial statements and notes thereto for the fiscal year ended August 31,
1996.
FINANCIAL CONDITION AND CAPITAL RESOURCES
During September, 1996 the Company successfully completed the final portion of
an offering pursuant to Regulation S of the Securities Act of 1933, with the
sale of 300,000 shares of its common stock for $498,750, net of expenses, to
several foreign parties with the marketing assistance of Comstar BioCapital,
Inc. (Comstar), and Sorbus Asset Strategies, S. A., (Sorbus) both being foreign
entities. Since inception, this offering raised in excess of $7,250,000 in
capital comprised of $2,800,000 in cash received for 1,600,000 shares of TXCO
common stock, and approximately $4,500,000 in oil and gas mineral leases in
exchange for 2,543,000 shares of Company stock.
During the second quarter ended February 28, 1997, the Company successfully
completed various transactions with the continued assistance of Comstar and
Sorbus. A total of $35,000,000 was raised, including: $14,000,000 before
expenses of $500,000, through the sale of 2,800,000 shares of TXCO common stock
under Regulation S; $4,000,000 through the sale of convertible debentures;
$17,000,000 through the sales of Net Profits Interests totaling 42.5% in future
wells to be drilled on various Company owned oil and gas leases.
During the current quarter, a portion of this capital was used to fund:
$23,835,000 for the purchase of 282,506 acres of oil and gas leases in the
Williston Basin of North and South Dakota and Montana; $545,000 of short term
debt retirement; the loss from operations for the current quarter of $280,775,
working capital advances to the Company's corporate affiliate, ExproFuels, Inc.
of $80,000; and $94,000 for Texas and $193,000 for North Dakota exploration
expenditures incurred in current drilling activities.
9
<PAGE> 10
As a result of these fund raising efforts, the Company's current ratio (current
assets divided by current liabilities) improved markedly for the period, from
.47 to 1 at November 30, 1996 to 11.4 to 1 at February 28, 1997.
Management is confident it has obtained sufficient levels of working capital to
carry out the Company's initial plans to develop newly acquired Williston Basin
leaseholds in North and South Dakota and Montana, and to continue exploration
on its extensive Texas leaseholds, as well as to meet the Company's obligations
in the ordinary course of business.
Management continues to actively pursue negotiations with various parties,
including banks, pensions funds and individuals, and is confident it will be
successful in obtaining required levels of favorably structured debt capital to
fund ongoing normal operations and continue the development of its extensive
drilling prospects.
RESULTS OF OPERATIONS
The increase in oil and gas sales for the second quarter and the six month year
to date period of fiscal year 1997 over the same period in 1996 is attributable
to increased production from the Paloma Ranch lease due to the successful
drilling of the Paloma #2-112 during 1996 as well as increased gas prices over
the previous year. The increase in year-to-date exploration expenses to
$172,368 reflects expenses incurred on the Gorman #2-4 and the Gorman #1-87
which were written-off during the first quarter of fiscal 1997, compared to no
dry holes during the same period of the prior fiscal year. The decrease in
interest expense for both the first and second quarter compared to the similar
periods of the prior fiscal year is directly attributable to the retirement of
$1,831,212 of convertible debentures during the current periods. The increase
in general and administrative expenses is due primarily to the additional
support personnel added and associated expenses to handle the Company's
expanding exploration and acquisition activities in the Williston Basin. The
increase in losses from ExproFuels from $96,085 to $173,913 is primarily due to
the weakness in sales for both first and second quarters of fiscal 1997, while
ongoing expenses and cost of sales remained steady or increased during the same
periods.
During the quarter, the Company drilled its first well in the Williston Basin
with Continental Resources, Inc. Although the Company owns a 75% interest in
the well, management elected to have Continental operate because of their vast
horizontal drilling experience in the area. The well was drilled approximately
5000 feet horizontally in the Red River "B" zone. Because the operator is
testing the well and has not announced the results, the Company cannot reveal
the production rates at this time; however, management is confident that this
first well is a commercial success.
Also during the quarter, the Company contributed small acreage positions to
various operators who completed several successful Lodgepole wells in the
Stadium Field in Stark County, North Dakota. The Company earned a 1.00%
interest in TransTexas Gas Corporation's Dinsdale #2-4, which tested at 5,500
barrels per day, and a 0.49% interest in the Dinsdale #1-3, which tested at
5100 barrels per day. The Company also earned a 0.22% interest in Duncan Oil
Company's Heart River #1-9, another Lodgepole well which tested at 1,000
barrels per day. With regulated field production limits at 2,000 barrels per
day per well, the Company's interests could generate additional monthly gross
revenues of $17,300 at current oil prices.
Subsequent to the end of the current quarter, the Company has entered into
agreements to drill additional wells with Continental Resources, Inc. and Union
Pacific Resources, Inc. Additionally, the Company began initial drilling
operations on wells to be operated for its own account, finalizing required
permit and survey work on 9 horizontal Red River "B" drilling prospects in
North Dakota and Montana.
10
<PAGE> 11
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
On February 28, 1997, the Company held the Annual Meeting of Shareholders
at its offices in San Antonio, Texas pursuant to the notice mailed to
shareholders of record on January 10, 1997. The following matters were
submitted to a vote at the meeting and the results of the voting is shown
for each matter.
1. Election of Three Directors:
<TABLE>
<CAPTION>
Nominee For Against
--------------- ----------- -------
<S> <C> <C>
Stephen M. Gose 5,359,573 10,293
Thomas H. Gose 5,359,693 10,173
James E. Sigmon 5,359,673 10,193
</TABLE>
There were no changes in directors of the Company.
2. Proposal to ratify the adoption of Akin, Doherty, Klein & Fuege, P.C., as
independent Auditors for the Company for the fiscal year 1997.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
5,360,635 6,923 2,308
</TABLE>
ITEM 5. OTHER INFORMATION
None
11
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
27 Financial Data Schedule
(b). Report on Form 8-K:
A Form 8-K was filed on February 20, 1997 in order to report the
completion of several transactions including: 1) the exchange of
1,000,000 shares of common stock and $22,000,000 cash for a 75% to
100% interest in a minimum of 221,330 acres of oil and gas leases, 2)
the sale of a 42.5% net profits interest in wells to be drilled on
the same acreage for $17,000,000 cash, 3) the issuance for cash of a
$4,000,000 five year convertible debenture, 4) the sale of 2,800,000
shares of common stock issued pursuant to Regulation S for
$14,000,000 cash, 5) the issuance of 532,488 shares of common stock
pursuant to the terms of an outstanding convertible debenture
retiring the Company's debt of $1,331,212 under that debenture and 6)
the issuance of 166,667 shares of common stock pursuant to the terms
of an outstanding convertible debenture retiring the Company's debt
of $500,000 under that debenture.
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/ Roberto R. Thomae
------------------------------------------
Roberto R. Thomae,
Chief Financial Officer
(Signing on behalf of the Registrant and
as chief accounting officer)
Date: April 10, 1997
13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
EXPLORATION COMPANY UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
FEBRUARY 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 10,957,718
<SECURITIES> 0
<RECEIVABLES> 94,199
<ALLOWANCES> 9,973
<INVENTORY> 0
<CURRENT-ASSETS> 11,579,727
<PP&E> 10,376,354
<DEPRECIATION> (509,731)
<TOTAL-ASSETS> 22,078,416
<CURRENT-LIABILITIES> 1,014,931
<BONDS> 4,030,000
0
0
<COMMON> 147,592
<OTHER-SE> 16,885,893
<TOTAL-LIABILITY-AND-EQUITY> 22,078,416
<SALES> 197,338
<TOTAL-REVENUES> 197,338
<CGS> 38,122
<TOTAL-COSTS> 388,632
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,495
<INCOME-PRETAX> (321,057)
<INCOME-TAX> 0
<INCOME-CONTINUING> (321,057)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (321,057)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> 0
</TABLE>
