<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, 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 July 10, 1997.
Common Stock $0.01 par value 14,759,210
(Class of Stock) (Number of Shares)
Total number of pages is 14
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MAY 31, 1997 AUGUST 31, 1996
- ------ ------------ ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 9,060,600 $ 967,838
Accounts receivable 276,504 71,587
Drilling deposits & advances 2,054 -0-
------------ -----------
Total Current Assets 9,339,158 1,039,425
PROPERTY & EQUIPMENT
Oil & gas properties-net of impairment 12,598,437 7,022,236
Mineral properties-net of impairment 306,564 306,564
Other equipment 172,172 79,453
Less accumulated depreciation, depletion
and amortization (536,454) (461,131)
------------ -----------
12,540,719 6,947,122
OTHER ASSETS
Investment in and advances to ExproFuels, Inc. 413,929 363,271
Other assets 342,754 83,616
------------ -----------
756,683 446,887
------------ -----------
TOTAL ASSETS $ 22,636,560 $ 8,433,434
============ ===========
</TABLE>
See notes to financial statements.
2
<PAGE> 3
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY MAY 31, 1997 AUGUST 31, 1996
- ------------------------------------ ------------ ---------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 931,558 $ 300,549
Current portion of long-term debt 957,613 772,500
Current portion of capital lease obligations 27,560 -0-
------------ ------------
Total Current Liabilities 1,916,731 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 25,587 -0-
------------ ------------
Total Long-term Liabilities 4,025,587 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 May 31, 1997
and 9,426,650 shares at August 31, 1996 147,592 94,266
Additional paid-in capital 35,928,054 23,482,432
Receivable due from sale of common stock (475,000) -0-
Accumulated deficit (18,906,404) (17,906,010)
------------ ------------
Total Stockholders' Equity 16,694,242 5,670,688
------------ ------------
Total Liabilities and Stockholders' Equity $ 22,636,560 $ 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
MAY 31, 1997 MAY 31, 1996
--------- ---------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 197,101 $ 102,566
Other income 62,351 14,523
--------- ---------
259,452 117,089
COSTS AND EXPENSES:
Lease operating expenses 16,179 18,849
Production and taxes 15,213 15,030
Exploration expenses 152,347 3,977
Depreciation, depletion and amortization 37,300 48,090
General and administrative expenses 335,365 144,680
--------- ---------
Total costs and expenses 556,404 230,626
--------- ---------
(296,952) (113,537)
ExproFuels operations:
Revenues 92,206 177,665
Costs and expenses (205,938) (203,790)
--------- ---------
(113,732) (26,125)
--------- ---------
Loss from operations (410,684) (139,662)
OTHER INCOME (EXPENSE):
Interest income 137,927 1,528
Interest expense (66,486) (69,714)
--------- ---------
71,441 (68,186)
--------- ---------
Net loss $(339,243) $(207,848)
========= =========
AMOUNTS PER COMMON SHARE:
Net loss $ (0.02) $ (0.04)
========= =========
</TABLE>
See notes to financial statements.
4
<PAGE> 5
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, 1997 MAY 31, 1996
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 479,232 $ 305,528
Other income 160,426 126,757
----------- -----------
639,658 432,285
COSTS AND EXPENSES:
Lease operating expenses 44,247 39,478
Production and taxes 48,560 41,437
Exploration expenses 324,715 315,557
Depreciation, depletion and amortization 169,287 144,270
General and administrative expenses 744,614 438,041
----------- -----------
Total costs and expenses 1,331,423 978,783
----------- -----------
(691,765) (546,498)
ExproFuels operations:
Revenues 318,098 819,723
Costs and expenses (605,743) (1,230,490)
----------- -----------
(287,645) (410,767)
----------- -----------
Loss from operations (979,410) (957,265)
OTHER INCOME (EXPENSE):
Interest income 172,633 47,500
Interest expense (193,617) (207,935)
----------- -----------
(20,984) (160,435)
----------- -----------
Net loss $(1,000,394) $(1,117,700)
=========== ===========
AMOUNTS PER COMMON SHARE:
Net loss $ (0.08) $ (0.20)
=========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE> 6
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, 1997 MAY 31, 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (1,000,394) $(1,117,700)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation, depletion and amortization 169,287 144,270
Equity in loss of ExproFuels, Inc. 287,645 410,767
Changes in operating assets and liabilities:
Receivables (204,017) 33,657
Drilling deposits and advances (2,054) -0-
Prepaid expenses and other -0- 35,800
Accounts payable and accrued expenses 630,198 83,889
------------ -----------
Net cash (used) in operating activities (119,335) (409,317)
INVESTING ACTIVITIES:
Development and purchases of oil and gas properties (9,736,800) (91,862)
Advances to ExproFuels, Inc. (338,303) (769,437)
Purchases of other equipment (92,719) (35,128)
Increase in other assets (354,029) 100,165
------------ -----------
Net cash (used) in investing activities (10,521,851) (796,262)
FINANCING ACTIVITIES:
Collection on note receivable -0- 602,528
Issuance of common stock, net of expenses 13,998,750 447,464
Other financing expenses (78,898) -0-
Proceeds from borrowings 5,718,886 118,511
Payments on borrowings (904,790) (4,778)
------------ -----------
Net cash provided from financing activities 18,733,948 1,163,725
------------ -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 8,092,762 (41,854)
Cash and equivalents at beginning of period 967,838 78,655
------------ -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 9,060,600 $ 36,801
============ ===========
</TABLE>
See notes to financial statements.
6
<PAGE> 7
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
PERIODS ENDED MAY 31, 1997 AND MAY 31, 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 nine month period ended May 31, 1996 have
been reclassified for comparative purposes to the nine month
period ended May 31, 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 and second quarter of fiscal 1997, the Company
completed and closed several offerings 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 February 28, 1997, the Company
received $13,998,750, net of expenses, in exchange for 3,100,000
shares of its common stock.
Through the second quarter of the current year, the Company issued
an additional 699,155 shares of its common stock pursuant to the
terms of its two outstanding convertible debenture notes, thereby
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 May 31, 1997, the Company had outstanding and exercisable
warrants and options to purchase 1,397,906 shares of common stock
at prices ranging from $2.00 to $6.00 per share. The warrants and
options expire at various dates through 2007.
The Financial Accounting Standards Board in February, 1997 issued
Statement No. 128, Earnings Per Share, effective for fiscal years
ending after December 31, 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 NINE MONTHS
------------ -----------
<S> <C> <C>
May 31, 1997 14,759,210 11,961,516
May 31, 1996 5,771,764 5,680,040
</TABLE>
4. DEBT
During the first quarter of fiscal 1997, 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 $957,613 under
this arrangement at May 31, 1997.
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 and through long term
borrowings of $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.
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 TXCO shareholders of record as of
September 13, 1997. The distribution of stock reduced the
Company's ownership
8
<PAGE> 9
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.
On February 28, 1997, Management filed a Form 10-SB with the
Securities and Exchange Commission to register ExproFuels
outstanding common stock under the Securities Act of 1934 and is
currently in the final stage of preparation for the actual
distribution of its share certificates to the shareholders and the
commencement of trading in the stock shortly thereafter.
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. 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. 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 second 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 second 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.
As of the end of the current quarter ended May 31, 1997, the Company had an
outstanding balance of $957,613 under the terms of its line of credit facility
for drilling purposes. Through May 31, 1997, these borrowings together with
existing working capital were expended to fund $158,000 of short term debt
retirement, the loss from operations for the current quarter of $410,684,
working capital advances to the Company's corporate affiliate, ExproFuels, Inc.
of $191,428, capital
9
<PAGE> 10
expenditures of $86,895 for property, equipment and other assets, plus
$2,672,349 for Texas and North Dakota exploration expenditures incurred in
current drilling activities.
As a result of these activities, the Company's current ratio (current assets
divided by current liabilities) weakened for the period, from 11.4 to 1 at
February 28, 1997 to 4.9 to 1 at May 31, 1997.
Management remains confident it will maintain sufficient levels of working
capital to continue the Company's ongoing plans to develop its recently 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, institutional funds and individuals, and is confident of its
ongoing access to 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 third quarter and the year to date
period of fiscal year 1997 over the same period in 1996 is attributable to a
full nine months of increased production from the Paloma Ranch leases due to
the successful drilling activities during 1996 as well as increased gas prices
over the previous year, plus the new production from successful drilling
activities in North Dakota during the current fiscal year. Quarter-to-date
exploration expenses increased to $152,347 due primarily to $62,824 in
expirations of nonproducing leases, $44,962 in lease administration and
geological expenses directly related to the increased level of exploration
activities during the period and $41,115 of dry hole and plugging costs
incurred or expensed during the current quarter. The increase in general and
administrative expenses for the year to date period is due primarily to
additional salary expense for administrative, geological, land and accounting
personnel hired during the period and associated expenses to handle the
Company's expanded exploration and acquisition activities, plus increased
legal, auditing and transfer agent expenses associated with increased
compliance reporting and equity and debt related fund raising activities during
the current fiscal year. The Company's portion of ExproFuels operations amounts
presented for the current quarter and the nine month period ended May 31, 1997
are not comparable to prior year period amounts as they reflect the Company's
current 40% ownership subsequent to the spinoff of ExproFuels, while prior
period amounts represent 100% of such activities. The significant increase in
interest income for the current quarter and the year to date period of fiscal
year 1997 over the same periods in 1996 reflects interest earned on cash
reserves invested in short term bank money market funds during the current
period, while less cash reserves were available for investment during similar
periods of the prior fiscal year.
During the current quarter, the Company drilled and began operating its first
well in the Williston Basin with the drilling of the 100% owned Sherry #1-16 in
Bowman County, North Dakota. Although the well was scheduled to be a horizontal
Red River "B" well, the Company's geologists, using 3-D seismic, positioned the
well so that it could also test the Red River "C" and "D" zones in the vertical
wellbore. A 2.5 hour drillstem test in the Red River "D" zone while drilling
the well indicated a calculated, potential production rate of 535 barrels of
oil per day (bopd). Based upon this test, the Company's engineers decided to
produce oil from the "D" zone prior to drilling horizontally in the "B"
interval. The actual initial production rate upon completing the well as a
flowing vertical producer was 263 bopd. Subsequent to the end of the quarter,
the Company installed a pump on the well to increase its producing capabilities
to an anticipated 300-350 bopd. The Company's engineers plan to drill the Red
River "B" zone horizontally at a later date after the production from the Red
River "D" zone depletes.
After successfully drilling the Sherry #1-16, the Company's geologists used 2-D
seismic to drill the 100% Company owned Martha #1-36, also in Bowman County,
North Dakota. Once again the well was positioned in such a manner to allow one
well to test the Red River "C" and "D" reservoirs in the vertical section prior
to drilling horizontally in the Red River "B". This time, drillstem tests
10
<PAGE> 11
conducted while drilling, indicated that the well should be productive in the
Red River "C" interval. The Company's engineers have completed the well as a
vertical producer initially but intend to drill horizontally in the Red River
"B" at a later date. Subsequent to the close of the quarter, the well was being
swab tested at rates of approximately 125 bopd and 125 bwpd. Final production
rates will not be available until the well is put on pump during the fourth
quarter.
During the current quarter, the Company also participated with Continental
Resources, Inc. ("CRI") with a 66% working interest in another horizontal "B"
well. The James #1-9 was drilled in Bowman County, North Dakota. The well had
good shows while being drilled underbalanced with nitrogen, a new technique
that has only recently been attempted in the Red River "B" interval. The well
was being put on pump after the end of the quarter. Final production rates have
not been released as of this writing by the operator.
During the current quarter, the Company has entered into new Joint Operating
Agreements with CRI and Union Pacific Resources Company ("UPRC") wherein the
Company has contributed approximately 7,800 acres, CRI has contributed 10,000
acres and UPRC has contributed 7,800 acres in an area covering portions of
North Dakota and South Dakota. Under the agreement, CRI will operate, while the
Company will participate with a 30% interest in wells to be drilled in the
combined 25,600 acre area. CRI has proposed that the first well under the
agreement, the Elmer #1-9 in Harding County, South Dakota, be drilled
horizontally in the Red River "B" interval beginning in mid-August under the
Joint Operating Agreement.
During the current quarter, the Company entered into a Joint Operating
Agreement with UPRC covering additional leases on the North Dakota and South
Dakota borders. Under the agreement, UPRC contributed 22,000 acres and the
Company contributed 22,000 acres giving the Company a 50% interest in any wells
drilled on the entire block. UPRC has been designated as operator under the
agreement. UPRC began the first well on the block in mid-July with the drilling
of the Abrahmson #1-33 in Bowman County, North Dakota. It will be drilled
horizontally in the Red River "B" interval.
During the current quarter, the Company entered into an additional Joint
Operating Agreement with CRI covering additional leases in Harding County,
South Dakota. Under the agreement, CRI contributed 4,350 acres and the Company
contributed 4,350 acres giving the Company a 50% interest in any wells drilled
on the entire block. CRI has been designated as operator under the agreement
and has proposed that the first well on the block, the Table Mountain #1-7, be
drilled beginning the last week of August. It will be drilled horizontally in
the Red River "B" interval.
By the end of the current quarter, the Company finalized yet another Joint
Operating Agreement with Eagle Oil & Gas Company ("Eagle") wherein the Company
has contributed approximately 27,000 acres and Eagle has contributed 27,000
acres in Slope and Golden Valley Counties of North Dakota. The Company has a
50% interest in the entire area and has been designated operator for
approximately one-half of the block while Eagle will operate wells drilled in
the remaining half. Management expects to begin drilling on the block during
the first quarter of the next fiscal year.
The Company owns a small interest in several successful Lodgepole wells in the
Stadium Field in Stark County, North Dakota, drilled during the first two
quarters of fiscal 1997. 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 5,100 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. During the
current quarter, the operators of the various wells began attempts to unitize
the field to begin pressure maintenance operations. If successful, the Company
will gain an interest in all wells producing in the field. While attempts to
unitize the field are underway, the North Dakota Industrial Commission has
voted to regulate field production limits at 500 barrels per day per well. Once
unitization is complete, which is anticipated
11
<PAGE> 12
to be during the first quarter of 1998, the production limits will be removed,
allowing overall production from the field to increase significantly.
During the current quarter, the Company also participated in the drilling of
three Lodgepole reef wells in Stark County, North Dakota. The Company had a
0.1% interest in Conoco, Inc.'s Kostelecky #33-2 which was plugged and
abandoned after drilling through the Lodgepole interval. The Company also had a
0.05% interest in Duncan Oil Company's Heart River #2-9 that was also plugged
and abandoned after drilling the Lodgepole. The Company has a 0.11% interest in
the Duncan Oil Company's Dinsdale #1-10. The well was completed in the
Lodgepole formation with an initial production rate of 450 barrels of oil per
day. Although it is close to the Stadium Field wells, pressure data has proven
that it is in a separate Waulsortian mound.
During the quarter, the Company drilled another successful Glen Rose reef well
in Maverick County, Texas. The Paloma #1-106 was completed in the Glen Rose and
tested at 1,645,000 cubic of gas per day and 3.3 barrels of condensate. The
well's absolute open flow was calculated to be 3,800,000 cubic feet of gas per
day. Also during the quarter, the Company began a new 3-D seismic program to
survey over nearly 13,000 additional acres of the Paloma Ranch. The survey was
completed shortly after the end of the quarter. Processing should be completed
by the first week of August at which point the Company's geologists will be
able to begin interpretation of the newly acquired data for wells to be drilled
in the next fiscal year.
At the end of the quarter, the Company began drilling a horizontal Georgetown
well, the Kincaid #1-199, on the Kincaid Ranch in Maverick County, Texas. The
Kincaid Ranch lease is comprised of 17,000 acres contiguous with the 33,000
acre Paloma Ranch lease. The Georgetown is a carbonate formation with low
permeability that appears to contain hydrocarbons under the entire 50,000 acre
block at depths of only 2,500 to 3,500 feet. If management is successful in its
efforts with this well, up to 150 additional wells could be drilled on the
Company's existing acreage. Subsequent to the end of the current quarter, the
well was successfully drilled 3,350 feet horizontally and tested at rates of up
to 400,000 cubic feet of gas per day. Management is cautiously optimistic that
once the well is producing into the pipeline, the producing rate will mirror
the tested rate. If ongoing production verifies the initial tested rate,
additional horizontal wells will be planned for fiscal 1998.
Forward-looking statements in this 10-Q are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that all forward-looking statements involve risks and
uncertainty, including without limitation, the costs of exploring and
developing new oil and natural gas reserves, the price for which such reserves
can be sold, environmental concerns effecting the drilling of oil and natural
gas wells, as well as general market conditions, competition and pricing.
Please refer to TXCO's Securities and Exchange Commission filings, copies of
which are available from the Company without charge, for additional
information.
12
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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
Report on Form 8-K:
A Form 8-K was filed on May 1, 1997 in order to report the
election of Mr. Robert Foree and Mr. Michael Pint to serve as
directors of The Exploration Company effective May 1, 1997.
The appointment of the two outside directors increases the
number of board members to five.
13
<PAGE> 14
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: July 10, 1997
14
<PAGE> 15
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 MAY 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 9,060,600
<SECURITIES> 0
<RECEIVABLES> 286,477
<ALLOWANCES> 9,973
<INVENTORY> 0
<CURRENT-ASSETS> 9,339,158
<PP&E> 13,077,173
<DEPRECIATION> 536,454
<TOTAL-ASSETS> 22,636,560
<CURRENT-LIABILITIES> 1,916,731
<BONDS> 4,025,587
0
0
<COMMON> 147,592
<OTHER-SE> 16,546,650
<TOTAL-LIABILITY-AND-EQUITY> 22,636,560
<SALES> 259,452
<TOTAL-REVENUES> 397,379
<CGS> 183,739
<TOTAL-COSTS> 556,404
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,486
<INCOME-PRETAX> (339,243)
<INCOME-TAX> 0
<INCOME-CONTINUING> (339,243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (339,243)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
</TABLE>
