<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, 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 January 10, 1997.
Common Stock $0.01 par value 9,900,044
(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
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS NOVEMBER 30, 1996 AUGUST 31, 1996
- ------ ----------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 659,768 $ 967,838
Accounts receivable-net 171,437 71,587
----------- -----------
Total Current Assets 831,205 1,039,425
PROPERTY & EQUIPMENT
Oil & gas properties-net of impairment 7,208,233 7,022,236
Mineral properties-net of impairment 306,564 306,564
Other equipment 143,491 79,453
Less accumulated depreciation, depletion
and amortization (485,431) (461,131)
----------- -----------
7,172,857 6,947,122
OTHER ASSETS
Net assets of ExproFuels, Inc. 279,051 363,271
Other assets 158,099 83,616
----------- -----------
437,150 446,887
----------- -----------
Total Assets $ 8,441,212 $ 8,433,434
=========== ===========
</TABLE>
See notes to financial statements.
2
<PAGE> 3
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY NOVEMBER 30, 1996 AUGUST 31, 1996
- ------------------------------------ ----------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 344,218 $ 276,242
Accrued payroll and taxes 22,499 24,307
Current portion of long-term debt 1,362,500 772,500
Current portion of capital lease obligations 27,560 -0-
------------- ------------
Total Current Liabilities 1,756,777 1,073,049
LONG TERM LIABILITIES
Long-term debt, net of current portion 468,712 1,689,697
Long-term capital lease obligations, net of current portion 31,884 -0-
------------- ------------
Total Long-term Liabilities 500,596 1,689,697
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized
200,000,000 shares; issued and outstanding
9,900,044 shares at November 30, 1996
and 9,426,650 shares at August 31, 1996 99,000 94,266
Additional paid-in capital 24,331,034 23,482,432
Accumulated deficit (18,246,195) (17,906,010)
------------- ------------
Total Stockholders' Equity 6,183,839 5,670,688
------------- ------------
Total Liabilities and Stockholders' Equity $ 8,441,212 $ 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
NOVEMBER 30, 1996 NOVEMBER 30, 1995
----------------- -----------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 134,919 $ 82,007
Other Income 47,738 4,874
------------ -----------
182,657 86,881
COSTS AND EXPENSES:
Lease operating expenses 9,523 5,287
Production and taxes 16,093 10,998
Exploration expenses 170,044 6,989
Depreciation, depletion and amortization 45,300 48,090
General and administrative expenses 145,428 120,819
------------ -----------
Total costs and expenses 386,388 192,183
------------ -----------
(203,731) (105,302)
ExproFuels operations:
Revenues 105,953 203,839
Costs and expenses (190,173) (374,644)
------------ -----------
(84,220) (170,805)
------------ -----------
Loss from operations (287,951) (276,107)
OTHER INCOME (EXPENSE):
Interest income 1,493 29
Interest expense (53,636) (69,102)
------------ -----------
(52,143) (69,073)
------------ -----------
Net loss $ (340,094) $ (345,180)
============ ===========
AMOUNTS PER COMMON SHARE:
Net loss $ (0.03) $ (0.06)
============ ===========
</TABLE>
See notes to financial statements.
4
<PAGE> 5
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
NOVEMBER 30, 1996 NOVEMBER 30, 1995
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (340,094) $ (345,180)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation, depletion and amortization 45,300 48,090
ExproFuels operations 84,220 170,805
Changes in operating assets and liabilities:
Receivables (99,850) (26,403)
Prepaid expenses and other -0- 13,468
Accounts payable and accrued expenses 66,169 47,874
----------- -----------
Net cash used in operating activities (244,255) (91,346)
INVESTING ACTIVITIES:
Development of oil and gas properties (206,997) (37,743)
Investments in and advances to venture -0- (181,193)
Purchase of property & equipment (64,038) (17,028)
Other assets (74,833) 10,197
----------- -----------
Net cash used in investing activities (345,868) (225,767)
FINANCING ACTIVITIES:
Issuance of common stock, net of expenses 498,750 177,655
Other financing expenses (78,750) -0-
Proceeds from long-term debt obligations 64,036 163,727
Payments on long-term obligations (201,983) (10,575)
----------- -----------
Net cash provided from financing activities 282,053 330,807
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (308,070) 13,694
Cash and equivalents at beginning of period 967,838 78,655
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 659,768 $ 92,349
=========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE> 6
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS FOR
THE PERIODS ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995 (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 fiscal year 1996 have been reclassified for
comparative purposes to fiscal 1997. The financial position and
results of operations of ExproFuels, Inc., previously consolidated
in the fiscal year ended August 31, 1995, 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 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.
3. COMMON STOCK AND LOSS PER SHARE
During the first quarter, the Company completed and closed its
ongoing 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
6
<PAGE> 7
shares to non-U.S. persons as defined in Regulation S. During the
three month period ended November 30, 1996, the Company received
$498,750, net of expenses, in exchange for 300,00 shares of its
common stock.
As of November 30, 1996, the Company had outstanding and
exercisable warrants and options to purchase 1,765,406 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.
Loss per share is computed based on the weighted average number of
common shares outstanding during the periods presented as follows:
THREE MONTHS
------------
November 30, 1996 9,845,603
November 30, 1995 5,549,300
4. LONG TERM DEBT
At the end of fiscal 1996, the Company had an outstanding balance
of $1,764,697 under the terms of a master convertible note payable
and indenture of trust agreement dated August 2, 1994. The terms
of the note include interest at 11.50%, payable semi-annually and a
conversion option at $2.50 per share of common stock. Through
September 13, 1996, a total of $433,484 of the note payable was
converted into 173,394 shares of the Company's common stock, at the
stated option price. The receiving shareholders qualify to
participate in the upcoming distribution of ExproFuels common stock
to TXCO shareholders of record as of September 13, 1996.
During September, the Company retired $197,500 of notes payable to
an individual, including accrued interest.
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 credit
is through a major Swiss bank, with interest at the banks market
rate, currently at 6.50%, is available in $250,000 increments as
wells are drilled and completed.
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. Shareholders of record
on September 13, 1996 are to receive 1 share of ExproFuels, stock
for every 5 shares of TXCO common stock then owned. The direct
distribution of stock reduced the Company's ownership in
ExproFuels, Inc. to 40%. The Company is proceeding with plans to
prepare an Information Statement concerning ExproFuels to be given
to shareholders prior to the distribution of the stock. Management
intends to file a Form 10 with the Securities and Exchange
Commission to register ExproFuels outstanding common stock under
the Securities Exchange Act of 1934 prior to the 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 as of that date.
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
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 its 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.
The original offering, commencing in September, 1995, was targeted to raise up
to $3,000,000 in capital with the marketing assistance of Comstar BioCapital,
Inc., and Sorbus Asset Strategies, S. A., both being foreign entities. Since
its inception, the offering has 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 current quarter, this capital was used to fund the cash loss from
operations of $244,255 and obtain the required permits and licenses for
scheduled exploration projects during the balance of the fiscal year on newly
acquired oil and gas properties in North Dakota and Montana. Additionally,
long-term capital financing was obtained to purchase approximately $64,000 of
new computer equipment for use in upgrading corporate accounting and
administration, as well as in-house interpretation and analysis of geologic and
seismic data.
While Management was successful in obtaining new equity capital and operating
funds during the current quarter, the timing of actual funding was such that
Company's current ratio (current assets divided by current liabilities)
deteriorated for the period, from .96 to 1 at August 31, 1996 to .47 to 1 at
November 30, 1996. Management is very confident that it will be able to force
the conversion of the remaining master convertible note payable outstanding
balance of $1,331,213 to common stock. The balance of the debt would be
exchanged for equity at $3.00 per common share of stock in the event the
closing bid price of the Company's common stock closed at $6.00 per share for
fifteen consecutive days. As of January 10, 1997, the stock had been trading
over $6.00 per share for three days. In the event the closing bid price of the
common stock averages $7.00 per share for a period of forty-five days, the
Company may also force the conversion of its $500,000 convertible note payable
for equity at $3.00 per common share of stock. The conversion of these
outstanding notes payable to equity would significantly improve the Company's
liquidity and eliminate cash requirements for interest payments of
approximately $175,000 over the remaining term of the notes.
In order to carry out management's plans to develop its newly acquired
Williston Basin leaseholds in North 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, 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 10, 1997, additional
operating funds have been raised through short term borrowings of $545,000 from
various individuals. Management is actively pursuing negotiations with various
foreign parties, including banks, pensions funds and individuals, and is
confident it will be successful in obtaining the required levels of favorably
structured equity capital and debt to fund ongoing normal operations, continue
the development of its extensive drilling prospects and meet the Company's debt
obligations on a timely basis. If Management's efforts to raise additional
capital are not successful, the Company's financial condition and liquidity
would be materially adversely affected.
8
<PAGE> 9
RESULTS OF OPERATIONS
OIL AND GAS DIVISION
The increase in oil and gas sales for the first quarter 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 $170,044 reflects expenses incurred on the
Gorman #2-4 and the Gorman #1-87 which were written-off subsequent to the end
of fiscal 1996. The decrease in interest expense for the current quarter is
directly attributable to the decrease in long- term debt from $2,462,197 in
1995 to $1,831,212 at quarter end. The increase in general and administrative
expenses is due primarily to the additional support personnel added to handle
the Company's acquisition of an interest in 160,000 net acres in the Williston
Basin. The decrease in losses from ExproFuels from $170,805 to $84,220
reflects the reduction in the Company's interest from 100% to 40% due the
distribution of 60% of the wholly-owned subsidiary to shareholders in September
1996.
The Paloma #2-112, which was drilled during the quarter, contained over 130
feet of porosity-bearing reef but only the top 10 feet appears to contain gas.
The Company is currently completing the well and expects that it will be
productive. Although the Gorman #2-4 was drilled nearly a quarter of a mile
from the nearest productive well, its 10 feet of sand were depleted by the
offset wells. The well was successful, however, in proving that the Escondido
sands continue to be prospective on the Gorman lease leaving the Company the
option to drill additional wells.
Subsequent to year-end, the Company began drilling 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 is
projected to be drilled approximately 4500 feet horizontally in the Red River
"B" zone. Additional activity continues around the Company's Williston Basin
acreage. The Company has a small interest in a well that TransTexas Gas
Corporation drilled offsetting TransTexas' Lodgepole discovery at Dickinson,
North Dakota. The discovery well had 140 feet of productive reef and produced
at a rate of 6,300 barrels of oil per day. The offset well, in which we have a
.25% interest, reportedly is high to the first well and also has 140 feet of
productive reef. Production rates have not been reported at this time but are
anticipated to be comparable to the discovery well. Additionally, the Company
has agreed to participate in another Lodgepole well in the immediate area to be
drilled by Duncan Oil.
9
<PAGE> 10
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 September 17, 1996, in order to report
the completion of several transactions including: 1) the
exchange of 2,543,015 shares of common stock issued pursuant
to Regulation S for a 25% interest in 131,860 acres of oil and
gas leases, 2) the sale of 1,300,000 shares of common stock
issued pursuant to Regulation S for $2,275,000 cash, 3) the
issuance of 173,394 shares of common stock pursuant to the
terms of an outstanding convertible debenture reducing the
Company's debt under the debenture by $433,484 and 4) the
decision by the Board of Directors to the spin-off of the
Company's ExproFuels Subsidiary, reducing its ownership to
approximately 40%.
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/ Roberto R. Thomae
------------------------------------
Roberto R. Thomae,
Chief Financial Officer
(Signing on behalf of the Registrant
and as chief accounting officer)
Date: January 14, 1997
11
<PAGE> 12
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
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, 1996 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> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 659,768
<SECURITIES> 0
<RECEIVABLES> 181,410
<ALLOWANCES> 9,973
<INVENTORY> 0
<CURRENT-ASSETS> 831,205
<PP&E> 7,658,288
<DEPRECIATION> 485,431
<TOTAL-ASSETS> 8,441,212
<CURRENT-LIABILITIES> 1,756,777
<BONDS> 500,596
0
0
<COMMON> 99,000
<OTHER-SE> 6,084,839
<TOTAL-LIABILITY-AND-EQUITY> 8,441,212
<SALES> 182,657
<TOTAL-REVENUES> 182,657
<CGS> 195,660
<TOTAL-COSTS> 386,388
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,636
<INCOME-PRETAX> (340,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> (340,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (340,094)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> 0
</TABLE>
