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, 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 January 9, 1998.
Common Stock $0.01 par value 15,613,516
(Class of Stock) (Number of Shares)
Total number of pages is 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS November 30, 1997 August 31, 1997
- ------ ----------------- ---------------
<S> <C> <C>
Current Assets
Cash $ 1,869,539 $ 6,198,069
Accounts receivable-net 1,058,760 362,426
Prepaid expenses 9,633 49,084
------------ -------------
Total Current Assets 2,937,932 6,609,579
Property and Equipment
Oil and gas properties, net of impairment 18,796,884 14,991,690
Other equipment 195,827 194,550
Less accumulated depreciation, depletion
and amortization (829,658) (754,658)
------------ ------------
18,163,053 14,431,582
Other Assets
Net assets of ExproFuels, Inc -0- -0-
Deferred financing fees, net of amortization 170,000 180,000
Other assets 450,314 431,565
620,314 611,565
------------ ------------
Total Assets $ 21,721,299 $ 21,652,726
========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity November 30, 1997 August 31, 1997
- ------------------------------------ ----------------- ---------------
<S> <C> <C>
Current Liabilities
Accounts payable and accrued expenses $ 3,095,974 $ 1,840,550
Accrued payroll and taxes 43,495 46,406
Current portion of long-term debt 1,461 944,013
Current portion of capital lease obligations 17,962 17,962
------------- --------------
Total Current Liabilities 3,158,792 2,848,931
Long Term Liabilities
Long-term debt, net of current portion 4,000,000 4,000,000
Long-term capital lease obligations, net of current portion 28,529 33,025
-------------- --------------
Total Long-term Liabilities 4,028,529 4,033,025
Stockholders' Equity
Common stock, par value $.01 per share; authorized 200,000,000 shares;
issued and outstanding 14,769,198 shares at November 30, 1997
and 14,759,198 shares at August 31, 1997 147,692 147,592
Additional paid-in capital 35,947,954 35,928,054
Accumulated deficit (21,561,668) (21,304,876)
------------ ------------
Total Stockholders' Equity 14,533,978 14,770,770
------------ ------------
Total Liabilities and Stockholders' Equity $ 21,721,299 $ 21,652,726
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
November 30, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 529,239 $ 134,919
Other Income 39,792 47,738
--------- ---------
569,031 182,657
Costs and Expenses:
Lease operating expenses 199,460 9,523
Production taxes 10,484 16,093
Exploration expenses 73,751 170,044
Impairment of properties 50,000 -0-
Depreciation, depletion and amortization 156,250 45,300
General and administrative expenses 285,906 145,428
--------- ---------
Total costs and expenses 775,851 386,388
--------- ---------
(206,820) (203,731)
Net loss from ExproFuels equity ownership -0- (84,220)
---------- -----------
Loss from operations (206,820) (287,951)
Other Income (Expense):
Interest income 70,082 1,493
Interest expense (72,509) (53,636)
Loss on currency translation (47,545) -0-
--------- ----------
(49,972) (52,143)
--------- ----------
Net loss $ (256,792) $ (340,094)
========= =========
Amounts Per Common Share:
[OBJECT OMITTED]
Net loss per common share $ (0.02) $ (0.03)
========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
November 30, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
Operating Activities:
Net Loss $ (256,792) $ (340,094)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Impairment of properties 50,000 -0-
Depreciation, depletion and amortization 156,250 45,300
ExproFuels operations -0- 84,220
Changes in operating assets and liabilities:
Receivables (409,750) (99,850)
Prepaid expenses and other 39,451 -0-
Accounts payable and accrued expenses 1,245,476 66,169
----------- -----------
Net cash provided (used) in operating activities 831,572 (244,255)
Investing Activities:
Development of oil and gas properties (4,211,778) (206,997)
Purchase of property and equipment (1,277) (64,038)
Other assets (19,999) (74,833)
------------- -----------
Net cash (used) in investing activities (4,233,054) (345,868)
Financing Activities:
Issuance of common stock, net of expenses 20,000 498,750
Other financing expenses -0- (78,750)
Proceeds from long-term debt obligations -0- 64,036
Payments on long-term obligations (947,048) (201,983)
----------- ----------
Net cash provided (used) in financing activities (927,048) 282,053
------------ ----------
Decrease in cash and equivalents (4,328,530) (308,070)
Cash and equivalents at beginning of period 6,198,069 967,838
----------- ----------
Cash and equivalents at end of period $ 1,869,539 $ 659,768
=========== ==========
</TABLE>
See notes to financial statements.
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS FOR
THE PERIODS ENDED NOVEMBER 30, 1997 AND NOVEMBER 30, 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. The accounting policies
followed by the Company are set forth in Note A to the audited financial
statements contained in the Company's annual report on Form 10-K.
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, 1997, which is incorporated herein by
reference.
2. Common Stock and Loss Per Share
As of November 30, 1997, the Company had
outstanding and exercisable warrants and options to purchase 1,420,406 shares of
common stock at prices ranging from $2.00 to $6.60 per share. The warrants and
options expire at various dates through May 2007.
The Financial Accounting Standards Board in
February 1997 issued Statement No. 128, Earnings Per Share, effective for
interim or annual periods 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
<S> <C>
November 30, 1997 14,762,593
November 30, 1996 9,845,603
</TABLE>
3. Long Term Debt and Subsequent Events
At August 31, 1997, the Company had an outstanding note payable balance of
$940,481 under the terms of a line of credit with Luzerner Kantonalbank, Luzern,
Switzerland. During November 1997 the Company retired the entire balance of the
note payable, incurring a $47,545 currency translation loss.
At the end of the current quarter, the Company had an outstanding balance of
$4,000,000 under the terms of its two outstanding convertible debentures. On
January 1, 1998, the Company elected to convert the entire $4,000,000
outstanding debenture balance, plus accrued interest of $221,590 into 844,318
shares of its common stock at the stated conversion rate of $5 per share as
provided for under the terms of the debenture.
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, 1997.
Liquidity and Capital Resources
The Company ended the first quarter of fiscal 1998 with negative working capital
of $220,860 and a current ration of .93 to 1, compared to negative working
capital of $925,572 and a current ration of .47 to 1 a year ago. While still
negative, the improvement in working capital is directly related to the
Company's success in raising equity and debt capital during 1997.
During the current quarter, the beginning cash reserve of $6,198,069, plus
working capital provided from current operating activities of $831,572 were used
to fund payments on current portions of debt and capital leases of $947,048,
interest on debt of $72,509 and related currency translations losses of $47,545.
Included in the debt repayments was $940,481 related to the prepayment in full
of the Company's line of credit with Luzerner Kantonalbank. Most significantly,
$4,211,778 was invested in the development of the Company's oil and gas
properties, including the drilling of three Williston Basin wells in North
Dakota, one Maverick Basin well in Texas, the acquisition of $466,440 in 3-D
seismic data over certain of the Company's North Dakota properties and $83,578
in 3-D seismic located in Texas. Additionally, expenditures of $266,375 were
incurred in completing the new Maverick County gas gathering system that became
operational in late October.
In order to carry out management's plans to continue the development of the
Company's 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 continue to be
necessary for the Company to raise additional equity or debt capital with terms
consistent with its improving internal cash generation capabilities.
Subsequent to the end of the first quarter, the Company significantly improved
its debt structure by the conversion of its entire long-term debt of $4,000,000
in outstanding debentures, with a 6% interest rate, to equity. Effective January
1, 1998, under terms of the debentures, the Company exercised its options to
convert the debentures, plus accrued interest of $221,590 into 844,318 shares of
common stock at the conversion price of $5.00 per share. The reduction of
$200,000 in annual interest charges plus the elimination of long term debt will
assist the Company in its pursuit of additional working capital form new equity
or debt sources. Management is actively pursuing negotiations with various
domestic and foreign parties, including banks, pension funds, institutions,
companies 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 and continue the development of its extensive drilling
prospects 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.
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.
Results of Operations
Oil and Gas Division
The 292% increase in oil and gas sales for the first quarter of fiscal year 1998
over the same period in 1997 is attributable to increased production from the
completion of two new Maverick Basin gas wells and 8 new Williston Basin oil
wells subsequent to November, 1996 as well as increased gas prices for the
current year. The increase in year-to-date lease operating expenses to $199,460
is due primarily to the completion of 8 new oil wells subsequent to November
1996 in the Williston Basin, with high, production associated, water disposal
costs. The decrease in exploration expenses of $97,000 is due to the write off
of two non-producing wells in the prior period, while the current quarter
contained no dry hole charges. During the current quarter, the Company
established a $50,000 reserve for impairment of non-producing leaseholds due to
the significant increase in new leases purchased during the past year.
Depreciation, depletion and amortization increased by $110,950 primarily due to
increases in oil an gas production and additional investments in equipment and
other oil and gas related assets subsequent to November 1996.
Interest expense for the current quarter is directly attributable to the
increase in long-term debt to $4,000,000 subsequent to November 1996, while
interest income increased by over $68,000 due to the increase in working capital
subsequent to the end of the first quarter of fiscal 1997. The increase in
general and administrative expenses is due primarily to staff increases
subsequent to November 1996, and related benefits, as required by increased
exploration activity, plus incremental legal and accounting expenses related to
increased compliance reporting requirements associated with the spin-off of the
Company's former subsidiary, ExproFuels, Inc. The decrease in losses from
ExproFuels from $84,220 to $0 reflects the complete write-off of the Company's
investment in ExproFuels prior to the beginning of the current quarter.
During the quarter, the Company completed six miles of 6 inch pipeline across
its Maverick County, Texas Paloma lease through its investment in Paloma
Pipeline, L.P. The Company owns a 62.5% percent interest in the pipeline that
will gather the Company's gas and transport gas for offsetting operators to the
Aquilla Gas Pipeline's system. The Company had previously experienced some
curtailment in its gas production because of the inability of the existing
pipelines to carry all the Company's gas. Upon completion of the line, the
Company's gross production increased from 2,400,000 cubic feet of gas per day to
3,800,000 cubic feet per day. With continued exploration and development, the
Company expects to substantially increase these volumes.
During the first quarter, the Company drilled the Paloma #2-83 on its 50,000
acres lease block in Maverick County, Texas. The well was completed in the Glen
Rose formation and had an absolute open flow potential of 63,000,000 cubic feet
of gas per day after completion. The well's production is not reflected in the
first quarter as it was not tied-into a pipeline until December, 1997. Its
initial production rate of 2,000,000 cubic feet per day was increased to
3,000,000 after 30 days production. The Company owns a 62.5% working interest in
the well.
The Company participated in Continental Resources, Inc.'s Table Mountain #1-7
that was drilled horizontally in the Red River "B" in Harding County, South
Dakota. It is the last well that the Company intends to drill on its Williston
Basin leases without the utilization of seismic data. The Company owns a 43%
working interest in the well which was producing at a rates of 60-75 barrels of
oil per day and 350 barrels of water per day shortly after the end of the
quarter.
Additionally, the Company drilled the Marty #1-17 horizontally in the Red River
"B" in Bowman County, North Dakota. The well was drilled horizontally 3,350 feet
using 3-D seismic in an area that was partially depleted by an older vertical
well. The Marty #1-17 was producing 108-120 barrels of oil and 200 barrels of
water subsequent to the end of the quarter.
The Company also began drilling its Dottie #1-23 in Golden Valley, North Dakota.
The well was drilled 1,750 feet horizontally in the Red River "B" formation
using several lines of 2-D seismic for control. The Company has not begun
completion operations but encountered encouraging shows of oil while drilling
the well.
The Company also made farmout agreements with Forrest Oil and Gresham Oil
Company involving some of its leases in Stark County, North Dakota. Although the
first well drilled was a dry hole, as of this writing, Forrest is reportedly
completing a Fryberg well offsetting the Company's block and has permitted
another well on the Company's farmout acres.
<PAGE>
4
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any matters of litigation incidental to
its business of a significant nature except for the two lawsuits filed
in July, 1997 between the Company's former subsidiary, ExproFuels, Inc.
versus CNG International, American Engineering, Inc.,(AEI) and American
Technical Institute (ATI), one being filed in federal court in San
Antonio, Texas by ExproFuels and the other by ATI and AEI in state
court in Memphis, Tennessee. To date, both suits remain in preliminary
stages, with no scheduling orders having been entered or trial dates
set. While the Company and its counsel remain optimistic they will
ultimately prevail in the matter, and remain confident that any
unfavorable outcome is extremely unlikely, it is difficult to predict
with any certainty the likelihood of an unfavorable outcome of such
litigation as of the date of this writing.
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 10-K:
A Form 8-K was filed on January 14, 1998 in order to report the
conversion of the Company's outstanding convertible debentures in the
amount of $4,000,000, plus accrued interest of $221,590 into 844,318
shares of the Company's common stock at a conversion price of $5.00 per
share effective January 1, 1998.
The cumulative effect of the transaction was that as of January 1, 1998
, the Company had issued an additional 844,318 shares of its common
stock thereby increasing its issued and outstanding shares total to
15,613,516. The Company's unaudited balance sheet net equity was
increased by $4,221,590.
<PAGE>
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, 1998
<PAGE>
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
NOVEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<CIK> 0000313395
<NAME> THE EXPLORATION COMPANY
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 1,869,539
<SECURITIES> 0
<RECEIVABLES> 1,068,733
<ALLOWANCES> 9,973
<INVENTORY> 0
<CURRENT-ASSETS> 2,937,932
<PP&E> 18,992,711
<DEPRECIATION> 829,658
<TOTAL-ASSETS> 21,721,299
<CURRENT-LIABILITIES> 3,158,792
<BONDS> 4,000,000
0
0
<COMMON> 147,692
<OTHER-SE> 14,386,286
<TOTAL-LIABILITY-AND-EQUITY> 21,721,299
<SALES> 529,239
<TOTAL-REVENUES> 569,031
<CGS> 283,695
<TOTAL-COSTS> 775,851
<OTHER-EXPENSES> 22,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,509
<INCOME-PRETAX> (256,792)
<INCOME-TAX> 0
<INCOME-CONTINUING> (256,792)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (256,792)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
</TABLE>
