<PAGE>
UNITED STATES
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, 1998
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 December 22, 1998.
Common Stock $0.01 par value 15,613,516
(Class of Stock) (Number of Shares)
Total number of pages is 10
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
Assets Nov 30, 1998 Aug 31, 1998
- ------ ------------ ------------
Current Assets
Cash ....................................... $ 1,636,049 $ 2,329,236
Accounts receivable-net .................... 1,369,468 861,666
Prepaid expenses ........................... 74,476 17,738
------------ ------------
Total Current Assets ......... 3,079,993 3,208,640
Property and Equipment
Oil and gas properties, net of impairment .. 15,661,315 14,576,057
Other equipment ............................ 236,839 236,839
Less accumulated depreciation, depletion
and amortization ....................... (2,540,247) (2,206,468)
------------ ------------
13,357,907 12,606,428
Other Assets
Deferred financing fees, net of amortization 15,000 18,000
Other assets ............................... 431,564 431,564
------------ ------------
446,564 449,564
------------ ------------
Total Assets ................. $ 16,884,464 $ 16,264,632
============ ============
See notes to financial statements.
PAGE 2
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THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity November 30, 1998 August 31, 1998
- ------------------------------------ ----------------- ---------------
<S> <C>> <C>
Current Liabilities
Accounts payable and accrued expenses $ 1,605,139 $ 845,564
Current portion of long term debt 1,997,914 1,846,383
------------- -------------
Total Current Liabilities 3,603,053 2,691,947
Long-term Liabilities
Long-term debt, net of current portion 2,614,642 2,977,544
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 200,000,000 shares;
issued and outstanding 15,613,516 shares
at November 30, 1998 and at August 31, 1998 156,135 156,135
Additional paid-in capital 40,161,100 40,161,100
Accumulated deficit (29,650,466) (29,722,094)
------------ ------------
Total Stockholders' Equity 10,666,769 10,595,141
------------ ------------
Total Liabilities and Stockholders' Equity $ 16,884,464 $ 16,264,632
============ ============
</TABLE>
See notes to financial statements.
PAGE 3
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THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months
Ended Ended
Nov 30, 1998 Nov 30, 1997
------------ ------------
Revenues:
Oil and gas sales ............................ $ 1,141,093 $ 529,239
Other income ................................. 89,881 39,792
----------- -----------
1,230,974 569,031
Costs and Expenses:
Lease operating expenses ..................... 155,239 199,460
Production taxes ............................. 78,261 10,484
Exploration expenses ......................... 37,723 73,751
Impairment of properties ..................... 50,000 50,000
Depreciation, depletion and amortization ..... 333,863 146,251
General and administrative expenses .......... 349,975 285,906
----------- -----------
Total costs and expenses ............. 1,005,061 765,852
----------- -----------
Income (loss) from operations .................... 225,913 (196,821)
Other Income (Expense):
Interest income .............................. 33,072 70,082
Interest expense ............................. (184,315) (72,509)
Loan fee amortization ........................ (3,000) (9,999)
Loss on currency translation ................. -0- (47,545)
----------- -----------
(154,243) (59,971)
----------- -----------
Net income (loss) ................................ $ 71,670 $ (256,792)
=========== ===========
Amounts Per Common Share:
Basic income (loss) per common share ............ $ 0.005 $ (0.017)
=========== ===========
See notes to financial statements.
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THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
November 30, 1998 November 30, 1997
----------------- -----------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 71,670 $ (256,792)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Impairment of properties 50,000 50,000
Depreciation, depletion and amortization 336,863 156,250
Changes in operating assets and liabilities:
Receivables (507,802) (409,750)
Prepaid expenses and other (56,738) 39,451
Accounts payable and accrued expenses 759,575 1,252,413
------------- ------------
Net cash provided in operating activities 653,568 831,572
Investing Activities:
Development and purchases
of oil and gas properties (1,135,385) (4,211,778)
Purchase of property and equipment -0- (1,277)
Other assets -0- (19,999)
-------------- ------------
Net cash (used) in investing activities (1,135,385) (4,233,054)
Financing Activities:
Issuance of common stock, net of expenses -0- 20,000
Proceeds from debt obligations 529,358 -0-
Payments on debt obligations (740,728) (947,048)
------------- -------------
Net cash (used) in financing activities (211,370) (927,048)
------------- -------------
Decrease in cash and equivalents (693,187) (4,328,530)
Cash and equivalents at beginning of period 2,329,236 6,198,069
------------- ------------
Cash and equivalents at end of period $ 1,636,049 $ 1,869,539
============= ============
</TABLE>
See notes to financial statements
PAGE 5
<PAGE>
THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS FOR
THE PERIODS ENDED NOVEMBER 30, 1998 AND NOVEMBER 30, 1997 (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, 1998, which is incorporated herein by reference.
2. COMMON STOCK AND BASIC INCOME OR LOSS PER SHARE
As of November 30, 1998, the Company had outstanding and exercisable warrants
and options to purchase 2,101,906 shares of common stock at prices ranging from
$2.00 to $6.60 per share. The warrants and options expire at various dates
through September 2008.
Basic income or 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, 1998 15,613,516
November 30, 1997 14,762,593
3. DEBT
During the current quarter, the Company obtained the remaining $500,000
available under its $4,000,000 financing agreement with Range Energy Finance
Corporation (NYSE:RRC) a publicly held energy company. The Company received the
funds on a non-recourse basis, in exchange for a limited term overriding royalty
interest related to specified depths underlying certain of its oil and gas
leases in Maverick County, Texas. The override will terminate upon repayment of
the funds, with interest, from a specified portion of sales proceeds of all
existing and future wells to be drilled on the subject leases.
PAGE 6
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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, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended November 30, 1998, cash reserves of
$2,329,236 at August 31,1998 were increased by cash provided in operating
activities of $653,568 resulting in a total of $2,982,804 in working capital
available for use in meeting the Company's ongoing operational and development
needs. Draws totaling $500,000 in additional working capital were obtained
during the current quarter under the existing Range Energy Finance Corporation
(Range) financing agreement.
During the current quarter portions of this capital were used to fund payments
on current portions of debt and capital leases of $740,728 and interest on debt
of $184,315. Most significantly, $1,135,385 was invested in the development of
the Company's oil and gas properties, including drilling and completion of five
Maverick Basin gas wells on the Company's acreage in south Texas.
As a result of these activities, the Company ended the first quarter of fiscal
1999 with negative working capital of $523,060 and a current ratio of .85 to 1.
This compares to a positive working capital of $516,693 and a current ratio of
1.19 to 1 at August 31, 1998. The Company's working capital position weakened
during the current quarter primarily due to cash outlays for its ongoing
development activities and for payments under the Range limited term overriding
royalty interest obligation. While it's working capital position weakened during
the period, the Company attained quarterly profitability for the first time in
recent history, realizing a net profit for the current quarter of $71,670 and
generating $653,568 in positive cash flow from its operating activities.
The increased revenues from new gas production from the Maverick Basin gas wells
placed on production during the last quarter of fiscal year 1998 and the current
quarter ended November 1998, plus the increased sales capacity from the Maverick
County pipeline expansion continue to significantly improve the Company's
ability to meet its ongoing operating cash expenses and development plans.
Except for statutory, intangible (non-cash) expenses required for compliance
reporting purposes, including impairment, depreciation, depletion and
amortization totaling $383,863, and exploration expenses of $37,723, actual
operating activities for the three month period ended November 30, 1998 resulted
in income from producing operations of $647,499.
Management continues to actively pursue financing arrangements with various
domestic and foreign parties, including banks, pension funds, institutions,
public and private companies and individuals. Based on it's ability to generate
working capital from operations and its fundraising results to date, Management
remains confident it will continue to be successful in obtaining the required
levels of favorably structured capital to fund the development of its extensive
drilling prospects on a timely basis. If Management's efforts to raise
additional debt or equity capital are not successful, or if realized gas and oil
prices for the growing new gas production from the Maverick Basin or existing
Williston Basin oil production is substantially less than expected, the
Company's financial condition and liquidity could be adversely affected.
PAGE 7
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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
The increase by 116% in oil and gas sales for the current quarter of fiscal year
1999 over the same quarter in fiscal year 1998 is attributable to increased
production from the completion of five new Maverick Basin gas wells subsequent
to the prior period. While positive, the increase was significantly offset by
the dramatic drop in realized oil an gas prices subsequent to November 1997.
Additionally, gas sales volumes were significantly enhanced by the completion of
the new gas gathering system addition placed in service during fiscal year 1998.
Depreciation, depletion and amortization increased by $187,612 over the same
three month period of the prior fiscal year. This increase was due primarily to
the increase in depletion caused by increased production levels and to a higher
depletion rate over the same period last year due to revised reserve estimates
required by the lower realized oil an gas prices for the period.
Interest income decreased by $37,010 during the current quarter of fiscal 1999
reflecting lower cash reserve levels while interest expense increased $111,806
for the same period reflecting the addition of the Range financing agreement in
the last quarter of fiscal year 1998 as compared to the similar period of fiscal
year 1998. The increase in general and administrative expenses of $64,069 is due
primarily to staff increases subsequent to February, 1997, as necessitated by
the increase in exploration activity.
During the first quarter of fiscal 1999, the Company finished the drilling
phase, completed and/or commenced marketing gas production from four new wells
located in the Prickly Pear (Glen Rose) Field on the Company's Paloma lease in
the Maverick Basin in South Texas, including the Paloma #2-66, the Paloma #4-51,
the Paloma #1-65 and the Paloma #1-64. These four latest Prickly Pear Field
wells, were the 4th through 7th consecutive new discoveries in the field. They
encountered between 40 and 72 feet of productive Glen Rose reefs and tested at
absolute open flow rates of between 10,000,000 and 121,000,000 cubic feet of gas
per day (cfd). The new wells are currently on production with gross daily
production volumes ranging from 1,000,000 to 4,000,000 cfd per well.
The Company proceeded with its evaluation of the newly acquired 21,600
additional acres contained in two new mineral leases offsetting two sides of its
existing Paloma lease, consistent with Management's strategy of extending the
known limits of its primary producing area. Initial drilling on the 8,800 acre
block located west of the Paloma lease resulted in the completion of the Alkek
#1-232 during October 1998. While the lower Glen Rose reef interval contained
water, the well was completed in the overlying Georgetown interval and was
placed on production in November 1998. Management continues to evaluate the
well's production profile and ongoing economic viability.
Also during the quarter, the Company's new 50% joint venture partners in the
Company's existing 17,000 acre Kincaid lease commenced field work on the new 27
square mile 3-D seismic acquisition program. Management remains confident that
its new partner's investment in the 3-D seismic study will identify significant
additional Glen Rose gas-bearing patch reef drilling prospects for future
development.
PAGE 8
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In December 1998, the Company announced the completion of the Paloma "E" #2-52,
its eighth consecutive new Prickly Pear (Glen Rose) Field gas well. The well
encountered 58 feet of gas-productive reef and tested at the absolute open flow
rate of 10,750,000 cfd, confirming another excellent producer. Management
anticipates the Paloma "E" # 2-52 will have an initial production rate of 1,000
mcfd to 2,000 mcfd.
Management expects that revenues from all of the new gas wells will have a
significant ongoing positive impact reflected in the operating results for the
second quarter ended February 1999. Pending gas and oil price stability,
operating results should reflect a continuing positive trend in increased net
revenues and positive cash flows from operations, while allowing the Company to
extend its ongoing profitability through the balance of fiscal year 1999 and
beyond.
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
None
PAGE 9
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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: December 23, 1998
PAGE 10
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<CIK> 0000313395
<NAME> THE EXPLORATION COMPANY
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<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
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<CASH> 1636049
<SECURITIES> 0
<RECEIVABLES> 1379441
<ALLOWANCES> 9973
<INVENTORY> 0
<CURRENT-ASSETS> 3079993
<PP&E> 15898154
<DEPRECIATION> 2540247
<TOTAL-ASSETS> 16884464
<CURRENT-LIABILITIES> 3603053
<BONDS> 2614642
0
0
<COMMON> 156135
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