<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, 1999
THE EXPLORATION COMPANY OF DELAWARE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 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, 2000.
Common Stock $0.01 par value 15,938,516
(Class of Stock) (Number of Shares)
Total number of pages is 10
Page 1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE EXPLORATION COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Assets November 30, 1999 August 31, 1999
- ------ ----------------- ---------------
<S> <C> <C>
Current Assets
Cash $ 2,951,691 $ 968,516
Accounts receivable-net 2,000,077 2,253,349
Prepaid expenses 141,176 256,334
------------- -------------
Total Current Assets 5,092,944 3,478,199
Property and Equipment
Oil and gas properties, net of impairment 17,736,061 17,892,488
Other equipment 268,883 268,325
Less accumulated depreciation, depletion
and amortization (5,035,892) (4,532,761)
------------- -------------
12,969,052 13,628,052
Other Assets
Deferred financing fees, net of amortization 13,000 16,000
Other assets 356,564 431,564
------------- -------------
369,564 447,564
------------- -------------
Total Assets $ 18,431,560 $ 17,553,815
============= =============
</TABLE>
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, 1999 August 31, 1999
- ------------------------------------ ----------------- ---------------
<S> <C> <C>
Current Liabilities
Accounts payable and accrued expenses $ 3,401,107 $ 2,438,726
Current portion of long term debt 1,824,677 2,565,067
------------- -------------
Total Current Liabilities 5,225,784 5,003,793
Long-term Liabilities
Long-term debt, net of current portion 242,470 529,742
Stockholders' Equity
Preferred stock, par value $.01 per share,
authorized 10,000,000, none issued
Common stock, par value $.01 per share;
authorized 50,000,000 shares; issued
and outstanding 15,938,516 shares at
November 30, 1999 and at August 31, 1999 159,385 159,385
Additional paid-in capital 40,651,444 40,651,444
Accumulated deficit (27,847,523) (28,790,549)
------------ ------------
Total Stockholders' Equity 12,963,306 12,020,280
------------ ------------
Total Liabilities and Stockholders' Equity $ 18,431,560 $ 17,553,815
============ ============
</TABLE>
See notes to financial statements.
Page 3
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THE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
November 30, 1999 November 30, 1998
----------------- -----------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 2,799,677 $ 1,141,093
Other income 195,265 89,881
------------ ------------
2,994,942 1,230,974
Costs and Expenses:
Lease operating expenses 373,597 155,239
Production taxes 208,001 78,261
Exploration expenses 246,895 37,723
Impairment of properties 240,000 50,000
Depreciation, depletion and amortization 503,131 333,863
General and administrative expenses 390,286 349,975
------------- ------------
Total costs and expenses 1,961,910 1,005,061
------------- ------------
Income from operations 1,033,032 225,913
Other Income (Expense):
Interest income 19,404 33,072
Interest expense (106,410) (184,315)
Loan fee amortization (3,000) (3,000)
------------- -------------
(90,006) (154,243)
------------- -------------
Net income $ 943,026 $ 71,670
============= ============
Amounts Per Common Share:
Basic and diluted income per common share $ 0.06 $ 0.005
============= ============
</TABLE>
See notes to financial statements.
Page 4
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THE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
November 30, 1999 November 30, 1998
----------------- -----------------
<S> <C> <C>
Operating Activities:
Net income $ 943,026 $ 71,670
Adjustments to reconcile net loss to net cash
provided by operating activities:
Impairment of properties 240,000 50,000
Depreciation, depletion and amortization 506,131 336,863
Changes in operating assets and liabilities:
Receivables 253,272 (507,802)
Prepaid expenses and other 115,158 (56,738)
Accounts payable and accrued expenses 962,381 759,575
------------- ------------
Net cash provided in operating activities 3,019,968 653,568
Investing Activities:
Development and purchases
of oil and gas properties (83,573) (1,135,385)
Purchase of property and equipment (558) -0-
Other assets 75,000 -0-
------------- ------------
Net cash (used) in investing activities (9,131) (1,135,385)
Financing Activities:
Issuance of common stock, net of expenses -0- -0-
Proceeds from debt obligations 20,131 529,358
Payments on debt obligations (1,047,793) (740,728)
Net cash (used) in financing activities (1,027,662) (211,370)
------------- -------------
Increase (decrease) in cash and equivalents 1,983,175 (693,187)
Cash and equivalents at beginning of period 968,516 2,329,236
------------- ------------
Cash and equivalents at end of period $ 2,951,691 $ 1,636,049
============= ============
</TABLE>
See notes to financial statements
Page 5
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THE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
PERIODS ENDED NOVEMBER 30, 1999 AND NOVEMBER 30, 1998 (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, 1999, which is incorporated herein by
reference.
2. COMMON STOCK AND BASIC INCOME OR LOSS PER SHARE
As of November 30, 1999, the Company had outstanding and exercisable warrants
and options to purchase 1,707,300 shares of common stock at prices ranging from
$0.98 to $6.60 per share. The warrants and options expire at various dates
through September 2008. Basic income per share is computed based on the weighted
average number of common shares outstanding during the periods presented as
follows:
Three Months
------------
November 30, 1999 15,938,516
November 30, 1998 15,613,516
Diluted income per share is computed in accordance with FASB 128, and resulted
in a less than $.002 change to basic earnings per share for each period
presented.
3. DEBT
At August 31, 1999 the Company had an outstanding balance of $2,279,669 under
its existing financing agreement with Range Energy Finance Corporation
(NYSE:RRC) a publicly held energy company. The Company received the financing 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 completion of repayment
of the debt, which is repayable with interest from a specified portion of sales
proceeds of all existing and future wells to be drilled on the subject leases.
As of November 30, 1999, this indebtedness had been reduced to approximately
$1,362,000.
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, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash reserves of $968,516 at August 31,1999 were increased by cash provided from
operating activities of $3,019,968 resulting in a total of $3,988,484 in working
capital available for use in meeting the Company's ongoing operational and
development needs during the three month period ended November 30, 1999
During the current quarter portions of this capital were used to fund payments
on current portions of debt and capital leases of $1,047,793 and interest on
debt of $106,410. The Company applied $275,254 to fund the expansion and ongoing
development of its core oil and gas producing properties, including drilling and
completion costs of $138,960 for wells drilled or completed during the period.
Also included were $106,476 in 3-D seismic acquisition and reprocessing costs
and $20,626 in lease payments expanding the Company's growing Maverick Basin
lease block. These expenditures were partially offset by $191,681 in payments
received from TXCO's new exploration partners during the current period pursuant
to terms of existing joint operating agreements.
As a result of these activities, the Company's negative working capital position
improved from $1,525,594 at August 31, 1999 to $132,840 at November 30, 1999.
The Company's current ratio also improved during the current period, reaching
.97 to 1 compared to a current ratio of .70 to 1 at August 31, 1999. The
Company's working capital position improved during the current quarter primarily
due to sustained gas production levels and the continued strength in commodity
prices realized for the Company's gas and oil production. The Company has
attained and increased its quarterly profitability for the last five consecutive
quarterly periods, realizing a record net profit for the current quarter of
$943,026 while generating $3,019,968 in positive cash flow from its operating
activities.
The increased revenues from new gas production from Maverick Basin gas wells
placed on production during fiscal year 1999, combined with improved prices for
its gas and oil production, continue to significantly enhance the Company's
ability to meet ongoing operating cash obligations and development plans.
Management continues to actively pursue financing arrangements with various
domestic and foreign based sources of debt and equity financing that could
provide favorably structured funding and which would serve to complement the
Company's internal capacity to generate working capital from operations.
Management remains confident that financial resources will remain available,
enabling the Company to continue the rapid development of its oil and gas
properties, and to continue to meet its normal debt service obligations. 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 are
substantially less than expected, the Company's financial condition and
liquidity could be adversely affected. Should this occur, Management retains its
ability to extend the timing of currently planned development activities to
match available working capital, while maintaining its current operating
obligations on a timely basis.
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.
Page 7
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RESULTS OF OPERATIONS
The increase by 145% in oil and gas sales for the current quarter of fiscal year
2000 over the same quarter in fiscal year 1999 is attributable to increased
production from the completion of six new Maverick Basin gas wells subsequent to
the prior period. The increase was significantly enhanced by improved oil and
gas prices realized during the latter half of fiscal 1999. The increases in
other income, lease operating expense and production taxes are directly related
to and increased proportionately with increases in gas and oil production
compared to the previous period. The increase by 554% in exploration expenses is
primarily due to $213,147 in dry hole costs charged off during the current
period, while no dry hole costs were incurred during the previous period.
The increase in impairment expense reflects the current period's portion of the
increased provision for lease expirations scheduled for the remainder of fiscal
year 2000, compared to a lower lease expiration rate experienced in the prior
period. Depreciation, depletion and amortization increased by 51% over the prior
period. 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.
Interest expense decreased $77,905 reflecting the lower outstanding balance of
borrowings under the Range financing agreement during the current period as
compared to the prior period.
During the first quarter of fiscal 2000, the Company drilled and completed the
Paloma "E" 4-83 gas well, its 10th consecutive Prickly Pear (Glen Rose) Field
discovery. The well encountered 55 feet of productive Glen Rose reefs, tested at
an absolute open flow rate of 82 MMcf of gas per day and was placed on
production in December 1999 at a gross daily production rate of 2 MMcf per day.
Also during the period, the Company participated with Castle Exploration
Company, Inc., a wholly owned subsidiary of Castle Energy Corporation (Nasdaq:
CECX) in drilling the first well under the recently announced joint venture
agreement on their jointly owned 33,000 acre lease block. The acreage is located
contiguous to the north and west of TXCO's Paloma Ranch lease (Prickly Pear Gas
Field). Pursuant to the agreement, Castle is to fund all lease and seismic
acquisitions, drill up to 12 wells, and carry TXCO for a 25% interest at no cost
to TXCO. The Alkek #3-233 well was drilled 5 miles outside of the known
production limits of the western flank of the field. The well-encountered 80
feet of reef containing water and a trace of gas and was subsequently plugged
and abandoned. By November 1999, the partners had completed the acquisition of a
new 3-D seismic survey covering over 31,700 acres of the lease block. Initial
interpretation of the data set indicates the presence of numerous Glen Rose reef
prospects located on the lease block. The Company expects additional drilling to
be scheduled for during the 2nd and 3rd quarters of the year.
In October 1999, the Company participated with Picosa Creek Partnership in
drilling the Chittim #1-187 well under the 12,800 acre Chittim Ranch lease. The
well was drilled 6 miles east of the nearest Glen Rose reef production, on a
site selected to test the Buda and Upper Georgetown formations, in association
with a known fault system that would serve to enhance the formations' production
capability. Drilling successfully intersected the fault, with multiple gas shows
present in the targeted shallow zones. The well also tested the underlying Glen
Rose reef interval. A 90-foot section of reef was encountered, but was found to
contain water. The well was completed as a Georgetown gas well. Management
continues to evaluate the well's production profile and ongoing economic
viability.
Management expects that revenues from the new gas wells will have an ongoing
positive impact reflected in TXCO's operating results for the remainder of the
year 2000. Pending gas and oil price stability, operating results should reflect
a continuation of profitability, with increased net revenues and positive cash
flows from operations through the balance of the year 2000.
Page 8
<PAGE>
In September 1999, the Company completed negotiations and entered into a joint
operating agreement with Blue Star Oil and Gas, Ltd., a Dallas based private
partnership, for an extensive exploration project targeting the deep Jurassic
interval underlying TXCO's Maverick Basin lease block. Under its terms, Blue
Star paid TXCO a cash consideration upon closing and is obligated to fund 100%
of the costs of a 58 square mile 3-D seismic acquisition program covering over
37,000 acres of TXCO's Paloma and Kincaid leases. In addition, Blue Star will
fund 100% of the costs of drilling 2 exploratory wells to test the underlying
deep Jurassic interval, carrying TXCO and its partners for a 25% working
interest. Blue Star is also obligated to provide a similar amount of new 3-D
seismic survey data, of TXCO's selection, which Blue Star is to acquire on its
191,000 acre Chittim Ranch lease which lies adjacent to TXCO's leases. Should
both wells be drilled in a timely fashion, Blue Star will earn a 50% interest in
the deep rights in both leases totaling 50,000 gross acres. TXCO will keep a 15%
to 50% working interest in future Jurassic wells drilled under the agreement,
depending on the location of future wells. Should initial drilling not occur
within certain deadlines ending in calendar year 2000, Blue Star will be
obligated to pay $900,000 to TXCO under the agreement. By January 2000,
acquisition of seismic field data was underway on various portions of the
Company's acreage block.
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
A Form 8-K was filed on December 29, 1999, in order to report
that the Board of Directors of The Exploration Company of Delaware,
Inc. had elected to change the Company's annual reporting period from a
fiscal year ending August 31 to a calendar year ending December 31. The
transition period for this change will be reported on Form 10-Q for the
three month period ended December 31, 1999.
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 10, 2000
Page 9
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
EXPLORATION COMPANY AUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
NOVEMBER 30, 1999 AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<CIK> 0000313395
<NAME> THE EXPLORATION COMPANY
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> NOV-30-1999
<EXCHANGE-RATE> 1
<CASH> 2951691
<SECURITIES> 0
<RECEIVABLES> 2027103
<ALLOWANCES> 27026
<INVENTORY> 0
<CURRENT-ASSETS> 5092944
<PP&E> 18004944
<DEPRECIATION> 5035892
<TOTAL-ASSETS> 18431560
<CURRENT-LIABILITIES> 5225784
<BONDS> 242470
0
0
<COMMON> 159385
<OTHER-SE> 12803921
<TOTAL-LIABILITY-AND-EQUITY> 18431560
<SALES> 2799677
<TOTAL-REVENUES> 2994942
<CGS> 1068493
<TOTAL-COSTS> 1961910
<OTHER-EXPENSES> (16404)
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<INTEREST-EXPENSE> 106410
<INCOME-PRETAX> 943026
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<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
