SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Commission file number: 0-12633
TEXOIL, INC.
(Name of small business issuer in its charter)
NEVADA 88-0177083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 SMITH STREET
SUITE 4000
HOUSTON, TEXAS 77002
(Address of principal executive offices)
(713) 652-5741
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which
so Registered Each Class is so Registered
Common Stock, par value $.01 per share Boston Stock Exchange
Class A Warrants exercisable to purchase Boston Stock Exchange
one share of Common Stock
Class B Warrants exercisable to purchase Boston Stock Exchange
one share of Common Stock
Securities registered under section 12(g) of the Exchange Act: Common Stock,
par value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,110,581
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was $2,972,833 as of March 26, 1996. On such date, the last sales
price of registrant's Common Stock was $1.3750 per share.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,155,230 shares of Common Stock,
$.01 par value, issued and outstanding at March 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
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TABLE OF CONTENTS
PART I
PAGE
Item 1. Description of Business ...................................... 3
Item 2. Description of Property ...................................... 9
Item 3. Legal Proceedings. 22
Item 4. Submission of Matters to a Vote of Security Holders .......... 22
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ..... 23
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 25
Item 7. Financial Statements ......................................... 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ......... 33
Item 10. Executive Compensation ....................................... 34
Item 11. Security Ownership of Certain Beneficial Owners and Management 36
Item 12. Certain Relationships and Related Transactions ............... 38
Item 13. Exhibits and Reports on Form 8-K ............................. 39
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<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS.
GENERAL
Texoil, Inc. ("Texoil" or the "Company") explores for, develops and
produces oil and natural gas. Founded in 1964, the Company is currently focusing
its operations on exploratory drilling in South Louisiana and Texas for oil and
natural gas reserves on relatively deep prospects, typically based on
interpretations of three-dimensional ("3-D") seismic surveys. The Company's
address is 1600 Smith Street, Suite 4000, Houston, Texas 77002 and its telephone
number is (713) 652-5741.
RECENT DEVELOPMENTS
On January 31, 1996 the Company's Board of Directors formed a special
committee charged with seeking out and considering significant transactions to
maximize shareholder value, including merger transactions and transactions
involving sale of all or substantially all of the Company's assets. In February,
1996 the Special Committee of the Board of Directors engaged the services of
Southcoast Capital Corporation ("Southcoast") to provide advisory services in
connection with the solicitation of possible business combinations and other
possible sources of financing for the Company. Southcoast Capital contacted
approximately twenty industry participants on behalf of the Company and has
completed its engagement. As a result of the Company's and Southcoast's efforts,
preliminary discussions have been held with a number of oil and gas companies.
Several small oil and gas companies have expressed an interest in exploring a
business combination with the Company and/or transactions pursuant to which such
companies might provide debt financing to the Company to fund the Company's
participation in its drilling prospects. These discussions have resulted in
several proposals for transactions, and discussions concerning the proposals are
continuing.
The decision to take these actions was in response to the Company's
continuing shortage of cash resources. Absent a significant capital infusion or
a business combination transaction offering significant cash resources,
management believes it unlikely that the Company will be able to fund Texoil's
desired level of ownership participation in various non-operated and
Company-operated exploratory drilling prospects. If sufficient cash resources
are not available, it is likely that the Company will be required to sell all or
substantially all of its participation interest in its drilling prospects to
finance the balance of its operations and to repay current liabilities,
including substantial current indebtedness to the Company's commercial bank and
to significant shareholders and directors (see " - Management's Discussion and
Analysis of Financial Condition - Cash Flow from Financing"). Based on the
collective, subjective business judgment of its members, the Company's board of
directors believes it likely that a significant business combination is more
likely to yield greater long term value for Texoil shareholders than the
piecemeal sale of all or a portion of the Company's interests in its exploratory
drilling prospects. Despite the Company's continuing efforts to identify a
suitable business combination transaction, there can be no assurance that such a
transaction will take place, or as to the terms and conditions of any such
transaction.
PRIOR HISTORY
The Company's business has been conducted since 1964 by its wholly-owned
subsidiary, Texoil Company, a Tennessee corporation. Texoil Company became a
subsidiary of the Company in March 1993 after surviving a merger with a
wholly-owned subsidiary of the Company. At the time of the merger the Company,
which then was named Comet Entertainment, Inc., a Nevada corporation
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("Comet"), was a Securities and Exchange Commission ("SEC") reporting company,
but had no substantive assets or operations. Upon consummation of the merger
(the "Comet Merger"), Texoil Company's stockholders and management became
Comet's management and controlling stockholders, Comet changed its name to
Texoil, Inc. and, accordingly, Texoil Company, as a wholly-owned subsidiary of
Texoil, Inc., survived the Comet Merger and continues its business under the
same management and control as it had before the Comet Merger. Unless otherwise
indicated, all future references herein to "Texoil" or the "Company" relate to
Texoil Company for the period prior to the Comet Merger and to Texoil, Inc. and
its subsidiaries for the period subsequent thereto.
In conjunction with its decision to change its business strategy,
Texoil's Board of Directors authorized the Company in late 1992 to seek a merger
with a public company and then engage in significant capital raising efforts.
When Texoil and Comet agreed to the Comet Merger, Comet, which had emerged from
Chapter 11 bankruptcy proceedings in March 1991, had no active business
operations and no public trading market existed for its common stock. Comet had
divested itself of all of its existing operations, including its two operating
subsidiaries in connection with its discharge from bankruptcy free of any
existing indebtedness.
Effective November 22, 1993, the Company amended its Articles of
Incorporation to effect a reverse stock split of its common stock ("Common
Stock") on a basis of one share of new Common Stock for every two shares of
outstanding old Common Stock, and to increase the par value of the Common Stock
from $.001 per share to $.01 per share. All information relating to shares of
Common Stock and per share amounts disclosed in this document have been restated
to reflect such reverse stock split.
In June 1994, the Company completed a public offering of its securities
(the "Public Offering"). A total of 750,000 units were sold at an offering price
to the public of $6.25 per unit with each unit comprised of two shares of the
Company's Common Stock, one Class A Warrant to purchase a share of the Company's
Common Stock at a price of $3.50 per share and one Class B Warrant to purchase
an additional share of the Company's Common Stock at a price of $4.50 per share.
The Company's Common Stock and the Class A and B Warrants trade separately and
are quoted on the NASDAQ Small-Cap Market under the symbols "TXLI," "TXLIW" and
"TXLIZ," respectively.
BUSINESS STRATEGY
The Company's strategy is to apply cost effective business measures and
newer, more efficient prospecting technologies to its exploration and production
operations. The objective of the Company's near-term strategy is maximization of
the value of its existing exploratory prospect inventory while reducing its cost
and risk exposure. To reduce costs, the Company replaced much of its internal
geological and administrative staff with outside consultants. To lower the risk
of exploration, the Company generally limits its participation in exploratory
drilling to those prospects for which geological evaluation has been obtained
through an advanced and cost-effective technology -- 3-D seismic surveys. The
Company also endeavors to spread its potential risk and expense by participating
for a lower working (i.e., "cost") interest in wells, typically one-eighth to
one-fourth, and selling additional interests on a promoted basis such that the
Company will ultimately own a 20% to 30% interest in each prospect that it
operates. Additionally, the Company is seeking to evaluate a wider array of
exploratory prospects than it has in the past and intends to participate in the
drilling of prospects operated by others where warranted.
As an initial step in implementing its new strategy, the Company entered
into a simultaneous prospect sale and participation agreement with Texas
Meridian Resources Corp. ("Texas Meridian")
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in December 1992 (the "Texoil-Texas Meridian Agreement"). Under the terms of the
agreement, Texoil transferred 14 of its unleased exploratory prospect ideas to
Texas Meridian for $500,000 cash, overriding royalties ranging from 2.0% to
3.75% on production from wells drilled within a defined area on the prospects,
and retained a prospect-by-prospect option (but no obligation) to acquire from
Texas Meridian on an unpromoted basis up to a 10% working interest in wells
drilled within the defined area on the Texoil generated prospects. The working
interest option arrangement provides Texoil with the opportunity to review the
3-D seismic survey data and other prospect information assembled by Texas
Meridian before Texoil's commitment to participate in drilling and prior to any
expenditure on Texoil's part, thus decreasing Texoil's cost and risk exposure
prior to its decision to participate. The unleased exploratory prospects
transferred to Texas Meridian consisted of geological and geophysical data,
maps, files, and interpretations relating to each of the 14 geographically
delineated areas believed to overlay geological features potentially productive
of hydrocarbons, all of which are located in South Louisiana. Subject to
positive results from a review of the 3-D seismic data, and management's
analysis of the project economics versus the cost of capital to participate, the
Company anticipates that it will participate for a full 10% interest in most of
the exploratory wells which Texas Meridian may propose to drill on any prospect
areas subject to the Texoil-Texas Meridian Agreement.
Continuing its new strategy, the Company completed its preliminary
geological and geophysical evaluation of several of its exploratory prospects
during the first quarter of 1995 (this process was begun in 1994). This
preliminary evaluation, a multi-month process, included the purchase of existing
so-called "2-D" seismic data, the reprocessing of that data, and the integration
of the reprocessed data, along with subsurface information from existing wells,
into the geological interpretation of each prospect. The goal of the preliminary
evaluation is to determine whether a prospect is a valid candidate for the
application of, and the expenditure required for, 3-D seismic surveys. Based
upon the results of the evaluations, Texoil began acquiring oil and gas lease
options and leases covering three of its most promising prospects during the
second quarter of 1995, and had by December 31, 1995 acquired over 17,000 gross
acres (8,000 net to Texoil). Marketing of the three prospects to industry
partners on a promoted basis was completed on two of the three during the fourth
quarter of 1995, and continues on the third. Of the two prospects sold, Raceland
and Greens Lake, Texoil is serving as operator on the former and a large
independent oil company is operator of the latter. Management anticipates that
the acquisition of a total of approximately 30,000 gross acres of geophysical
permits (where rights are granted to enter property for the purpose of
conducting geophysical operations, including 3-D seismic surveys, but no mineral
rights are included) will be completed on Raceland and Greens Lake during the
second quarter of 1996, and that a 64 square mile 3-D seismic survey, and an 18
square mile 3-D seismic survey, respectively, will commence immediately
thereafter. (see - "Texoil Exploration Prospects" below).
The Company does not contemplate re-hiring a substantial in-house
exploration staff but rather intends to concentrate its near-term efforts on the
prospects described below, using outside consultants as necessary. Beyond the
time frame required for evaluating and drilling such prospects, the Company
anticipates conducting its ongoing exploration activities by retaining
experienced consulting geologists and geophysicists to evaluate prospects that
are generated by others and presented to Texoil for possible acquisition, as
well as to occasionally generate selected prospects in-house. By so containing
the level of general and administrative expense, management believes the
Company's oil and gas finding costs will be reduced while expanding its oil and
gas reserve base.
Page 5 of 43
THREE-DIMENSIONAL SEISMIC SURVEYS
Management anticipates that drilling of all of the Texas
Meridian-operated prospects in which it may participate, and all of the
Texoil-operated exploratory prospects it expects to drill in the near future,
will occur on prospects which have been evaluated by 3-D seismic surveys.
Seismic surveys are digital recordings of shock waves reflected off of
underground formations. Three-dimensional seismic is the application of powerful
computer workstations and sophisticated software to seismic data acquired from a
dense pattern of shot points to create computer-generated, three-dimensional
displays of subsurface formations. Extensive arrays of listening devices gather
thousands of times more detail than conventional, "2-D" seismic surveys, and
permit a more complete, clear picture of the subsurface. This detail enables
explorationists to detect seismic anomalies and structural features that are not
apparent in 2-D surveys, thus improving their view of target formations and the
areal extent of potential pay sands. Management believes that 3-D seismic
surveys are particularly suited to exploration in geologically complex areas of
the Texas and Louisiana Gulf Coast. Both the Miocene and Oligocene Frio
geological formations of South Louisiana and the Texas Gulf Coast are believed
by management to offer opportunities for discovery of significant oil and gas
reserves that were previously overlooked or which underlie previously found
productive fields. Management believes that 3-D seismic surveys are capable of
delineating complex and subtle traps, often adjacent to dry holes.
Three-dimensional seismic surveys have greatly improved technically and
become less expensive in recent years, making 3-D seismic surveys a more
economical exploratory technique. Management estimates that the cost of 3-D
seismic data acquisition and interpretation has fallen to between 20% and 30% of
the cost in 1985. Improvements in computer technology and data acquisition,
together with increased competition within the industry have resulted in
obtaining better data at a lower cost.
Statistics have shown that 3-D technology, properly used, will reduce
exploration risks and costs by reducing the number of dry holes, optimizing well
locations, and reducing the number of wells required to develop a discovery. In
September 1994, Texoil entered into a strategic alliance with a well-regarded
technical partner, 3DX Technologies, Inc. ("3DX"), concerning certain of the
Company's South Louisiana prospects which the Company intends to operate (see
"Description of Business - Exploration Prospects - Texoil Exploration
Prospects").
COMPETITION
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for exploration for
crude oil and natural gas. The principal competitive factors in the acquisition
of such oil and gas properties include the staff and data necessary to identify,
investigate and purchase such leases, and the financial resources necessary to
acquire and develop such leases. Many of the Company's competitors have
financial resources, staffs and facilities substantially greater than those of
the Company.
REGULATION
ENVIRONMENTAL REGULATION. Operations of the Company are subject to
numerous federal, state, and local laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences; restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production activities; prohibit drilling activities
on certain lands lying within wetlands or other
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protected areas; and impose substantial liabilities for pollution resulting from
drilling and production operations. Moreover, state and federal environmental
laws and regulations may become more stringent. These environmental laws and
regulations may affect the Company's operations and costs as a result of their
effect on oil and gas development, exploration, and production operations. For
instance, legislation has been proposed in Congress from time to time that would
amend the federal Resource Conservation and Recovery Act of 1976 ("RCRA") to
reclassify oil and gas production wastes as "hazardous waste." If such
legislation were enacted, it could have a significant impact on the Company's
operating costs, as well as on the oil and gas industry in general. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material in relation to its total capital expenditures program
by reason of environmental laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance. In addition, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") and
certain state laws and regulations impose liability for cleanup of waste sites.
The federal Clean Water Act, including the National Pollutant Discharge
Elimination System ("NPDES") permit program, and similar state environmental
laws regulate discharges by oil and gas producers of produced water into Coastal
Waters (waters of the U.S. landward of the territorial seas). The Company is
currently discharging produced water into Coastal Waters at its Main Pass 3 and
Main Pass 4 Field facilities in Louisiana (see "Description of Property
Producing Properties and Development Drilling"). The Company has discharge
permits from the Louisiana Department of Environmental Quality ("LDEQ") with
respect to both of these facilities. However, under the applicable NPDES General
Permit for Produced Water and Produced Sand Discharges from the Oil and Gas
Extraction Point Source Category to Coastal Waters in Louisiana and an
associated administrative order, discharges of produced water will be prohibited
after December 31, 1996. When the Company is required to cease discharge of
produced water at Main Pass 3 and Main Pass 4 Fields facilities, it must either
install underground injection facilities, which themselves require permits, to
dispose of the produced water or abandon its remaining reserves produced from
water-bearing zones at those properties. In either case, the Company could
experience loss of reserves and added production costs, but management believes
the Company's financial condition would not be materially adversely affected in
either event.
OIL AND GAS REGULATION. Complex regulations concerning all phases of
energy development at the local, state and federal levels apply to the Company's
operations and often require interpretation by the Company's professional staff
or outside advisors. The federal government and various state governments have
adopted numerous laws and regulations respecting the production, transportation,
marketing and sale of oil and natural gas. Regulation by state and local
governments usually covers matters such as the spacing of wells, allowable
production rates, environmental protection, pollution control, taxation and
other related matters. In Louisiana, the Commissioner of the Office of
Conservation is empowered to create geographic or geological units for drilling
and producing wells which units contain, in the Commissioner's sole judgment,
the production acreage likely to be efficiently and economically drained by such
well. These units are created only after notice to interested parties and a
hearing at which time the Commissioner will accept geological and engineering
testimony from the interested parties. The creation of these units can combine
the Company's leasehold interest with lease acreage held by competing producers
and can have the effect of decreasing (or increasing) the interest to which the
Company would otherwise be entitled. Moreover, future changes in local, state or
federal laws and regulations could adversely affect the operations of the
Company.
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Domestic exploration for, and production and sale of, oil and gas are
extensively regulated at both the federal and state levels. Legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Numerous departments and
agencies, both federal and state, are also authorized by statute to issue, and
have issued, rules and regulations binding on the oil and gas industry that
often are costly to comply with and that carry substantial penalties for
non-compliance. In addition, production operations are affected by changing tax
and other laws relating to the petroleum industry, by constantly changing
administrative regulations, and possible interruption or termination by
government authorities.
Effective January 1, 1993, all price controls on natural gas were
eliminated, ending decades of federal pricing control of natural gas. The impact
of price decontrol on the Company is uncertain at present but would appear not
to cause a material adverse effect on the business of the Company.
In the late 1980s, the Federal Energy Regulatory Commission ("FERC"),
through a series of orders, made major changes in certain of its regulations
that have since significantly affected the transportation and marketing of gas.
These regulations require gas pipelines to transport gas on a non-discriminatory
basis. As a result, many pipelines have become transporters of gas owned by
others and have greatly reduced their purchases of gas for resale.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, and
636-B ("Order No. 636"), which require interstate pipelines to provide
transportation separate, or "unbundled", from the pipelines' sales of gas. Also,
Order No. 636 requires pipelines to provide open-access transportation on a
basis that is equal for all gas shippers. Although Order No. 636 does not
directly regulate the Company's activities, the FERC has stated that it intends
for Order No. 636 to foster increased competition within all phases of the
natural gas industry. It is unclear what impact, if any, increased competition
within the natural gas industry under Order No. 636 will have on the Company's
activities. Although Order No. 636, assuming it is upheld in its entirety, could
provide the Company with additional market access and more fairly applied
transportation service rates, Order No. 636 could also subject the Company to
more restrictive pipeline imbalance tolerances and greater penalties for
violation of those tolerances. The FERC has issued final orders of virtually all
Order No. 636 pipeline restructuring proceedings. Appeals of Order No. 636, as
well as orders in the individual pipeline restructuring proceedings, are
currently pending, and the Company cannot predict the ultimate outcome of court
review. This review may result in the reversal, in whole or in part, of Order
No. 636.
In December 1992, the FERC issued Order No. 547 governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. Order No. 547 applies to non-first sales that remain
subject to the FERC's NGA jurisdiction. The FERC intends Order No. 547, in
tandem with Order No. 636, to foster a competitive market for natural gas by
giving natural gas purchasers access to multiple supply sources at market-driven
prices. Order No. 547 may increase competition in markets in which the Company's
natural gas is sold.
Commencing in May 1994, the FERC has issued a series of orders in
individual cases that delineate its gathering policy as a result of the comments
received. Among other matters, the FERC slightly narrowed its statutory tests
for establishing gathering status and reaffirmed that it does not have
jurisdiction over natural gas gathering facilities and services and that such
facilities and services are properly regulated by state authorities. As a
result, natural gas gathering may receive greater regulatory scrutiny by state
agencies. In addition, the FERC has approved several transfers by interstate
pipelines of gathering facilities to unregulated gathering companies, including
affiliates.
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This could allow such companies to compete more effectively with independent
gatherers. The FERC's orders delineating its new gathering policy are subject to
possible court appeals.
The FERC has recently announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction and the manner in which
interstate pipelines release transportation capacity under Order No. 636. While
any resulting FERC action would affect the Company only indirectly, these
inquiries are intended to further enhance competition in natural gas markets.
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to all of the risks normally
incident to the production of oil and gas, including blowouts, cratering, pipe
failure, casing collapse, oil spills and fires, each of which could result in
severe damage to or destruction of oil and gas wells, production facilities or
other property, or injury to persons. The energy business also is subject to
environmental hazards, such as oil spills, gas leaks, and ruptures and discharge
of toxic substances or gases that could expose the Company to substantial
liability due to pollution and other environmental damage. Although the Company
maintains insurance coverage considered to be customary in the industry, it is
not fully insured against certain of these risks, either because such insurance
is not available or because of high premium costs. The occurrence of a
significant event that is not fully insured against could have a material
adverse effect on the Company's financial position.
EMPLOYEES
At December 31, 1995, the Company's management and administrative
functions were conducted by 7 persons, 6 full time employees and 1 temporary
contract personnel. The Company does not expect to significantly expand its
staff in the foreseeable future.
FACILITIES
The Company currently occupies approximately 6,700 square feet of office
space, net of approximately 2,300 subleased square feet, located at 1600 Smith,
Suite 4000, Houston, Texas 77002. The lease provides for gross rent of $122,540
per year and expires September 30, 2000. Under the terms of the Agreement, the
Company received a partial year's free rent (such free rent was from June 1,
1995 to February 1, 1996) and has the option to terminate the lease in October
1998 by paying a one-time penalty of $33,403. In the event this option is
exercised, the approximate future minimum payments under the terms of the lease
agreement would be reduced by approximately $214,000. The Company believes its
current facility is sufficient for the foreseeable future. The rent expense is
currently offset by proceeds from a sublease which expires in the year 2000,
making the Company's net lease expense approximately $94,266 per year.
Item 2. DESCRIPTION OF PROPERTY.
EXPLORATION PROSPECTS
The Company's domestic exploratory drilling is expected to be conducted
primarily in South Louisiana where its management has substantial experience.
South Louisiana is believed by management to offer substantial natural gas
reserve addition opportunities. The Company expects to exploit these
opportunities through exploratory drilling on prospects generated by Texoil for
its
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own operations on prospects generated by others and presented to Texoil for
possible acquisition, as well as through exploratory drilling programs with
other experienced South Louisiana operators.
A prospect is a geographic area which the Company believes encompasses
one or more subsurface features that may be productive of oil or natural gas if
drilled. In order for a prospect to be drilled, it typically is necessary for
the operator of the prospect to obtain oil and gas leases covering the prospect
from the owners of the mineral interests underlying the prospect. References to
"prospect areas" or "prospects" mean geographic areas of exploratory interest
that may be entirely unleased or in various stages of leasing and should not be
understood to imply that all oil and gas leases necessary for drilling of the
prospects are owned by an operating partner or the Company, as the case may be.
"Texas Meridian-Operated Prospects" refers to certain prospects generated by the
Company and transferred to Texas Meridian which were largely unleased at the
time of transfer. Texoil anticipates that each such prospect will be operated by
Texas Meridian if it chooses to acquire, and is successful in acquiring, the
necessary oil and gas leases covering the prospect and elects to drill a test
well on the prospect. "Texoil Exploration Prospects" refers to prospects in
various stages of leasing with respect to which Texoil generally plans to retain
ownership of possible future drilling and production operations provided it is
successful in obtaining working interest participants for drilling of the
prospect, acquiring necessary oil and gas leases covering the prospect and
satisfying other prerequisites for drilling of the prospects (see "--Title to
Properties").
TEXOIL EXPLORATION PROSPECTS
As of December 31, 1995 Texoil had in its inventory eight exploratory
prospects at varying stages of geological and geophysical evaluation, all but
one of which are located in South Louisiana.
During the second quarter of 1995, the Company sold working interest
participation interests in the Buras Landing Prospect in Plaquemines Parish,
Louisiana to third party participants and received proceeds from the sale of the
interests in the amount of $172,500. The spudding of an exploratory test well on
this prospect was commenced in June 1995 and the well was plugged and abandoned
as a dry hole in July 1995.
For the Company's exploratory prospects and, generally, for any
additional third-party generated prospects that it may decide to acquire in the
future, the Company has sought, and with regard to at least one prospect is
currently seeking, industry and other partners to participate in such prospects.
In that regard, the Company entered into a strategic alliance with 3DX in
September 1994 for the evaluation of Texoil's South Louisiana exploration
prospects using 3-D seismic technology. 3DX selected a single prospect for its
working interest participation, and is providing technical expertise to design
the survey, provide quality control of the data acquisition, supervise the
processing and interpret the data. 3DX purchased a 12.5% working interest in the
prospect selected by it for 3-D seismic definition, with Texoil and other
partners owning the remaining interests (see "Raceland 3-D Exploration Project"
below).
The Company's ability to drill and operate the Texoil Exploration
Prospects will depend on several factors. In particular, it will be necessary
for the Company to sell working interests in its prospects on acceptable terms
to other oil and gas industry participants in order to finance the cost of 3-D
seismic surveys, where warranted, and drilling of an exploratory well on each
prospect. The Company will attempt to do so on terms under which a substantial
portion of the 3-D seismic survey and drilling costs which would ordinarily be
borne by the Company with respect to its working interest will be paid instead
by other working interest participants. The Company will also seek to retain
operatorship of the prospects though there is no assurance that it will be able
to do so. The
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3-D seismic surveying and ultimately, drilling of Texoil's prospects will depend
especially on the ability of the Company to obtain necessary geophysical
permits, oil and gas lease options, oil and gas leases covering the prospect
areas on acceptable terms. There can be no assurance, therefore, that the
Company will continue to pursue exploration of its prospects, or that if any
such prospects are drilled they will be productive.
The following are summaries of the three prospects on which Texoil
anticipates conducting significant 3-D seismic based exploration activities
during 1996.
RACELAND 3-D EXPLORATION PROJECT
At Raceland, in Lafourche Parish, Louisiana, the Company plans to
conduct a 64 square mile 3-D seismic survey during the second quarter of 1996.
Raceland encompasses a producing field which has been a significant producer
subsequent to its discovery prior to World War II. The prospect is situated
adjacent to a large salt dome structure with accompanying complicated geology.
The salt dome is underproduced for a feature of its size and type, and the area
has never been the subject of modern technology such as 3-D seismic. Management
anticipates that the confirmation of several exploratory prospects may result
from the planned 3-D survey. The Company had assembled over 12,000 gross acres
(3,600 net to Texoil) of oil and gas lease options and leases as of December 31,
1995, and had expanded its holdings to over 17,170 gross acres (5,000 net to
Texoil) as of March 8, 1996. During the fourth quarter of 1995, Texoil sold
working interest participation rights in the Raceland 3-D Exploration Project to
certain industry participants on a promoted basis, retaining a 12% participation
during the 3-D seismic survey phase, and a 30.5% ownership through the land and
drilling phases, and received $329,735 in the form of prospect generation fees
and reimbursement of previously incurred pre-3-D geological and geophysical
costs as well as geological and geophysical costs associated with the planned
3-D survey. Texoil is the operator of the Raceland 3-D Exploration Project, and
its working interest partners include Pogo Producing Company, Southwest Gas
Supply (a subsidiary of MCN Corp), GEDD, Inc., Shore Oil Company, and 3DX
Technologies, Inc.
GREENS LAKE PROSPECT
At Greens Lake Prospect in Galveston County, Texas, the Company intends to
participate in an 18 square mile 3-D seismic survey that is planned to commence
during the second quarter of 1996. During the fourth quarter of 1995, Texoil
sold interests in the Greens Lake Prospect to a single industry participant, a
large independent oil company, on a promoted basis, retaining a 15%
participation through the 3-D seismic survey phase and a 40% working interest
ownership in the land and drilling phases. The Company received $136,288 in the
form of prospect generation fees and reimbursement of geological and geophysical
costs relating to pre-3-D and 3-D seismic related activities carried out by the
Company. As of December 31, 1995, the Company and the large independent, who
will serve as the operator, had assembled over 1,200 gross acres (480 net to
Texoil) of oil and gas lease options and leases, and had expanded those holdings
to over 3,500 gross acres (1,400 acres net to Texoil) as of March 8, 1996.
LAUREL GROVE PROSPECT
At Laurel Grove Prospect in Lafourche Parish, Louisiana, Texoil is planning to
participate in a 23 square mile 3-D seismic survey during 1996. The Company had
assembled 1,970 net acres of oil and gas lease options supplemented by a 1,900
net acre farmout over this prospect as of December 31, 1995. Efforts to sell
working interest participation rights to industry partners on this prospect are
ongoing.
Page 11 of 43
The following table summarizes the remaining five Texoil exploratory
prospects in South Louisiana, which are unleased.
ESTIMATED
PROSPECT NAME PARISH/CO. SIZE (ACRES) TARGET DEPTH (FEET)
- ------------- ---------- ------------ -------------------
Creole Cameron, LA 1,400 11,500
West Cameron Cameron, LA 1,000 14,000
Dorcyville Deep Iberville, LA 2,000 18,500
Chalkley Deep Cameron, LA 2,000 17,000
Chalkley Shallow Cameron, LA 600 10,200
TEXAS MERIDIAN-OPERATED PROSPECTS
Under the Texoil-Texas Meridian Agreement, the Company has options to
participate in a 3-D seismic-controlled exploration drilling program in South
Louisiana operated by Texas Meridian. Texas Meridian has advised Texoil that
Texas Meridian's exploration program includes the evaluation by 3-D seismic
surveys of seven of the group of 14 exploratory prospects which were generated
by the Company that are included in the Texoil-Texas Meridian Agreement. Texas
Meridian has indicated that it intends to actively pursue the exploration of
these prospects. Successful exploratory test wells have already been drilled by
Texas Meridian on one of the prospect areas and at a location immediately
adjacent to another one. On two additional prospects current drilling operations
are underway on acreage adjacent to the area in which the Company has
participation rights. On these two prospects, preliminary evaluation of the 3-D
seismic survey conducted by Texas Meridian indicates that the areas do not
appear to be sufficiently prospective of hydrocarbons to warrant the drilling of
an exploratory test well.
The 14 unleased prospects were sold to Texas Meridian for $500,000
cash, plus overriding royalty interests of 2.0% to 3.75% in wells drilled
(depending on landowner and certain other royalty burdens) as well as the right
to participate on a proportionate cost basis (i.e., "unpromoted") for up to a
10% working interest in a defined area within each prospect. The Company's
overriding royalty interests and working interest options are expected to relate
to most but not all of the lease acreage which Texas Meridian may choose to
assemble with respect to each prospect. Texas Meridian has leased or is expected
to seek leases for its own account on acreage adjacent to or near (but not
within) the prospect areas identified by Texoil in the Texoil-Texas Meridian
Agreement. The Company will therefore not participate in net revenues from any
exploratory or development wells drilled on leases in which it has no overriding
royalty or working interest, unless lease acreage in which the Company owns an
interest is included within a producing unit ordered by the Louisiana Office of
Conservation or otherwise created.
The terms of the Texoil-Texas Meridian Agreement do not obligate Texas
Meridian to conduct seismic surveys on, or drill, any of the prospects acquired
from the Company. Conversely, the Company is not obligated to participate as a
working interest owner in the drilling of any well, but has the option to do so
on a prospect-by-prospect basis. The Company will become entitled to receive
formal assignments of working interests within a prospect covered by the
Texoil-Texas Meridian Agreement only if (i) Texas Meridian determines in its
sole discretion to lease and drill the prospect, and (ii) the Company makes a
timely response to drilling recommendations made by Texas Meridian and makes a
prompt payment of the exploratory and estimated drilling costs. Texoil generally
must determine whether to participate on a working interest basis in each
prospect within 30 days after Texas Meridian gives Texoil a recommendation for
drilling an exploratory test well. Management anticipates that any drilling
recommendations will be made by Texas Meridian that lies
Page 12 of 43
within the Company's participation rights area after it has completed 3-D
seismic acquisition, processing and evaluation of the prospect. Texoil is
contractually entitled to review all lease, geological and geophysical data
gathered by Texas Meridian before being required to exercise its participation
option, and management anticipates that Texoil will do so. If the Company does
not elect to participate in the initial test well on a prospect, it will have no
rights to participate in any wells subsequently drilled on the prospect. In any
event, however, the Company becomes entitled to assignments of its overriding
royalty interests when oil and gas leases within the defined prospect area are
obtained by Texas Meridian (see "--Title to Properties").
In October 1994, the first well drilled under the Texoil-Texas Meridian
Agreement was placed on production. This well, the Ariel #1, was drilled on the
Bayou Lafourche Prospect in Lafourche Parish, Louisiana. Recent production
volumes from the well have been approximately 600 barrels of oil and
approximately 2,700 Mcf of natural gas per day. Texoil has an 11.20% net revenue
interest in the well attributable to its 10% working interest and its 3.75%
overriding royalty interest. Based on current production volumes, Texoil
anticipates that the revenues from the well will continue to positively impact
the Company's operating cash flow. Texas Meridian has indicated preliminary
plans for the drilling of a development well at Bayou Lafourche but the timing
of such a well is presently uncertain.
Texas Meridian also announced in October 1994 the successful completion
of an exploratory test well at a location immediately adjacent to acreage in
which Texoil owns participation rights in the Lake Boeuf Prospect area in
Lafourche Parish. The Lake Boeuf Prospect is the second such prospect area
subject to the Texoil-Texas Meridian Agreement. Late in the fourth quarter of
1994, Texas Meridian began drilling a second well to further evaluate the
potential of this prospect. This well was also being drilled on the lease
immediately adjacent to the Texoil acreage. The second well was successfully
completed as a producer during the third quarter of 1995, having been bottomed
on the Texoil participation rights acreage. Texas Meridian commenced drilling a
third well on acreage in which Texoil owns participation rights during the
fourth quarter of 1995. Although the first two wells were not drilled on
Texoil's participation rights acreage, unitization by Louisiana regulatory
authorities resulted in approximately 22% of the producing units being comprised
of Texoil's participation rights acreage. Management reviewed the then available
geological and geophysical data, and the project economics, with the result that
the Company declined to participate for its working interest in the two existing
producing wells and the third well that was then being drilled due to
management's analysis of the economics of the project versus the cost of the
capital necessary to participate. The third well was subsequently plugged and
abandoned as a dry hole. The Company ownership of its overriding royalty
interest in the first two wells was unaffected by its working interest election.
During the fourth quarter of 1995, Texas Meridian commenced the
drilling of a well approximately one-half mile distant from the Company's
participation rights acreage at the North Crescent Farms Prospect, Terrebonne
Parish, Louisiana. It is management's belief that the well, if successful, is
not located such that the producing unit for the well would include any of
Texoil's participation rights acreage. Also, Texas Meridian commenced the
drilling of a well on acreage lying outside of Texoil's participation rights at
the East Cameron Prospect, Cameron Parish, Louisiana, during the first quarter
of 1996. It is uncertain whether unitization, if the well is successful, will
result in the inclusion of Texoil's participation rights acreage. It is unknown
what effect, if any, may result from either the success or failure of these test
wells.
The following table summarizes the seven Texas Meridian-operated
prospects in South Louisiana for which 3-D seismic surveys have been completed
or planned.
Page 13 of 43
PROSPECT NAME PARISH SIZE (ACRES) (1) TARGET DEPTH (FEET)
- ------------- ------ ---------------- -------------------
Bayou Lafourche Lafourche 750 16,500
Lake Boeuf Lafourche 1,700 13,000
North Crescent Farms Terrebonne 2,150 18,000
Northeast Thornwell (2) Jefferson Davis 2,800 13,500
East Lake Charles Calcasieu 2,800 14,500
East Cameron Cameron 2,800 11,000
Crown Point (3) Plaquemines 2,000 13,000
- ----------------------------
(1) Represents the defined area within each prospect subject to the Texoil-
Texas Meridian Agreement.
(2) Texas Meridian has stated that a 3-D seismic survey has been completed
over this prospect and that there are no exploratory drilling plans
contemplated on the prospect at present.
(3) Texas Meridian has indicated that no 3-D seismic survey has yet been
shot on this prospect, however, one is planned for 1996.
With respect to the remaining prospects subject to the Texoil-Texas
Meridian Agreement, Texas Meridian has stated that there can be no assurance
that any such prospects will in fact be pursued or drilled. In that regard,
Texas Meridian has also indicated that its final decision with respect to the
drilling of any exploratory drilling prospect will depend on a number of
factors, including (i) the ability of Texas Meridian to obtain the agreement of
other industry partners to participate in the exploration and development of the
prospect, (ii) the ability of Texas Meridian to obtain lease options to permit
seismic surveys on the prospect, (iii) the ability of Texas Meridian to obtain
oil and gas leases on reasonable terms covering the prospect areas to be drilled
and necessary governmental permits, (iv) the results of a further review and
analysis of the seismic data, including the results of 3-D seismic surveys, (v)
the availability of sufficient capital resources to Texas Meridian and the other
participants for the drilling of the prospect, (vi) the approval of Texas
Meridian and the other working interest participants in each prospect for the
drilling of the prospect after additional data has been compiled, and (vii)
economic conditions at the time of drilling, including prevailing and
anticipated prices for natural gas.
PRIOR DRILLING ACTIVITIES
Until embarking on its present business strategy for expanding its existing
oil and gas reserve base, Texoil primarily operated as a "prospect generator,"
identifying, evaluating, marketing and drilling exploratory prospects.
Approximately 50 exploratory prospects were identified by the Company and
drilled from 1980 through 1991. During this period, Texoil's prospect generation
and exploratory drilling efforts were focused entirely within two productive
areas of the South Louisiana Gulf Coast. Of these exploratory prospects, 32 were
located onshore in South Louisiana and 18 were located in the shallow Louisiana
state waters; the geological formations tested were of Miocene and Oligocene
(also known as "Frio") age. Working interest participation in prospects
generated by Texoil were typically sold to oil industry partners, primarily
other independent oil companies, but some major companies as well as individual
investors. The terms of such sales typically provided for Texoil to be
reimbursed by the other participants for the cost of performing preliminary
analyses of geological and geophysical data and of acquiring leases from
landowners allowing the drilling of exploratory wells on the prospects. Usual
prospect sale arrangements further provided that the Company would receive,
without cost to it, up to a 25% carried working interest in the drilling to
casing point of the initial test well on such prospects. The portion of such
initial test well costs
Page 14 of 43
attributable to Texoil's carried working interest but not borne by Texoil were
proportionately allocated to other participants. Texoil has acted as operator in
the drilling of approximately 80% of the wells drilled on its prospects.
The following table sets forth the number of gross and net exploratory and
development wells drilled and completed by Texoil from 1980 through 1995, all of
which were drilled in Louisiana. The absence of drilling operations in 1991 and
1993 and reduced drilling in 1992 reflects the Company's aforementioned change
in business strategy in the early 1990's.
<TABLE>
<CAPTION>
EXPLORATORY DEVELOPMENT
---------------------------- -----------------------------
Year Ended PRODUCTIVE DRY PRODUCTIVE DRY
DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET
- ------------ ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1980.................................. 1 .11 2 .13 -- -- -- --
1981.................................. 3 .53 4 .95 2 .35 -- --
1982.................................. 1 .21 4 .69 1 .25 -- --
1983.................................. -- -- 2 .48 2 .46 -- --
1984.................................. 1 .30 9 2.10 -- -- -- --
1985.................................. 1 .22 11 2.32 1 .22 -- --
1986.................................. 3 .22 1 .13 1 .22 -- --
1987.................................. 1 .06 2 .45 -- -- -- --
1988.................................. -- -- 3 .68 2 .28 -- --
1989.................................. 2 .48 1 .50 1 .04 1 .16
1990.................................. 1 .26 1 .25 -- -- 1 .13
1991.................................. -- -- -- -- -- -- -- --
1992.................................. -- -- -- -- 1 .23 -- --
1993 (1).............................. -- -- -- -- -- -- -- --
1994 ................................. 2 .25 -- -- 1 .64 -- --
1995.................................. - - 1 .14 - - - -
- - - --- - - - -
Total........................ 16 2.64 41 8.82 12 2.69 2 .29
== ==== == ==== == ==== = ===
</TABLE>
- ------------
(1) Drilling of the exploratory Rusich #1 well commenced in 1993 and was
completed as a productive oil well in January 1994.
PRODUCING PROPERTIES AND DEVELOPMENT DRILLING
The Company's oil and gas producing activities are conducted in six
South Louisiana fields. The Bayou Lafourche Field (also known as the Southwest
Lake Boeuf Field) and Lake Boeuf Field, operated by Texas Meridian, were placed
on production in the fourth quarter of 1994 (see "Exploration Prospects - Texas
Meridian-Operated Exploration Prospects"). The other four fields in which the
Company has producing interests were discovered or extended by new exploratory
efforts conducted by Texoil in prior years. All but two of the wells in which
Texoil owns a working interest are operated by the Company. Presented below are
brief descriptions of each producing field which include disclosures of the
proved reserve quantities as of December 31, 1995, the latest date as of which
the Company has disclosed such information (see "--Oil and Gas Reserves").
SOUTHWEST LAKE BOEUF FIELD, LAFOURCHE PARISH (CONTAINS THE BAYOU
LAFOURCHE PROSPECT AND THE LAKE BOEUF PROSPECT). The Field was originally
discovered by Bradco Oil & Gas Company in 1969. Cumulative field production to
date has been approximately 4.8 million barrels of oil and 34 BCF of gas. In the
late 1980's, Texoil generated a prospect, referred to as the Bayou Lafourche
Prospect, covering approximately 750 acres in an untested portion of the Field
with multiple potential objectives ranging from 13,500 to 17,500 feet. This was
one of the 14 prospects included in the sale to Texas Meridian (see "Exploration
Prospects -- Texas Meridian-Operated Exploration Prospects). In early 1994,
following 3-D seismic evaluation by Texas Meridian, that company commenced
drilling
Page 15 of 43
of the Ariel #1 well in which Texoil elected to participate as a 10% working
interest owner in accordance with the terms of its agreement with Texas
Meridian. The well was successfully completed in June 1994 and went on
production in October 1994. The well is currently producing approximately 570
barrels of oil and approximately 2,790 Mcf of natural gas per day. Proved
reserves applicable to Texoil's interest in the Bayou Lafourche Prospect at
December 31, 1995 amounted to approximately 76,600 barrels of oil and
approximately 407,000 Mcf of gas, all of which is classified as proved developed
reserves. This represents an increased upward revision of proved reserves due to
the well's continued strong performance after more than 15 months of production.
Texas Meridian also announced in October 1994 the successful completion of an
exploratory test well at a location immediately adjacent to acreage in which
Texoil owns participation rights in the Lake Boeuf Prospect within the Southwest
Lake Boeuf Field area in Lafourche Parish. The Lake Boeuf Prospect is the second
such prospect area subject to the Texoil-Texas Meridian Agreement. Late in the
fourth quarter of 1994, Texas Meridian began drilling a second well to further
evaluate the potential of this prospect. This well was also being drilled on the
lease immediately adjacent to the Texoil acreage. The second well was
successfully completed as a producer during the third quarter of 1995, having
been bottomed on the Texoil participation rights acreage. Texas Meridian
commenced drilling a third well on acreage in which Texoil owns participation
rights during the fourth quarter of 1995. Although the first two wells were not
drilled on Texoil's participation rights acreage, unitization by Louisiana
regulatory authorities resulted in approximately 22% of the producing units
being comprised of Texoil's participation rights acreage. Management reviewed
the then available geological and geophysical data, and the project economics,
with the result that the Company declined to participate for its working
interest in the two existing producing wells and the third well that was then
being drilled due to management's analysis of the economics of the project
versus the cost of the capital necessary to participate. The third well was
subsequently plugged and abandoned as a dry hole. The Company ownership of its
overriding royalty interest in the first two wells was unaffected by its working
interest election. The Pacific Enterprises #1 is currently producing
approximately 300 barrels of oil and approximately 300 Mcf of natural gas per
day. The Pacific Enterprises #2 is currently producing approximately 1,500
barrels of oil and approximately 2,800 Mcf of natural gas per day. Cumulative
gross production from the two wells as of December 31, 1995 has been
approximately 327,000 barrels of oil and 586,000 Mcf of gas. Texoil's interest
in this Prospect is a net 0.56% overriding royalty. Proved reserves applicable
to Texoil's interest in the Lake Boeuf Prospect at December 31, 1995 amounted to
approximately 8,500 barrels of oil and approximately 16,000 Mcf of gas.
BURAS FIELD, PLAQUEMINES PARISH. The Buras Field was discovered
originally by Shell Oil Company in the early 1950's. In 1980, when the field was
no longer producing, Texoil extended the productive limits of the field to the
south and subsequently drilled eight producing wells, three of which were dually
completed in various portions of the newly extended field. Cumulative gross
production from the Texoil wells has been approximately 642,000 barrels of oil
and 8,190 Mmcf of gas. Currently, the Company owns a 15% working interest in the
Rusich #1 which will increase to 36% after payout in the Rusich #1 (formerly
Mistich #1) well which was completed in January 1994 and went on production in
March 1994. The well is currently producing approximately 56 barrels of oil per
day along with a small amount of gas and has produced a cumulative total of
approximately 95,000 barrels of oil and 58,000 Mcf of gas since going on
production in March 1994. Proved reserves applicable to Texoil's interest in
this field at December 31, 1995 amounted to approximately 900 barrels of oil and
260 Mcf of natural gas, all of which is classified as proved developed reserves.
This represents a downward revision of proved reserves due to significantly
increasing water production and corresponding higher lease operating expenses.
The Company's attempt to further increase both oil and gas production in the
Buras area by drilling the Buras
Page 16 of 43
Landing Prospect described above, was not successful, as the Buras Landing test
well was plugged and abandoned during July 1995 as a dry hole.
DORCYVILLE FIELD, IBERVILLE PARISH. The Dorcyville Field was discovered
by Texoil in 1985. Four producing wells were subsequently drilled and completed
in the field and two wells currently remain on production and are producing an
aggregate daily volume of approximately 60 barrels of oil and 130 Mcf of gas.
The Murrell #1 well reached its economic limit and was plugged and abandoned in
February 1996. The Company's average working interest within this field is
approximately 26%. Cumulative gross production to date has been approximately
1,897,000 barrels of oil and 1,900 Mmcf of gas. Although no further development
of the field is currently planned, additional drilling could be possible if
production is found in Texoil's Dorcyville Deep Prospect which lies in close
proximity to the field. Proved reserves applicable to Texoil's interest in this
field at December 31, 1995 amounted to approximately 17,138 barrels of oil and
16,889 Mcf of natural gas, all of which is classified as proved developed
reserves.
MAIN PASS 3 FIELD, ST. BERNARD PARISH. The Main Pass 3 Field is within
the Chandeleur Sound Block 71 productive area. In 1989, Texoil established
production in several gas and oil zones which were found at a shallower depth
and to the south of the main field production. An additonal productive interval
was found in one of the regular field pay sands. This provided the necessary
evidence to extend the productive limits of the reservoir onto the Texoil
acreage. As a consequence, Texoil shares in oil and gas revenue from this
reservoir which is produced in a non-operated well. Of the shallower zones
discovered by Texoil, cumulative gross production to date from the well drilled
by Texoil has been approximately 153,913 barrels of oil and 1,170 Mmcf of gas.
Texoil has a 60.4% working interest in the Company-operated State Lease 12789 #1
well, which is now temporarily abandoned, plus a minor interest in a second
producing well operated by another company. In August 1994, the Company
completed drilling of a successful development well on the State Lease 12503
which is currently producing approximately 27 barrels of oil per day and a small
amount of natural gas (Texoil's working interest is presently 63.7%, including
10.1% acquired by assignment of interests from non-consenting partners in the
well). Proved reserves applicable to Texoil's interest in this field at December
31, 1995 amounted to approximately 28,120 barrels of oil and approximately
91,978 Mcf of gas, all of which is classified as proved developed reserves. This
represents a downward revision of proved reserves due to mechanical problems in
the S.L. 12789 No. 1 and lower than expected recovery from the S.L. 12503 No. 1.
MAIN PASS 4 FIELD, ST. BERNARD PARISH. The Main Pass 4 Field was
discovered by Texoil in 1986. Cumulative gross production to date has been
approximately 3,550 Mmcf of gas and 23,000 barrels of oil and condensate. In the
summer of 1994, Texoil made a successful recompletion of the State Lease 11046
#1 well in which the Company owns a 98.2% working interest and which is
currently shut in pending workover operations. Proved reserves applicable to
Texoil's interest in this field at December 31, 1995 amounted to approximately
80,789 barrels of oil and approximately 161,034 Mcf of gas, all of which is
classified as proved developed reserves.
OIL AND GAS RESERVES
Presented below are the estimated quantities of proved and proved
developed reserves of crude oil and natural gas owned by Texoil as of December
31, 1993, 1994 and 1995, and the principal components of the changes in the
quantities of reserves for each of the years then ended which has been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. Texoil's oil and gas reserves were estimated by Gruy Engineering
Corporation, independent petroleum engineers, for the years ended December 31,
1992, 1993, 1994 and 1995.
Page 17 of 43
Of the Company's total proved reserves as of December 31, 1995, approximately
50% were classified as proved developed "producing" and approximately 50% were
classified as proved developed non-producing.
Oil Gas
(MBBLS) (MMCF)
PROVED RESERVES:
Balance at January 1, 1993.................. 352 1,216
Discoveries and extensions............... 48 54
Revisions of previous estimates.......... (43) (472)
Production............................... (32) (63)
----- -----
Balance at December 31, 1993................ 325 735
Discoveries and extensions............... 88 472
Revisions of previous estimates.......... (27) (356)
Production............................... (33) (77)
----- -----
Balance at December 31, 1994................ 354 774
Discoveries and extensions............... 8 16
Revisions of previous estimates.......... (109) 55
Production............................... (41) (152)
----- -----
Balance at December 31, 1995................ 212 693
===== =====
PROVED DEVELOPED RESERVES AT DECEMBER 31:
1993..................................... 325 735
===== =====
1994..................................... 354 774
===== =====
1995..................................... 212 693
===== =====
The following table shows the present value (discounted at 10%) as of
December 31, 1993, 1994 and 1995 of estimated pre-tax future net revenue from
the production and sale of Texoil's proved reserves. These estimated discounted
present values are derived from the independent petroleum engineer's reserve
reports and Company estimates described above and are calculated in accordance
with the rules and regulations of the SEC. The estimates are therefore not
intended to represent the current fair market value of the estimated oil and gas
reserves owned by the Company.
DECEMBER 31,
---------------------------------------------
1993 1994 1995
------------ ------------ -----------
Proved developed................ $ 687,243 $ 3,239,989 $ 3,138,222
Proved undeveloped.............. 1,331,165 -- --
------------ ------------ ------------
Total proved.......... $ 2,018,408 $ 3,239,989 $ 3,138,222
============ ============ ============
Page 18 of 43
The reserve information set forth above are only estimates. There are
numerous uncertainties inherent in estimating quantities of proved reserves and
in projecting future rates of production and timing of development expenditures,
including many factors beyond the control of Texoil. Reserve engineering is a
subjective process of estimating underground accumulations of crude oil and
natural gas that cannot be measured in an exact manner, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. The quantities of oil
and gas that are ultimately recovered, production and operating costs, the
amount and timing of future development expenditures and future oil and gas
sales prices may all differ from those assumed in these estimates. Therefore,
the present value shown above should not be construed as the current market
value of the estimated oil and gas reserves attributable to Texoil's properties.
In this regard, the information set forth in the foregoing tables
includes revisions of certain volumetric reserve estimates attributable to
proved properties included in the preceding year's estimates. The revisions were
the result of additional information from subsequent completions and production
history from the properties involved. In accordance with SEC guidelines,
estimates of future net revenues from Texoil's properties and the present value
thereof are made using oil and gas sales prices in effect as of the dates of
such estimates and are held constant throughout the life of the properties
except where such guidelines permit alternate treatment, including, in the case
of gas contracts, the use of fixed and determinable contractual price
escalations. The averages of the product prices as of December 31, 1995, were
$18.99 per barrel of oil and $3.81 per thousand cubic feet of gas, which compare
to December 31, 1994 prices of $16.13 per barrel of oil and $1.67 per thousand
cubic feet of gas. Prices for gas and, to a lesser extent, oil are subject to
substantial seasonal fluctuations, and prices for each are subject to
substantial fluctuations as a result of numerous other factors.
The oil and gas reserves of the Company were revised downward at
December 31, 1995 by a net amount of 108,867 barrels of oil and upward by a net
amount of 54,900 Mcf of gas. These revisions resulted from changes in
recoverable reserves attributable primarily to three areas. In the Southwest
Lake Boeuf Field, the Ariel Corp. No. 1 well's continued strong performance
after more than 15 months of production results in a forecast which shows the
recovery will be greater than the original volumetric forecast. The net increase
is 16,732 barrels of oil and 71,807 Mcf. In the Main Pass 3 field, the Texoil
S.L. 12789 No. 1 was temporarily abandoned earlier than anticipated due to
mechanical wellbore problems. The S.L. 12503 No. 1 was recompleted in another
zone after production ceased prematurely due to suspected formation sand
blocking the perforations. Reserves from the one remaining proved zone were
further reduced due to the increased risk attributable to these problems. The
entire downward revision to Main Pass 3 Field reserves totalled 100,105 net
barrels of oil and 28,621 net Mcf of gas. The third area of significant revision
is the Buras Field where the Rusich No. 1 was revised downward by a net 38,279
barrels of oil and 3,739 Mcf of gas. The well is producing almost 90% salt water
now, thus resulting in lower recoverable reserves.
Since December 31, 1994, Texoil has not filed any estimates of proved
oil or gas reserves with any federal authority or agency (see Note 12 to the
Consolidated Financial Statements for certain additional information concerning
Texoil's proved reserves).
PRODUCTION AND SALES
The following table presents certain information with respect to oil
and gas production attributable to Texoil's properties, the revenue derived from
the sale of such production, average
Page 19 of 43
sales price received and average production costs during the three years ended
December 31, 1993, 1994 and 1995.
DECEMBER 31,
---------------------------
1993 1994 1995
------ ------- -------
PRODUCTION:
Oil (MBbl) ................................. 32 33 41
Gas (MMcf) ................................. 63 77 152
REVENUE (000'S):
Oil ........................................ $556 $519 $759
Gas ........................................ 156 156 352
------ ------ ------
Total .................................. $712 $675 $1,111
====== ====== ======
AVERAGE SALES PRICE:
Oil (per Bbl) .............................. $17.38 $15.73 $18.51
Gas (per Mcf) .............................. $ 2.48 $ 2.03 $ 2.32
Per BOE .................................... $16.75 $14.73 $16.83
PRODUCTION COSTS PER BOE ....................... $ 5.36 $ 5.45 $ 4.17
The decline in production costs per BOE is attributable primarily to
the Ariel #1 Well at Southwest Lake Boeuf Field being on production for a full
year during 1995 as opposed to only two months during 1994. The increased
production volumes in 1995 reduced the Company's overall average production
costs as compared to 1994. Management believes that production costs per BOE
will continue to decline somewhat in 1996 but should then level off.
Texoil's oil production is sold primarily to large petroleum company
purchasers in South Louisiana. Because of the quality of its crude oil
production, Texoil generally receives a premium of between $.50 and $1.50 a
barrel over the periodic "posted" prices in the area.
Texoil's gas production is sold primarily to pipelines and/or gas
marketers in South Louisiana under short-term contracts (usually 90 days) at
prices which are pegged to the "spot" market for gas sold in South Louisiana.
Revenues received (or receivable) from companies comprising more than
10% of Texoil's total sales in each of the last three years were as follows:
DECEMBER 31,
-----------------------------
1993 1994 1995
---- ---- ----
Koch Oil Company ........................... 49% 36% 14%
Murphy Oil Corporation ..................... 29% 31% 18%
Texas Meridian Resources Corp. ............. -- 14% 58%
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1995, Texoil had working interests in 7 gross (2.10
net) producing oil wells and 2 gross (1.05 net) producing gas wells. Although
the Company has additional undeveloped
Page 20 of 43
acreage under lease adjacent to such producing well locations, no proved
reserves have been assigned thereto by the Company's independent petroleum
engineers. The following table sets forth certain information with respect to
Texoil's developed and undeveloped acreage in Louisiana as of December 31, 1995.
Acreage shown below does not include acreage attributable to any options held by
Texoil to acquire working interests of up to 10% within defined areas of any of
14 prospects sold by Texoil to Texas Meridian, upon which Texas Meridian has
commenced no drilling operations. Nor does it include Texoil's share of leases
and options covering some 17,000 gross acres of land to be included in planned
3-D seismic survey areas.
GROSS NET
----- ---
Developed Acreage (1) ........................................... 1,115 402
Undeveloped Acreage (2) ......................................... 707 362
----- ---
1,822 764
===== ===
- ---------------
(1) Developed acreage is comprised of acres pooled with, unitized from
or assigned to productive wells.
(2) Undeveloped acres are acres on which wells have not been drilled
or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether or not
such acreage contains proved reserves.
TITLE TO PROPERTIES
The Company's rights to obtain overriding royalty interests and options
to acquire a working interest in the Texas Meridian-operated prospects are
contractual rights and will not mature into recordable title interests in real
property until such time as Texas Meridian has acquired oil and gas leases
covering such respective prospects and Texas Meridian has delivered recordable
conveyances to the Company covering such rights. If Texas Meridian is unwilling
or unable to deliver recordable conveyances to the Company covering any of these
interests, the Company may be unable to obtain such conveyances or, if so, may
be able to obtain them only after substantial additional expense. As of this
date, the Company has received assignment of both its working interest and
overriding royalty interest in the Bayou Lafourche Prospect leases in which it
participated.
The prospects sold by the Company to Texas Meridian were substantially
unleased by the Company at the time of such sale. Management has been informed
by Texas Meridian that Texas Meridian has already acquired and is continuing to
acquire leases and lease options covering certain of the Texas Meridian-Operated
Prospects. Texoil has acquired a substantial number of lease options covering
lands it intends to explore with 3-D seismic surveys over several projects.
Until such time as all of the lands within these prospects are leased by either
the Company or Texas Meridian, as the case may be, it is possible that all or a
portion of such prospects could be leased by others.
It is customary in the oil and gas industry to make only a cursory review
of title to undeveloped oil and gas leases at the time they are acquired. It is
also customary to obtain more extensive title examinations prior to the
commencement of drilling operations on undeveloped leases or prior to the
acquisition of producing oil and gas properties. With respect to the future
acquisition of both undeveloped and developed leaseholds, the Company plans to
conduct title examinations on such properties in a manner generally consistent
with such industry practices. The Company has
Page 21 of 43
obtained title opinions, title reports or otherwise conducted title
investigations covering substantially all of its producing properties and
believes it has satisfactory title to such properties in accordance with
standards generally accepted in the oil and gas industry. The Company's
properties are subject to customary royalty interests, overriding royalty
interests, liens for current taxes and other burdens which the Company believes
do not materially interfere with the use or affect the value of such properties.
Substantially all of the Company's oil and gas properties are and may continue
to be mortgaged to secure borrowings under the Company's credit facilities (see
"Management's Discussion and Analysis or Plan of Operation -- Liquidity and
Capital Resources - Cash Flow from Financing"). In the past, additional working
interests in certain properties operated by the Company were acquired by the
Company after a search of real property lien records but without title
examination.
RELIANCE ON OPERATORS; JOINT OPERATIONS; CERTAIN RISKS
The Company will be a non-operating working interest owner in any Texas
Meridian prospect in which it chooses to participate, and may be a non-operating
interest owner in other wells in which it acquires a working interest. In such
instances, the Company will depend on the operator of the wells to properly
conduct lease acquisition, drilling, completion and production operations. The
failure of an operator, or the drilling contractors and other service providers
selected by the operator to properly perform services, could adversely affect
the Company.
The Company anticipates that it will typically own substantially less
than a 50% working interest in its prospects and will therefore engage in joint
operations with other working interest owners as is typical in oil and gas
exploration. If the Company owns or controls less than 50% of the working
interest in a prospect, decisions affecting the prospect could be made by the
owners of more than 50% of the working interest with which the Company
disagrees. For instance, if the Company is unwilling or unable to participate in
the costs of operations approved by a majority of the working interest in a
well, its working interest in the well (and possibly other wells on the
prospect) will likely be subject to contractual "non-consent penalties." These
penalties may include full or partial forfeiture of the Company's interest in
the well or a relinquishment of the Company's interest in production from a well
in favor of the participating working interest owners until the participating
working interest owners have recovered a multiple of the costs which would have
been borne by the Company had it elected to participate, often from 300% to 400%
of such costs.
Item 3. LEGAL PROCEEDINGS.
Texoil presently is not a party to any pending legal proceedings.
Moreover, the Company is not aware of any such proceedings that are contemplated
by government authorities with respect to Texoil, its domestic oil and gas
properties or its wholly-owned (inactive) subsidiary, Texoil de Argentina, S.A.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 1995, the Company submitted no matters to a
vote of security holders.
Page 22 of 43
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to the merger of Comet and Texoil on March 16, 1993, there had been
no public market for the securities of either company in the two previous fiscal
years. Until filing of its bankruptcy petition in March 1990, Comet's common
stock was traded on the NASDAQ system under the symbol "COMT." Comet's common
stock was removed from NASDAQ trading upon filing of the bankruptcy petition due
to failure to meet minimum equity requirements.
In May 1993, after the Comet Merger and an associated "reverse" split of
its Common Stock, the Company obtained a new trading symbol, "TXLI." From that
time through May 26, 1994, the effective date of the Securities Act registration
statement for the Company's Public Offering, there was sporadic trading of the
Company's Common Stock in the "pink sheets" of various NASD broker-dealers,
however, only approximately 150,000 shares of Common Stock (after giving effect
to a 1-for-2 reverse stock split subsequent to the Comet Merger) were
"unrestricted" and eligible to be bought and sold through such medium (all of
which related to holdings of former Comet stockholders). Since May 27, 1994, the
Common Stock has been included in the NASDAQ Small-Cap Market and listed on the
Boston Stock Exchange. The last reported trade by NASDAQ for the Common Stock on
December 29, 1995 was $1.5625. As of December 31, 1995, the Company had
approximately 846 stockholders of record.
The following table sets forth the range of high and low bid and asked
prices (after giving effect to the aforementioned 1-for-2 reverse stock split)
for the Common Stock since May 1993 through December 31, 1995. These quotations
represent prices between dealers without adjustment for retail markups,
markdowns or commissions and may not necessarily represent actual transactions.
BID ASK
------------------ -------------------
LOW HIGH LOW HIGH
--- ---- --- ----
Second Quarter 1993............. $2.00 $6.00 $4.00 $8.00
Third Quarter 1993.............. $1.00 $4.50 $3.00 $6.00
Fourth Quarter 1993............. $1.50 $3.38 $3.00 $4.50
First Quarter 1994.............. $1.00 $3.38 $2.25 $4.12
Second Quarter 1994
(through May 26, 1994)........ $1.25 $3.25 $2.12 $4.25
Second Quarter 1994
(since May 27, 1994).......... $2.00 $2.81 $2.25 $3.12
Third Quarter 1994.............. $1.88 $2.62 $2.12 $2.75
Fourth Quarter 1994............. $1.75 $2.88 $2.06 $3.00
First Quarter 1995.............. $1.25 $2.13 $1.50 $2.50
Second Quarter 1995............. $1.31 $2.06 $1.44 $2.38
Third Quarter 1995.............. $1.50 $2.00 $1.88 $2.38
Fourth Quarter 1995............. $1.50 $1.75 $1.69 $1.88
CLASS A AND B WARRANT TRADING
Since May 27, 1994, the Class A Warrants have been included on the
NASDAQ Small-Cap Market under the symbol "TXLIW." The following table sets forth
the range of high and low bid and asked prices for the Class A Warrants since
May 27, 1994 through December 31, 1995. The last
Page 23 of 43
reported trade on NASDAQ for the Class A Warrants on December 28, 1995 was
$0.44. As of December 31, 1995, the Company had approximately 21 Class A
warrantholders of record.
BID ASK
---------------- ----------------
LOW HIGH LOW HIGH
--- ---- --- ----
Second Quarter 1994
(since May 27, 1994).............. $0.38 $0.62 $0.62 $0.88
Third Quarter 1994.................. $0.44 $0.62 $0.56 $0.75
Fourth Quarter 1994................. $0.38 $0.62 $0.56 $0.88
First Quarter 1995.................. $0.25 $0.44 $0.38 $0.75
Second Quarter 1995................. $0.25 $0.56 $0.38 $0.69
Third Quarter 1995.................. $0.50 $0.56 $0.63 $0.69
Fourth Quarter 1995................. $0.44 $0.50 $0.56 $0.63
Since May 27, 1994, the Class B Warrants have been included on the
NASDAQ Small-Cap Market under the symbol "TXLIZ." The following table sets forth
the range of high and low bid and asked prices for the Class B Warrants since
May 27, 1994 through December 31, 1995. The last reported trade on NASDAQ for
the Class B Warrants on December 29, 1995 was $0.25. As of December 31, 1995,
the Company had approximately 20 Class B warrantholders of record.
BID ASK
---------------- ----------------
LOW HIGH LOW HIGH
--- ---- --- ----
Second Quarter 1994
(since May 27, 1994).............. $0.25 $0.50 $0.50 $0.75
Third Quarter 1994.................. $0.31 $0.38 $0.50 $0.62
Fourth Quarter 1994................. $0.25 $0.38 $0.38 $0.56
First Quarter 1995.................. $0.13 $0.38 $0.19 $0.44
Second Quarter 1995................. $0.13 $0.28 $0.19 $0.34
Third Quarter 1995.................. $0.25 $0.28 $0.31 $0.34
Fourth Quarter 1995................. $0.25 $0.25 $0.34 $0.34
DIVIDEND POLICY
The Company never has paid dividends on its Common Stock. The Company's
ability to declare and pay dividends on the Common Stock is restricted under the
Company's Amended and Restated Loan Agreement dated December 31, 1994 between
Texoil and First Interstate Bank of Texas, N.A. The terms of the Company's
Series A Preferred Stock also prohibit the payment of dividends on Common Stock
unless cumulative dividends on the Series A Preferred Stock for all prior
dividend periods and for the then current quarterly dividend period have been
paid or set aside out of legally available funds for payment. The annual
dividend amount on the currently outstanding Series A Preferred Stock is
$276,000.
The payment of future dividends on Common Stock, if any, will be
reviewed periodically by the Company's Board of Directors and will depend upon,
among other things, the Company's financial condition, funds available from
operations, the amount of anticipated capital and other expenditures, the
Company's future business prospects, any restrictions imposed by the Company's
present or future credit arrangements, and dividend restrictions imposed by the
terms of the Series A Preferred Stock or any other series of preferred stock
which may be established. It is likely,
Page 24 of 43
however, that for the foreseeable future, funds otherwise available for
dividends on Common Stock, if any, will be retained by the Company to finance
the growth of its business.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto reflected in the
Index to Consolidated Financial Statements on page F-1.
GENERAL
The Company uses the full cost method of accounting for its investment
in oil and gas properties. Under the full cost method, all costs of acquisition,
exploration and development of oil and natural gas reserves are capitalized into
a "full cost pool" for each cost center (generally defined as a country). Oil
and gas properties in the pool are depleted and charged to operations using the
unit of production method based on the ratio of current production to total
proved recoverable oil and natural gas reserves. Under the full cost method, to
the extent that capitalized costs (net of depreciation, depletion and
amortization) exceed the discounted future net revenues of estimated proved oil
and natural gas reserves on an after-tax basis, such excess costs are charged to
operations as additional depreciation, depletion and amortization expense.
Certain costs associated with the acquisition and evaluation of unproved
properties may, however, be excluded from amortization until it is determined
whether or not proved reserves can be assigned to the properties. At December
31, 1995 the Company had costs of $711,603 associated with evaluation and
marketing of various unproved drilling prospects, some of which management is
continuing to evaluate, and some of which management is currently in the process
of marketing to other parties (see Note 4 to Consolidated Financial Statements).
At December 31, 1995, the Company's discounted future net revenues from
estimated proved reserves on an after-tax basis was only in excess of the net
capitalized costs in the Company's full cost pool by an amount of approximately
$300,000. So long as this condition continues, any increase in the Company's
full cost pool which is not offset by increased discounted future net revenues
from proved reserves on an after-tax basis (or, conversely, any decrease in the
Company's estimated discounted future net revenues from proved reserves on an
after-tax basis which is not offset) may result in charges to the Company's
operations. Certain events and conditions that may cause such charges cannot be
reasonably predicted by the Company. For example, the Company is unable to
predict with certainty whether, or to what extent, it may be required to
recognize charges to operations as a result of future writeoffs or writedowns of
proved reserve quantities or declines in oil and gas prices. Once incurred, a
writedown of oil and gas properties cannot be reversed at a later date even if
oil and gas prices subsequently rise.
At December 31, 1995, the average prices received by the Company for
its oil and gas production were $18.99 per barrel of oil and $3.81 per Mcf of
gas ($20.37 on a weighted average barrel of oil equivalent ("BOE") basis)
reflecting an increase of approximately $5.87 per BOE, or 40%, from the year end
1994 level.
Page 25 of 43
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 COMPARED
TO YEAR ENDED DECEMBER 31, 1995
While positioning itself to take advantage of exploration opportunities
under a new mode of operation begun in 1992 (see "Description of Business
Business Strategy"), Texoil recorded net operating losses of $1,142,943 and
$726,415 in the years ended December 31, 1994 and 1995, respectively. The
reduction in the Company's comparative net losses resulted from the following
factors:
Decrease (increase)
IN NET LOSS
(Increase) in depreciation, depletion and
amortization expense $ (299,593)
Decrease in net general and
administrative expenses 216,821
Increase in oil and gas production
income (revenues less lease operating
expenses and production taxes) 435,613
Other expenses, net 63,687
$ 416,528
The increase in depreciation, depletion and amortization ("DD&A")
expense was due primarily to increases in oil and gas production volumes
attributable to new wells that went on production in the Buras Field in March
1994 and in the Bayou Lafourche Field in October 1994. Further compounding the
effect of higher production volumes were increases in the Company's DD&A rates
from $7.50 per BOE during the twelve months ended December 31, 1994 to $9.83 per
BOE during the twelve months ended December 31, 1995. The increased DD&A rates
in 1995 reflect relatively higher cost additions that were made in the fourth
quarter of 1994 associated with the producing Ariel #1 well and the third
quarter of 1995 associated with the Buras Landing test well which resulted in a
dry hole to the "base" of oil and gas properties subject to DD&A. The Company's
net share of the Barrois #1 Well dry hole costs was approximately $158,000.
The decrease in net general and administrative expenses was due largely
to the absence of expenses associated with the Company's June 1994 public
offering of its securities (such offering efforts began in the fourth quarter of
1993).
The increases in oil and gas production income during 1995 are
attributable to increases in production volumes noted above totaling
approximately 19,200 BOE and an increase in average product prices amounting to
approximately $5.87 per BOE. Oil and gas price fluctuations were essentially
neutral during the first three quarters of 1995, as increases in oil prices in
the nine month period ending September 30, 1995 were substantially offset by
declines in gas prices for the same period. During the fourth quarter of 1995,
however, prices for both oil and gas increased significantly. During the fourth
quarter, oil prices ranged from a low of $14.54 per barrel in October
Page 26 of 43
to a high of $19.35 per barrel in December 1995. Gas prices also ranged from a
low of $1.65 per Mcf in October to a high of $2.68 per Mcf in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
The oil and gas industry is a highly capital intensive business,
especially in the initial stages of development of a new venture. The Company
requires capital principally to fund the following expenses: (i) purchase of
leases and other interests in oil and gas producing properties; (ii) capital
expenditures under agreements for geological, geophysical and seismic costs and
drilling and completion costs of wells; and (iii) general and administrative
expenses. The amount of available capital will affect the scope of the Company's
operations and the speed of its growth. Texoil has historically operated with a
working capital deficiency as the capital expenditures required to establish oil
and gas production are generally incurred prior to the commencement of
production revenues.
GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLANS. The Company has
suffered recurring operating losses and cash flow and working capital deficits
that raise substantial doubt about its ability to continue as a going concern.
There are no remaining unexpended proceeds from the Public Offering after
allowing for the payment of such capital expenditures and of certain debt
obligations and preferred stock dividends which were made simultaneous with or
subsequent to the closing of the Public Offering (see " - Cash Flow from
Financing" below). In order to fund Texoil's proposed level of participation in
various non-operated and Company-operated exploration prospects described below,
management believes that it will be necessary to seek an additional capital
infusion, and/or business combination transaction. The board of directors,
acting on January 31, 1996, formed a special committee of its board of directors
charged with seeking out and considering significant transactions to maximize
shareholder value, including mergers and/or an equity infustion of capital.
Further, the board, acting on or about February 22, 1996, engaged the services
of Southcoast Capital Corporation to provide financial advisory services in
connection with the solicitation of possible financial transactions, mergers and
or acquisitions. Southcoast Capital contacted over twenty industry participants
on behalf of the Company and has completed its engagement. While these
preliminary transactional steps have been undertaken by the board, the
structure, timing, amount and value of any such transaction are presently
uncertain. Should the Company be unsuccessful in obtaining either an equity
infusion or in completing a merger, management would dispose of selected assets
with the intent of generating sufficient funds to develop its remaining oil and
gas properties and to support its existing operations through December 31, 1996.
The Company would, however, in that instance be required to significantly reduce
its proposed level of investment in the new exploration opportunities described
below as well as to take measures to address its working capital deficit (for
further discussion see - "Description of Business - Recent Developments.").
There can be no assurance, however, that the Company would either
generate sufficient funds from the sale of selected assets or be successful in
addressing its working capital deficit. The report of the Company's independent
accountants includes an explanatory paragraph describing the substantial doubt
about the Company's ability to continue as a going concern.
CASH FLOW FROM OPERATIONS. The Company's net cash flow from operations
resulted in deficits of $593,155 and $34,191 in cash for the years ended
December 31, 1994 and 1995, respectively. The reduction in the deficit in the
Company's operating cash flow in 1995 reflects the increase in oil and gas
production income and decrease in general and administrative expenses noted
above, partially offset by changes in certain working capital components since
December 31, 1994.
Page 27 of 43
CASH FLOW FROM FINANCING. Texoil has a revolving credit/term loan
agreement with First Interstate Bank of Texas, N.A. ("FIBOT"). The revolving
credit/term loan agreement dated December 31, 1994, provides for interest on
borrowings at a rate of 1 1/4% above FIBOT's prime rate and is secured by
substantially all of Texoil's oil and gas producing properties. Borrowings at
various levels have remained outstanding under a previous credit/term agreement
since November 12, 1991; borrowings outstanding to FIBOT amounted to $323,000 at
December 31, 1995, and the Company has remained current on interest and
principal payments as they have become due. The borrowing base of the new
credit/term loan was established at $575,000 in December 1994 and declined by
$21,000 each month through December 1995 and, thereafter will decline by $19,000
each month through May 1997. The revolving credit/term loan agreement contains
certain financial covenants related to maintenance of working capital (current
assets, plus unevaluated property costs anticipated to be recovered currently,
must exceed current liabilities) and stockholders' equity (at least $2,300,000).
The Company was not in compliance with such covenants as of December 31, 1995
and a waiver has been obtained from FIBOT with respect to these covenants until
the earlier of the filing date of its first quarter 10-QSB or May 31, 1996. As a
requirement for providing this waiver, a major shareholder and director, T. W.
Hoehn, Jr., personally guaranteed the repayment of the balance of the loan. The
Company does not expect to be in compliance with its financial covenants upon
the expiration of the waiver and anticipates requesting an extension of such
waiver.
On April 2, 1993, the Board of Directors authorized the Company to
incur additional, short-term borrowings from a combination of its chairman,
other stockholders and unrelated private investors. As of March 31, 1994, the
Company had borrowed $1,837,500 from these persons in order to finance the
Company's working capital needs prior to completion of the Public Offering in
June 1994. As approved by the Board of Directors, interest has been paid on such
outstanding borrowings at a rate of 2% per annum over FIBOT's prime rate (8-1/2%
at December 31, 1995). As an incentive for the Company's chairman, the other
stockholders and the private investors to enter into these loan arrangements,
the Company issued such individuals warrants to purchase 154,375 shares of the
Company's common stock (exercisable until June 1996) at an exercise price equal
to the per share Public Offering price attributable to one share of common stock
included in the public "unit" offering, being $3.00 per share. In accordance
with the terms of the underlying loan agreements, $800,000 of such borrowings
was repaid subsequent to closing of the Public Offering in June 1994, an
additional $200,000 was repaid by the due date, resulting in a balance of
$837,500 as of December 31, 1994. Net borrowings of an additional $225,000 were
made under the bridge loan program during 1995 (without issuance of additional
common stock purchase warrants) and of the noteholders who were owed the
aggregate balance outstanding of $1,062,500 at December 31, 1995, noteholders of
all but $12,500 (which will be repaid at April 1, 1995) have agreed to extend
the maturity of their notes to the earlier of consummation of any additional
equity infusion transaction or May 1, 1996. Further borrowings under the bridge
loan facility may possibly be made.
Prior to entering into the financing arrangement described in the
preceding paragraph, Texoil had historically supplemented its funding needs with
borrowings from its former Chairman at FIBOT's prime rate. After giving effect
to the conversion of a portion of such indebtedness to preferred stock in 1992,
the Company remained indebted to its Chairman in the principal amount of
$250,000 pursuant to a promissory note payable on December 31, 1994 bearing
interest at FIBOT's prime rate (the note was repaid on its due date). Dividends
of $2.00 per share on the outstanding preferred stock were declared for the last
two months of 1992 and paid in January 1993 and quarterly dividends of $3.00 per
share have been declared in each subsequent quarter.
CAPITAL EXPENDITURES. Texoil's net capital expenditures totaled
$1,998,725 and $176,185 in the years ended December 31, 1994 and 1995,
respectively. Of the former amount, approximately $613,073 relates to an
exploratory well at the non-operated Bayou Lafourche Field that was
Page 28 of 43
completed in June 1994 and went on production in October 1994. Of the latter
amount, approximately $158,000 relates to the drilling and plugging and
abandonment of the test well at the Company's Buras Landing Prospect that
resulted in a dry hole during the third quarter of 1995. The Company's capital
expenditures during the second half of 1994 were funded largely from a portion
of the proceeds of the Company's public offering. There are no remaining
unexpended proceeds from the public offering after allowing for the payment of
such capital expenditures and of certain debt obligations and preferred stock
dividends which were made simultaneous with or subsequent to the closing of the
public offering.
FUTURE CAPITAL REQUIREMENTS. Subject to obtaining an additional equity
infusion of at least $1.5 million (or other financing or transactional
arrangements as discussed above under "- Going Concern Uncertainty and
Management Plans"), Texoil anticipates making further capital expenditures
during 1996 relating to its participation in a series of exploration prospects
in South Louisiana and Texas that are described in the following paragraphs.
RACELAND 3-D EXPLORATION PROJECT
At Raceland, in Lafourche Parish, Louisiana, the Company plans to
conduct a 64 square mile 3-D seismic survey during the second quarter of 1996.
Raceland encompasses a producing field which has been a significant producer
subsequent to its discovery prior to World War II. The prospect is situated
adjacent to a large salt dome structure with accompanying complicated geology.
Management believes the salt dome is underproduced for a feature of its size and
type, and the area has never been the subject of modern technology such as 3-D
seismic. Management anticipates that the confirmation of several exploratory
prospects may result from the planned 3-D survey. The Company had assembled over
12,000 gross acres (3,600 net to Texoil) of oil and gas lease options and leases
as of December 31, 1995, and had expanded its holdings to over 17,170 gross
acres (5,000 net to Texoil) as of March 8, 1996. During the fourth quarter of
1995, Texoil sold working interest participation rights in the Raceland 3-D
Exploration Project to certain industry participants on a promoted basis,
retaining a 12% participation during the 3-D seismic survey phase, and a 30.5%
ownership through the land and drilling phases, and received $329,735 in the
form of prospect generation fees and reimbursement of previously incurred
pre-3-D geological and geophysical costs as well as geological and geophysical
costs associated with the planned 3-D survey. The Company anticipates making
capital expenditures at Raceland for 3-D seismic permitting, data acquisition,
processing and interpretation during the first three quarters of 1966 amounting
to approximately $680,000. Texoil is the Operator of the Raceland 3-D
Exploration Project, and its working interest partners include Pogo Producing
Company, Southwest Gas Supply (a subsidiary of MCN Corp), GEDD, Inc., Shore Oil
Company, and 3DX Technologies, Inc.
GREENS LAKE PROSPECT
At Greens Lake Prospect in Galveston County, Texas, the Company intends
to participate in an 18 square mile 3-D seismic survey that is planned to
commence during the second quarter of 1996. During the fourth quarter of 1995,
Texoil sold interests in the Greens Lake Prospect to a single industry
participant, a large independent oil company, on a promoted basis, retaining a
15% participation through the 3-D seismic survey phase and a 40% working
interest ownership in the land and drilling phases. The Company received
$136,288 in the form of prospect generation fees and reimbursement of geological
and geophysical costs relating to pre-3-D and 3-D seismic related activities
carried out by the Company. The Company anticipates making capital expenditures
at Greens Lake for 3-D seismic permitting, data acquisition, processing and
interpretation during the first three quarters of 1966 amounting to
approximately $231,000. As of December 31, 1995, the Company and the large
independent, who will serve as the operator, had
Page 29 of 43
assembled over 1,200 gross acres (480 net to Texoil) of oil and gas lease
options and leases, and had expanded those holdings to over 3,500 gross acres
(1,400 acres net to Texoil) as of March 8, 1996.
LAUREL GROVE PROSPECT
At Laurel Grove Prospect in Lafourche Parish, Louisiana, Texoil is
planning to participate in a 23 square mile 3-D seismic survey during 1996. The
Company had assembled 1,970 net acres of oil and gas lease options supplemented
by a 1,900 net acre farmout over this prospect as of December 31, 1995. The
Company anticipates making capital expenditures at Laurel Grove for 3-D seismic
permitting, data acquisition, processing and interpretation during 1996 of
approximately $84,000. Efforts to sell working interest participation rights to
industry partners on this prospect are ongoing.
TEXAS MERIDIAN
Under an agreement dated December 31, 1992, Texoil sold fourteen
unleased exploratory geological prospects to Texas Meridian for $500,000 cash
and is entitled to receive overriding royalties of from 2.0% to 3.75% in each
well subsequently drilled on the prospects sold. The Texas Meridian Resources
Corporation ("Texas Meridian") prospect sale agreement also grants Texoil the
option to acquire, on an unpromoted basis, up to a 10% working interest in wells
drilled on the prospects sold. Management anticipates that any drilling
recommendations will be made by Texas Meridian after it has completed
three-dimensional ("3-D") seismic acquisition, processing and evaluation of each
prospect area. The Company's overriding royalty interests and working interest
options are expected to relate to most but not all of the lease acreage which
Texas Meridian may choose to assemble with respect to each prospect. The
prospect at Bayou Lafourche (referred to in the paragraph above) is the first
such Texas Meridian-operated prospect in which Texoil exercised its option to
participate as a working interest owner. Management believes it likely that
Texoil will elect to participate for its full 10% working interest in most, if
not all subsequent wells proposed by Texas Meridian under the aforementioned
agreement, but the final decision of whether it will do so will depend upon
management's review of then available geological and geophysical data,
management's analysis of the project economics, and the Company's ability to
finance its participation. During the fourth quarter of 1995, the Company
declined to participate in two existing producing wells and one exploratory well
that was then being drilled by Texas Meridian on the Lake Boeuf Prospect in
Lafourche Parish, Louisiana. Management's decision not to participate was based
upon an analysis of the economics of the project versus the cost of the capital
necessary to participate. The number of wells actually proposed for drilling by
Texas Meridian under the aforementioned agreement will depend on, among other
factors, the results of the 3-D seismic surveys and, with respect to development
wells, whether the initial exploratory test well was successful.
OTHER
The Company also expects to make capital expenditures in 1996 with
respect to certain exploratory prospects retained by it after the Texas Meridian
prospect sale. These capital expenditures are expected to include costs for
further geological and geophysical evaluation of the prospects, including 3-D
seismic surveys where warranted, and leasehold acquisition and other costs
necessary for Texoil to obtain working interest participants in the prospects
and, possibly, prepare one or more of the prospects for drilling during 1996.
The amount and timing of such capital expenditures will depend on many factors,
including the Company's ability to obtain working interest participants for
drilling of the prospects and the preferences of such participants as to these
matters, as well as the availability of sources to finance the Company's equity
in such prospects.
Page 30 of 43
CHANGING PRICES. Texoil's revenues and the carrying value of its oil
and natural gas properties are affected by changes in oil and natural gas
prices. Moreover, Texoil's ability to maintain current borrowing capacity and to
obtain additional capital on attractive terms also is substantially dependent
upon oil and natural gas prices. Oil and natural gas prices are subject to
substantial seasonal, political and other fluctuations which are beyond the
ability of Texoil to control or accurately predict.
TAX NET OPERATING LOSS CARRYFORWARDS
Texoil had approximately $5,168,000 of tax net operating loss ("NOL")
carryforwards at December 31, 1995. Additionally, approximately $2,161,000 in
depletion carryforwards and $82,000 of investment tax credit ("ITC")
carryforwards remain at December 31, 1995. Section 382 of the Internal Revenue
Code of 1986, as amended, limits the availability of the NOL and ITC
carryforwards if there is a change of ownership of more than 50% of the Company
within a retroactive three year period. This limitation, if applied, would limit
the utilization of the NOL and ITC carryforwards in each taxable year to an
amount equal to the product of the federal long-term tax-exempt bond rate
prescribed by the Internal Revenue Service and the fair market value of the
Company immediately prior to the time of the ownership change. Texoil's
management anticipates, however, that should a cumulative change in ownership of
Texoil in excess of 50% be deemed to occur within a retroactive three year
period in connection with any recent or proposed securities transaction, the
resulting limitation would not have a material impact on the Company's financial
position because no deferred tax asset has been established for the Company's
significant net operating loss carryforwards.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No.
121). SFAS No. 121 requires, among other things, that impairment losses on
assets to be held, and gains or losses from assets that are expected to be
disposed of, be included as a component of income from continuing operations.
The Company will adopt SFAS No. 121 in 1996 and its implementation is not
expected to have a material effect on the consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." (SFAS No. 123). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No.25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. However, the
Company will be required to provide additional disclosures beginning in 1996
providing pro forma effects as if the Company had elected to adopt SFAS No. 123.
Item 7. FINANCIAL STATEMENTS.
See page F-1 for Index to Financial Statements.
Page 31 of 43
[THIS PAGE LEFT INTENTIONALLY BLANK]
Page 32 of 43
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company. All directors are elected for a term of one
year and serve until their successors are elected and qualified. All executive
officers hold office until their successors are elected and qualified.
NAME AGE POSITION WITH THE COMPANY
Walter L. Williams(1)........................68 Chairman of the Board of
Directors, Chief Executive
Officer, and a Director
John L. Graves...............................38 President, Chief Operating
Officer and a Director
Ruben Medrano................................38 Vice President - Operations
T. W. Hoehn, Jr.(1)..........................67 Director
Joe C. Richardson, Jr.(1)(2).................68 Director
William F. Seagle(2).........................68 Director
T. W. Hoehn, III(2)..........................45 Director
- ----------------------------
(1) Member of Executive Committee.
(2) Member of Compensation and Audit Committees.
WALTER L. WILLIAMS has been a director of Texoil since he co-founded
it in 1964 and served as its President since 1971. He became Chairman and Chief
Executive Officer in July 1995. Prior to forming Texoil, Mr. Williams was an
independent petroleum consultant for six years and Manager of Drilling and
Production for an independent oil company prior to that period. He received a
Bachelor of Science degree in Petroleum Engineering from Texas A&M in 1949 and
is a Registered Professional Engineer in both the States of Texas and Louisiana.
JOHN L. GRAVES has been a director of Texoil since 1990, Executive
Vice President since December 1992 and President since July 1995. He has been
employed by Texoil since joining it as a field landman in 1981 and became Vice
President-Land in 1987. He received a Bachelor of Arts in History and Political
Science (double major) from Texas A&M University in 1980. Mr. Graves is a member
of the American Petroleum Institute, the American Association of Professional
Landmen and the Association of International Petroleum Negotiators. Mr. Graves
is a son-in-law of Mr. Williams.
RUBEN MEDRANO joined Texoil as a consultant in November 1992 and
became Vice President - Operations effective July 15, 1994. From 1980 to 1992,
Mr. Medrano was employed by Exxon Company, U.S.A. as a reservoir and production
engineer and as a field superintendent. Mr. Medrano received a B.S. degree in
Mechanical Engineering from the University of Texas at El Paso in 1979. He is a
member of the Society of Petroleum Engineers, and is a registered professional
engineer in the State of Texas.
Page 33 of 43
T. W. HOEHN, JR. has been a director of Texoil since he co-founded it
in 1964 and was formerly its Chairman. He is Chairman of Hoehn Motors, Inc., a
multi-line automobile agency located in Carlsbad, California, which he founded
in 1975.
JOE C. RICHARDSON, JR. has been a director of Texoil since April
1992. He has been President of Vital Energy, Inc. since 1980. Prior to that he
was Manager of Drilling and Production for Shamrock Oil & Gas Corporation,
formed and operated a consulting petroleum engineering firm, and formed and
operated a public oil and gas company. Mr. Richardson received a Bachelor of
Science degree in Petroleum Engineering and a Bachelor of Science degree in
Mechanical Engineering from Texas A&M in 1950 and is a Registered Professional
Engineer in the State of Texas.
WILLIAM F. SEAGLE has been a director of Texoil since 1977. For a
number of years he has had business and personal interests in construction, real
estate and investments.
T. W. HOEHN, III has been a director of Texoil since 1984. He is
President and General Manager of Hoehn Motors, Inc., a multi-line automobile
agency located in Carlsbad, California, where he has been employed since 1975.
He is a graduate of Stanford University and a son of Mr. T. W. Hoehn, Jr.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under Rule 16a-3(d) during 1995 and Forms 5 and
amendments thereto furnished to the Company with respect to 1995, the Company is
not aware of any director, officer, or beneficial owner of more than 10% of any
class of equity securities of the Company registered pursuant to Section 12 of
the Securities Exchange Act of 1934 that failed to file on a timely basis, as
disclosed in the above forms, reports required by Section 16(a) of the Exchange
Act during such year.
Item 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table reflects all forms of compensation for each of the
years ended December 31, 1995, 1994 and 1993 for Walter L. Williams' services to
the Company. No other executive officer had salary and bonus which in 1995
exceeded $100,000.
<TABLE>
<CAPTION>
Long-term Compensation
--------------------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other Securities All
Annual Restricted Underlying Other
Name And Principal Compensa- Stock Options/ Ltip Compensa-
Position Year Salary Bonus Tion (1) Awards Sars(#) Payouts Tion
- ----------------- ---- ------ ----- -------- ------ ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Walter L. Williams, 1995 $ 84,000 $ - $42,645 $ - - $ - $ -
President and Chief 1994 99,000 - 8,532 - 50,000 (2) - -
Executive Officer 1993 78,000 - 4,445 - - - -
</TABLE>
- -----------
(1) See "--1995 Stock Compensation Plan" and "--Employee Overriding
Royalty Plans" below.
(2) See "--Option Grants" below.
Page 34 of 43
1995 STOCK COMPENSATION PLAN
In July 1995, the Company's stockholders approved the 1995 Stock
Compensation Plan ("the Plan"), which provides for the issuance of shares of
common stock to certain employees and consultants whose cash compensation was
reduced by 30% effective April 1, 1995. Pursuant to the Plan, a total of 77,447
shares of common stock were issued to such individuals on recognition of their
reduced cash compensation for the months of April through December 1995 and for
services rendered and reimbursement of expenses incurred. The Company recognized
compensation expense in the amount of $119,870 representing the fair market
value of such shares issued in lieu of reduced cash compensation for the months
of April through December 1995. An additional 19,133 shares of common stock were
issued under the Plan through February 1996, for which compensation expense in
the amount of $26,360 has been recognized. Subject to stockholder approval, the
Company anticipates the creation of a 1996 Stock Compensation Plan effective
April 1, 1996.
EMPLOYEE OVERRIDING ROYALTY PLANS
In previous years, Texoil has granted to Walter L. Williams and a former
officer overriding royalty interests in exploration prospects generated,
acquired and sold through their respective efforts. This arrangement has
provided performance-based incentive compensation for these officers in lieu of
Company-sponsored retirement or savings plans. For similar reasons, John L.
Graves and certain former employees who have not been directly involved in
prospect generation have in previous years received overriding royalty interests
in a royalty "pool" (ranging from 0.5% to 1.0%) based on a formula determined by
reference to the overall royalty burdens on each lease included in the generated
prospects when they were sold to industry participants. The awarded overriding
royalty interests are not subject to continued employment and remain the
grantee's property for so long as the underlying lease remains in effect. No
overriding royalty interests were granted by Texoil to its management or other
personnel on the 14 prospects sold to Texas Meridian and none are expected to be
granted on Texoil's present exploratory prospect inventory, with the exception
of a 2% of 8/8ths overriding royalty granted to Dennis A. Drake, the Company's
consulting geologist, as the generator of the Greens Lake Prospect. Overriding
royalty interest payments made to Texoil's current and former officers (directly
or pursuant to their interests in the royalty "pool") during the years ended
December 31, 1993, 1994 and 1995 were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
OFFICER/GROUP 1993 1994 1995
------------- ---------- ---------- ----------
Walter L. Williams............... $ 4,445 $ 8,532 $ 6,645
John L. Graves................... 4,189 4,495 1,496
Former officers (two in group)... 28,200 (1) 29,012 (1) 13,342(1)
---------- --------- ---------
$ 36,834 $ 42,039 $ 21,483
========== ========= =========
- --------
(1) These amounts include payments of $21,089, $26,318 and $13,342 in 1993,
1994 and 1995, respectively, to Texoil's former vice president of
exploration who terminated his employment in October 1991.
OPTION GRANTS
The following table sets forth additional information with respect to a
stock option granted to Walter L. Williams for services rendered in 1994. This
option to purchase Common Stock was granted in July 1994 under the Company's
1994 Stock Option Plan, under which, the Company
Page 35 of 43
granted Mr. Williams and two other officers options to purchase an aggregate of
110,000 shares of Common Stock at an exercise price of $3.00 per share.
<TABLE>
<CAPTION>
Number Of Percent Of Total
Securities Options/sars
Underlying Granted To Exercise
Options/sars Employees In Or Base Expiration
Name Granted (#) Fiscal Year 1994 Price ($/Sh) Date
- ---- ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Walter L. Williams 50,000 45.4% (1) $3.00 July 26, 2004 (2)
</TABLE>
(1) Excludes option granted to non-employee consultant; percentage
including such option is 43.5%.
(2) Option expires 10 years after the date of grant, and vests 100% on
first anniversary of date of grant. If prior to exercise or expiration
of the option a "change of control" occurs, the entire option generally
becomes immediately exercisable. Such a "change of control" occurs when
(i) any person acquires ownership of the Company's securities
representing more than 50% of the combined voting power of the
Company's then outstanding securities, or (ii) at any given time, less
than 50% of the then incumbent members of the Board of Directors have
been continuously incumbent during the preceding 18 months.
No options were granted under any stock option plan during 1995, and
40,000 options to purchase Common Stock issued in 1994 to an officer expired in
November 1995.
Subsequent to December 31, 1995, the Company's board of directors
authorized the issuance of options to a director to purchase 50,000 shares of
the Company's common stock at an exercise price of $1.56 per share with an
expiration date to be determined.
DIRECTOR COMPENSATION
Directors who are not employed by the Company are authorized to be paid
a fee of $500 for each meeting of the Board of Directors attended (including
committee meetings, if any, held in conjunction therewith). No such fee was paid
during 1995. The Company reimburses each director for his actual and necessary
expenses reasonably incurred in connection with attending meetings of the Board
and its committees.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of February 29, 1996 the number of
shares of the Company's equity securities owned by (i) each person known by the
Company (based on publicly-available filings with the Commission) to be the
holder of more than five percent of its voting securities, (ii) each director
and executive officer of the Company, and (iii) all of the Company's directors
and executive officers as a group. Unless otherwise indicated, each holder has
sole voting and investment power with respect to the shares of capital stock
owned by such holder.
Page 36 of 43
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF
(ADDRESS INDICATED IF NOT A DIRECTOR OR AN OFFICER) BENEFICIAL OWNERSHIP PERCENT OF CLASS
--------------------------------------------------- -------------------- ----------------
COMMON STOCK:
<S> <C> <C>
T. W. Hoehn, Jr........................................ 1,523,566(1)(2) 33.95%
John L. Graves......................................... 397,308(3) 8.96%
Walter L. Williams..................................... 391,201(4) 9.4%
Wellington Management Company.......................... 330,000(5) 7.94%
Joe C. Richardson, Jr.................................. 282,009(6) 6.36%
T. W. Hoehn, III....................................... 240,519(7) 5.77%
William F. Seagle...................................... 67,446(8) 1.62%
Directors and Executive Officers
as a Group (6 persons)................................ 2,902,049(1)(2)(3)(4) 57.12%
(6)(7)(8)
SERIES A PREFERRED STOCK:
T. W. Hoehn, Jr........................................ 20,000(9) 87.0%
Robert A. Hoehn........................................ 3,000(10) 13.0%
Directors and Executive Officers
as a Group (6 persons)................................ 20,000(9)(10) 87.0%
</TABLE>
(1) Excludes shares of Common Stock issuable upon conversion of an
aggregate 23,000 outstanding shares of Series A Preferred Stock, of
which 20,000 may be deemed held by T. W. Hoehn, Jr. and are presently
convertible into 666,667 shares of Common Stock.
(2) Includes 332,500 shares issuable to Mr. Hoehn pursuant to presently
exercisable warrants.
(3) Includes 281,384 shares issuable to Mr. Graves pursuant to a presently
exercisable option and 97,578 shares owned by Lynn W. Graves, wife of
Mr. Graves and the Secretary of the Company. Mr. Graves disclaims
beneficial ownership of such shares.
(4) Includes 35,268 shares owned by Betty B. Williams, wife of Mr.
Williams, and 5,000 shares issuable to Mrs. Williams pursuant to a
presently exercisable warrant. Mr. Williams disclaims beneficial
ownership of such shares. Does not include 50,000 shares issuable upon
exercise of outstanding stock options which are not presently
exercisable.
(5) Wellington Management Company (75 State Street, Boston, MA 02109), in
its capacity as investment advisor, may be deemed beneficial owner of
these shares which are owned by numerous investment counseling
clients.
(6) Includes 281,384 shares issuable pursuant to a presently exercisable
option and 625 shares issuable pursuant to a presently exercisable
warrant.
(7) Includes 15,000 shares issuable pursuant to presently exercisable
warrants.
(8) Includes 9,250 shares issuable pursuant to presently exercisable
warrants.
(9) These shares presently are convertible into 666,667 shares of Common
Stock. Of these shares, 1,000 shares are owned of record by Mr.
Hoehn's wife, Carolina Vivanco Hoehn, and 4,000 shares are owned of
record by The BJH Foundation, a charitable foundation of which Mr.
Hoehn is a trustee. Mr. Hoehn shares voting and investment power with
two co-trustees of the Foundation with respect to these 4,000 shares.
Mr. Hoehn disclaims beneficial ownership of all 5,000 shares.
(10) These shares presently are convertible into 100,000 shares of Common
Stock. Robert A. Hoehn (5566 Paseo Del Norte, Carlsbad, CA 92008) is
the son of T. W. Hoehn, Jr. and the brother of T. W. Hoehn, III.
Page 37 of 43
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Nine individuals, some of whom are stockholders of the Company, have made
interim debt financing available to the Company for working capital purposes. As
of March 31, 1994, the Company had borrowed $1,737,500 from these persons in
order to finance the Company's working capital needs prior to completion of the
Public Offering in June 1994. As approved by the Board of Directors, interest
has been paid on such outstanding borrowings at a rate of 2% per annum over
FIBOT's prime rate (10-1/2% at December 31, 1995). As an incentive for the
Company's chairman, the other stockholders and the private investors to enter
into these loan arrangements, the Company issued such individuals warrants to
purchase 154,375 shares of the Company's common stock (exercisable until June
1996) at an exercise price equal to the per share Public Offering price
attributable to one share of common stock included in the public "unit"
offering, being $3.00 per share. In accordance with the terms of the underlying
loan agreements, $800,000 of such borrowings were repaid subsequent to closing
of the Public Offering in June 1994, an additional $100,000 was repaid in the
fourth quarter of 1994, resulting in a balance of $837,500 as of December 31,
1994. Net borrowings of an additional $225,000 were made under the bridge loan
program during 1995 (without issuance of additional common stock purchase
warrants) and of the noteholders who were owed the aggregate balance outstanding
of $1,062,500 at December 31, 1995 noteholders of all but $12,500 (which will be
repaid at April 1, 1996) have agreed to extend the maturity of their notes to
the earlier of consummation of any additional equity infusion transaction or May
1, 1996. Each interim loan is evidenced by a promissory note bearing interest at
an annual rate of 2% over the prime rate charged by the Company's bank lender,
First Interstate Bank of Texas, N.A. ("FIBOT"), which was 8 1/2% at December 31,
1995. Pursuant to these notes, the Company has issued to the interim lenders
warrants to purchase an aggregate of 154,375 shares of Common Stock exercisable
at any time before May 27, 1996 at a per share price of $3.00, being the price
attributable to one share of Common Stock in the Company's Public Offering. The
Company also has agreed to grant registration rights with respect to the Common
Stock for which the warrants are exercisable. One of the nine interim lenders is
the Company's former Chairman, T. W. Hoehn, Jr., from whom the Company has
borrowed $1,400,000 ($400,000 of which was repaid in June 1994 and $1,000,000 of
which is due no later than May 1, 1996) and to whom the Company has issued
warrants exercisable for 92,500 shares of Common Stock. Two other individuals
who made interim debt financing available to the Company in 1993 are William F.
Seagle and Joe C. Richardson, Jr., each of whom is a director of the Company and
loaned $25,000 (repaid in February 1995) and $12,500 (due no later than April 1,
1996), respectively, and has been issued a warrant exercisable for 1,250 shares
and 625 shares of Common Stock, respectively. Another 1993 interim lender is the
wife of Walter L. Williams, the Company's Chairman. She loaned $50,000 to the
Company that is due no later than May 1, 1996, and has been issued a warrant
exercisable for 5,000 shares of Common Stock. Betty Ann Hoehn Garrison and Peter
R. Garrison, the daughter and former son-in-law of T. W. Hoehn, Jr., also are
among the Company's 1993 interim lenders, each of whom loaned $150,000 and has
been issued a warrant for 15,000 shares of Common Stock. Of the aggregate amount
owed to Ms. Garrison, $50,000 was repaid from the proceeds of the Public
Offering in June 1994 and additional principal payments aggregating $100,000
were subsequently made during 1994. Mr. Garrison's loan was repaid in full from
the proceeds of the Public Offering. A 1995 interim lender is Hart Brown, the
father-in-law of Walter L. Williams, the Company's Chairman, who loaned
$100,000.
Page 38 of 43
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.1 - Agreement and Plan of Merger, by and between Comet Entertainment,
Inc., Comet Acquisition Subsidiary, Inc. and Texoil Company, dated as
of November 4, 1992 (incorporated by reference to Exhibit A to Item 7
of Form 8-K filed on November 18, 1992).
3.1 - Restated Articles of Incorporation of Texoil, Inc., as amended
(incorporated by reference to Exhibit 3.1 to Form 10-QSB filed on
November 2, 1994).
3.2 - Amended and Restated Bylaws of Texoil, Inc., as amended
(incorporated by reference to Exhibit 4.1 to Form 10-QSB filed on
August 3, 1994).
4.1 - Form of Warrant Agreement between Texoil, Inc. as Issuer and First
Interstate Bank of Texas, N.A. as Warrant Agent, dated May 26, 1994
(incorporated by reference to Exhibit 4.1 to Form SB-2 Registration
Statement No. 33-72082 filed on May 26, 1994).
4.2 - Specimen certificate for Class A Warrant (incorporated by reference
to Exhibit 4.2 to Form SB-2 Registration Statement No. 33-72082 filed
on May 26, 1994).
4.3 - Specimen certificate for Class B Warrant (incorporated by reference
to Exhibit 4.3 to Form SB-2 Registration Statement No. 33-72082 filed
on May 26, 1994).
4.4 - Specimen certificate for Underwriters Class A Warrant (incorporated
by reference to Exhibit 4.4 to Form SB-2 Registration Statement No.
33-72082 filed on May 26, 1994).
4.5 - Specimen certificate for Underwriters Class B Warrant (incorporated
by reference to Exhibit 4.5 to Form SB-2 Registration Statement No.
33-72082 filed on May 26, 1994).
4.6 - Specimen certificate for shares of Common Stock, par value $.01 per
share (incorporated by reference to Exhibit 4.6 to Form SB-2
Registration Statement No. 33-72082 filed on May 26, 1994).
10.1 - First Amended and Restated Loan Agreement dated as of December 31,
1994 between Texoil Company and First Interstate Bank of Texas, N.A.
(incorporated by reference to Exhibit 10.1 to Form 10-KSB for the year
ended December 31, 1994).
10.2 - Revolving Note in the original principal amount of $650,000, dated
December 31, 1994 executed by Texoil Company and made payable to the
order of First Interstate Bank of Texas, N.A. (incorporated by
reference to Exhibit 10.2 to Form 10-KSB for the year ended December
31, 1994).
Page 39 of 43
10.3 - Act of Mortgage and Security Agreement dated December 31, 1994
between Texoil Company and First Interstate Bank of Texas, N.A.
(incorporated by reference to Exhibit 10.3 to Form 10-KSB for the year
ended December 31, 1994).
10.4 - Stock Pledge Agreement dated December 31, 1994 by Texoil, Inc. for
the benefit of First Interstate Bank of Texas, N.A. (incorporated by
reference to Exhibit 10.4 to Form 10-KSB for the year ended December
31, 1994).
10.5 - Guaranty Agreement dated December 31, 1994 executed by Texoil, Inc.
for the benefit of First Interstate Bank of Texas, N.A. (incorporated
by reference to Exhibit 10.1 to Form 10-KSB for the year ended
December 31, 1994).
10.6 - Subordination Agreement and Assignment dated December 31, 1994
between Texoil Company, T. W. Hoehn, Jr. and Betty Brown Williams for
the benefit of First Interstate Bank of Texas, N.A. (incorporated by
reference to Exhibit 10.6 to Form 10-KSB for the year ended December
31, 1994).
10.7 - Agreement dated as of December 31, 1992 by and between Texas
Meridian Resources Exploration, Inc. and Texoil Company (incorporated
by reference to Exhibit 19.7 to Form 10-QSB filed on May 3, 1993).
10.8 - Form of Non-Qualified Stock Option Agreement entered into by and
between Texoil, Inc. and each of John L. Graves and Joe C. Richardson,
Jr. dated April 16, 1993 (incorporated by reference to Exhibit 19.10
to Form 10-QSB filed on May 3, 1993).
10.9 - Replacement Gas Purchase Contract between Texoil Company, ET AL. and
Delta Gas, Inc. dated January 1, 1987 (incorporated by reference to
Exhibit 19.11 to Form 10-QSB filed on May 3, 1993).
10.10 - Sublease Agreement between Presidio Exploration, Inc. and Texoil
Company dated as of January 1, 1990 (incorporated by reference to
Exhibit 19.12 to Form 10-QSB filed on May 3, 1993).
10.11 - Agreement, dated September 20, 1994, between Texoil Company and 3DX
Technologies, Inc. (incorporated by reference to Exhibit 10.11 to Form
10-KSB for the year ended December 31, 1994).
10.12 - Promissory Note, dated November 1, 1995, made by Texoil, Inc. to T.
W. Hoehn, Jr. and Betty Joe Hoehn Revocable Trust in original
principal amount of $900,000 (incorporated by reference to Exhibit
10.1 to Form 10-QSB filed on November 14, 1995).
10.13 - Promissory Note, dated November 1, 1995, made by Texoil, Inc. to Joe
C. Richardson, Jr. in original principal amount of $12,500
(incorporated by reference to Exhibit 10.2 to Form 10-QSB filed on
November 14, 1995).
10.14 - Promissory Note, dated November 1, 1995, made by Texoil, Inc. to
Betty Brown Williams in original principal amount of $50,000
(incorporated by reference to Exhibit 10.3 to Form 10-QSB filed on
November 14, 1995).
Page 40 of 43
10.15 - Promissory Note, dated November 1, 1995, made by Texoil, Inc. to
Hart Brown in original principal amount of $100,000 (incorporated by
reference to Exhibit 10.4 to Form 10-QSB filed on November 14, 1995).
10.16 - Stock Surrender Agreement, as amended, by, between and among Texoil,
Inc. and certain of its stockholders identified therein, dated
February 24, 1994 (incorporated by reference to Exhibit 10.23 to Form
SB-2 Registration Statement No. 33-72082 filed on May 26, 1994).
10.17 - Form of Warrant, dated June 1, 1994, issued by Texoil, Inc. to nine
individuals to purchase an aggregate 154,375 shares of common stock
(incorporated by reference to Exhibit 10.1 through 10.9 to Form 10-QSB
filed on August 3, 1994).
10.18 - 1994 Stock Option Plan, dated July 25, 1994 (incorporated by
reference to Exhibit 10.1 to Form 10-QSB filed on November 2, 1994).
10.19 - Non-Qualified Stock Option Agreement, dated July 26, 1994, between
Texoil, Inc. and Walter L. Williams (incorporated by reference to
Exhibit 10.2 to Form 10-QSB filed on November 2, 1994).
10.20 - Non-Qualified Stock Option Agreement, dated July 26, 1994, between
Texoil, Inc. and Ruben Medrano (incorporated by reference to Exhibit
10.4 to Form 10-QSB filed on November 2, 1994).
10.21 - Non-Qualified Stock Option Agreement, dated September 15, 1994,
between Texoil, Inc. and Marcus L. Countiss (incorporated by reference
to Exhibit 10.5 to Form 10- QSB filed on November 2, 1994).
10.22 - Lease Agreement between 1600 Smith Street Venture (Landlord) and
Texoil, Inc. (Tenant), dated June 1, 1995 (incorporated by reference
to Exhibit 10.23 to Form 10-QSB filed on August 4, 1995).
10.23 - 1995 Stock Compensation Plan (incorporated by reference to Exhibit
10.5 to Form 10-QSB filed on November 14, 1995).
10.24 - 1995 Stock Compensation Plan Participation Agreement, dated April 1,
1995 between Texoil, Inc. and Walter L. Williams (incorporated by
reference to Exhibit 10.6 to Form 10-QSB filed on November 14, 1995).
10.25 - 1995 Stock Compensation Plan Participation Agreement, dated April 1,
1995 between Texoil, Inc. and John L. Graves (incorporated by
reference to Exhibit 10.7 to Form 10-QSB filed on November 14, 1995).
10.26 - 1995 Stock Compensation Plan Participation Agreement, dated April 1,
1995 between Texoil, Inc. and Ruben Medrano (incorporated by reference
to Exhibit 10.8 to Form 10-QSB filed on November 14, 1995).
10.27 - 1995 Stock Compensation Plan Participation Agreement, dated April 1,
1995 between Texoil, Inc. and Lynn W. Graves (incorporated by
reference to Exhibit 10.9 to Form 10-QSB filed on November 14, 1995).
Page 41 of 43
10.28 - 1995 Stock Compensation Plan Participation Agreement, dated April 1,
1995 between Texoil, Inc. and Dennis A. Drake (incorporated by
reference to Exhibit 10.10 to Form 10-QSB filed on November 14, 1995).
10.29 - 1995 Stock Compensation Plan Participation Agreement, dated August
1, 1995 between Texoil, Inc. and Warren M. Shimmerlik (incorporated by
reference to Exhibit 10.11 to Form 10-QSB filed on November 14, 1995).
21.1 - Following are the Company's subsidiaries:
Other Name Under Which Jurisdiction of
NAME OF SUBSIDIARY SUBSIDIARY CONDUCTS BUSINESS INCORPORATION
Texoil Company None Tennessee
Texoil de Argentina, S.A. None Nevada
23.1 - Consent of BDO Seidman, LLP (filed herewith).
23.2 - Consent of Price Waterhouse LLP (filed herewith).
27.1 - Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
Report on Form 8-K, dated December 29, 1995, reporting the change in
Texoil's accountants from Price Waterhouse LLP to BDO Seidman, LLP.
Page 42 of 43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TEXOIL, INC.
By: /s/ WALTER L. WILLIAMS
Walter L. Williams,
Chairman and Chief Executive Officer
Date: MARCH 30, 1996
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ WALTER L. WILLIAMS Chairman of the Board, Chief MARCH 30, 1996
- --------------------------------- -----------------
Walter L. Williams Executive Officer and Director
(principal executive officer)
/s/ JOHN L. GRAVES President, Chief Operating MARCH 30, 1996
- --------------------------------- -----------------
John L. Graves Officer and Director, Acting
Chief Financial and Accounting
Officer
/s/ T. W. HOEHN, JR. Director MARCH 30, 1996
- --------------------------------- -----------------
T. W. Hoehn, Jr.
/s/ JOE C. RICHARDSON, JR. Director MARCH 30, 1996
- --------------------------------- -----------------
Joe C. Richardson, Jr.
/s/ T. W. HOEHN, JR. Director MARCH 30, 1996
- --------------------------------- -----------------
T. W. Hoehn, III
/s/ WILLIAM F. SEAGLE Director MARCH 30, 1996
- --------------------------------- -----------------
William F. Seagle
</TABLE>
Page 43 of 43
TEXOIL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants................................F-2 to F-3
Consolidated Balance Sheet as of December 31, 1995.......................F-4
Consolidated Statements of Loss and Deficit
for the years ended December 31, 1994 and 1995................F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1994 and 1995..............................F-6
Notes to Consolidated Financial Statements.......................F-7 to F-17
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Texoil, Inc.
We have audited the consolidated balance sheet of Texoil, Inc. at December 31,
1995 and the consolidated statements of loss and deficit and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Texoil,
Inc. at December 31, 1995 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 3 and 6
to the consolidated financial statements, the Company has suffered recurring
operating losses and cash flow and working capital deficits and must extend or
otherwise refinance notes payable due on or before December 31, 1996.
Accordingly, there is substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Notes 3 and 6. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Houston, Texas
March 22, 1996
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Texoil, Inc.
In our opinion, the accompanying consolidated statements of income (loss) and
retained earnings (deficit) and of cash flows present fairly, in all material
respects, the results of operations of Texoil, Inc. and its subsidiary and their
cash flows for the year ended December 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Texoil, Inc. for any period subsequent to
December 31, 1994.
The consolidated statements referred to above have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 3 and 6 to
the consolidated financial statements, because the Company has suffered
recurring operating losses as well as cash flow deficits and must extend or
otherwise refinance notes payable due on or before December 31, 1995, there is
substantial doubt about its ability to meet the future expenditure obligations
necessary to fully evaluate and develop its oil and gas properties and to
continue as a going concern. Management's plans in regard to these matters are
also discussed in Notes 3 and 6. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
PRICE WATERHOUSE LLP
Houston, Texas
March 20, 1995
F-3
TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995
----
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 2,414
Accounts receivable 426,026
Other current assets 35,537
------------------
Total current assets 463,977
Oil and gas properties, net (on the basis of full cost
accounting) 3,543,099
Other equipment, net 1,167
------------------
$ 4,008,243
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 678,071
Note payable to bank 323,000
Notes payable to stockholders 1,062,500
Preferred stock dividends payable 69,000
------------------
Total current liabilities 2,132,571
Other long-term liabilities 216,635
Stockholders' equity:
Series A preferred stock, $.01 par; redeemable and convertible with
liquidation preference of $100 per share plus cumulative accrued unpaid
dividends at annual rate of $12 per share; 10,000,000 shares
authorized; 23,000 shares issued and outstanding 2,300,000
Common stock, $.01 par; 50,000,000 shares authorized;
4,136,090 shares issued and outstanding 41,361
Additional paid-in capital 4,587,285
Deficit (5,269,609)
------------------
1,659,037
------------------
$ 4,008,243
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
<TABLE>
<CAPTION>
For The Year
Ended December 31,
--------------------------------------------
1994 1995
------------------- -------------------
Revenues:
<S> <C> <C>
Oil and gas sales $ 674,712 $ 1,110,581
------------------- -------------------
Costs and expenses:
Lease operating expenses 249,701 275,139
Depreciation, depletion and amortization 356,488 656,081
Production taxes 69,054 43,872
General and administrative expenses, net 1,037,958 821,137
Other (income) expenses:
Interest expense 137,962 149,377
Interest income and other (33,508) (108,610)
------------------- -------------------
1,817,655 1,836,996
------------------- -------------------
Net loss (1,142,943) (726,415)
Dividends on preferred stock (276,000) (276,000)
Net loss applicable to common stock (1,418,943) (1,002,415)
Deficit at beginning of year (2,848,251) (4,267,194)
------------------- -------------------
Deficit at end of year $ (4,267,194) $ (5,269,609)
=================== ===================
Net loss per share of common stock $ (.37) $ (.25)
=================== ===================
Average number of shares outstanding 3,835,536 4,079,929
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Year
Ended December 31,
-----------------------------------------
1994 1995
------------------- -------------------
<S> <C> <C>
Operating activities:
Net loss $ (1,142,943) $ (726,415)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 356,488 656,081
Non-cash compensation expense - 127,871
(Increase) decrease in accounts receivable 37,089 (23,193)
Decrease in other current assets 156,377 129,574
Decrease in accounts payable (8,724) (240,293)
Increase in other long-term liabilities 8,558 42,184
----------------- ------------------
Net cash used in operating activities (593,155) (34,191)
----------------- ------------------
Investing activities:
Capital expenditures (1,998,725) (812,718)
Proceeds from sales of prospects - 636,533
----------------- ------------------
Net cash used in investing activities (1,998,725) (176,185)
----------------- ------------------
Financing activities:
Proceeds of public unit offering 3,633,862 -
Proceeds from borrowings 700,000 439,000
Payments on borrowings (1,375,000) (151,000)
Preferred stock dividends paid (276,000) (276,000)
----------------- ------------------
Net cash provided by financing activities 2,682,862 12,000
----------------- ------------------
Net increase (decrease) in cash and cash equivalents 90,982 (198,376)
Cash and cash equivalents at beginning of year 109,808 200,790
----------------- ------------------
Cash and cash equivalents at end of year $ 200,790 $ 2,414
================= ==================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 137,962 $ 149,377
================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND BASIS OF PRESENTATION
Texoil, Inc. and its wholly-owned subsidiary Texoil Company (collectively
"Texoil" or the "Company") are engaged in the exploration for and production of
oil and natural gas, primarily in South Louisiana and to a lesser extent in
Texas. In March 1993 Texoil Company merged with a wholly-owned subsidiary of
Comet Entertainment, Inc. ("Comet"), a Nevada corporation. In conjunction with
the merger, Comet changed its name to Texoil, Inc. The merger was accounted for
as a "reverse acquisition" with Texoil as the acquiror and surviving entity.
CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiary.
LOSS PER COMMON SHARE
The loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding and common stock equivalents, if
dilutive. The average number of shares outstanding reflected in the net loss per
share of common stock for the year ended December 31, 1994 and 1995 is equal to
the weighted number of common shares outstanding during the period after giving
effect to the transactions described in Note 5.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for oil and gas property
acquisition, exploration and development activities. Under this method, all
productive and nonproductive costs incurred in connection with the acquisition
of, exploration for and development of oil and gas reserves for each cost center
are capitalized. Capitalized costs include lease acquisitions; geological and
geophysical work; delay rentals; costs of drilling, completing and equipping oil
and gas wells; and administrative costs applicable to the Company's personnel
directly engaged in exploration and development activities. Gains or losses are
recognized only upon sales or dispositions of significant amounts of oil and gas
reserves. Proceeds from all other sales or dispositions are treated as
reductions to capitalized costs.
The capitalized costs of oil and gas properties, plus estimated future
development costs relating to proved reserves and estimated costs of plugging
and abandonment, net of estimated salvage value, are amortized on the
unit-of-production method based on total proved reserves. The costs of unproved
properties are excluded from amortization until the
F-7
properties are evaluated, subject to an annual assessment of whether impairment
has occurred. The Company's proved oil and gas reserves were estimated by Gruy
Engineering Corporation, independent petroleum engineers, as of December 31,
1994 and 1995.
The capitalized oil and gas property costs, less accumulated depreciation,
depletion and amortization and related deferred income taxes, if any, are
generally limited to an amount (the ceiling limitation) equal to the sum of: (a)
the present value of estimated future net revenues computed by applying current
prices in effect as of the balance sheet date (with consideration of price
changes only to the extent provided by contractual arrangements) to estimated
future production of proved oil and gas reserves, less estimated future
expenditures (based on current costs) to be incurred in developing and producing
the reserves using a discount factor of 10% and assuming continuation of
existing economic conditions; and (b) the cost of investments in unevaluated
properties excluded from the costs being amortized.
OTHER PROPERTY AND EQUIPMENT
Property and equipment, other than oil and gas properties, are recorded at
historical cost and are presented net of accumulated depreciation of $313,712 in
the accompanying consolidated balance sheet. Depreciation is provided generally
on a straight-line basis over the estimated useful lives of the assets which
range from five to ten years.
STATEMENT OF CASH FLOWS AND CLASSIFICATION OF CASH AND CASH EQUIVALENTS
Cash equivalents are comprised of highly liquid debt instruments purchased with
a maturity of three months or less. The carrying amount approximates fair value
because of the short maturity of those instruments.
INCOME TAXES
The Company uses the liability approach for accounting for income taxes. Under
the liability approach, recognition is given to the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities.
ACCOUNTING ESTIMATES
The accompanying financial statements are prepared in conformity with generally
accepted accounting principles which requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No. 121
requires, among other things, that impairment losses on assets to be held, and
gains or losses from assets
F-8
that are expected to be disposed of, be included as a component of income from
continuing operations. The Company will adopt SFAS No. 121 in 1996 and its
implementation is not expected to have a material effect on the consolidated
financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." (SFAS No. 123). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No.25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. However, the
Company will be required to provide additional disclosures beginning in 1996
providing pro forma effects as if the Company had elected to adopt SFAS No. 123.
SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's operations are subject to all of the environmental and operational
risks normally associated with the oil and gas industry. The Company maintains
insurance that is customary in the industry; however, there are certain risks
for which the Company does not maintain full insurance coverage. The occurrence
of a significant event that is not fully covered by insurance could have a
significant adverse effect on the Company's financial position.
RECLASSIFICATION
Certain amounts have been reclassified in the accompanying 1994 consolidated
financial statements to conform to the 1995 presentation.
NOTE 2 - GOING CONCERN UNCERTAINTY AND MANAGEMENT PLANS:
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
recurring operating losses and cash flow and working capital deficits that raise
substantial doubt about its ability to meet its current and future expenditure
obligations necessary to fully evaluate and develop its oil and gas properties
and to continue as a going concern. Accordingly, management has determined that
the Company should seek an additional equity infusion in order to meet its
current working capital requirements and to fully pursue new exploration
opportunities in accordance with its business plan. The Company has undertaken
both capital raising and possible merger efforts directed toward an equity
infusion; however, the structure, timing and amount of any such transactions are
presently uncertain. The consolidated financial statements do not reflect any
adjustments that might result from the outcome of these uncertainties.
Should the Company be unsuccessful in obtaining either an equity infusion or in
completing a merger, management would dispose of selected assets with the intent
of generating sufficient funds to develop its remaining oil and gas properties
and to support its existing
F-9
operations through December 31, 1996. The Company would, however, in that
instance be required to significantly reduce its proposed level of investment in
new exploration opportunities as well as to take measures to address its working
capital deficit.
There can be no assurance, however, that the Company would either (1) generate
sufficient funds from the sale of selected assets or (2) be successful in
addressing its working capital deficit.
NOTE 3 - CONCENTRATIONS AND WORKING CAPITAL DATA:
Accounts receivable at December 31, 1995 consist of oil and gas revenues
receivable of $263,226 and joint interest receivables of $162,800. The Company's
accounts receivable are primarily from purchasers of oil and natural gas
products and exploration and production companies which own interests in
properties operated by the Company. Accordingly, the Company's principal credit
risk rests with customers operating in the oil and natural gas industry.
Revenues received (or receivable) from companies comprising more than 10% of
total sales in the years ended December 31, 1994 and 1995 were: Texas Meridian
Resources Corporation, 14% and 58%; Murphy Oil Corporation, 31% and 18%; and
Koch Oil Company, 36% and 14%, respectively. The Company's significant customers
conduct operations both on a nationwide basis and in the Gulf Coast region.
Accounts payable and accrued liabilities consist of the following at December
31, 1995:
Trade payables and other $ 443,562
Oil and gas revenues payable 234,509
--------------------
$ 678,071
====================
NOTE 4 - OIL AND GAS PROPERTIES:
The following table sets forth information concerning the Company's oil and gas
properties at December 31, 1995:
Evaluated $ 16,821,907
Unevaluated 711,603
--------------------
17,533,510
Accumulated depreciation,
depletion and amortization (13,990,411)
$ 3,543,099
====================
Unevaluated costs excluded from amortization at December 31, 1995 include
geological and geophysical and leasehold costs which are related to the
Company's exploration activities in South Louisiana and Texas.
Capitalized administrative costs applicable to the Company's personnel directly
engaged in exploration and development activities amounted to approximately
$93,000 and $180,000 in 1994 and 1995, respectively.
F-10
NOTE 5 - PUBLIC OFFERING:
In June 1994, the Company completed a public offering consisting of a total of
750,000 units sold at an offering price of $6.25 per unit resulting in gross
proceeds in the amount of $4,687,500. Each unit was comprised of two shares of
the Company's common stock, one Class A Warrant to purchase a share of the
Company's common stock at a price of $3.50 per share and one Class B Warrant to
purchase an additional share of the Company's common stock at a price of $4.50
per share. Net proceeds to the Company were $3,633,862. Common stock share data
through the date of the Company's public offering give retroactive effect to the
one-for-two reverse stock split and change in par value of the Company's common
stock which occurred on November 22, 1993.
In conjunction with the public offering, the holders of the Company's
outstanding "restricted" common stock agreed to surrender on a pro rata basis
approximately 987,900 shares of common stock. Such surrendered shares have been
accounted for as contributed treasury stock which have been canceled and
restored to unissued shares.
NOTE 6 - INDEBTEDNESS AND SERIES A PREFERRED STOCK:
Indebtedness at December 31, 1995 includes $323,000 outstanding under a
revolving credit/term loan agreement with a bank dated December 31, 1994 bearing
interest at a rate of 1 1/4% above the bank's prime rate (8.5% at December 31,
1995), and $1,062,500 outstanding under promissory notes due to four of the
Company's stockholders bearing interest at 2% above the bank's prime rate (see
Note 8).
The borrowing base of the credit/term loan was established at $575,000 in
December 1994 and will decline to $95,000 and $0 at December 1996 and 1997,
respectively. Of the amount outstanding at December 31, 1995, $228,000 is due in
1996 and $95,000 is due in 1997. The revolving credit/term loan agreement is
secured by substantially all of the Company's producing oil and gas properties,
is guaranteed by a member of the Company's board of directors, and contains
certain financial covenants related to maintenance of working capital (current
assets, plus unevaluated property costs anticipated to be recovered currently,
must exceed current liabilities) and stockholders' equity (at least $2,300,000).
The Company was not in compliance with such covenants as of December 31, 1995
and has requested and received a waiver from the bank with respect to these
covenants through the earlier of the filing date of its first quarter 10-QSB or
May 31, 1996. Accordingly, the outstanding balance due at December 31, 1995 has
been classified as current in the accompanying consolidated balance sheet.
The notes payable to stockholders represent the unpaid portion of borrowings
aggregating $2,087,500 that the Company made from a total of nine individuals
(five of whom are stockholders) during 1993, 1994 and 1995 in order to finance
its working capital needs. In accordance with the terms of the underlying loan
agreements, $800,000 of such borrowings was repaid upon closing of the public
offering in June 1994 and $225,000 was repaid by the due date, resulting in a
balance of $1,062,500 due December 31, 1995. Of the noteholders of such amount,
the noteholders of all but $12,500 (which will be repaid on April 1, 1996)
agreed to extend the maturity thereof until the earlier of consummation of any
additional equity infusion transaction (see Note 3) or May 1, 1996. Of the total
amount
F-11
outstanding at December 31, 1995, $950,000 may not be paid until the outstanding
credit/term loan due to the bank is paid.
The Series A Preferred Stock is convertible into common stock at any time with
the number of shares issuable determined by dividing the liquidation value of
the surrendered preferred stock by $3.00, being the price attributable to one
share of common stock in the Company's "unit" public offering (see Note 5).
Series A Preferred Stock dividends of $3.00 per share for every quarter of 1994
and 1995 were declared and subsequently paid.
NOTE 7 - INCOME TAXES:
The Company is subject to domestic federal and state taxation. There were no
such taxes currently payable in 1994 or 1995 due to the Company's operating
losses. Deferred U.S. federal tax assets are comprised of the following at
December 31, 1995:
Tax loss carryforwards $ 1,757,000
Credit carryforwards 82,000
Property and equipment bases differences (826,000)
Statutory depletion carryforwards 735,000
Other (54,300)
Valuation allowance (1,693,700)
----------------
$ -
================
The income tax benefit differs from the amount of income tax determined by
applying the applicable statutory federal income tax rate to pretax loss from
operations as a result of the following:
1994 1995
---------- --------
Tax benefit at statutory rates $ (388,600) $(247,000)
Effect of net operating losses not currently
utilizable 380,100 247,000
Other 8,500 -
---------- ---------
Tax benefit at effective tax rates $ - $ -
========== =========
Approximately $5,168,000 of tax loss carryforwards remain at December 31, 1995.
The carryforwards expire in the following years: 2000 ($906,800); 2001
($714,100); and thereafter ($3,547,100). Additionally, approximately $2,161,000
of depletion carryforwards and $82,000 of investment tax credit carryforwards
remain at December 31, 1995. Section 382 of the Internal Revenue Code of 1986,
as amended, limits the availability of the net operating loss ("NOL") and
investment tax credit ("ITC") carryforwards if there is a change of ownership of
more than 50% of the Company within a retroactive three year period. This
limitation, if applied, would limit the utilization of the NOL and ITC
carryforwards in each taxable year to an amount equal to the product of the
federal long-term tax-exempt bond rate prescribed by the Internal Revenue
Service and the fair market value of the Company immediately prior to the time
of the ownership change. Texoil's management anticipates, however, that should a
cumulative change in ownership of Texoil in excess of 50% be deemed to occur
within a retroactive three year period in connection with any recent or
F-12
proposed securities transaction, the resulting limitation would not have a
material impact on the Company's financial position because no deferred tax
asset has been established for the Company's significant net operating loss
carryforwards.
NOTE 8 - RELATED PARTIES:
Interest payments on notes to stockholders amounted to $122,487 and $101,012 in
1994 and 1995, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
During 1995, the Company negotiated a renewal of its operating agreement to
lease office space. Under the terms of the Agreement, the Company received a
partial year's free rent (such free rent was from June 1, 1995 to February 1,
1996) and has the option to terminate the lease in October 1998 by paying a
one-time penalty of $33,403. In the event this option is exercised, the
approximate future minimum payments under the terms of the lease agreement would
be reduced by approximately $214,000.
The Company's rent obligation is currently offset by the $2,356 monthly proceeds
from a sublease commencing in June 1995 and expiring in the year 2000. This
sublease arrangement results in the Company's net lease expense to be
approximately $74,000 per year. Since the sublease has a 90 day cancellation
clause, the Company's future lease commitments were not offset in the following
table.
Year ending
DECEMBER 31, AMOUNT
1996 $ 122,540
1997 122,540
1998 122,540
1999 122,540
2000 91,900
----------------
$ 582,060
Net lease payments made under the terms of the lease operating agreements
totaled $81,534 in 1994 and $12,777 in 1995.
As is common within the industry, the Company has entered into various
commitments and operating agreements related to exploration and the development
of and production from certain proved oil and natural gas properties. It is
management's belief that such commitments will be met without a material adverse
effect on the Company's financial position.
F-13
NOTE 10 - ISSUANCES OF COMMON STOCK, OPTIONS AND WARRANTS:
The following table presents the changes in the Company's common stock accounts
since January 1, 1994:
<TABLE>
<CAPTION>
Additional
Common Paid-in
Shares Stock Capital
-------------- ---------------- -----------------
<S> <C> <C> <C>
Balance, January 1, 1994 3,546,499 $ 35,465 $ 831,448
Public offering of 750,000 units 1,500,000 15,000 3,618,862
Surrendered stock, net (987,856) (9,879) 9,879
-------------- ---------------- -----------------
Balance, December 31, 1994 4,058,643 40,586 4,460,189
Stock issued pursuant to 1995 Stock
Compensation Plan 77,447 775 127,096
-------------- ---------------- -----------------
Balance, December 31, 1995 4,136,090 $ 41,361 $ 4,587,285
============== ================ =================
</TABLE>
The Company has outstanding options granted to two directors to each purchase
281,384 shares of common stock at approximately $.46 per share. The options are
exercisable in blocks of at least 5,000 shares through December 31, 1999.
Subsequent to December 31, 1995, the Company's board of directors authorized the
issuance of options to a director to purchase 50,000 shares of the Company's
common stock at an exercise price of $1.56 per share with an expiration date to
be determined. The net loss per share of common stock for the years ended
December 31, 1994 and 1995 does not reflect the weighted average number of
shares that would be outstanding assuming exercise of these options as the
effect of such exercise would be anti-dilutive.
In June 1994, the Company issued the nine individuals who provided it working
capital loans (see Note 6), warrants to purchase an aggregate of 154,375 shares
of common stock through May 1996 at a per share price of $3.00, being the price
attributable to one share of common stock in the Company's "unit" public
offering (see Note 5). Also in conjunction with the public offering, the Company
issued the underwriters a warrant to purchase 75,000 units at $7.50 per unit
(exercisable beginning one year after closing of the public offering for a
period of four years).
NOTE 11 - STOCK OPTION AND COMPENSATION PLANS:
1994 STOCK OPTION PLAN
In July 1994, the Board of Directors adopted the 1994 Stock Option Plan (the
"1994 Plan"), subject to approval by the Company's stockholders. The 1994 Plan
was approved by the Company's stockholders at their annual meeting in August
1994. Pursuant to the 1994 Plan, options to purchase up to 250,000 shares of
common stock may be granted. The terms of such options are determined by the
Compensation Committee of the Board of Directors and the exercise price of
options may not be less than the market value of the common stock
F-14
on the date of the grant. In July 1994, the Company granted three officers
options to purchase an aggregate of 110,000 shares of common stock at an
exercise price of $3.00 per share and in September 1994, the Company granted an
option to a non-employee consultant to purchase 5,000 shares of common stock at
an exercise price of $3.50 per share. These options are subject to a one year
vesting period. There are no other options outstanding under the 1994 Plan. As
of December 31, 1995, none of the options had been exercised.
1995 STOCK COMPENSATION PLAN
In July 1995, the Company's stockholders approved the 1995 Stock Compensation
Plan (the "1995 Plan"), which provides for the issuance of shares of common
stock to certain employees and consultants whose cash compensation was reduced
by 30% effective April 1, 1995. Pursuant to the 1995 Plan, a total of 77,447
shares of common stock were issued to such individuals on recognition of their
reduced cash compensation for the months of April through December 1995 and for
services rendered and reimbursement of expenses incurred. The Company recognized
compensation, travel and consulting expense in the amount of $127,871
representing the fair market value of such shares issued in lieu of reduced cash
compensation for the months of April through December 1995. Subject to
stockholder approval, the Company anticipates the creation of a 1996 Stock
Compensation Plan.
NOTE 12 - SUPPLEMENTAL OIL AND GAS INFORMATION:
Information with respect to the Company's oil and gas producing activities is
presented in the following tables. Estimates of reserve quantities, as well as
future production and discounted cash flows, were determined by Gruy Engineering
Corporation, independent petroleum engineers, as of December 31, 1994 and 1995.
OIL AND GAS RELATED COSTS
The following table sets forth information concerning costs related to the
Company's oil and gas property acquisition, exploration and development
activities in the United States during the years ended December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Property acquisition costs - proved $ - $ -
- unproved 570,714 341,614
Less - proceeds from sale of prospect interests - (636,532)
Exploration costs, net 729,876 397,836
Development costs 735,272 156,863
---------------- ---------------
$ 2,035,862 $ 259,781
=============== =================
</TABLE>
F-15
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth the Company's results of operations from oil and
gas producing activities for the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Revenues $ 674,712 $ 1,110,581
Production costs and taxes (318,755) (319,011)
Depreciation, depletion and amortization (343,961) (654,125)
---------------- -----------------
Results of operations before income taxes 11,996 137,445
Income taxes - -
---------------- -----------------
Results of operations from oil and gas
producing activities $ 11,996 $ 137,445
================ ==================
</TABLE>
In the presentation above, no deduction has been made for indirect costs such as
corporate overhead or interest expense. No income taxes are reflected due to the
fact that the Company is not currently in a tax-paying position as well as the
fact that the deferred tax liabilities reflected in the provision for income
taxes (see Note 7), while substantially related to Texoil's oil and gas
producing activities, are more than offset by tax loss carryforwards and
depletion carryforwards applicable to the Company's oil and gas producing
activities. For the years ended December 31, 1994 and 1995, the depreciation,
depletion and amortization rate per barrel of oil equivalent of production was
$7.50 and $9.83, respectively.
OIL AND GAS RESERVES (UNAUDITED)
The following table sets forth the Company's net proved oil and gas reserves at
December 31, 1994 and 1995 and the changes in net proved oil and gas reserves
for the years then ended. Proved reserves represent the estimated quantities of
crude oil and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. The reserve information
indicated below requires substantial judgment on the part of the reserve
engineers, resulting in estimates which are not subject to precise
determination. Accordingly, it is expected that the estimates of reserves will
change as future production and development information becomes available and
that revisions in these estimates could be significant.
OIL GAS
(Mbbls) (Mmcf)
Proved reserves:
Balance at January 1, 1994 325 735
Discoveries and extensions 88 472
Revisions of previous estimates (27) (356)
Production (33) (77)
--------- ---------
Balance at December 31, 1994 354 774
Discoveries and extensions 8 16
F-16
Revisions of previous estimates (109) 55
Production (41) (152)
--------- ---------
Balance at December 31, 1995 212 693
========= =========
Proved developed reserves at December 31:
1994 354 774
========= =========
1995 212 693
========= =========
Of the Company's total proved reserves as of December 31, 1995, approximately
50% were classified as proved developed "producing" and approximately 50% were
classified as proved developed non-producing. All of the Company's reserves are
located in the continental United States.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The standardized measure of discounted future net cash flows from the Company's
proved oil and gas reserves at December 31, 1994 and 1995 is presented in the
following table:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Future cash inflows $ 6,998,087 $ 6,670,825
Future production costs and taxes (2,320,149) (2,114,558)
Future development costs (376,928) (387,054)
Future income tax expenses - -
---------------- -----------------
Net future cash flows 4,301,010 4,169,213
Discount at 10% for timing of cash flows (1,061,021) (1,030,991)
---------------- -----------------
Discounted future net cash flows from
proved reserves at December 31 $ 3,239,989 $ 3,138,222
================ =================
</TABLE>
The following table sets forth the changes in the standardized measure of
discounted future net cash flows from proved reserves during 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Balance at beginning of year $ 2,018,408 $ 3,239,989
Sales, net of production costs and taxes (355,957) (791,570)
Discoveries and extensions 1,611,472 183,470
Changes in prices and production costs 488,216 1,247,487
Revisions of quantity estimates (590,000) (955,000)
Interest factor - accretion of discount 201,841 323,999
Development costs incurred 408,028 156,863
Changes in future development costs (361,959) (199,238)
Changes in production rates and other (180,060) (67,778)
---------------- -----------------
Balance at end of year $ 3,239,989 $ 3,138,222
================ =================
</TABLE>
F-17
Estimated future net cash flows represent an estimate of future net revenues
from the production of proved reserves using current sales prices, along with
estimates of the production costs, ad valorem and production taxes and future
development and abandonment costs (less salvage value) necessary to produce such
reserves. The average prices used at December 31, 1994 and 1995 were $16.13 and
$18.99 per barrel of oil and $1.67 and $3.81 per mcf of gas, respectively. No
deduction has been made for depreciation, depletion or any indirect costs such
as general corporate overhead or interest expense.
Operating costs and production taxes are estimated based on current costs with
respect to producing oil and gas properties. Future development costs are based
on the best estimate of such costs assuming current economic and operating
conditions.
Income tax expense is computed based on applying the appropriate statutory tax
rate to the excess of future cash inflows less future production and development
costs over the current tax basis of the properties involved, less applicable
carryforwards, for both regular and alternative minimum tax (AMT). On such
basis, no regular tax or AMT resulted for either 1994 or 1995.
The future net revenue information assumes no escalation of costs or prices,
except for gas sales made under terms of contracts which include fixed and
determinable escalation. Future costs and prices could significantly vary from
current amounts and, accordingly, revisions in the future could be material.
F-18
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Texoil, Inc.
We hereby consent to the incorporation of our report dated March 22, 1996,
included in the annual report of Texoil, Inc. ("Texoil") on Form 10-KSB for its
fiscal year ended December 31, 1995, into Texoil's previously filed Registration
Statement on Form S-8, File No. 33- 62175.
BDO Seidman, LLP
March 22, 1996
Houston, Texas
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8, File No. 33-62175, of our report dated March 20, 1995
which appears on page F-3 of the 1995 Annual Report of Texoil, Inc. on Form
10-KSB.
PRICE WATERHOUSE LLP
March 29, 1996
Houston, Texas
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 426
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 463
<PP&E> 17,848
<DEPRECIATION> (14,304)
<TOTAL-ASSETS> 4,008
<CURRENT-LIABILITIES> 2,133
<BONDS> 0
0
2,300
<COMMON> 4,587
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,008
<SALES> 1,111
<TOTAL-REVENUES> 1,111
<CGS> 1,688
<TOTAL-COSTS> 1,688
<OTHER-EXPENSES> 276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149
<INCOME-PRETAX> (1,002)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,002)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
