SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
Commission file number: 0-12633
TEXOIL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0177083
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
110 CYPRESS STATION DRIVE
SUITE 220
HOUSTON, TEXAS 77090
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 537-9920
(ISSUER'S TELEPHONE NUMBER)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 36,707,618 shares of common
stock, $.01 par value, issued and outstanding at May 8, 1998.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TEXOIL, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of
March 31, 1998................. 3
Consolidated Statements of
Income for the three months ended
March 31, 1998 and 1997........ 4
Consolidated Statements of Cash
Flows for the three months ended
March 31, 1998 and 1997........ 5
Notes to Consolidated Financial
Statements..................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS..................... 11
PART II. OTHER INFORMATION.......... 15
2
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TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31,
1998
---------
Assets:
Current Assets:
Cash and cash equivalents.......... $ 1,373
Accounts receivable and other...... 2,225
Notes receivable................... 120
Other current assets............... 82
---------
Total current assets.......... 3,800
Property, plant and equipment, at cost:
Oil and natural gas properties
(full-cost method)
Evaluated properties.......... 17,851
Unevaluated properties........ 5,084
Office and other equipment.............. 445
---------
23,380
Less -- accumulated depletion,
depreciation and amortization......... (1,788)
---------
Net property, plant and equipment....... 21,592
---------
Other assets............................ 684
---------
Total assets.................. $26,076
=========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued
liabilities....................... $ 2,943
Revenue royalties payable.......... 1,200
---------
Total current liabilities..... 4,143
---------
Long-term debt.......................... 10,057
---------
Deferred income taxes................... 307
---------
Stockholders' equity:
Series A preferred stock -- $.01
par value with liquidation
preference of $100 per share,
10,000,000 shares authorized, none
issued and outstanding............ --
Common stock -- $.01 par value;
50,000,000 shares authorized;
36,707,618 shares issued and
outstanding....................... 367
Additional paid-in capital.............. 10,044
Retained earnings....................... 1,158
---------
Total stockholders' equity......... 11,569
---------
Total liabilities and stockholders'
equity............................ $26,076
=========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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TEXOIL, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1998 1997
--------- ---------
Revenues:
Oil and gas sales............... $ 1,866 $ 1,282
Operator and management fees.... 255 160
Interest and other.............. 57 27
--------- ---------
Total revenues............. 2,178 1,469
--------- ---------
Costs and Expenses:
Lease operating................. 770 477
Workover........................ 81 141
Production taxes................ 103 70
General and administrative...... 437 250
Depletion, depreciation and
amortization................... 434 154
Interest........................ 109 65
--------- ---------
Total expenses............. 1,934 1,157
--------- ---------
Income before income taxes........... 244 312
Provision for income taxes...........
Current......................... -- (35)
Deferred........................ (92) (71)
--------- ---------
Total provision for income
taxes.................... (92) (106)
--------- ---------
Net income........................... $ 152 $ 206
========= =========
Basic net income per share........... $ -- $ .01
========= =========
Basic weighted average shares........ 36,587 16,663
========= =========
Diluted net income per share......... $ -- $ .01
========= =========
Diluted weighted average shares...... 42,374 17,514
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
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TEXOIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
1998 1997
--------- ---------
Cash flows from operating activities:
Net income.............................. $ 152 $ 206
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depletion, depreciation and
amortization...................... 434 154
Deferred income taxes.............. 92 71
Accounts receivable................ 1,219 509
Accounts receivable -- related
party............................. 60 186
Notes receivable................... (120) --
Other assets....................... (239) 3
Accounts payable and accrued
liabilities....................... (1,264) 66
Accounts payable -- related
party............................. -- (192)
Revenue royalties payable.......... (687) (53)
--------- ---------
Net cash provided by (used in)
operating activities........ (353) 950
--------- ---------
Cash flows from investing activities:
Additions to oil and gas
properties........................ (2,309) (963)
Other equipment additions.......... (23) (11)
--------- ---------
Net cash used in investing
activities.................. (2,332) (974)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common
stock............................. -- --
Proceeds from long-term debt and
other............................. -- 382
Repayments of long-term debt....... (1) --
--------- ---------
Net cash provided by (used in)
financing activities........ (1) 382
--------- ---------
Net increase in cash and cash
equivalents........................... (2,686) 358
Cash and cash equivalents -- beginning
of period............................. 4,059 287
--------- ---------
Cash and cash equivalents -- end of
period................................ $ 1,373 $ 645
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest...................... $ 136 $ 62
========= =========
Income taxes.................. $ -- $ 25
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
BUSINESS COMBINATION
On December 31, 1997, pursuant to the terms of a definitive plan of merger
("Merger Agreement" or "Merger") and a financing arrangement, Texoil, Inc.
("Texoil" or the "Company"), a Nevada corporation, formed a wholly-owned
subsidiary, Texoil Acquisition, Inc., which acquired all of the outstanding
common shares of Cliffwood Oil & Gas Corp. ("Cliffwood"), a Texas corporation.
Immediately before the Merger, Cliffwood had approximately 3,785,000 shares of
common stock outstanding. Texoil issued 6.74 previously authorized but unissued
common shares for each outstanding share of Cliffwood stock, for a total
issuance of approximately 25,512,000 shares. As a result, Cliffwood became a
wholly-owned subsidiary of Texoil. As a result of the Merger, fifty-three former
stockholders of Cliffwood acquired 70% (and voting control) of Texoil
outstanding common stock. The existing stockholders of Texoil retained
approximately 11,075,000 shares, or 30% of such common stock. Accordingly, for
financial reporting purposes, the Merger has been accounted for as a reverse
acquisition of Texoil by Cliffwood.
Texoil assets ("Texoil Net Assets"), existing on December 31, 1997, have
been recorded at fair value using the purchase method of accounting, as required
by generally accepted accounting principles. Such assets consisted of cash, oil
and gas properties, certain mineral leases, options and 3-D seismic data with an
estimated fair value of approximately $3,131,000. Management believes the
recorded basis of the Texoil Net Assets is appropriate because (1) the fair
value of underlying net assets acquired can be readily determined, with
reasonable precision, using valuation procedures common in the oil and gas
industry, (2) there has been limited trading activity in Company shares, (3)
common stock issued to effect the business combination and recapitalization
substantially exceeds the trading volume of shares in the marketplace and the
number of shares outstanding prior to the business combination, (4) shares
issued are restricted in their marketability, (5) limitations on capitalized
costs exist for proved oil and gas properties pursuant to regulations of the
Securities and Exchange Commission, and (6) costs allocated to unproved
properties should not exceed their fair value.
PRO FORMA RESULTS OF OPERATIONS
Selected results of operations for the three months ended March 31, 1997,
on a pro forma basis giving effect to the Merger, as if it took place on January
1, 1997, are as follows (in thousands, except per share data):
Revenues............................. $ 1,744
=========
Net Income........................... $ 228
=========
Basic income per share............... $ .01
=========
Basic weighted average shares
outstanding.......................... 27,738
=========
Diluted income per share............. $ .01
=========
Diluted weighted average shares
outstanding........................ 29,456
=========
Adjustments to the historical results to estimate the pro forma results of
operations for the three months ended March 31, 1997, include adjustments to (1)
reduce general and administrative expenses for the effects of actual personnel
reductions implemented subsequent to the Merger, (2) recalculate depletion,
depreciation and amortization based on the combined reserves and production of
Texoil and Cliffwood and to eliminate the historical provision for impairment of
oil and gas properties recorded in 1997 by Texoil,
6
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TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) adjust interest expense related to debt issued in connection with the
Merger, (4) eliminate preferred dividends on securities converted to common
stock as a condition of the merger (no preferred stock dividends by Texoil were
declared subsequent to June 30, 1996) and (5) recalculate the provision for
income taxes. The unaudited pro forma amounts do not purport to be indicative of
the results of operations which would have been reported had the reverse
acquisition occurred as of January 1, 1997, or that may be reported in the
future.
ORGANIZATION AND BASIS OF PRESENTATION
Texoil is engaged in the acquisition, development and production of, and
exploration for, crude oil, natural gas and related products primarily in Texas
and Louisiana. The accompanying consolidated financial statements include the
historical accounts of Cliffwood and its wholly-owned subsidiaries, Cliffwood
Energy Company ("CEC"), Cliffwood Production Co. ("CPC"), and Cliffwood
Exploration Co. ("CEXCO"), for the periods ended March 31, 1998 and 1997. A
predecessor company to Cliffwood was incorporated in 1993 and was solely owned
by the President of Cliffwood. No significant operations commenced until
February 1996, with the acquisition of CEC; and effective May 1, 1996, the
predecessor entity was recapitalized and changed its name to Cliffwood Oil & Gas
Corp. The Cliffwood wholly-owned subsidiaries are all collectively referred to
herein as "Texoil" or "The Company", unless otherwise specified. All events
described or referred to as prior to December 31, 1997, relate to Cliffwood, as
the accounting acquiror.
The financial statements included herein have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, they reflect all adjustments (which
consist solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial results for
interim periods. Certain information and notes normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year-ended December 31, 1997,
filed with the SEC.
NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share",
effective for interim and annual reporting periods ending after December 15,
1997. This statement replaces primary net income per common share with a newly
defined basic net income per common share and modifies the computation of
diluted net income per common share. The Company adopted this statement
effective for the fiscal year ending December 31, 1997. All prior period net
income per common share amounts have been restated.
7
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TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic net income per common share is computed based on the weighted average
shares of common stock outstanding. Net income per share computations to
reconcile basic and diluted net income for the quarters ended March 31, 1998 and
1997 consist of the following:
QUARTER ENDED MARCH 31,
------------------------------
1998 1997
-------------- --------------
Net Income........................... $ 152,000 $ 206,000
Basic weighted average shares........ 36,587,000 16,662,553
Effect of dilutive securities(1):
Warrants........................ 3,207,662 851,861
Options......................... 2,397,018 --
Awards.......................... 181,980 --
Convertible notes............... -- --
Diluted weighted average shares...... 42,373,620 17,514,414
Per common share net income:
Basic........................... $ -- $ .01
Diluted......................... $ -- $ .01
- ------------
(1) A weighted average year-to-date number of warrants to purchase 231,372
shares of common stock was outstanding during 1997, which were not included
in the computation of diluted per common share net income because the
warrants' exercise prices were greater than the average market price of the
common shares.
NOTE 2: NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The statement requires (a) classification of items of other comprehensive income
by their nature in a financial statement and (b) display of the accumulated
balance of other comprehensive income separate from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for interim periods beginning after December
15, 1997. For the quarters ended March 31, 1998, and 1997, there is no
difference between the Company's "traditional" and "comprehensive" net
income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which establishes standards
for reporting information about operating segments in annual financial
statements and requires that selected information be reported about the
operating segments in interim financial reports issued to the shareholders. It
also establishes standards for related disclosure about products and services,
geographic areas, and major customers. The Company has concluded that it does
not meet the criteria which require business segment reporting.
NOTE 3: CREDIT AGREEMENT
In September 1996, the Company entered into a revolving credit agreement
(Credit Agreement) with a bank to finance property acquisitions and for
temporary working capital requirements. The Credit Agreement, as amended,
provides up to $25,000,000 in available borrowings, limited by a borrowing base
(as defined in the Credit Agreement) which was $9,500,000 at March 31, 1998. As
of March 31, 1998, borrowings outstanding under the Credit Agreement were
$50,000. The borrowing base is redetermined annually (or more frequently at the
option of the Company) and is reduced over a five-year period on a straight-line
basis. The Credit Agreement provides for an annual facility fee of 1/4% of the
initial borrowing base and on any increases thereto, and it also provides for
monthly interest payments at the lender's prime
8
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TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate plus 1/2%. The average interest rate paid to the lender was 9.0% for the
three months ended March 31, 1998. The Company has granted first mortgages,
assignments of production, security agreements and other encumbrances on its oil
and gas properties to the lender, as collateral, pursuant to the Credit
Agreement. Under the terms of the Credit Agreement, up to $500,000 is available
under the borrowing base for the issuance of letters of credit. At March 31,
1998, $124,955 was reserved for the issuance of letters of credit. The Credit
Agreement contains covenants which, among other things, restrict the payment of
dividends on any security, limit the amount of consolidated debt, limit the
Company's ability to make certain loans and investments, and require that the
Company remain in compliance with certain covenants of the Credit Agreement.
NOTE 4: CONVERTIBLE SUBORDINATED NOTES
On December 31, 1997, the Company entered into a Note Purchase Agreement
(the "RIMCO Agreement") with four limited partnerships of which RIMCO is the
controlling general partner (the "RIMCO Lenders"). Under the RIMCO Agreement,
the RIMCO Lenders agreed to provide financing and Texoil issued 7.875%
Convertible Subordinated General Obligation Notes in the principal amount of
$10,000,000 (the "Convertible Notes") which will mature December 31, 1999,
("Maturity Date") subject to extension pursuant to the terms of the RIMCO
Agreement. Interest is payable on the first day of each month beginning
February, 1998. All outstanding principal plus all accrued and unpaid interest
are due and payable on the Maturity Date or upon a "Change of Control" as
defined in the RIMCO Agreement.
At any time prior to the Maturity Date, indebtedness outstanding under the
Convertible Notes is convertible by the holders, in whole or in part, into
Texoil Common Stock at an initial per share conversion price equal to $1.75,
subject to antidilution adjustments. Texoil may convert all of the outstanding
indebtedness under the Convertible Notes if the average closing price per share
during a period of 20 consecutive trading days equals or exceeds 130% of the
conversion price. If, on December 31, 1999, cash availability, as defined in the
RIMCO Agreement, of Texoil and its subsidiaries, is less than the principal and
accrued and unpaid interest outstanding under the Convertible Notes, the RIMCO
Lenders can be required to convert the outstanding principal and accrued and
unpaid interest into Texoil Common Stock, if the relationship between the
average price and the conversion price satisfies certain conditions set forth in
the RIMCO Agreement. The Convertible Notes have not been included in the diluted
net income per common share calculation, as their effect is antidilutive.
The indebtedness under the RIMCO Agreement is subject to the terms of the
subordination agreement among the RIMCO Lenders, Comerica Bank - Texas, N. A.
(as agent for itself and another lender), Texoil, Inc., Cliffwood Oil & Gas
Corp., Cliffwood Energy Company, and Cliffwood Production Company under which
indebtedness under the RIMCO Agreement is subordinated in right of payment.
Furthermore, the RIMCO Lenders are subject to certain restrictions on their
right to exercise remedies under the RIMCO Agreement. The subordination
provisions do not affect the ability to convert indebtedness under the RIMCO
Agreement into common stock of Texoil. The Company granted the holders of the
Convertible Notes certain registration rights in respect of shares of Texoil
Common Stock issuable upon conversion of debt under the Convertible Notes.
NOTE 5: SUBSEQUENT EVENTS
On May 4, 1998, Texoil, Inc. ("The Company"), through its wholly-owned
subsidiary Cliffwood Oil & Gas Corp. ("Cliffwood"), acquired all of the oil
and gas assets of the Cliffwood Acquisition -- 1996 Limited Partnership (the
"Partnership"), an affiliated limited partnership. Cliffwood is the general
partner of the Partnership, and prior to the transaction, owned 10% of the
Partnership. The purchase price was $4,430,000 cash and 898,000 shares of the
Registrant's common stock to be issued. The properties included working
interests in seven producing fields located in Texas. A wholly-owned subsidiary
of the Company is the operator of all the acquired properties. The Company
financed the cash portion of the acquisition with
9
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TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its pre-existing credit facility with a bank. Proved developed reserves
associated with the acquisition have been estimated, by an independent petroleum
engineering firm, to be 1,260,700 Bbls of oil and 1,962,100 Mcf of gas, net to
Cliffwood. Additional secondary recovery operations and certain development and
exploratory opportunities may result in additional proved reserves.
Concurrent with the acquisition of properties, the Company and Cliffwood
entered into certain agreements with EnCap Equity 1996 Limited Partnership and
Energy Capital Investments Company PLC (both referred to as "Limited
Partners"), which amended and restated various terms of the Partnership
Agreement, including but not limited to, (1) rename the Partnership the
CLIFFWOOD ACQUISITION -- 1998 LIMITED PARTNERSHIP, (2) increase available
Partnership capital to $15.0 million, (3) increase Cliffwood's initial General
Partner ownership to 15%, (4) commit 30% of the Company's future acquisitions to
the Partnership (subject to Partnership capital limitations), (5) allow the
Partnership to participate in exploratory and/or development drilling activities
and (6) modify various terms related to operating and development expenditures.
Pursuant to the terms of the Partnership Agreement, the General Partner's share
of Partnership profits and ownership increases significantly predicated upon a
return of capital, with a specified rate of return to Limited Partners. The
increased capital to the Partnership is expected to have an indirect benefit to
the Company because the Partnership intends to invest with the Company.
In addition, Limited Partners surrendered warrants to purchase 2,022,000
shares of common stock in exchange for 1,647,225 shares of common stock to be
issued. The Partnership and its limited Partners received certain registration
rights in connection with the stock to be issued in this transaction.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes thereto, included elsewhere
in this 10-QSB.
MERGER
As discussed in the Notes to the Consolidated Financial Statements included
in this quarterly report, the Company underwent a substantial change in
ownership, management, assets and business strategy, all effective December 31,
1997. These significant changes occurred as a result of the acquisition of
Cliffwood (via Merger) and certain related transactions, pursuant to a
definitive Plan and Agreement of Merger. For financial reporting purposes, the
Merger is accounted for as a reverse acquisition of Texoil by Cliffwood. The
historical Consolidated Financial Statements are those of Cliffwood, and
management's discussion and analysis of financial condition and results of
operations presented herein relate to Cliffwood. Both reflect the acquisition of
Texoil net assets (existing immediately prior to the Merger) at fair value,
using purchase accounting, on December 31, 1997, as required by generally
accepted accounting principles.
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 gas reserves are capitalized separately
for each cost center (generally defined as a country). Capitalized balances are
referred to as the "Full-Cost Pool" and may further be classified as evaluated
or unevaluated. Evaluated costs are those where proved reserves have been
determined or where the property has been impaired or abandoned. Such costs are
subject to depletion, depreciation and amortization expense (DD&A). Unevaluated
costs are not subject to DD&A and generally require additional geological,
geophysical and/or engineering evaluation prior to management's decision to
drill, develop or abandon such properties. When such properties are fully
evaluated, capitalized balances will be included in the calculation of DD&A.
Depletion expense is calculated using the units 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 DD&A) 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 DD&A.
Included in capitalized costs subject to amortization for the first quarter
of 1998 are $116,000 of payroll and related costs of technical personnel which
are directly attributable to the Company's oil and gas acquisition, exploration
and development activities. The amount of similar costs capitalized for the
first quarter of 1997 was not significant. The Company capitalizes interest
attributable to oil and natural gas properties which are not subject to
amortization and are in the process of being evaluated. Included in unevaluated
capitalized costs for the first quarter of 1998 are interest costs of $94,700;
no such costs were capitalized for the first quarter of 1997.
At March 31, 1998, the Company's estimated discounted future net revenues
from estimated proved reserves on an after-tax basis exceed net evaluated
capitalized costs by approximately $2,000,000. Net capitalized costs could
exceed discounted future net revenues in future periods due to downward
revisions to estimates of proved reserve quantities, declines in oil and gas
prices, increases in operating costs, unsuccessful exploration and development
activities or other factors which cannot be reasonably predicted by the Company.
Once incurred, a writedown of oil and gas properties cannot be reversed at a
later date even if estimated reserve quantities or oil and gas prices
subsequently increase.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
The Company recorded net income of $152,000 and $206,000 in three months
ended March 31, 1998 and 1997, respectively. The $54,000 decrease in the
Company's comparative net income resulted primarily from the following factors:
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
-----------------------
(000'S)
Oil and gas production income
(revenues less lease operating
expenses and production taxes)..... $ 318
Depletion, depreciation and
amortization expense ("DD&A").... (280)
General and administration
expenses -- net.................... (187)
Interest expense..................... (44)
Other income -- net.................. 125
Provision for income taxes........... 14
-------
$ (54)
=======
The $318,000 increase in net oil and gas production income is primarily
attributable to the increase in production volumes resulting from the
acquisition and development of producing properties. Oil and gas sales increased
by $584,000 resulting from increases in production volumes reduced by a
significant decrease in average oil prices in 1998 compared to 1997. The average
oil price decreased to $13.93 for the first quarter of 1998, down $7.23 or 35%
from the first quarter of 1997, while the average gas price was down $.54 or
21%, comparing the same periods. On an energy equivalent basis, the Company's
production is approximately 74% oil and 26% natural gas. Thus, the larger
percentage decrease in oil prices had a significant adverse impact on revenues.
The increase in net revenues of 46% was offset by directly related increases in
lease operating and workover expenses and production taxes. These combined
expenses increased $266,000 or 39% over the prior year. Management believes that
certain of the increased expenses are non-recurring, and resulted from
re-engineering activities on acquired properties designed to lower on-going
operating expenses, such as revamping facilities, certain chemical programs and
workovers.
The $280,000 increase in DD&A expenses is primarily due to the increase of
oil and gas production volumes, reserves and capitalized balances subject to
DD&A resulting from the acquisition and development of producing properties.
Gross capitalized costs included in the Full-Cost Pool and subject to DD&A were
$17,851,000 and $5,662,000 at March 31, 1998 and 1997, respectively. In
addition, estimated future development costs associated with proved undeveloped
reserves in the amount of $5,429,000 and $261,000 at March 31, 1998 and 1997,
respectively, were included in the DD&A calculations.
The $187,000 increase in net general and administrative expenses is
comprised primarily of increases in management and administrative staffing
associated with the Company's growth. The Company is the operator of the
majority of its properties and, accordingly, must attract and retain competent
technical and administrative personnel to fulfill its contractual obligations.
Although the operator is allowed certain "overhead reimbursements" pursuant to
the terms of applicable operating agreements (reflected as "operator and
management fees" in the Consolidated Statements of Income), such reimbursements
do not necessarily recover the full amount of Company expenditures.
Interest expense increased by $44,000 primarily due to the increased
long-term debt used to finance acquisitions.
Other income increased $125,000 in 1998 principally due to increased
administrative overhead reimbursements on operated properties, engineering
consulting fees and interest income.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Merger, Texoil suffered recurring operating losses and had
working capital deficits that caused doubt about its ability to meet future
expenditure obligations necessary to fully evaluate and develop its oil and gas
prospects and to continue as a going concern. The Merger generally brought
incremental cash flow to the Company along with a new management team
experienced in capital formation and oil and gas activities. Some of the
conditions to closing the Merger were the closing of a financing arrangement
with RIMCO whereby the Company issued $10.0 million of subordinated convertible
notes and the conversion to common equity of approximately $5.1 million of
pre-existing convertible notes and $2.3 million of Texoil Convertible Series A
Preferred Stock.
The Company expects to finance its future growth, resulting from its
acquisition, development and exploration activities, through cash flow from
operating activities, its bank credit facility, sale of non-strategic assets,
and through the additional issuance of common stock. In addition, the Company
intends to finance drilling activities through the sale of participations to
industry partners on a promoted basis, whereby the Company will earn working
interests in reserves and production greater than its proportionate capital
cost.
RIMCO FINANCING
On December 31, 1997, Texoil entered into the RIMCO Agreement which
provided $10,000,000 in new financing. Accordingly, Texoil issued 7.875%
Convertible Subordinated General Obligation Notes in the principal amount of
$10,000,000 to the RIMCO Lenders ("Convertible Notes"), which will mature
December 31, 1999, or upon a change in control, subject to certain extensions
pursuant to the terms of the RIMCO Agreement. At any time prior to the maturity
date, outstanding indebtedness is convertible by the holders, in whole or in
part, into Texoil Common Stock at an initial per share conversion price equal to
$1.75, subject to antidilution adjustments. Texoil may convert all of the
outstanding indebtedness under the Convertible Notes into Texoil Common Stock if
the average closing price per share during a period of 20 consecutive trading
days equals or exceeds 130% of the conversion price.
If on December 31, 1999, cash availability of the Company and its
subsidiaries, as defined in the RIMCO Agreement, is less than the principal and
accrued and unpaid interest outstanding under the Convertible Notes, the RIMCO
Lenders can be required to convert the outstanding principal and accrued and
unpaid interest into Texoil Common Stock, if the relationship between the
average price and the conversion price satisfies certain conditions set out in
the RIMCO Agreement. The Company granted the holders of the Convertible Notes
certain registration rights in respect of shares of Texoil Common Stock issuable
upon conversion of debt under the Convertible Notes.
The indebtedness under the RIMCO Agreement is subject to the terms of a
subordination agreement among the RIMCO Lenders, Comerica Bank - Texas, N. A.
(as agent for itself and another lender), Cliffwood Oil & Gas Corp., Cliffwood
Energy Company, and Cliffwood Production Co., whereby indebtedness under the
RIMCO Agreement is subordinated in right of payment and the RIMCO Lenders are
subject to restrictions on their right to exercise remedies under the RIMCO
Agreement. The subordination provisions do not affect the ability to convert
indebtedness under the RIMCO Agreement into Common Stock of Texoil.
CREDIT FACILITY
At March 31, 1998, the Company had available borrowing capacity of
$9,450,000, in accordance with a revolving credit agreement ("Credit
Agreement"), with a bank which can be used to finance property acquisitions and
temporary working capital requirements. On May 4, 1998, the Company drew $5.0
million on the facility to finance the acquisition of oil and gas properties
(see Note 5, "Subsequent Events" in Notes to Consolidated Financial
Statements). The borrowing base is redetermined annually, or more often, at the
request of the Company. The Company believes that acquisitions and production
increases which have occurred since the last redetermination, will result in a
higher borrowing base. Upon redetermination, the Company estimates the borrowing
base will exceed $14.0 million resulting in approximately $9.0 million of
additional borrowing availability.
13
<PAGE>
CASH FLOW FROM OPERATING ACTIVITIES
The Company's net cash flow used in operating activities was $353,000, down
$1,303,000, from $950,000 provided by operating activities for the period March
31, 1997. This decrease is directly attributable to the reduction in oil and gas
prices and the use of cash to reduce current liabilities.
CAPITAL EXPENDITURES
The Company's net oil & gas capital expenditures totaled approximately
$2,296,000 in the three months ended March 31, 1998. A summary of 1998 capital
expenditures is as follows:
CAPITAL
EXPENDITURES
-------------
($000'S)
Evaluated properties................. $ 1,830
Unevaluated properties............... 466
-------------
$ 2,296
=============
The capital expenditures for the three months ended March 31, 1998, were
financed principally with the proceeds of the RIMCO financing, obtained on
December 31, 1997. Capital expenditures for the remainder of 1998 cannot be
estimated with precision as many expenditures are discretionary and can be
delayed; however, the Company expects to incur approximately $2,600,000 of
development expenditures associated with proved properties owned as of December
31, 1997. In addition, the Company expects to incur additional capital
expenditures during 1998 to complete the interpretation of 3-D seismic data in
its Raceland, Greens Lake and Laurel Grove prospects, to maintain and acquire
additional leases and to drill wells on the prospects. Together these capital
costs are estimated to total approximately $2,250,000 in 1998. The Company also
expects to make capital expenditures in 1998 in connection with its Joint
Venture with Bechtel Exploration Company. Commitments include geological,
geophysical and drilling costs for an estimated eight (8) drillable prospects.
The Company estimates net capital expenditures of $2,400,000 for a 12 1/2-20%
retained interest in each of the prospects. The Company may reduce these costs
through the sale of interests to third parties; and, alternatively, pending
incremental cash flows or financing, the Company may retain additional interests
or elect to drill additional prospects.
The Company cannot predict with any accuracy the level of capital
expenditures it may incur in connection with purchasing producing properties.
However, management has set a goal of acquiring at least $10.0 million of proved
producing properties in 1998. Toward that goal, as more fully discussed in the
Notes to Consolidated Financial Statements included herein, on May 4, 1998, the
Company acquired all of the oil & gas assets of an affiliated limited
Partnership ("Partnership"), for $4,430,000 and 898,000 shares of common stock
to be issued.
The Company believes that it will have sufficient capital available from
its credit facility and cash flows from operating activities to fund its 1998
capital obligations. In connection with the acquisition of Partnership
properties, the Company amended and restated the Partnership Agreement to
increase available Partnership capital to $15.0 million for acquisition and
development activities. The Company has a Partnership interest equal to 15%.
Capital available from the Partnership, with capital available directly to the
Company, results in a greater ability to compete for acquisitions. In addition,
the Company believes that funds available from traditional sources of equity,
debt, and project finance will further expand its ability to pursue strategic
corporate and property acquisitions.
CHANGING PRICES
Texoil's revenues and the carrying value of its oil and natural gas
properties are affected by changes in oil and gas prices. Oil prices have been
significantly reduced during the first quarter of 1998, with a resulting
reduction in net revenues. Moreover, Texoil's ability to obtain additional
capital on attractive terms may also depend upon oil and natural gas prices.
Should prices continue to fall, additional capital may be more difficult to
obtain. Currently, the downward trend has stabilized, and the Company has
maintained positive net revenues, notwithstanding its leverage and cost
structure. The Company believes prices will
14
<PAGE>
remain lower, but stable. 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.
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-QSB contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this report
including, without limitation, statements regarding the Company's business
strategy, plans, objectives and beliefs of management for future operations are
forward-looking statements. Although the Company believes the expectations and
beliefs reflected in such forward-looking statements are reasonable, it can give
no assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are discussed elsewhere in this report. Forward-looking statements
are not guarantees of future performance and actual results, developments and
business decisions may differ from those envisioned by such forward-looking
statements.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings -- No material change from legal proceedings
reported in Registrant's Form 10-KSB for the fiscal year ended
December 31, 1997.
Item 2 -- Change in Securities -- None
Item 3 -- Defaults Upon Senior Securities -- None
Item 4 -- Submission of Matters to a Vote of Security Holders -- None
Item 5 -- Other Information -- None
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits -- None
(b) Reports on Form 8-K
On March 16, 1998, the Company filed a report on Form 8-K/A1
including Item 7, (Consolidated Financial Statements of Cliffwood
Oil & Gas Corp., and related Pro Forma Consolidated Financial
Statements) relating to the report on Form 8-K reporting the
Merger with Cliffwood Oil & Gas Corp., filed on January 9, 1998.
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TEXOIL, INC.
Date: May 13, 1998 By: /s/FRANK A. LODZINSKI
FRANK A. LODZINSKI
PRESIDENT AND CEO
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S QUARTERLY REPORT CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,373
<SECURITIES> 0
<RECEIVABLES> 2,345
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,800
<PP&E> 23,380
<DEPRECIATION> (1,788)
<TOTAL-ASSETS> 26,076
<CURRENT-LIABILITIES> 4,143
<BONDS> 0
0
0
<COMMON> 10,411
<OTHER-SE> 1,158
<TOTAL-LIABILITY-AND-EQUITY> 26,076
<SALES> 1,866
<TOTAL-REVENUES> 2,178
<CGS> 954
<TOTAL-COSTS> 437
<OTHER-EXPENSES> 434
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> 244
<INCOME-TAX> 92
<INCOME-CONTINUING> 152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
