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 SEPTEMBER 30, 1999
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: 6,555,126 shares of common stock,
$.01 par value, issued and outstanding at October 30, 1999.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
<PAGE>
TEXOIL, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1999 ............... 3
Consolidated Statements of Income
for the three and nine months ended
September 30, 1999 and 1998.................................... 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 ......... 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 OPERATION ............................ 11
PART II. OTHER INFORMATION ................................................ 23
2
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TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30,
1999
-------------
Assets:
Current Assets:
Cash and cash equivalents .............................. $ 2,006
Accounts receivable and other .......................... 4,048
Other current assets ................................... 844
--------
Total current assets ............................... 6,898
Property, plant and equipment, at cost:
Oil and natural gas properties (full-cost method):
Evaluated properties ............................... 51,501
Unevaluated properties ............................. 6,053
Office and other equipment .................................... 771
--------
58,325
Less - accumulated depletion, depreciation and amortization ... (8,720)
--------
Net property, plant and equipment ............................. 49,605
--------
Other assets, net ............................................. 475
--------
Total assets ....................................... $ 56,978
========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued liabilities ............... $ 3,064
Revenue royalties payable .............................. 2,106
A/P advanced billings .................................. 127
--------
Total current liabilities .............................. 5,297
--------
Deferred income tax ........................................... 68
Long-term debt ................................................ 28,900
Convertible subordinated notes ................................ 10,000
Stockholders' equity:
Series A Preferred Stock - $.01 par value with
liquidation preference of $100 per share;
5,000,000 shares authorized; none issued
and outstanding .................................. --
Common stock - $.01 par value; 25,000,000 shares
authorized; 6,555,126 shares issued and
outstanding ...................................... 66
Additional paid-in capital .................................... 11,116
Retained earnings ............................................. 1,531
--------
Total stockholders' equity ............................. 12,713
--------
Total liabilities and stockholders' equity ............. $ 56,978
========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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TEXOIL, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales .......... $ 5,253 $ 1,932 $ 13,925 $ 6,164
Operator and management fees 241 243 720 724
Interest and other ......... 69 13 81 86
----------- ----------- ----------- -----------
Total revenues ...... 5,563 2,188 14,726 6,974
----------- ----------- ----------- -----------
Costs and Expenses:
Lease operating ............ 1,561 1,241 4,595 3,383
Workover ................... 41 10 87 119
Production taxes ........... 435 111 1,047 337
General and administrative . 507 286 1,403 1,113
Depletion, depreciation
and amortization ......... 1,391 555 3,485 1,489
Interest ................... 759 242 1,841 521
Write-down of oil and
gas properties ........... -- -- -- 1,208
----------- ----------- ----------- -----------
Total expenses ...... 4,694 2,445 12,458 8,170
----------- ----------- ----------- -----------
Income (loss) before income
taxes .......................... 869 (257) 2,268 (1,196)
Provision for deferred income
taxes .......................... (328) -- (858) 215
----------- ----------- ----------- -----------
Net income ....................... $ 541 $ (257) $ 1,410 $ (981)
=========== =========== =========== ===========
Basic net income per share ....... $ .08 $ (.04) $ .22 $ (.15)
=========== =========== =========== ===========
Basic weighted average shares .... 6,555,126 6,547,516 6,555,126 6,351,487
=========== =========== =========== ===========
Diluted net income per share ..... $ .08 $ (.04) $ .21 $ (.15)
=========== =========== =========== ===========
Diluted weighted average shares .. 6,738,210 6,547,516 6,779,168 6,351,487
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ 1,410 $ (981)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization ........ 3,485 1,489
Write-down of oil and gas properties ............ -- 1,208
Deferred income taxes ........................... 858 (215)
Accounts receivable ............................. (2) 1,739
Accounts receivable - related party ............. -- 60
Other assets .................................... (661) (1,486)
Accounts payable and accrued liabilities ........ 273 (2,634)
Accounts payable - related party ................ -- 1,002
Revenue royalties payable ....................... 608 (1,084)
------- -------
Net cash provided by (used in)
operating activities ............... 5,971 (902)
------- -------
Cash flows from investing activities:
Additions to oil and gas properties ............. (7,645) (8,504)
Other equipment additions ....................... (143) (163)
------- -------
Net cash used in investing activities ... (7,788) (8,667)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt and other .......... 5,400 6,000
Repayments of long-term debt .................... (2,000) (8)
------- -------
Net cash provided by financing activities 3,400 5,992
------- -------
Net increase (decrease) in cash and cash equivalents . 1,583 (3,577)
Cash and cash equivalents - beginning of period ...... 423 4,059
------- -------
Cash and cash equivalents - end of period ............ $ 2,006 $ 482
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................ $ 2,052 $ 703
======= =======
Income taxes ............................ $ -- $ --
======= =======
Oil and gas properties purchased by issuance of
common stock .................................... $ -- $ 763
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Texoil Inc. ("Texoil" or the "Company") operates a single business
segment involved in the acquisition, development and production of, and
exploration for, crude oil, natural gas and related products, primarily in Texas
and Louisiana. The financial statements included herein have been prepared by
the Company without an 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,
1998.
REVERSE STOCK SPLIT
In June 1999, the Company's Board of Directors approved certain changes
to the Company's outstanding common shares intended to result in approximately a
1-for-6 reverse stock split. In order to reduce the number of outstanding odd
lots, the reverse split occurred in a two-step process whereby a 1-for- 600
reverse split was followed by a 100-for-1 forward split. The process allowed the
Company to: (1) more favorably position its stock price and number of
outstanding shares in the marketplace in relation to its peer group, (2) adjust
or redeem odd-lots, resulting in an administrative cost savings, and (3) provide
for long-term compliance with listing requirements. The time period to redeem
fractional shares initially expired on September 30, 1999, but the Company has
extended the exchange period for holders entitled to receive round lots. The
Company is now authorized to issue 25,000,000 shares of common stock, par value
$.01, and 5,000,000 shares of preferred stock, $.01 par value. The Company
estimates that 6,555,126 shares are issued and outstanding at September 30,
1999, subject to certain nominal adjustments as shares are exchanged.
All issued and outstanding shares and per share data reflected in the
accompanying Consolidated Financial Statements and Notes to Consolidated
Financial Statements have been retroactively restated to reflect the impact of
the reverse stock split.
6
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NET INCOME PER COMMON SHARE
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 September 30, 1999
and 1998 consist of the following (in thousands except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income .................... $ 541 $ (257) $ 1,410 $ (981)
Basic weighted average shares . 6,555,126 6,547,516 6,555,126 6,351,487
Effect of dilutive securities:
Warrants ................. 43,029 -- 56,159 --
Options .................. 140,055 -- 167,883 --
Awards ................... -- -- -- --
Convertible notes ........ -- -- -- --
Diluted weighted average shares 6,738,210 6,547,516 6,779,168 6,351,487
Per common share net income:
Basic .................... $ .08 $ (.04) $ .22 $ (.15)
Diluted .................. $ .08 $ (.04) $ .21 $ (.15)
</TABLE>
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued SFAS
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows the gains and losses on derivatives to offset related
results on the hedged item either in the income statement or in the statement of
stockholders' equity, and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The statement is effective for fiscal years beginning after June 15,
2000. The Company is currently evaluating the new standard but has not yet
determined the impact it will have on its financial position and results of
operations.
NOTE 3: UNAUDITED PRO FORMA FINANCIAL INFORMATION
In October 1998 the Company closed on a significant acquisition of oil
and gas properties in South Texas and Louisiana. The acquisition was accounted
for using the purchase method of accounting. The activities of the acquired
properties were included in results of operations beginning November 1, 1998.
7
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Selected results of operations for the nine months ended September 30, 1998, on
a pro forma basis, giving effect to the acquisition as if it took place on
January 1, 1998, are as follows:
Revenues ........................................... $15,070
=======
Net income ......................................... $ 653
=======
Basic income per share ............................. $ .10
=======
Basic weighted average shares outstanding .......... 6,351
=======
Diluted income per share ........................... $ .09
=======
Diluted weighted average shares outstanding ........ 6,931
=======
Adjustments reflected in the historical results to estimate the above pro
forma results of operations for the quarter ended September 30, 1998, include
adjustments to (1) increase operator fees pursuant to operating agreements
associated with acquired properties, (2) recalculate depreciation, depletion and
amortization based upon combined historical production, reserves and cost basis,
(3) reflect interest expense for borrowings under the increased and amended
credit facility at an estimated average annual interest rate of 8.0%, and (4)
adjust income tax expense as a result of the acquisition. The unaudited pro
forma amounts do not purport to represent what the results of operations would
have been had the acquisition of the Sonat Properties occurred on such date or
to project the Company's results of operations for any future period.
NOTE 4: CREDIT AGREEMENT
The Company has 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 $75 million in
available borrowings, limited by a borrowing base (as defined in the Credit
Agreement) which was $36 million and $8.5 million at September 30, 1999 and
1998, respectively. As of September 30, 1999 and 1998, borrowings outstanding
under the Credit Agreement were $28.9 million and $6.1 million, respectively.
The borrowing base is redetermined annually by the bank pursuant to the Credit
Agreement (or more frequently at the option of the Company) and is reduced over
a five-year period on a straight-line basis, at $500,000 per month, commencing
October 1, 1999. The average interest rate paid to the lender was 7.6% and 8.6%
for the nine months ended September 30, 1999 and 1998, respectively. 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. The Credit Agreement contains covenants which,
among other things, restrict the payment of dividends on common stock, 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.
8
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5: HEDGING ACTIVITIES
OIL AND GAS PRICES
The Company has entered into various oil and gas hedging contracts in an
effort to manage its exposure to product price volatility. Under these
contracts, the Company receives or makes payments based on the differential
between fixed and variable prices for crude oil and natural gas. Such amounts
are reflected in oil and gas sales in the accompanying financial statements.
Amounts received or paid under such hedging and financial instrument contracts
decreased oil and gas sales by $674,484 and $574,259 for the three and nine
months ended September 30, 1999, respectively. There were no hedging activities
in 1998. The oil and gas hedging contracts in place as of September 30, 1999,
had a market value of $(1,406,128). For the three and nine months ended
September 30, 1999, the Company sold 300,000 MMBtu and 800,000 MMBtu,
respectively, at a fixed price of $2.17 per MMBtu and 70,000 MMBtu and 70,000
MMBtu, respectively, at a fixed price of $3.095 per MMBtu under two natural gas
swap agreements. In addition to these amounts, the Company has various fixed
price swap contracts for October 1999 through October 2000 covering 1,880,000
MMBtu's of natural gas at a price per-unit averaging $2.52 based on Houston Ship
Channel index pricing. For the three and nine months ended September 30, 1999,
the Company sold 135,000 Bbls and 185,000 Bbls, respectively, at prices ranging
from $17.02 to $18.36 per barrel. The Company also has fixed price swaps
covering 285,000 Bbls of oil at prices averaging $18.62 per Bbl for the period
of October 1999 through June 2000.
INTEREST RATES
The Company entered into an interest rate swap effective November 5,
1998, which fixed the floating portion of its interest rate at 5.25% on
$12,000,000 notional amount for the period from November 5, 1998 through
November 6, 2000. For the three and nine months ended September 30, 1999, the
Company received $139 and paid $17,480, respectively, which has been recorded as
additional interest expense. The market value of the interest rate swap contract
in place as of September 30, 1999, was $70,573.
NOTE 6: SUBSEQUENT EVENT
On October 12, 1999, the Company entered into a Series A Preferred Stock
Purchase Agreement with Quantum Energy Partners, L.P. ("Quantum"), affiliates of
EnCap Investments L.L.C. ("EnCap"), the V&C Energy Limited Partnership ("V&C")
and certain other individual investors. Pending shareholder approval, the
Company intends to issue 2,750,000 shares of Series A Convertible Preferred
Stock ("Preferred Stock") at $8.00 per share, initially convertible into two (2)
shares of common stock. The total consideration of $22.0 million will be used to
reduce indebtedness, implement the Company's capital development program and for
other corporate purposes. The dividend rate is 9% per annum payable in
additional shares of Preferred Stock or in cash. The Preferred Stock may be
converted at any time at the election of the holder and is automatically
convertible at any time after December 31, 2002, based on the achievement of
certain net asset and per share
9
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
values. Conversion rates are subject to certain anti-dilution adjustments. In
addition, investors have been granted certain registration rights and protective
covenants. Quantum is the lead investor and will acquire 1,875,000 shares for
$15.0 million. Quantum was not previously affiliated with the Company. Certain
other investors include current officers, directors or shareholders of the
Company, who are participating on the same basis as non-affiliated investors.
On November 1, 1999, the Company closed the acquisition of the Eloi Bay
Field located in the offshore state waters of Louisiana. The net acquisition
price is estimated at $5.5 million net of certain post-closing adjustments as
specified in the purchase and sale agreement. A subsidiary of the Company will
operate the Eloi Bay Field. The Company funded the acquisition with available
borrowings under its Credit Agreement. Pursuant to a separate purchase and sale
agreement, the Company also closed the acquisition of certain other mineral and
seismic assets for $300,000. In connection with the acquisition, the Company's
borrowing base under the Credit Agreement has increased from $36.0 million to
$40.0 million.
10
<PAGE>
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 and should further be read in conjunction with the Company's
annual report on Form 10-KSB, for the year-ended December 31, 1998, and prior
quarterly filings on Form 10-QSB made in 1999.
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-QSB, and in particular this Management's
Discussion and Analysis of Financial Condition and Results of Operations,
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 and, in particular, this section of this report,
including, without limitation, statements regarding the Company's business
strategy, plans, objectives, expectations, intent and beliefs of management
related to current or future operations are forward-looking statements. Such
statements are based on certain assumptions and analyses made by management,
based on its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes to be
appropriate. The forward-looking statements included in this report are subject
to a number of material risks and uncertainties including assumptions about the
pricing of oil and gas, assumptions about operating costs, production operations
continuing as in the past or as projected by Company or independent engineers,
the ability to generate and take advantage of acquisition opportunities and
numerous other factors, which may be subject to material change. A detailed
discussion of important factors that could cause actual results to differ
materially from the Company's expectations are contained herein and in the
Company's Annual Report on Form 10-KSB for 1998. Forward-looking statements are
not guarantees of future performance; therefore, actual results, developments
and business decisions may differ from those envisioned by such forward-looking
statements.
BUSINESS AND STRATEGY
Texoil is an independent oil and gas company engaged in the acquisition
and development of oil and gas reserves through an active and diversified
program which includes purchases of oil and gas reserves, re- engineering,
development and exploration activities. As further discussed herein, future
growth in assets, earnings, cash flows and share values are dependent upon the
Company's ability to acquire, discover and develop an oil and gas reserve base
that can be produced at a profit and has market value exceeding its finding and
production costs. The price of crude oil was significantly depressed in 1998 and
early 1999. The industry-wide reduction in prices adversely affected revenues
and net cash flows of the Company, as well as most companies in the industry,
particularly those whose assets were concentrated in oil reserves. Such reduced
revenues and cash flows resulted in capital budget decreases, contraction of
exploration financing and elimination or deferral of new ventures by many
companies and institutional investors. Texoil reacted promptly to these industry
conditions by concentrating on operating and administrative cost reductions,
acquiring additional producing assets, focusing on prospects which were readily
marketable to industry and undertaking certain other corporate actions intended
to offset the severe effects of such price reductions. Most of these actions
already were an integral part of the Company's fundamental business strategy. As
a result of its business strategy and pro-active reaction to the low price
environment, the Company emerged the low price period with significantly
increased reserves and production levels, which have led to increased
11
<PAGE>
revenues, cash flows and earnings. While commodity prices have rebounded, no
assurance can be given that current price levels will be sustained or that such
prices will continue to increase.
Management believes that its growth during the low price environment has
improved its standing in the industry relative to its competitors, enhanced its
credibility with sellers and financial institutions, favorably impacted its
access to potential acquisitions, and enhanced its ability to solicit industry
or financial partners for drilling activities. Management further believes that
Texoil will benefit from opportunities to acquire and develop additional
reserves. The Company has identified development and exploratory projects in its
existing property portfolio and has further undertaken detailed field studies
intended to define additional potential. In addition, management believes the
acquisitions market will expand as larger companies divest of "non-core"
properties and smaller companies, that were not positioned to withstand the
significant price declines, sell assets, are liquidated or consolidate to
satisfy creditors or improve shareholder value. Finally, with the expansion of
corporate budgets, the Company expects to solicit industry partners for certain
high potential exploratory projects, which had previously been deferred.
Texoil continues to implement its business strategy and to focus on
capital expenditures that can result in increased production and operating cost
reductions, on a per-unit basis. The current corporate strategy is merely an
expansion and adaptation of the business plan which was conceived and
implemented in early 1996, and has resulted in significant growth to date.
Following is a brief outline of management's plans. See also, "Impact of
Property Acquisitions and Development", "Hedging Activities" and "Capital
Expenditures" below.
1) Place greater emphasis on acquisition opportunities. Selectively
acquire corporate entities and properties with significant proved
producing reserves and development and exploration potential.
2) Complete field studies and implement capital development programs.
3) Continue the Company's exploration program; solicit industry partners
on a promoted basis.
4) Continue activities directed toward reducing per-unit operating and
general and administrative costs on a long-term sustained basis.
5) Increase equity and long-term financing, as necessary, through
available means, whether through direct placement of securities or in
connection with corporate acquisition activities.
Consistent with the emphasis being placed on acquisitions and development,
in the short-term capital expenditures directed toward new exploration projects
may be reduced as a percentage of the overall budget. The Company will focus on
acquisitions of proved properties with development and exploratory potential,
particularly those where seismic data and prospective acreage can be acquired as
part of the acquisition. Management believes the current market is conducive to
the acquisition of proved properties with seismic data and exploratory acreage,
at little or no incremental cost over proved reserves. In addition, the Company
will focus on exploratory projects currently in inventory.
While the impact and success of corporate plans cannot be predicted with
any accuracy, management's goal is to replace production and further increase
its reserve base at an acquisition or finding cost that will yield attractive
rates of return and share appreciation.
12
<PAGE>
ACCOUNTING FOR OIL & GAS PROPERTIES
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 are further classified as evaluated or
unevaluated. Evaluated costs are those associated with proved reserves or with
properties which have 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 evaluated, capitalized
costs will be transferred to an evaluated status and 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. The depletion rate is applied to a cost base which
includes net capitalized evaluated costs plus an estimate of costs to be
incurred in the development of proved undeveloped reserves or in future
abandonment activities. Under the full-cost method, a write-down of oil and gas
properties must be charged to operations if net capitalized costs at the end of
each quarterly reporting period exceed the estimated discounted future net
revenues of proved oil and natural gas reserves, using current oil and gas
prices and costs, held constant over the life of the properties, plus the lower
of cost or fair value of unevaluated properties, both on an after-tax basis (the
"full-cost ceiling").
Capitalized costs include payroll and related costs of technical
personnel which are directly attributable to the Company's oil and gas
acquisition, exploration and development activities. Such amounts capitalized
for the three and nine months ended September 30, were $152,685 and $483,477 for
1999, and $163,000 and $428,000 for 1998, respectively. 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 three and nine months ended September 30, 1999 and
1998, are interest costs of $84,337 and $320,172 for 1999, and $65,000 and
$267,000 for 1998.
At the end of the third quarter of 1999, the Company's full-cost ceiling
substantially exceeded its net capitalized costs. Net capitalized costs could
exceed the full-cost ceiling in future periods due to downward revisions to
estimated 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 recorded, a
write-down of oil and gas properties cannot be reversed at a later date, even if
estimated reserve quantities or oil and gas prices subsequently increase.
Management believes that current reserve estimates, which represent the basis
for calculating limitations on capitalized costs, are reasonable under present
operating conditions and circumstances. However, reserve estimates and forecasts
are inherently imprecise and, therefore, subject to significant future changes.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998.
The Company recorded a net income (loss) of $541,000 and $(257,000) for
three months ended September 30, 1999 and 1998, respectively. The $798,000
increase 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 sales .................................... $ 3,321
Lease operating and workover expenses ................ (351)
Production taxes ..................................... (324)
General and administrative expenses - net ............ (221)
Depletion, depreciation and amortization
expense ("DD&A").................................... (836)
Interest expense - net ............................... (517)
Other income - net ................................... 54
Provision for income taxes ........................... (328)
-------
$ 798
=======
The following discussion applies to the changes in the composition of net
income shown above.
The $3,321,000 or 172% increase in net oil and gas sales is due to the
increase in production volumes resulting from the acquisition and development of
properties and an increase in average prices, as shown in the table presented
immediately below. Average prices reflect the net impact of hedging activities.
See "Hedging Activities" below.
THREE MONTHS ENDED
PERCENT SEPTEMBER 30,
INCREASE ------------------------
(DECREASE) 1999 1998
---------- --------- ---------
Gas production (MMcf) ......... 334% 1,068 246
Oil production (MBbls) ........ 28% 160 125
Barrel of oil equivalent (MBOE) 104% 338 166
Average gas price (per Mcf) ... 30% $ 2.51 $ 1.93
Average oil price (per Bbl) ... 38% $ 16.11 $ 11.66
Average price per BOE(1) ...... 34% $ 15.54 $ 11.64
(1) "BOE" is defined as Barrel of Oil Equivalent.
Lease operating expenses and workover costs increased $351,000 or 28 %.
On a unit-of-production, per BOE basis, costs were actually reduced 37%. The
dollar increase is a result of the acquisition and development of oil and gas
properties. On a BOE basis, production volumes increased 104% over the prior
year. Accordingly, lease operating expenses increased primarily as a result of
additional production volumes.
14
<PAGE>
The Company may achieve further reductions to lease operating expenses on a BOE
basis as a result of re-engineering and development activities. Production
taxes increased by $324,000 or 292% due to increased production volumes and
revenues.
General and administrative costs increased $221,000 or 77%. The
percentage increase in general and administrative expenses was less than the
increases in production and revenues, as a result of both rigorous cost
containment efforts and production increases. On a BOE basis, general and
administrative expenses actually were reduced by13% in 1999 over 1998 levels.
The dollar increase is comprised primarily of increases in management, operating
and administrative staffing associated with the Company's growth. The Company
must attract and retain competent management, technical and administrative
personnel to pursue its business strategy and fulfill its contractual
obligations.
The $836,000 or 151% increase in DD&A expenses is primarily due to the
increase in oil and gas production volumes and capitalized balances subject to
DD&A, offset by increases in estimated recoverable reserves, resulting from the
acquisition and development of gas and oil properties and from the effect that
price increases have on estimated quantities of recoverable reserves.
Capitalized costs included in the full- cost pool and subject to DD&A were $51.5
and $25.6 million at September 30, 1999 and 1998, respectively. In addition,
estimated future development costs associated with proved undeveloped reserves
in the amount of $14.3 million and $5.3 million at September 30, 1999 and 1998,
respectively, were included in the DD&A calculations. The proved reserve
quantities used for the calculation of DD&A were approximately 18.5 million
barrels of oil equivalent.
Interest expense increased by $517,000, primarily due to the increased
long-term debt used to finance acquisitions. Interest expense was $759,000 and
$242,000 for the three months ended September 30, 1999 and 1998, respectively,
and is expected to be approximately $2.4 million in 1999. The Company expects to
close a private placement of preferred equity on or about November 10, 1999.
Proceeds will initially be used to reduce debt; therefore, interest expense is
expected to decrease in future periods. See Note 6 to the Consolidated Financial
Statements and "Liquidity and Capital Resources," below.
The net change in the provision for income taxes was $328,000 due to the
recognition of pre-tax income in 1999 versus a 1998 loss.
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
The Company recorded a net income (loss) of $1,410,000 and $(981,000) for
the nine months ended 1999 and 1998, respectively. The $2,391,000 increase in
the Company comparative net income resulted primarily from the following
factors:
NET AMOUNT
CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
----------------------
(000'S)
Oil and gas sales ....................................... $ 7,761
Lease operating and workover expenses ................... (1,180)
Production taxes ........................................ (710)
General and administrative expenses - net ............... (290)
Depletion, depreciation and amortization expense
("DD&A")............................................... (1,996)
Interest expense - net .................................. (1,320)
Writedown of oil and gas properties ..................... 1,208
Other income - net ...................................... (9)
Provision for income taxes .............................. (1,073)
-------
$ 2,391
=======
The following discussion applies to the changes in the composition of net
income shown above.
The $7,761,000 or 126% increase in net oil and gas sales is primarily
attributable to the increase in production volumes resulting from the
acquisition and development of properties during 1998. The increase in
production volumes and changes in prices are shown in the table presented
immediately below. Average prices reflect the net impact of hedging activities.
See "Hedging Activities" below.
NINE MONTHS ENDED
PERCENT SEPTEMBER 30,
INCREASE --------------------
(DECREASE) 1999 1998
-------- ------- -------
Gas production (MMcf) ......... 294% 3,029 768
Oil production (MBbls) ........ 41% 503 356
Barrel of oil equivalent (MBOE) 108% 1,008 484
Average gas price (per Mcf) ... 9% $ 2.23 $ 2.05
Average oil price (per Bbl) ... 11% $ 14.28 $ 12.84
Average price per BOE ......... 8% $ 13.82 $ 12.74
(1) "BOE" is defined as Barrel of Oil Equivalent.
Lease operating expenses and workover costs increased $1,180,000 or 34%.
On a unit-of production, per BOE basis, costs were actually reduced 36%. The
dollar increase is a result of the acquisition and development of oil and gas
properties in 1998. On a BOE basis, production volumes increased 108% over the
prior year. Accordingly, lease operating expenses increased primarily as a
result of additional production volumes. The Company may achieve further
reductions to lease operating expenses on a BOE basis as a result
16
<PAGE>
of re-engineering and development activities. Production taxes increased by
$710,000 or 211% due to increased production volumes and revenues.
General and administrative costs increased $290,000 or 26%. The
percentage increase in general and administrative expenses was less than the
increases in production and revenues, as a result of both rigorous cost
containment efforts and production increases. On a BOE basis, general and
administrative expenses actually were reduced by 40% in 1999 compared to 1998
levels. The dollar increase is comprised primarily of increases in management,
operating and administrative staffing associated with the Company's growth. The
Company must attract and retain competent management, technical and
administrative personnel to pursue its business strategy and fulfill its
contractual obligations.
The $1,996,000 or 134% increase in DD&A expenses is primarily due to the
increase in oil and gas production volumes and capitalized balances subject to
DD&A, offset by increases in estimated recoverable reserves, resulting from the
acquisition and development of gas and oil properties and the effect that price
increases have on estimated quantities of recoverable reserves. Capitalized
costs included in the full-cost pool and subject to DD&A were $51.5 and $25.6
million at September 30, 1999 and 1998, respectively. In addition, estimated
future development costs associated with proved undeveloped reserves in the
amount of $14.3 million and $5.3 million at September 30, 1999 and 1998,
respectively, were included in the DD&A calculations. The proved reserve
quantities used for the calculation of DD&A were approximately 18.5 million
barrels of oil equivalent.
Interest expense increased by $1,320,000 primarily due to the increased
long-term debt used to finance acquisitions. Interest expense was $1,841,000 and
$521,000 for the nine months ended September 30, 1999 and 1998, respectively,
and is expected to be approximately $2.4 million in 1999. The Company expects to
close a private placement of preferred equity on or about November 10, 1999.
Proceeds will initially be used to reduce debt; therefore, interest expense is
expected to decrease in future periods. See Note 6 to the Consolidated Financial
Statements and "Liquidity and Capital Resources," below.
Other income decreased $9,000 for the nine months ended September 30,
1999, principally due to decreases in interest income and consulting fees.
The provision for income taxes increased $1,073,000 as a result of the
increase in net income.
IMPACT OF PROPERTY ACQUISITIONS AND DEVELOPMENT
Management expects revenues and cash flow (EBITDDA) of approximately
$21.0 million and $10.5 million, respectively, in 1999, representing an increase
of 103% and 235%, respectively, over 1998. These estimates are predicated on the
results of operations for the nine months ended September 30, 1999, anticipated
production levels, estimated prices and costs and the closing of the Eloi Bay
Field acquisition. Estimates are based on independent reserve reports prepared
by third parties in connection with required redetermination of the bank
borrowing base. These increases are a direct result of acquisition and
development activities. In connection with its acquisitions, the Company
generally implements a capital expenditures program, which it refers to as
"re-engineering activities," designed to increase production (or arrest natural
or mechanical declines) and lower recurring expenses. Thereafter, the Company
conducts detailed field studies designed to isolate development opportunities.
The Company has identified projects in its existing property portfolio related
to proved behind-pipe and undeveloped reserves and expects to define
17
<PAGE>
additional development and exploratory potential. Net future cash flows could be
favorably affected by further price improvements, additional reductions to
per-unit operating costs, and development activities related to proved and
non-proved reserves. No assurance can be given, however, that the Company will
be able to successfully and economically develop additional reserves which are
associated with its existing properties.
IMPACT OF CHANGING PRICES AND COSTS
Texoil's revenues and the carrying value of its oil and gas properties
are subject to significant change due to changes in oil and gas prices. As
demonstrated historically, prices are volatile and unpredictable. As previously
mentioned, oil prices declined appreciably during 1998 and early 1999, but have
recently rebounded. Average oil prices for the nine months ended September 30,
1999, of $14.28 per Bbl were 11% higher than the comparable period in 1998, but
still 21% and 35% lower than average prices realized in 1997 and 1996,
respectively. Should prices fall or fail to remain at levels which will
facilitate repayment of debt and reinvestment of cash flow to replace current
production, the Company could experience difficulty in developing its assets and
continuing its growth.
HEDGING ACTIVITIES
The Company implemented a hedging strategy in May of 1999, in a direct
response to improving prices. The intent of the hedging strategy is to "lock-in"
profits and cash flows greater than realized during 1998 and early 1999.
Management believes its hedging strategy will also result in greater
predictability of internally generated funds, which can be dedicated to capital
development projects and corporate obligations. In general, the Company has
entered into fixed price swaps for portions of its gas and oil production
through October 2000. Monthly quantities of natural gas hedged range from
120,000 MMBtu's to 170,000 MMBtu's per month over the period July 1, 1999,
through October 31, 2000, at prices ranging from $2.16 to $3.20 per MMBtu.
Monthly quantities of oil hedged range from 25,000 Bbls to 45,000 Bbls per month
over the period from October 1, 1999, through June 2000, at prices ranging from
$17.57 per Bbl to $19.25 per Bbl. Significant oil quantities are available for
such arrangements commencing January 1, 2000. Texoil does not engage in
speculative trading activities and does not hedge all available or anticipated
quantities; its strategy involves the following factors:
1) Effectively manage cash flow to minimize price volatility and
generate internal funds available for capital development projects
and additional acquisitions.
2) Ensure the Company's ability to fully support its exploration
activities, administrative and debt service obligations.
3) "Lock-in" growth in revenues, cash flows and profits for financial
reporting purposes.
4) Allow certain quantities to float, particularly in months with high
price potential.
18
<PAGE>
Management believes that speculation and trading activities are
inappropriate for the Company, but further believes appropriate management of
realized prices is an integral part of managing its business strategy.
Furthermore, as a growth Company actively pursuing additional acquisitions and
development activities, the Company expects to realize additional production
that will expose the Company to pricing upside.
ADMINISTRATIVE AND OPERATING COSTS
Early in 1998, in an effort to mitigate the adverse effect of low oil
prices, the Company expanded numerous cost-saving programs designed to reduce
operating and administrative costs and enhance cash flows. Rather than reduce
technical and other personnel, the Company chose to implement a salary-reduction
program and defer salary increases. With continued growth and price recovery,
salaries have been restored to prior levels and the Company has expanded its
office space to accommodate the personnel needed for additional acquisitions and
development activities. The Company continues to focus clearly on cost-
containment measures that can lower per-unit operating and administrative costs,
but still result in continued growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to finance its future acquisition, development and
exploration activities through its pending issuance of preferred equity, cash
flow from operating activities, its bank credit facility, sale of non-strategic
assets and various means of project finance. In addition, the Company intends to
continue to subsidize 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.
PENDING ISSUANCE OF PREFERRED STOCK
As further discussed in Note 6 to the Consolidated Financial Statements,
on October 12, 1999, Texoil entered into a definitive Preferred Stock Purchase
Agreement for the issuance of $22.0 million of Series A Preferred Stock at $8.00
per share which is convertible under certain circumstances into two shares of
Common Stock subject to certain anti-dilution considerations.
19
<PAGE>
The following table illustrates the impact of the offering on the capital
structure of the Company, along with the closing of the recent acquisition of
the Eloi Bay Field (see Capital Expenditures below) on a pro-forma basis at
September 30, 1999:
<TABLE>
<CAPTION>
PRO-FORMA PRO-FORMA
CAPITALIZATION SEPTEMBER 30, 1999 ADJUSTMENTS SEPTEMBER 30, 1999
-------------- ------------------ ----------- ------------------
($ MILLIONS)
<S> <C> <C> <C>
Long-term debt ......... $28.9 (10.5)(1) $22.9
4.5 (2)
Subordinated notes
due December 31, 1999 .. 10.0 (10.0)(1) --
Preferred equity ....... -- 20.5 (1) 20.5
Common equity .......... 12.7 -- 12.7
----- ----- -----
$51.6 $4.5 $56.1
===== ===== =====
</TABLE>
(1) Estimated proceeds, net of fees, commissions, legal, engineering and
other estimated closing costs.
(2) Estimated borrowings for Eloi Bay Field acquisition, net of estimated
closing adjustments and cash balances used to partially fund the
acquisition.
The Company expects to significantly increase its credit capacity and
cash flow from operations as a result of closing the issuance of preferred stock
and the Eloi Bay Field acquisition. See further discussion below.
CREDIT FACILITY
At September 30, 1999 and 1998, the Company had available borrowing
capacity of $7.1 million and $2.5 million, respectively, in accordance with a
revolving Credit Agreement with its banks, which can be used to finance property
acquisitions and temporary working capital requirements. The borrowing base is
redetermined annually, or more often at the request of the Company. As of
September 30, 1999, a $36 million borrowing base was established.
20
<PAGE>
The Company expects to further revise and amend its Credit Agreement
subsequent to the closing of its issuance of preferred stock and the acquisition
of its Eloi Bay Field. Preliminary discussions are already underway with its
banks and are expected to be completed by year-end. Texoil will attempt to
increase its facility to $100 million with an initial borrowing base of $45 - 50
million. At present, the Company estimates at least the following:
BORROWING BASE
--------------
(millions)
Existing at September 30, 1999 ................................. $36.0
Additions:
- Eloi Bay Field collateral value ........................... 5.0
- Expected increase due to retirement of subordinated
notes ..................................................... 4.0
-----
Estimated borrowing base ....................................... 45.0
Less expected amount outstanding post-closing
transactions .............................................. (22.9)
-----
Estimated availability ......................................... $22.1
=====
Thus, the Company expects to have approximately $22.1 million of
availability under its Credit Agreement subsequent to its redetermination. At
present, its availability is estimated at approximately $17.1 million, exclusive
of the impact of retirement of the subordinated notes. However, no assurance can
be given that the Company will be able to realize or maintain the increases in
credit availability discussed above.
CASH FLOW FROM OPERATING ACTIVITIES
For the nine months ended September 30, 1999, the Company's net cash flow
provided by operating activities was $6.0 million, up $6.9 million from the
prior year. This increase is attributable to increased production from
acquisition and development activities, price increases, lower per-unit
operating expenses and lower cash requirements to reduce current liabilities.
Texoil expects 1999 to result in approximately $21.0 million of revenue and
$10.5 million of cash flow (EBITDDA).
Using prices of approximately $17.50 per Bbl and $2.25 per Mcf, Texoil
estimates significant increases to cash flows in 2000 as a direct result of its
acquisition and development program. On a preliminary basis, the Company is
forecasting revenues of $31.0 million and cash flows of $15.0 million.
Management expects that such cash flows will be used to fund its capital
development and exploratory activities for the year-ended December 31, 2000, and
for additional acquisitions.
Management estimates that the Company could have approximately $36.0
million to fund capital expenditures and new acquisitions, (including both
credit availability and cash flow). However, given the volatility of prices and
uncertainty of cost and recoverability of reserves, no assurance can be given
that the Company will realize these estimates.
21
<PAGE>
CAPITAL EXPENDITURES
The Company's net oil and gas capital expenditures for the nine months
ended September 30, 1999 and 1998, are as follows:
CAPITAL EXPENDITURES
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
------ ------
Acquisition of properties:
Evaluated properties......................... $7,568 $7,678
Unevaluated properties....................... 573 1,590
------ ------
$8,141 $9,268
====== ======
Capital expenditures for the nine months ended September 30, 1999, were
financed principally with cash flows from operations. During the majority of
1999, the Company has concentrated on integrating its 1998 acquisitions into its
operations and commencing detailed field studies and implementing re-engineering
and development projects. However, the Company has also acquired additional
properties and interests in its geographical focus areas and implemented certain
re-engineering and development programs.
As a result of the Company's growth and performance, management believes
the Company has emerged from the industry downturn with significant profit
potential, stronger financial capabilities and enhanced credibility in the
industry. Therefore, management believes the Company can compete successfully
for new acquisition opportunities. Accordingly, the Company has directed a
greater portion of its current efforts toward corporate and asset acquisitions,
which are expected to include both proved and exploratory assets. Certain
exploration and development projects have been deferred in favor of anticipated
industry opportunities. In particular, the Company has deferred projects which
are "held-by-production" in favor of projects with definitive lease expirations.
The Company's business strategy has always been to shift its emphasis among
acquisitions, development and exploratory activities consistent with changes in
the marketplace.
During the remainder of 1999, Texoil intends to concentrate its capital
expenditures on re-engineering facilities (surface and down-hole), restoring
shut-in wells to production and recompletions. The Company expects to make
additional capital expenditures during 1999 to maintain leases and complete the
interpretation of 3-D seismic data associated with certain exploratory and
development projects. Texoil will continue its practice of soliciting partners,
on a promoted basis, for higher risk exploratory and development projects.
22
<PAGE>
Based solely on its existing portfolio of properties and projects, the
Company expects to incur approximately $1.5 million of capital expenditures
during the remainder of 1999, exclusive of the acquisition of the Eloi Bay Field
and certain other seismic and mineral assets for approximately $6.8 million (see
Note 6 to Consolidated Financial Statements) as follows:
($000'S)
--------
Development of proved properties:
Re-engineering - facilities & equipment ............ $ 400
Well recompletions ................................. 700
Drilling ........................................... --
Exploration:
Land, geological & geophysical ..................... 370
Drilling ........................................... --
------
$1,470
======
Management believes projected expenditures will result in increased
production, cash flows and reserve value and will further expose the Company to
potentially significant upside from exploration. Management further believes the
deferral of certain projects will not result in any material losses.
The Company cannot predict with accuracy the level of capital expenditures
it may incur in connection with the development of its existing asset base or
with acquisitions and development of new producing properties. However, since
June 30, 1999, the Company has acquired or contracted for the purchase of
certain properties in South Texas and South Louisiana for $11.2 million and has
set a goal of $50.0 million for the acquisition and development of properties
over the next two years.
YEAR 2000 COMPLIANCE
The Company has conducted a review of, and will continue to review, its
software applications for Year 2000 issues. None of the software applications
utilized by the Company were developed internally and all have been acquired and
routinely updated since early 1996. The Company uses a PC based networked
hardware configuration with widely utilized, accepted and supported software
applications for its basic operating and office support functions. The primary
software applications used by the Company for its oil and gas activities are its
accounting, land, production management, engineering and interpretative
exploration software. All such systems were purchased from third party vendors,
who are responsible for their maintenance and support, pursuant to the terms of
license and use agreements. The most critical systems referred to above are the
accounting, land and production systems. Other systems are primarily analytical
tools which facilitate and support engineering and geological projects. Based on
reviews and inquiries conducted by Company personnel and resultant
representations by software vendors, the Company believes its primary software
applications are Year 2000 compliant. Accordingly, the Company does not expect
to incur any material costs to modify, upgrade or replace its basic business
systems over and above ongoing requirements to expand systems, as required by
growth and operations. However, the Company is not able nor does it possess the
technical expertise to conduct a comprehensive review of programs and systems
23
<PAGE>
purchased from and supported by third parties; therefore, the Company cannot
guarantee that it will not incur problems with such software and business
applications. As a further precaution, the Company has engaged a consultant to
review our hardware/network architecture and certain software and to test the
system for compliance.
Although the Company does not expect Year 2000 issues to have a material
impact on its internal operations, it is possible that such issues could
adversely affect customers, suppliers and joint venture partners, with the
possibility of an adverse impact on the Company. Major issues include, (i) the
ability of the Company's customers to accurately and timely measure and pay for
quantities of oil and gas production delivered, (ii) the ability of the
Company's vendors and suppliers to accurately invoice for services and products
and to properly process and account for payments received, (iii) the ability of
non-operating partners in Company operated properties to process and pay their
share of joint interest billings, as rendered and due, and (iv) the ability of
operators, where the Company is a non-operating participant, to disburse net
revenue and render joint interest billings to the Company. As part of its basic
operating practices, the Company believes it currently has adequate internal
controls and procedures in place to account for and monitor material aspects of
the above described activities. As Year 2000 approaches, the Company intends to
take additional steps to determine the Year 2000 readiness of third parties and
to implement additional procedures as it deems reasonably necessary, to account
for and take actions necessary to minimize potential problems resulting from
third party customers, vendors and partners outside of the control of the
Company. In the opinion of management, the single most significant issue is the
timely receipt of payment for oil and gas volumes sold. The majority of the
Company's production is from operated properties where the Company sells field
production to a relatively small number of purchasers. The Company can readily
account for production volumes and prices and aggressively pursue collection.
The effect of problems associated with third parties, if any, cannot be
controlled by the Company and the potential financial impact cannot be estimated
with any accuracy. Such matters could have a material impact on the Company.
The Company has conducted a survey of substantially all of its third party
vendors/suppliers as well as purchasers of oil and gas. The response indicates
that, with very few exceptions from smaller companies, our vendors, suppliers,
purchasers and partners are or expect to be Year 2000 compliant.
24
<PAGE>
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings - During the three months ended September 30, 1999,
the Company settled certain litigation with Mobil Oil Corporation (Cause No.
99-93557) for $290,000; the Company may recover up to $90,000 of such settlement
from a third party. There has been no material change from legal proceedings
reported in Registrant's Form 10-KSB for the fiscal year ended December 31,
1998.
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 October 13, 1999, the Company filed a report on Form 8-K,
including Item 5, Other Events, related to the execution of a
Preferred Stock Purchase Agreement and amended such report by Form
8-K/A filed October 22, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXOIL, INC.
Date: November 8, 1999 By: /s/ FRANK A. LODZINSKI
Frank A. Lodzinski
President and CEO
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM TEXOIL QUARTERLY REPORT 09/30/99 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,006
<SECURITIES> 0
<RECEIVABLES> 4,048
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,898
<PP&E> 58,325
<DEPRECIATION> (8,720)
<TOTAL-ASSETS> 56,978
<CURRENT-LIABILITIES> 5,297
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 12,647
<TOTAL-LIABILITY-AND-EQUITY> 56,978
<SALES> 13,925
<TOTAL-REVENUES> 14,726
<CGS> 5,729
<TOTAL-COSTS> 1,403
<OTHER-EXPENSES> 3,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,841
<INCOME-PRETAX> 2,268
<INCOME-TAX> 858
<INCOME-CONTINUING> 1,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,410
<EPS-BASIC> .22
<EPS-DILUTED> .21
</TABLE>
