SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
TEXOIL, INC.
(Name of Registrant as Specified in its Charter)
_____________________________________________________________________
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
2. Form, Schedule or Registration Statement No.:
3. Filing Party:
4. Date Filed:
<PAGE>
TEXOIL, INC.
110 Cypress Station Drive, Suite No. 220
Houston, Texas 77090-1629
(281) 537-9920 (281) 537-8324 - Fax
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 8, 1999
Notice is hereby given that the annual meeting of Shareholders of Texoil,
Inc. (the "Company"), will be held at the Houston Marriott North at Greenspoint,
255 North Sam Houston Parkway East, Houston, Texas 77060, on Monday, November
8, 1999, at 2:00 P.M. (Houston time), for the following purposes:
1. To elect six Directors in three separate groups, two in Group One,
to serve until the Annual Meeting of Shareholders in 2000, two in
Group Two to serve until the Annual Meeting of Shareholders in 2001
and two in Group Three to serve until the Annual Meeting of
Shareholders in 2002 or until their successors are elected and
qualified.
2. To consider and vote upon the approval of a Preferred Stock Purchase
Agreement concerning the issuance of 2,750,000 shares of Series A
Preferred Stock plus additional shares of Series A Preferred Stock
issuable as payment-in-kind dividends, pursuant to the terms and
conditions of the Preferred Stock Purchase Agreement and the
Certificate of Designation of Series A Preferred Stock.
3. To consider and vote upon Amended and Restated Articles of
Incorporation restating the existing articles and providing
amendments (i) to classify the Board of Directors into Class A
Directors and Class B Directors, with the Class A Directors to be
elected by the record holders of Common Stock and to be further
classified into three groups of two Directors each (subject to
reduction as set forth in Proposal 3) with each group serving for
three years and one group to be elected each year and the Class B
Directors to be elected by the record holders of the Series A
Preferred Stock or Class B Common Stock; (ii) to provide that the
voting power of individual directors or classes of directors may be
greater or less than that of other directors or classes of
directors; (iii) to create Class B Common Stock into which the
proposed Series A Preferred Stock may be automatically converted;
(iv) to increase the amount of Preferred Stock authorized; (v) to
amend the indemnification provisions to increase the rights of
members of the Board of Directors; and (vi) to provide that the
Company's Bylaws cannot be altered or amended in such a way that
they would undermine the intent or the provisions of the Amended and
Restated Articles of Incorporation.
4. To approve the appointment of Arthur Andersen LLP as independent
auditors of the Company for the year ending December 31, 1999.
5. To consider and act upon such other business as may properly be
presented to the meeting or any adjournment thereof.
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<PAGE>
A record of shareholders has been taken as of the close of business on
October 1, 1999, and only those shareholders of record on that date will be
entitled to notice of, and to vote at the meeting or any adjournment thereof. A
complete list of shareholders so entitled to vote will be available at the
Company's principal office at 110 Cypress Station Drive, Suite No. 220, Houston,
Texas 77090- 1629, commencing October 29, 1999, for inspection by any
stockholder during usual business hours prior to the annual meeting. All
Shareholders of the Company are invited to attend the meeting. The Board of
Directors, however, requests that you promptly sign, date and mail the enclosed
proxy, even if you plan to be present at the meeting. If you attend the meeting,
you can either vote in person or by your proxy. Please return your proxy in the
enclosed, postage-paid envelope.
By Order of the Board of Directors,
Jerry M. Crews
Secretary
October 22, 1999
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<PAGE>
SHAREHOLDERS MAY OBTAIN, WITHOUT CHARGE, A COPY OF TEXOIL'S ANNUAL REPORT
ON FORM 10-KSB FOR THE YEAR-ENDED DECEMBER 31, 1998, THE INTERIM REPORTS ON FORM
10-QSB FOR THE QUARTERS ENDED MARCH 31, 1999 AND JUNE 30, 1999, AND THE REPORTS
ON FORM 8-K FILED ON JUNE 21, 1999, JULY 30, 1999, AND OCTOBER 13, 1999, AND THE
AMENDMENT TO FORM 8-K DATED OCTOBER 13, 1999 FILED OCTOBER 22, 1999, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, BY WRITING TO TEXOIL AT 110 CYPRESS
STATION DRIVE, SUITE NO. 220, HOUSTON, TEXAS 77090-1629, ATTENTION: INVESTOR
RELATIONS. Copies of Texoil's Annual Report and Quarterly Reports may also be
obtained directly from the Securities and Exchange Commissions' web site at
http://www.sec.gov or from Texoil's web site at http://www.texoil.com.
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN AND RETURN THE
ACCOMPANYING PROXY FORM IN THE ENVELOPE PROVIDED.
3
<PAGE>
TEXOIL, INC.
110 Cypress Station Drive, Suite No. 220
Houston, Texas 77090-1629
(281) 537-9920 (281) 537-8324 - Fax
PROXY STATEMENT
This proxy statement and the enclosed proxy are being mailed to
Shareholders of Texoil, Inc., a Nevada corporation (the "Company"), commencing
on or about October 22, 1999. The Company's Board of Directors is soliciting
proxies to be voted at the Company's annual meeting of Shareholders to be held
at the Houston Marriott North at Greenspoint, 255 North Sam Houston Parkway
East, Houston, Texas 77060, on November 8, 1999, and at any adjournment thereof,
for the purposes set forth in the accompanying notice. The shares represented by
a proxy, if such is properly executed and received prior to the meeting, will be
voted in accordance with the directions given, but in the absence of directions
to the contrary, such shares will be voted (i) for the election of the Board's
nominees for Directors; (ii) for the proposal to approve the Preferred Stock
Purchase Agreement; (iii) for approval of the proposed Amended and Restated
Articles of Incorporation; (iv) for the appointment of Arthur Andersen LLP as
independent auditors of the Company for the year ending December 31, 1999; and
(v) in accordance with the judgment of the persons voting with respect to any
other matters which may properly come before the meeting. A proxy may be revoked
at any time before it is exercised by giving written notice to, or filing a duly
executed proxy bearing a later date with, the Secretary of the Company, or by
voting in person at the meeting.
The description of the proposals for shareholder approval of (a) the
Preferred Stock Purchase Agreement and the related Certificate of Designation,
and (b) the Amended and Restated Articles of Incorporation described in this
proxy statement is not a complete description of all material information
relating to the proposals and such documents. The description is subject to and
qualified in its entirety by references to the more detailed information
contained in the specific agreements, certificates or other documents attached
hereto or attached as exhibits to the Form 8-K of the Company filed on October
13, 1999, as amended by Form 8-K/A filed October 22, 1999.
At the close of business on October 1, 1999, the record date for
determining the Shareholders entitled to notice of, and to vote at the meeting
(the "Record Date"), there were outstanding and entitled to vote 6,555,126
shares of the Company's Common Stock, par value $.01 per share ("Common Stock").
Each share of Common Stock entitles the holder to one vote on all matters
presented at the meeting. There is no cumulative voting with respect to the
Common Stock.
The Company will bear the costs of soliciting proxies in the accompanying
form. In addition to solicitations by mail, a number of regular employees of the
Company may solicit proxies in person or by telephone.
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<PAGE>
THE COMPANY
Texoil, Inc., an independent energy company, acquires and develops oil and
gas reserves through an active and diversified program that includes purchases
of reserves, re-engineering, development and exploration activities, currently
focused in Texas, South Louisiana and the Texas Gulf Coast. On December 31,
1997, Texoil Acquisition, Inc., a Texas corporation and wholly-owned subsidiary
of the Company (the "Company Sub"), the Company and Cliffwood Oil & Gas
Corporation, a privately held Texas corporation ("Cliffwood"), executed an
Agreement and Plan of Merger pursuant to which Company Sub was merged with and
into Cliffwood, with Cliffwood surviving as a wholly-owned subsidiary of the
Company (the "Merger").
REVERSE STOCK SPLIT AND SHAREHOLDERS OF RECORD
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 effective on June 25, 1999. 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. These
procedures enabled the Company to adjust or redeem odd-lots, for a substantial
administrative cost savings to the Company. 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. All amounts of shares and related prices
reported in this proxy reflect the adjustment for the reverse stock split. Those
shareholders who have not yet exchanged their old shares for the new reverse
split shares shall be entitled to vote as shareholders of record, and represent
approximately 356,180 shares held by 72 owners. The Company estimates that
6,555,126 shares are issued and outstanding at October 1, 1999, subject to
certain nominal adjustments as shares are exchanged.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1999, the number of
shares of the Company's equity securities owned by (i) each person known by the
Company (based on publicly- available filings with the Commission) to be the
holder of more than five percent of its voting securities; (ii) each Director
and the named Executive Officer of the Company in the Summary Compensation
Table; and (iii) all of the Company's Directors and executive Officers as a
group. This table does not reflect any shares to be acquired pursuant to the
Preferred Stock Purchase Agreement by some of the persons listed below. Unless
otherwise indicated, each holder has sole voting and investment power with
respect to the shares of capital stock owned by such holder.
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<PAGE>
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF
(ADDRESS INDICATED IF NOT A DIRECTOR OR AN OFFICER) BENEFICIAL OWNERSHIP PERCENT OF CLASS
--------------------------------------------------- ---------------------- ----------------
<S> <C> <C>
COMMON STOCK:
Frank A. Lodzinski, Director, President and Chief Executive
Officer............................................................ 1,522,445(1) 22.84%
Michael A. Vlasic, Director................................................ 1,405,352(2) 21.35%
Jerry M. Crews, Director, Executive Vice President and
Secretary....................................................... 373,194(3) 5.61%
Robert E. LaJoie, Director................................................. 173,181(4) 2.63%
T. W. Hoehn III, Director.................................................. 103,906 1.59%
Thomas A. Reiser, Director................................................. 75,607(5) 1.15%
All Directors and Executive Officers as a group (6 persons)................ 2,275,636 32.83%
Resource Investors Management Company...................................... 1,756,718(6) 23.40%
600 Travis Street, Suite No. 6875
Houston, Texas 77002
The Lincoln National Life Insurance Company................................ 880,413(7) 12.86%
200 East Berry Street
Ft. Wayne, Indiana 46802
First Union Capital Partners, Inc.......................................... 562,604(8) 8.34%
1001 Fannin, Suite 2255
Houston, Texas 77002
V&C Energy Limited Partnership............................................. 1,378,049(9) 20.84%
710 Woodward
Bloomfield Hills, Michigan 45304
Vlasic Investments, L.L.C.................................................. 1,405,352(10) 21.35%
710 Woodward
Bloomfield Hills, Michigan 45304
Encap Investments L.C...................................................... 427,871(11) 6.53%
1100 Louisiana, Suite No. 3150
Houston, Texas 77002
</TABLE>
(1) Includes 1,321,883 shares of Common Stock and 56,167 shares of Common Stock
underlying presently exercisable warrants beneficially owned through V&C
Energy Limited Partnership, of which Energy Resource Associates, Inc.,
("ERA") a Texas corporation owned by and controlled by Mr. Lodzinski, is a
general partner. Mr. Lodzinski disclaims any beneficial ownership of shares
held by V&C Energy Limited Partnership. Includes 109,213 shares of Common
Stock underlying presently exercisable options owned by Mr. Lodzinski.
Excludes 3,120 shares of Common Stock underlying options owned by Mr.
Lodzinski that are not presently exercisable.
(2) Includes 1,321,883 shares of Common Stock and 56,167 shares of Common Stock
underlying presently exercisable warrants beneficially owned through V&C
Energy Limited Partnership, of which Vlasic Investments L.L.C. ("Vlasic
Investments") is the limited partner. Mr. Vlasic is the Managing Director of
Vlasic Investments. Mr. Vlasic disclaims any beneficial ownership of shares
held by V&C Energy Limited Partnership. Includes 27,303 shares of Common
Stock underlying presently exercisable options assigned by Mr. Vlasic to
Vlasic Investments. Excludes 780 shares of Common Stock underlying options
assigned by Mr. Vlasic to Vlasic Investments that are not presently
exercisable.
(3) Includes 98,292 shares of Common Stock underlying presently exercisable
options owned by Mr. Crews. Excludes 2,808 shares of Common Stock underlying
options owned by Mr. Crews that are not presently exercisable.
6
<PAGE>
(4) Includes 140,417 shares held by Robert E. LaJoie, as General Partner to a
family limited partnership, and 32,764 shares underlying presently
exercisable options owned by Mr. LaJoie. Excludes 936 shares of Common Stock
underlying options owned by Mr. LaJoie that are not presently exercisable.
(5) Includes 27,303 of Common Stock underlying presently exercisable options
owned by Mr. Reiser. Excludes 780 shares of Common Stock underlying options
owned by Mr. Reiser that are not presently exercisable.
(6) Includes 952,381 shares of Common Stock underlying presently convertible
notes.
(7) Includes 293,471 shares of Common Stock underlying presently exercisable
warrants.
(8) Includes 188,159 shares of Common Stock underlying presently exercisable
warrants.
(9) Includes 56,167 shares of Common Stock underlying presently exercisable
warrants.
(10)Includes 1,321,883 shares of Common Stock and 56,167 shares of Common Stock
underlying presently exercisable warrants beneficially owned through V&C
Energy Limited Partnership, of which Vlasic Investments is the limited
partner. Mr. Vlasic is the Managing Director of Vlasic Investments. Mr.
Vlasic disclaims any beneficial ownership of shares held by V&C Energy
Limited Partnership. Includes 27,303 shares of Common Stock underlying
presently exercisable options assigned by Mr. Vlasic to Vlasic Investments.
Excludes 780 shares of Common Stock underlying options assigned by Mr.
Vlasic to Vlasic Investments that are not presently exercisable.
(11)Includes 320,903 shares of Common Stock beneficially owned through Encap
Equity 1996 Limited Partnership, of which Encap Investments L.C. is the
general partner. Also includes 106,968 shares of Common Stock beneficially
owned through Energy Capital Investment Company PLC, for which EnCap
Investments L.C. serves as investment advisor. Encap Investments L.C.
disclaims any beneficial ownership of shares held by Encap Equity 1996
Limited Partnership or Energy Capital Investment Company PLC.
7
<PAGE>
PROPOSAL 1. ELECTION OF DIRECTORS
BOARD AND COMMITTEE ACTIVITIES - STRUCTURE AND COMPENSATION
The Company's operations are managed under the broad supervision and
direction of the Board of Directors, which has the ultimate responsibility for
the establishment and implementation of the Company's general operating
philosophy, objectives, goals and policies. Pursuant to delegated authority,
certain Board functions are discharged by the Board's two current standing
committees, the Executive Committee and the Audit/Compensation Committee. During
the fiscal year ended December 31, 1998, the Board of Directors held two (2)
meetings, the Audit Committee held one (1) meeting and the Compensation
Committee held one (1) meeting. Incumbent members of the Board attended or
participated in at least 75% of the aggregate number of (i) Board meetings and
(ii) committee meetings held by all committees of the Board on which he served.
The Executive Committee is authorized to exercise, to the extent permitted
by law, the power of the full Board of Directors when a meeting of the full
Board is not practicable or necessary. The Executive Committee is currently
comprised of Messrs. Lodzinski, Crews, LaJoie and Vlasic.
The Audit Committee recommends to the Board the independent accountants of
the Company and reviews the Company's annual report on Form 10-KSB, internal
controls and accounting operations and any transactions of the Company in which
management or controlling persons of the Company have an interest. The
Compensation Committee is responsible for formulating and adopting or
recommending to the Board executive compensation plans and policies, including
those relating to incentive compensation and benefits. The Audit Committee is
currently composed of Messrs. LaJoie and Reiser. The Compensation Committee is
composed of Messrs. LaJoie and Reiser.
Directors who are not employed by the Company are authorized to be paid a
fee of $1,000 for each meeting of the Board of Directors attended (including
Committee meetings, if any, held in conjunction therewith). The Company
reimburses each Director for his actual and necessary expenses reasonably
incurred in connection with attending meetings of the Board and its Committees.
NOMINEES
At the meeting, six nominees are to be elected by the holders of Common
Stock to the Company's Board of Directors pursuant to the classification
provisions to be approved at this Annual Meeting. This group of directors will
become the Class A Directors upon the filing of the Amended and Restated
Articles of Incorporation with the Secretary of State of Nevada. Group One will
hold office until the Annual Meeting of Shareholders in 2000, and be elected for
a three-year term thereafter, Group Two will hold office until the Annual
Meeting of Shareholders in 2001, and be elected for a three-year term
thereafter, and Group Three will hold office until the Annual Meeting of
Shareholders in 2002, and be elected for a three-year term thereafter. If the
amendment to the Articles of Incorporation is not approved, all Directors shall
serve until the Annual Meeting of Shareholders in 2000. Group One Directors are
Messrs. Reiser and LaJoie, Group Two Directors are Messrs. Hoehn and Vlasic, and
Group Three Directors are Messrs. Lodzinski and Crews. For a discussion of the
effects of classification, please see: Proposal 3 - Approval of the Amended and
Restated Articles of Incorporation - Classification of Directors, below. Unless
your proxy specifies
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<PAGE>
otherwise, or withholds authority to vote for one or more nominees named thereon
and described below, it is intended that the shares represented by your proxy
will be voted for the election of these six nominees. Proxies cannot be voted
for a greater number of persons than the number of nominees named. If any
nominee should become unavailable for election, your proxy may be voted for a
substitute nominee selected by the Board, or the Board may be reduced
accordingly. The Board is unaware of any circumstances likely to render any
nominee unavailable.
Set forth below are the names, ages, terms and positions of the Directors
and Executive Officers of the Company.
NAME AGE TERM POSITION WITH THE COMPANY
- ---- --- ---- -------------------------
Frank A. Lodzinski 50 2002 Chairman of the Board, President and
Chief Executive Officer, Director
Jerry M. Crews 49 2002 Secretary, Executive Vice President,
Director
T. W. Hoehn III 49 2001 Director
Robert E. LaJoie 74 2000 Director
Thomas A. Reiser 48 2000 Director
Michael A. Vlasic 39 2001 Director
FRANK A. LODZINSKI has been Chairman of the Board, President, Chief
Executive Officer, and a Director of the Company since the Merger. He has been
President and a Director of Cliffwood since he founded a predecessor entity and
commenced operations in February 1996. From January 1992 to February 1995, he
served as President and a Director of Hampton Resources Corporation, a public
corporation which he co-founded. From February 1995, when Hampton was sold to
Bellwether Exploration Company, to February 1996, he was self-employed and was a
consultant to Bellwether Exploration Company. From 1984 to 1992, Mr. Lodzinski
was engaged in the oil and natural gas business through Energy Resource
Associates, Inc., a closely-held Texas corporation which he owned and
controlled. Prior to 1984, he was employed in public accounting with Arthur
Andersen & Co. and in various capacities with independent oil and gas companies.
He is a Certified Public Accountant and holds a BSBA degree from Wayne State
University.
JERRY M. CREWS has been an Officer and Director of the Company since the
Merger and was an Officer and Director of Cliffwood since April 1996. For the
preceding 12 years he was an Officer of Citation Oil & Gas Corp. and was
responsible for all production operations. His experience includes acquisitions,
drilling and development operations in most of the producing basins of the
United States. Prior experience was with Conoco and Lear Petroleum. He holds a
B.S. in Petroleum Engineering from Texas A&M University.
T. W. HOEHN, III has been a Director of the Company since 1984. He is
President and General Manager of Hoehn Motors, Inc., a multi-line automobile
agency located in Carlsbad, California, where he has been employed since 1975.
He is a graduate of Stanford University.
ROBERT E. LAJOIE has been a Director of the Company since the Merger and
was a Director of Cliffwood since July 1996. Mr. LaJoie retired in 1977 and is a
private investor with more than
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forty years experience in the oil and natural gas, real-estate and food services
industries. He is a graduate of the University of Michigan.
THOMAS A. REISER has been a Director the Company since the Merger and was
a Director of Cliffwood since April 1996. For more than the past five years he
has served as Chairman and President of Technical Risks, Inc., a private
insurance brokerage firm which he founded. He is a graduate of the College of
William and Mary.
MICHAEL A. VLASIC has been a Director of the Company since the Merger and
was a Director of Cliffwood since July 1996. For more than the past five years,
he has been a principal with Vlasic Investments L.L.C. He is a graduate of Brown
University.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
The executive Officers of the Company serve at the pleasure of the Board
of Directors and are subject to appointment by the Board. The Company currently
has two Executive Officers, Frank A. Lodzinski, who has been President and Chief
Executive Officer of the Company since the Merger, and Jerry M. Crews, who has
been Secretary and Executive Vice President since the Merger. For further
information regarding Messrs. Lodzinski and Crews, please refer to "Election of
Directors" above.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table reflects all forms of compensation for each of the
years ended December 31, 1998, 1997 and 1996 for Ruben Medrano who served as
Chief Executive Officer until the merger and Frank A. Lodzinski who has served
and continues to serve as Chief Executive Officer since the merger. In 1998, no
executive officer had salary and bonus that exceeded $100,000.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------ -------
SECURITIES
UNDERLYING
OTHER ANNUAL RESTRICTED OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS(#) PAYOUTS COMPENSATION
- --------------------------- ---- ------ ----- ------------ ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Frank A. Lodzinski............... 1998 $58,500 -- -- -- -- -- --
Chairman of the Board,........ 1997 -- -- -- -- -- -- --
President and Chief Executive
Officer (1)
Ruben Medrano.................... 1997 $72,940 $10,000 $18,235 -- -- -- --
Former President and.......... 1996 $67,700 -- $28,800 -- -- -- --
Chief Executive Officer (2)
</TABLE>
(1) Mr. Lodzinski became Chairman of the Board, President and Chief Executive
Officer on December 31, 1997. Mr. Lodzinski received no compensation from
Texoil in 1997. Mr. Lodzinski voluntarily reduced his salary in April
1998, from $90,000 to $48,000 as part of a corporate initiative to reduce
general and administrative costs in response to significant declines in
oil prices. In July 1999, Mr. Lodzinski's salary was increased to $100,000
per annum.
(2) Mr. Medrano resigned as President and Chief Executive Officer effective
December 31, 1997.
CLIFFWOOD OPTIONS
Prior to the Merger, Cliffwood granted options to purchase 573,000 shares of
Common Stock under Cliffwood's 1997 Stock Option Plan and Non-Employee Director
Stock Option Plan. Pursuant to the Merger Agreement, these options were canceled
and replaced by options to purchase 6.74
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<PAGE>
shares of Texoil Common Stock for every share that could have been purchased
under the Cliffwood plans. In June 1999 these options were adjusted for the net
1-for-6 reverse stock split, and the table below reflects the number of shares
underlying total options and related adjusted exercise price after the split.
See "Reverse Stock Split," above.
No new options were granted in 1998. The following table sets forth
additional information with respect to these stock option grants.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
OPTIONS/SARS
NUMBER OF GRANTED TO
TEXOIL SHARES EXERCISE OR BASE EMPLOYEES
UNDERLYING PRICE ($/SHARE) EFFECTIVE EXPIRATION DATE
NAME OPTIONS GRANTED JANUARY 1, 1997
- ----------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Frank A. Lodzinski................ 112,333 $3.12 21.1% August 2007
Francis M. Mury................... 101,100 $3.12 18.9% August 2007
Jerry M. Crews.................... 101,100 $3.12 18.9% August 2007
Peggy C. Simpson.................. 39,317 $3.12 7.4% August 2007
Mandel C. Selber.................. 28,083 $3.12 5.3% August 2007
Ralph D. Hollingshead............. 22,467 $3.12 4.2% August 2007
</TABLE>
OPTION EXERCISES AND YEAR-END VALUES
Information on the options issued to Cliffwood employee option holders is
presented in the following table.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT DECEMBER 31, 1998 OPTIONS/SARS AT DECEMBER 31, 1998
--------------------------------------------- ---------------------------------
NAME (1)
----
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Frank A. Lodzinski 74,889 37,445 $17,973 $8,987
Francis M. Mury 67,400 33,700 $16,176 $8,088
Jerry M. Crews 67,400 33,700 $16,176 $8,088
Peggy C. Simpson 26,211 13,106 $ 6,291 $3,145
Mandel C. Selber 18,722 9,361 $ 4,493 $2,247
Ralph D. Hollingshead 14,978 7,489 $ 3,595 $1,797
</TABLE>
(1) Shares have been adjusted to reflect the net 1-for-6 reverse stock split
implemented by the Company in June 1999.
EMPLOYMENT AGREEMENT
Mr. Lodzinski is employed under an agreement pursuant to which he receives
an annual salary of $90,000, subject to increases at the discretion of the Board
of Directors, and a bonus at the sole discretion of the Board of Directors. Mr.
Lodzinski voluntarily reduced his salary in 1998 to $48,000, and the Board
increased his salary in July 1999 to $100,000. The Employment Agreement also
provides for the grant of options to purchase Common Stock. This Employment
Agreement
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expires January 1, 2001. The Employment Agreement is expected to be superseded
by a new contract as part of the Preferred Stock Purchase Agreement proposed for
shareholder approval as part of this proxy solicitation.
CERTAIN TRANSACTIONS
The Company is the operator for certain properties and prospects where
affiliates of Resource Investors Management Company ("RIMCO") have a direct or
indirect interest. Through approximately September 30, 1999 the Company was the
operator and direct owner of a 12% working interest in the East and West Refugio
prospects located in Refugio County, Texas. Certain affiliates of RIMCO also
have direct working interests in these prospects. Through September 30, 1999 the
Company has provided certain operating and administrative services, for a
monthly fee, to an affiliate of RIMCO related to the operation of certain fields
located in Montana and North Dakota. All operating and management fees charged
by the Company to related parties are arms-length and based on rates for
comparable services prevailing in the industry.
REQUIRED VOTE
Only holders of Common Stock as of the Record Date will be entitled to
vote in person or by proxy at the meeting. A majority of issued and outstanding
shares of Common Stock as of the Record Date represented at the meeting in
person or by proxy will constitute a quorum for the transaction of business.
Abstentions and broker non-votes will be counted for purposes of determining the
presence or absence of a quorum. Provided that a quorum is present at the
meeting, the six Director nominees who receive the greatest number of votes cast
for election by Shareholders entitled to vote therefore, whether or not an
actual majority of shareholders, will be elected Directors. Votes withheld in
connection with the election of one or more Director nominees will not be
counted as votes cast for such individuals. With respect to Proposal 3, under
Nevada law approval of the amendments requires a favorable vote by a majority of
the issued and outstanding shares. Abstentions or withheld votes in connection
with Proposal 3 will therefore count as a "no" vote. Proposals 2 and 4 may be
approved under Nevada law if more votes are cast in favor than against. The
members of the Board of Directors control the voting of approximately 1,924,594
shares, or 29.4%, of the Common Stock issued and outstanding and entitled to
vote, and the members intend to vote in favor of the nominees for Directors and
all of these proposals. Votes will be tabulated by the Secretary of the Company
and the results will be certified by the inspector of election, who is required
to resolve impartially any interpretive questions as to the conduct of the vote.
In tabulating votes, a record will be made of the number of shares (a) voted for
each nominee or proposal, (b) with respect to which authority to vote for each
nominee or proposal has been withheld, and (c) present at the meeting but not
voting.
OWNERSHIP REPORTS
Section 16(a) of the 1934 Act requires the Company's Officers, Directors
and persons who own more than 10% of its Common Stock to file with the
Securities and Exchange Commission reports of their ownership and changes of
ownership of Common Stock. These persons are required
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<PAGE>
to furnish the Company copies of all Section 16(a) reports that they file. Based
solely upon a review of reports and related written representations received by
it, the Company believes that all required reports were filed on a timely basis
during and in respect of the fiscal year ended 1998.
PROPOSALS FOR SHAREHOLDER APPROVAL
The following material sets forth three proposals, one concerning the
approval of the Preferred Stock Purchase Agreement pursuant to which Series A
Preferred Stock would be issued for cash and in connection with the
payment-in-kind dividends, one concerning the approval of Amended and Restated
Articles of Incorporation, which include (i) an amendment to classify the Board
of Directors into Class A Directors and Class B Directors, with the Class A
Directors to be elected by the record holders of Common Stock and to be further
classified into three groups of two Directors each (subject to reduction as set
forth in Proposal 3) with each group serving for three years and one group to be
elected each year and the Class B Directors to be elected by the record holders
of the Series A Preferred Stock or Class B Common Stock; (ii) provisions to
provide that the voting power of individual directors in classes of directors
may be greater than or less than that of other individual directors or classes
of directors; (iii) an amendment to create Class B Common Stock to which the
Series A Preferred Stock may be automatically converted; (iv) an amendment to
increase the amount of Preferred Stock authorized; (v) an amendment to add
additional indemnification provisions to increase the rights of members of the
Board of Directors, and (vi) an amendment to state that the Company's Bylaws
cannot be altered or amended in a way that would undermine the intent or
provisions of the Amended and Restated Articles of Incorporation, and a third to
approve Arthur Andersen, L.L.P. as the Company's independent accountant. The
current Board of Directors controls the voting of approximately 1,924,594 shares
of Common Stock or 29.4% of the shares issued and outstanding and entitled to
vote. The Directors intend to vote all of their shares in favor of each
proposal, and it is likely that the proposals will be adopted.
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<PAGE>
PROPOSAL 2. APPROVAL OF THE PREFERRED STOCK PURCHASE AGREEMENT
AND ISSUANCE OF SERIES A PREFERRED STOCK
On October 12, 1999, Quantum Energy Partners, LP ("Quantum"), V&C Energy
Limited Partnership ("V&C"), EnCap Equity 1996 Limited Partnership ("EnCap"),
Energy Capital Investment Company PLC ("Energy Capital"), Arthur L. Smith, Paul
B. David, Thomas A. Reiser and Jerry M. Crews (all collectively referred to as
"Investors") entered into a Preferred Stock Purchase Agreement ("Agreement")
with Texoil to purchase 2,750,000 shares of Series A Convertible Preferred Stock
("Series A Preferred Stock") at a purchase price of $8.00 per share for an
aggregate purchase price of $22,000,000. The Series A Preferred Stock is
convertible into Common Stock on a two-for-one basis at any time at the
Investor's option (subject to anti-dilution adjustments). The Series A Preferred
Stock is automatically convertible into Class B Common Stock on a two-for-one
basis (subject to anti-dilution adjustments) at any time after December 31,
2002, if the Company exceeds certain net equity value targets. The Class B
Common Stock is convertible into Common Stock on a one-for-one basis (subject to
anti-dilution adjustments) at any time at the Investor's option. The Series A
Preferred Stock will vote as a separate class on all matters as required by
Nevada law and on certain matters as set forth in the Certificate of
Designation, and will vote according to the number of shares of Common Stock
into which it will convert. Class B Common Stock has the same voting rights as
Common Stock, except for the right to elect Class B Directors. According to NASD
rules, the Company is required to obtain shareholder approval of the Preferred
Stock Purchase Agreement because it involves the issuance by the Company of
securities convertible into Common Stock equal to more than 20% of the Common
Stock outstanding before such issuance for a purchase price less than the
greater of book value or market value of the Common Stock. The issuance of
5,500,000 shares of Common Stock today would constitute 45.6% of the issued and
outstanding Common Stock. The net proceeds from the sale of the Series A
Preferred Stock will be applied to the repayment of outstanding indebtedness of
the Company, including the redemption of the $10,000,000 convertible notes held
by RIMCO. See "Security Ownership of Certain Beneficial Owners and Management,"
above.
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<PAGE>
The following is a summary of the principal terms of the Agreement. The
Registration Rights Agreement, Indemnification Agreement and Employment
Agreements referred to below are an integral part of this financing and are
included as exhibits to the Agreement.
o PURCHASE AND SALE OF SECURITIES - Each of the Investors will purchase
the number of shares specified in the Agreement for cash. The issuance
will total 2,750,000 shares of Series A Preferred Stock at $8.00 per
share, for an aggregate consideration of $22,000,000.
o DIVIDENDS - Holders of the Series A Preferred Stock are entitled to
receive dividends at a rate of 9% per annum payable quarterly.
Dividends may be paid in cash or in additional shares of Series A
Preferred Stock priced at the original issue price. The single largest
purchaser of Series A Preferred Stock intends to elect to receive its
dividends in kind, which is expected to result in a minimum issuance of
approximately 352,700 additional shares of Series A Preferred Stock
during the two-year period following the closing of the Preferred Stock
Purchase Agreement.
o CONVERSION - The Investors may convert each share of Series A Preferred
Stock into two shares of Common Stock. The Certificate of Designation
provides for an automatic conversion after December 31, 2002, into
Class B Common Stock upon reaching a "net equity value" goal of
$121,500,000 and a net equity value per share of at least $10.00 (both
according to formulas set forth therein). These conversion rates are
subject to adjustment for anti-dilution rights and in the event of a
subdivision, combination, consolidation, reorganization or
reclassification of the Common Stock, as specified in the Certificate
of Designation.
o LIQUIDATION PREFERENCE - In the event of a liquidation, dissolution or
winding-up of the Company, the holders of the Series A Preferred Stock
will be entitled to receive distributions as set forth in the
Certificate of Designation prior to any distributions being paid to the
holders of the Common Stock or any other class or series of capital
stock of the Company.
o VOTING RIGHTS - The holders of Series A Preferred Stock will be
entitled to vote as a separate class on matters as required by Nevada
law and on certain matters set forth in the Certificate of Designation
and will be entitled to elect and have the voting power of the Class B
Directors. See "Conduct of Business After Closing" below. The holders
of Class B Common Stock will vote with Common Stock except they will
have the right to elect and have the voting power of the Class B
Directors.
o BOARD OF DIRECTORS - The maximum number of members of the Board of
Directors will be increased to nine and the Board of Directors will be
classified into two classes consisting of up to six Class A Directors
and up to three Class B Directors. The Class A Directors will be
further classified into three groups of two Directors each (subject to
reduction as set forth in Proposal 3), with each group serving for
three years and one group to be elected each year. The Class A
Directors will be elected by the holders of Common Stock and the Class
B Directors will be elected by the holders of Series A Preferred Stock
or Class B Common Stock. The Class A Directors will have a total of six
votes (subject to
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<PAGE>
reduction as set forth in Proposal 3), to be divided equally among the
Class A Directors then holding office. The Class B Directors will have
a total of three votes (subject to increase as set forth in Proposal
3), to be divided equally among the Class B Directors then holding
office.
o REGISTRATION RIGHTS - Holders of the Series A Preferred Stock are
entitled to up to three demand registrations, giving Investors the
right to have their securities registered with the Securities and
Exchange Commission and have certain "piggy-back rights" to have their
securities included in other registrations of the Company's securities.
o PARTICIPATION OF MAJOR SHAREHOLDERS, OFFICERS AND DIRECTORS - Frank A.
Lodzinski, President and Chief Executive Officer, and Michael A.
Vlasic, a Director, both through their interest in the V&C Energy
Limited Partnership, Jerry M. Crews, Executive Vice President and
Director, Energy Capital Investment Company PLC and EnCap Equity 1996
Limited Partnership, affiliates of El Paso Capital Investment Company,
LLC and Thomas A. Reiser, Director, are all current holders of Common
Stock of the Company and will participate in the purchase of Series A
Preferred Stock, purchasing 843,750 shares thereof pursuant to the
terms and conditions of the Preferred Stock Purchase Agreement.
Collectively, these Investors currently own 32.2% of the issued and
outstanding Common Stock of the Company and will vote in favor of the
Preferred Stock Purchase Agreement and the related issuance of the
Series A Preferred Stock.
o EMPLOYMENT AGREEMENT - Frank A. Lodzinski will enter into an Employment
Agreement and continue as President and Chief Executive Officer of
Texoil. Jerry M. Crews, Francis M. Mury and Peggy C. Simpson would also
enter into Employment Agreements and remain Officers of the Company.
o REPRESENTATIONS AND WARRANTIES - The Agreement contains customary
representations and warranties regarding corporate authority and
existence, as well as representations and warranties regarding
financial condition, capitalization, liabilities, employee matters,
material contracts, insurance, title to properties, environmental
matters, taxation, investments, year 2000 compliance, ownership of data
and other matters relevant to the Company and Investors.
o INDEMNIFICATION - The Investors have required that the Company enter
into an Indemnification Agreement with each Class B Director of the
Company, to grant rights beyond those available under the applicable
Nevada law, and the Company intends to offer the same arrangement to
all of its Directors. In addition to these Indemnification Contracts,
the Articles of Incorporation (see Proposal 3 below), as well as to the
Bylaws of Texoil will be amended to increase the indemnification
provisions. The Preferred Stock Purchase Agreement also contains mutual
indemnification provisions in the event of breach by any party. The
Preferred Stock Purchase Agreement also provides for a reduction in the
conversion price of the Series A Preferred Stock in the event of any
inaccuracy in or breach or nonperformance of the agreements, covenants,
representations or warranties made or to be performed by the Company
pursuant to the terms of the Preferred Stock Purchase Agreement.
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<PAGE>
o GOVERNING LAW - The Preferred Stock Purchase Agreement is to be
governed by and construed in accordance with the laws of the state of
Texas.
o CONDUCT OF BUSINESS AFTER CLOSING - The holders of Series A Preferred
Stock will have certain approval rights related to (i) the creation of
any new class or series of securities or the issuance of any securities
that have preference over, or are on parity with, the Series A
Preferred Stock; (ii) the issuance of capital stock (or convertible
securities) for a consideration less than 150% of the conversion price
then in effect for the Series A Preferred Stock; (iii) the redemption
or repurchase of capital stock; (iv) the authorization or payment of
dividends; (v) the undertaking, entering into or consummation of (A) a
consolidation or merger of the Corporation with or into any other
corporation or business entity in which the holders of the voting
securities of the Corporation outstanding immediately prior to such
transaction do not continue to hold more than fifty percent (50%) of
the total voting securities of the surviving entity outstanding
immediately after such transaction, (B) the sale or other transfer in a
single transaction or a series of related transactions of all or
substantially all of the assets of the Corporation, or (C) the
liquidation, dissolution, winding-up or reorganization of the
Corporation; (vi) the entering into or modification of any commodity
hedge transaction at a price below $17.50 per barrel for crude oil or
$2.10 per MMBtu for natural gas; (vii) any amendment to alter the
rights, preferences or privileges of Series A Preferred Stock; and
(viii) the amendment of the Articles of Incorporation, Bylaws or the
Certificate of Designation.
The following table sets forth the current holdings of Common Stock by
parties participating in the Series A Preferred Stock Agreement and the number
of shares of Common Stock they would hold if their Preferred Stock was converted
to Class A Common Stock.
<TABLE>
<CAPTION>
PREFERRED HOLDINGS OF COMMON STOCK IF
INVESTORS CURRENT HOLDINGS OF CLASS A SHARES PREFERRED SHARES ARE CONVERTED
COMMON STOCK PURCHASED TO CLASS A COMMON
------------------------------- ---------------- --------------------------------
PERCENT OF PERCENT OF
SHARES TOTAL SHARES TOTAL
OUTSTANDING OUTSTANDING
--------------- --------------- ---------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Quantum Energy Partners - 0.0% 1,875,000 3,750,000 31.1%
V&C Energy Limited Partnership 1,321,883 20.2% 456,250 2,234,383 18.5%
EnCap Equity 1996 Limited Partneship 320,904 4.9% 281,250 883,404 7.3%
Energy Capital Investment Company PLC 106,968 1.6% 93,750 294,468 2.4%
Arthur L. Smith 834 0.0% 12,500 25,834 0.2%
Paul B. David 62,159 0.9% 18,750 99,659 0.8%
Thomas A. Reiser 48,303 0.7% 6,250 60,803 0.5%
Jerry M. Crews 274,902 4.2% 6,250 287,402 2.4%
--------------- --------------- ---------------- ------------------ -------------
Total of Participants 2,135,953 32.5% 2,750,000 7,635,953 63.2%
All Other Issued & Outstanding Class A Common 4,419,173 67.5% 4,419,173 36.8%
--------------- --------------- ------------------ -------------
Total Outstanding and Convertible Preferred 6,555,126 100.0% 12,055,126 100.0%
=============== =============== ================== =============
</TABLE>
The Board of Directors recommends that the shareholders vote FOR the
proposal to approve the Preferred Stock Purchase Agreement and the issuance of
Series A Preferred Stock. This proposal will be adopted if more shareholders
vote for it than against it. The current Board of Directors controls the voting
of approximately 1,924,594 shares, or 29.4%, of the Common Stock issued and
outstanding and entitled to vote. The Directors intend to vote all of their
shares in favor of this proposal.
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<PAGE>
PROPOSAL 3. APPROVAL OF THE AMENDED AND RESTATED ARTICLES OF
INCORPORATION
Proposal 3 is a proposal to approve the Amended and Restated Articles of
Incorporation. The Company has restated its Articles and added four amendments.
Adoption of Proposal 3 will adopt all amendments. If you do not wish to vote FOR
any amendment, you must vote against the entire Amended and Restated Articles of
Incorporation.
INDEMNIFICATION AMENDMENTS
The amendments proposed in connection with the indemnification provisions
of the Amended and Restated Articles of Incorporation are designed to complement
and implement the Indemnification Agreements to be entered into pursuant to the
terms of the Preferred Stock Purchase Agreement. Originally, the Articles of
Incorporation had no indemnification provisions, and prior management adopted a
rudimentary indemnification provision.
The proposed amendment initially duplicates the grant of the
indemnification rights as currently found in the laws of the State of Nevada,
with the proviso that the permissive verb "may" has been altered to the
mandatory verb "shall," in connection with the grant of rights. The Amendment
further strengthens the Directors' right to request and receive advancement of
expenses prior to final disposition of any action. Finally, the amendment
specifically requires the Company to use its best efforts to purchase and
maintain insurance on behalf of the Directors and to make any other financial
arrangements, including a trust, self-insurance, granting liens in company
assets or the establishment of a guaranty or a letter of credit.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company is proposing this amendment to classify the Board of Directors
to provide representation on the Board for the holders of Series A Preferred
Stock or Class B Common Stock, to ensure the respective voting rights of Class A
and Class B Directors and to provide for continuity of management. The proposal
to classify the Class A Directors of the Board together with the provision that
Class A Directors may only be removed for cause, may have the effect of
prohibiting an outside third party from gaining control of the Board or the
Company, thereby perpetuating control by current management. The Board is not
aware of any current specific effort to attempt to gain control of the Company.
This proposal is to amend the Articles of Incorporation to divide the
Board of Directors into Class A Directors and Class B Directors, with the Class
A Directors to be elected by the record holders of Common Stock and the Class B
Directors to be elected by the record holders of the Series A Preferred Stock or
Class B Common Stock. The Class A Directors shall be further subdivided into
three groups of two Directors each (subject to reduction as set forth below)
with each group serving for three years and one group to be elected each year.
Initially, the Board would consist of six Class A Directors elected in staggered
terms of three years each and three Class B Directors elected by the record
holders of Series A Preferred Stock or Class B Common Stock. The Class B
Directors would have three votes (subject to change upon a "Trigger Event"),
while Class A Directors would have six
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<PAGE>
votes (subject to a "Trigger Event"). The holders of Common Stock may reduce the
number of Class A Directors, while maintaining the total number of six votes
divided equally among the Class A Directors then holding office and the holders
of Series A Preferred Stock or Class B Common Stock may also reduce the total
number of Class B Directors and retain three votes divided equally among the
Class B Directors then holding office. Upon a Trigger Event, this allocation of
voting rights would reverse and Class A Directors would have three votes divided
equally among the Class A Directors then holding office and Class B Directors
would have six votes divided equally among the Class B Directors then holding
office. The number of Class A Directors would be reduced to three over a period
of time by electing only one director per group. A Trigger Event may occur
beginning in 2005, and is defined in the Certificate of Designation of Series A
Preferred Stock. It may occur nine months after a Liquidation Notice by the
record holders of Series A Preferred Stock (the earliest possible date being
January 1, 2005).
The present Articles of Incorporation are silent on the matter of election
of Directors and, accordingly, under applicable law, all Directors are to be
elected to the Board annually for a term of one year. Directors of the Company
are elected by a plurality of the votes cast in an election of directors at any
annual or special meeting of the shareholders. The Company's Articles of
Incorporation do not permit cumulative voting for directors.
Classifying the Class A Directors into groups serving staggered terms will
extend the time required to change the composition of a majority of the Class A
Directors. Presently, a change in composition of the Board of Directors can be
made by shareholders of a majority of the Company's Common Stock voting at a
single meeting. With Class A Directors, it will take holders of Common Stock at
least two annual meetings to change the composition of a majority of the Class A
Directors, since only one-third of the number of directors will be elected at
each meeting. Holders of Common Stock may not elect or remove Class B Directors.
Because of the additional time required to change the composition of the Board,
classification of the Board also may make the removal of incumbent Class A
Directors more difficult.
Since the classified Class A Directors, along with the existence of Class
B Directors, will increase the time required for a third party to obtain control
of the Company without the cooperation of the Board of Directors, it may tend to
discourage certain tender offers, including perhaps some tender offers that some
shareholders may feel would be in their best interest. The Board of Directors
believes, however, that classification of the Board will provide the Board with
more time to evaluate any takeover proposal and thus enable it to better protect
the interests of the Company and the remaining shareholders. The Board is not
aware of any current specific effort to attempt to gain control of the Company.
Although the proposed amendment would not impede an acquisition of the Company
approved by the Board, adoption of the amendment may affect the ability of the
shareholders of the Company to change the composition of the incumbent Board, to
affect its policies generally and to benefit from transactions which are opposed
by the incumbent Board.
Section I of Article III of the Company's current Bylaws provides that the
number of directors constituting the Board of Directors of the Company shall be
seven. There was one vacancy on the current Board of Directors. Under Nevada
law, generally, the number of directors may be fixed or changed from time to
time, within the variable range established in the Bylaws, by the shareholders
or by the Board of Directors. This amendment would prohibit the Board of
Directors from altering
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<PAGE>
the number of votes of Directors in each Class of the Board, while permitting a
variable number of Directors who exercise those votes. The proposal will
establish the maximum size of the current Board of Directors to be nine
directors to be divided into Class A (up to six) and Class B (up to three), and
will increase the number of directors, effective as of the 1999 Annual Meeting
of Shareholders, from seven to nine.
This provision, together with the provisions hereafter discussed regarding
the filling of vacancies on the Board and restrictions on removal of incumbent
directors, may make it more difficult for a controlling shareholder to obtain
representation quickly by enlarging the Board and filling the directorships with
its own nominees.
Currently, any director may be removed, with or without cause, by not less
than two-thirds of the voting power of the shares entitled to elect directors
and newly-created directorships and vacancies may be filled by a plurality vote
of the shareholders or a majority vote of the Board of Directors. Under the
proposal, Class B Directors may only be elected by the holders of a majority of
the outstanding shares of Series A Preferred Stock or Class B Common Stock, and
may be removed with or without cause, only by vote of the holders of two-thirds
of the voting power of such Class or Series. The amendment provides that Class A
Directors may be removed only for cause by the vote of the holders of two-thirds
of the voting power of the Common Stock and that any vacancy on the existing
Class A Director positions occurring during the course of the year may be filled
by a majority vote of the remaining Class A Directors, whether or not a quorum.
Nevada law requires a vote of two-thirds of the shares entitled to vote to
remove a director. Class A Directors may not create and fill new directorships
or otherwise fill vacancies, except in accordance with the Articles of
Incorporation.
This provision, together with the provision for classification of the
Board of Directors and the other proposed amendments, would make it more
difficult and more time consuming for shareholders to replace a majority of the
directors. These provisions are intended to ensure the respective voting rights
of Class A Directors and Class B Directors.
The Company's Articles of Incorporation and Bylaws do not currently
contain any other conventional anti-takeover provisions, and the Company has no
current plans to submit further proposals to shareholders with a possible
"anti-takeover" effect.
CREATION OF CLASS B COMMON STOCK
The Amended and Restated Articles of Incorporation create 10,000,000
shares of Class B Common Stock. Class B Common Stock is the class of common
stock into which the Series A Preferred Stock will automatically convert upon
the Company meeting certain financial goals. The Board of Directors created a
separate class of Common Stock to preserve the rights of the holders of the
Series A Preferred Stock following an automatic conversion to elect Class B
Directors and maintain the right to control the Board upon the occurrence of a
Trigger Event or the passing of six years from the date of closing the Preferred
Stock Purchase Agreement.
Class B Common Stock is only issuable upon the Mandatory Conversion of the
Series A Preferred Stock pursuant to Section 4(b) of the Certificate of
Designation. All outstanding shares
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<PAGE>
Company meets or exceeds certain financial goals after December 31, 2002.
Conversion into Class B Common Stock is mandatory if the Net Equity Value equals
or exceeds $121,500,000 and the Company's Net Equity Value per share (calculated
on a fully diluted basis) equals or exceeds $10.00. Net Equity Value is
calculated by a formula that is the sum of reserve values of proved oil and gas
reserves calculated as specified in the Certificate of Designation, plus the
Company's current assets, less current liabilities and long term liabilities
(exclusive of deferred taxes). There is a mechanism for the holders of the
Series A Preferred Stock and the Board of Directors to use an independent
valuation if there is more than a 10% variance (based on the lowest price)in the
net equity values.
Holders of Class B Common Stock will have the right to elect Class B
Directors. Class B Common Stock will not have anti-dilution protection, but will
be adjusted upon the reclassification, subdivision, combination or consolidation
of the Common Stock. Class B Common Stock is fully convertible into Common Stock
on a one-for-one basis at any time upon the request of the holder thereof.
PREFERRED STOCK
The Company is currently authorized to issue up to 5,000,000 shares of
Preferred Stock. The relative rights, preferences, designations, dividends and
so forth may be determined by the Board of Directors and series of this
Preferred Stock issued upon resolution of the Board of Directors and filing of a
Certificate of Designation with the Secretary of State of the State of Nevada.
Pursuant to existing authorized Preferred, the Company, through its Board of
Directors, will create and issue the Series A Preferred Stock. The Board,
however, is proposing to amend the Articles of Incorporation to create an
additional amount of 5,000,000 shares of Preferred Stock in order to assure
enough preferred stock to issue in the event of in-kind dividends and any other
adjustments of Series A Preferred Stock, as well as to have sufficient Preferred
Stock to permit future transactions. There are no current plans (aside from the
issuance of the Series A Preferred Stock) to issue any of the newly created
Preferred Stock.
ARTICLE VIII
Article VIII would be amended to read as follows: "The Directors shall
have the power to make, alter or repeal from time to time the Bylaws of the
Corporation in any manner not inconsistent with the law, these Articles or the
Certificate. Bylaws so made by the Directors under the powers so conferred may
be altered, amended, or repealed by the Directors or the shareholders in any
manner not inconsistent with the law, these Articles or the Certificate, at any
meeting called and held for that purpose."
The Board of Directors recommends that the shareholders vote FOR the
Proposal to Approve the Amended and Restated Articles of Incorporation. Adoption
of these amendments to the Articles of Incorporation requires the affirmative
vote of at least 51% of the issued and outstanding shares of the Company's
Common Stock. A failure to vote either by not returning the proxy or checking
the "Abstain" box will have the same effect as a "no" vote. The Board of
Directors controls the voting of approximately 1,924,594 shares, or 29.4%, of
the Common Stock issued and outstanding and entitled to vote. The Directors
intend to vote all of their shares in favor of this proposal.
22
<PAGE>
PROPOSAL 4. APPROVAL OF INDEPENDENT ACCOUNTANTS
The Company has engaged Arthur Andersen LLP as its independent accountants
as of March 4, 1998. Arthur Andersen LLP served as auditors of Cliffwood Oil &
Gas Corp., prior to its merger with the Company. The Audit Committee recommends
that Arthur Andersen LLP be appointed as the independent accountant for the year
ending December 31, 1999. Representatives of Arthur Andersen LLP are expected to
be present at the annual meeting, will have an opportunity to make a statement
if they desire to do so, and are expected to be available to respond to
appropriate questions.
The Board of Directors recommends that the shareholders vote FOR the
Proposal to Approve the Independent Accountants. This proposal will be adopted
if more shareholders vote for it than against it. The Board of Directors
controls the voting of approximately 1,924,594 shares, or 29.4%, of the Common
Stock issued and outstanding and entitled to vote. The Directors intend to vote
all of their shares in favor of this proposal.
23
<PAGE>
OTHER MATTERS
STOCKHOLDER PROPOSALS
Any stockholder who wishes to submit a proposal for action to be included
in the proxy statement and form of proxy relating to the Company's 2000 annual
Shareholders' meeting must submit the proposal to the Company on or before
February 29, 2000. Any such proposals should be timely sent by certified mail,
return receipt requested, to the Secretary of the Company, 110 Cypress Station
Drive, Suite No. 220, Houston, Texas, 77090-1629.
AVAILABILITY OF ANNUAL REPORT AND RELATED FINANCIAL INFORMATION
The Company has previously furnished to all of its shareholders and
otherwise or made available a copy of its annual report on Form 10-KSB for the
fiscal year ended December 31, 1998, and its quarterly report on Form 10-QSB for
the period ended March 31, 1999. The Form 10-QSB for the period ended June 30,
1999 has been made available and is being sent to shareholders along with this
proxy statement. This proxy statement incorporates by reference the financial
information required to be furnished in connection herewith from its annual
report as previously sent, but the quarterly financial information in the June
30, 1999 Form 10-QSB is being mailed herewith.
By Order of the Board of Directors,
Jerry M. Crews
Secretary
October 22, 1999
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<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON NOVEMBER 8, 1999
The undersigned hereby appoints Frank A. Lodzinski and Jerry M. Crews, and
each of them, either one of whom may act without joinder of the other, each with
full power of substitution and ratification, attorneys and proxies of the
undersigned to vote all shares of Texoil, Inc., which the undersigned is
entitled to vote at the annual meeting of Shareholders to be held at the Houston
Marriott North at Greenspoint, 255 North Sam Houston Parkway East, Houston,
Texas 77060 on Monday, November 8, 1999, at 2:00 P.M., and at any adjournment
thereof.
This proxy will be voted in accordance with the specifications made
hereon. IF NO CONTRARY SPECIFICATION IS MADE, THEN THIS PROXY WILL BE VOTED FOR
THE ELECTION OF THE SIX DIRECTOR NOMINEES NAMED IN ITEM 1 AND FOR PROPOSALS 2, 3
AND 4.
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders and the proxy statement furnished herewith. PLEASE DATE,
SIGN AND RETURN THIS PROXY PROMPTLY in the enclosed, pre-addressed stamped
envelope.
(Continued, and to be dated and signed on the reverse side.)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ELECTION OF DIRECTORS [ ] FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ] EXCEPTIONS
listed below for all nominees listed below
</TABLE>
Nominees: Group One Directors: Robert E. LaJoie, Thomas A. Reiser
Group Two Directors: T. W. Hoehn III, Michael A. Vlasic
Group Three Directors: Frank A. Lodzinski, Jerry M. Crews
INSTRUCTION: To withhold authority to vote for any individual nominee, mark the
"Exception" box and write that nominee's name in the space provided below.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PROPOSAL TO APPROVE THE PREFERRED STOCK
PURCHASE AGREEMENT AND ISSUANCE OF SERIES A
PREFERRED STOCK [ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL TO APPROVE THE AMENDED AND RESTATED [ ] FOR [ ] AGAINST [ ] ABSTAIN
ARTICLES OF INCORPORATION
APPROVAL OF APPOINTMENT OF ARTHUR ANDERSEN LLP [ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
In their discretion, upon such other matters (including procedures and other
matters relating to the conduct of the meeting) which may properly come before
the meeting and any adjournment thereof.
Please sign exactly as your name
appears on your stock certificate. When
signing as executor, administrator,
trustee or other representative, please
give your full title. All joint owners
should sign.
Dated: _______________________ 1999
_______________________________________
Signature(s) of Stockholders
Sign, date, and return the
Proxy Card Promptly Using _______________________________________
the Enclosed Envelope. Signature(s) of Stockholders
FOLD AND DETACH HERE
26
<PAGE>
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 JUNE 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 July 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 June 30, 1999 ..................... 3
Consolidated Statements of Income for the three and six months
ended June 30, 1999 and 1998 ...................................... 4
Consolidated Statements of Cash Flows
for the six months ended June 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 OPERATIONS .............................. 10
PART II. OTHER INFORMATION ............................................. 18
2
<PAGE>
TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1999
--------
<S> <C>
Assets:
Current Assets:
Cash and cash equivalents.......... $ 671
Accounts receivable and other...... 3,911
Drilling advances.................. 9
Other current assets............... 27
--------
Total current assets.......... 4,618
Property, plant and equipment, at cost:
Oil and natural gas properties
(full-cost method)
Evaluated properties.......... 45,634
Unevaluated properties........ 5,968
Office and other equipment.............. 679
--------
52,281
Less -- accumulated depletion,
depreciation and amortization......... (7,358)
--------
Net property, plant and equipment....... 44,923
--------
Other assets, net....................... 715
Deferred tax asset...................... 260
--------
Total assets.................. $ 50,516
========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued
liabilities....................... $ 2,084
Revenue royalties payable.......... 1,758
--------
Total current liabilities..... 3,842
--------
Long-term debt.......................... 24,500
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.............. 11,118
Retained earnings....................... 990
--------
Total stockholders' equity......... 12,174
--------
Total liabilities and stockholders'
equity............................ $ 50,516
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales............... $ 4,845 $ 2,366 $ 8,672 $ 4,232
Operator and management fees.... 237 227 479 481
Interest and other.............. 8 15 12 73
----------- ----------- ----------- -----------
Total revenues............. 5,090 2,608 9,163 4,786
----------- ----------- ----------- -----------
Costs and Expenses:
Lease operating................. 1,534 1,372 3,034 2,142
Workover........................ 44 29 46 109
Production taxes................ 338 123 612 226
General and administrative...... 449 389 896 827
Depletion, depreciation and
amortization.................. 1,069 500 2,094 934
Interest........................ 535 170 1,082 279
Write-down of oil and gas
properties.................... -- 1,208 -- 1,208
----------- ----------- ----------- -----------
Total expenses............. 3,969 3,791 7,764 5,725
----------- ----------- ----------- -----------
Income (loss) before income taxes.... 1,121 (1,183) 1,399 (939)
Provision for deferred income
taxes.............................. (424) 307 (529) 215
----------- ----------- ----------- -----------
Net income........................... $ 697 $ (876) $ 870 $ (724)
=========== =========== =========== ===========
Basic net income per share........... $ .11 $ (.14) $ .13 $ (.12)
=========== =========== =========== ===========
Basic weighted average shares........ 6,555,126 6,387,652 6,555,126 6,251,848
=========== =========== =========== ===========
Diluted net income per share......... $ .10 $ (.14) $ .13 $ (.12)
=========== =========== =========== ===========
Diluted weighted average shares...... 6,721,681 6,387,652 6,789,882 6,251,848
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 870 $ (724)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depletion, depreciation and
amortization................... 2,094 934
Write-down of oil and gas
properties..................... -- 1,208
Deferred income taxes........... 529 (215)
Accounts receivable............. 134 1,669
Accounts receivable -- related
party.......................... -- 60
Notes receivable................ -- (120)
Other assets.................... (52) (262)
Accounts payable and accrued
liabilities.................... (862) (1,949)
Revenue royalties payable....... 260 (1,029)
--------- ---------
Net cash provided by (used
in) operating activities. 2,973 (428)
--------- ---------
Cash flows from investing activities:
Additions to oil and gas
properties..................... (1,674) (7,977)
Other equipment additions....... (51) (156)
--------- ---------
Net cash provided by (used
in) investing
activities.............. (1,725) (8,133)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common
stock.......................... -- --
Proceeds from long-term debt and
other.......................... -- 5,000
Repayments of long-term debt.... (1,000) (2)
--------- ---------
Net cash provided by
financing activities.... (1,000) 4,998
--------- ---------
Net increase (decrease) in cash and
cash equivalents................... 248 (3,563)
Cash and cash equivalents --
beginning of period................ 423 4,059
--------- ---------
Cash and cash equivalents -- end of
period............................. $ 671 $ 496
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................... $ 1,348 $ 379
========= =========
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,
Louisiana and Oklahoma. 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,
1998.
REVERSE STOCK SPLIT
The Company's Board of Directors recently approved certain changes to the
Company's outstanding common shares intended to result in approximately a
1-for-6 reverse stock split effective on June 25, 1999. 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.
These procedures were undertaken to enable the Company to adjust or redeem
odd-lots, which should result in substantial annual administrative cost savings
to the Company. Step one (the reverse split) resulted in each 600 shares of
outstanding stock being reduced to one share of common stock. Shareholders with
less than one share, but at least one-tenth share of stock, were issued one
whole share of common stock. Shareholders with less than one-tenth share after
the reverse stock split are entitled to receive a cash payment in redemption of
their fractional shares at a price equal to the market value. With step two (the
forward split), each share of common stock was adjusted to 100 shares of common
stock, $.01 par value. 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 the rounding and redemption effects of
these actions will result in approximately 8,600 shares being issued and
approximately 7,400 shares being redeemed, on a post-split basis. The redemption
cost is estimated at $25,000.Annual savings related to administrative costs are
estimated at $38,000. The Company estimates that 6,555,126 shares are issued and
outstanding at June 30, 1999, subject to certain nominal adjustments as shares
are exchanged.
All issued and outstanding share 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 June 30, 1999 and
1998 consist of the following (in thousands except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income.............................. $ 697 $ (876) $ 870 $ (724)
Basic weighted average shares........... 6,555,126 6,387,652 6,555,126 6,251,848
Effect of dilutive securities:
Warrants........................... 38,042 -- 62,833 --
Options............................ 128,513 -- 171,923 --
Awards............................. -- -- -- --
Convertible notes.................. -- -- -- --
Diluted weighted average shares......... 6,721,681 6,387,652 6,789,882 6,251,848
Per common share net income:
Basic.............................. $ .11 $ (.14) $ .13 $ (.12)
Diluted............................ $ .10 $ (.14) $ .13 $ (.12)
</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.
7
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: UNAUDITED PRO FORMA FINANCIAL INFORMATION
On October 30, 1998, the Company closed on a significant acquisition of oil
and gas properties in South Texas and Louisiana from Sonat Exploration Company
("Sonat Properties"). The acquisition was accounted for using the purchase
method of accounting. The activities of the acquired Sonat Properties were
included in results of operations beginning November 1, 1998. Selected results
of operations for the six months ended June 30, 1998, on a pro forma basis,
giving effect to the acquisition as if it took place on January 1, 1998, are as
follows:
<TABLE>
<S> <C>
Revenues................................ $ 10,047
===========
Net income.............................. $ 436
===========
Basic income per share.................. $ .07
===========
Basic weighted average shares
outstanding........................... 6,251,848
===========
Diluted income per share................ $ .06
===========
Diluted weighted average shares
outstanding........................... 7,069,767
===========
</TABLE>
Adjustments reflected in the historical results to estimate the above pro
forma results of operations for the quarter ended June 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 $50 million in available
borrowings, limited by a borrowing base (as defined in the Credit Agreement)
which was $31 million and $9.0 million at June 30, 1999 and 1998, respectively.
As of June 30, 1999 and 1998, borrowings outstanding under the Credit Agreement
were $24.5 million and $5.0 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, commencing September 1, 1999. The average interest
rate paid to the lender was 7.3% and 9.0% for the six months ended June 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 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 5: HEDGING ACTIVITIES
OIL AND GAS PRICES
The Company has entered into various oil and gas hedging contracts with a
major financial institution 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
8
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or paid under such hedging and financial instrument contracts increased oil and
gas sales by $9,225 and $100,225 for the three and six months ended June 30,
1999, respectively. There were no hedging activities in 1998. The oil and gas
hedging contracts in place as of June 30, 1999 had a market value of $(517,728).
For the three and six months ended June 30, 1999, the Company sold 300,000
MMBtu and 500,000 MMBtu, respectively, at a fixed price of $2.17 per MMBtu under
a natural gas swap. In addition to these amounts, the Company has various fixed
price swap contracts for July 1999 through October 1999 and February 2000
through October 2000 production covering 1,210,000 MMBtu's of natural gas at a
price per unit averaging $2.16 based on Houston Ship Channel index pricing. For
the three months ended June 30, 1999, the Company sold 50,000 Bbls at prices
ranging from $17.75 to $18.07 per barrel. No oil volumes were hedged in the
first quarter of 1999. The Company also has fixed price swaps covering 270,000
Bbls of oil at prices averaging $17.76 per Bbl for the period of July 1999
through December 1999.
INTEREST RATES
In order to mitigate the impact of changes in 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
six months ended June 30, 1999 the Company paid $9,826 and $17,618,
respectively, which has been recorded as additional interest expense. The market
value of the interest rate swap contract in place as of June 30, 1999, was
$60,486.
NOTE 6: SUBSEQUENT EVENT
On July 22, 1999, the Company closed the acquisition of Hagist Ranch field,
Duval County, Texas. The acquisition price was approximately $5.4 million,
subject to certain post-closing adjustments, as specified in the purchase and
sale agreement. Texoil will operate the field through its wholly-owned operating
subsidiary. The Company funded the acquisition with available borrowings under
its Credit Agreement. In connection with the acquisition, the Company's
borrowing base under its Credit Agreement has increased from $31.0 million to
$36.0 million.
9
<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.
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 independent engineers, the ability
to generate and take advantage of acquisition opportunities and numerous other
factors. A detailed discussion of important factors that could cause actual
results to differ materially from the Company's expectations are discussed
herein and in the Company's annual report on Form 10-KSB for 1998.
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.
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 commercial quantities of oil and gas
reserves that can be produced at a profit and assemble an oil and gas reserve
base with a market value exceeding its finding and production costs. The price
of crude oil was significantly depressed in 1998 and early 1999. While prices
have recently rebounded, no assurance can be given that current price levels
will be sustained or that prices will continue to increase. 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
have led to capital budget decreases, contraction of exploration financing and
elimination or deferral of new ventures by many companies and institutional
investors. In the opinion of management, during 1998 and early 1999, such
conditions adversely affected Texoil's ability to solicit industry partners for
major exploration prospects. Texoil compensated for these industry conditions by
focusing clearly on exploratory prospects which were readily marketable to
industry partners, acquiring additional producing assets, concentrating on
operating and administrative cost reductions, and taking other actions designed
to offset the severe effects of price reductions. Most of these actions already
were an integral part of the Company's fundamental business strategy. Recent
price increases appear to have favorably impacted corporate budgets and the
Company has begun soliciting industry partners for certain high potential
exploratory projects that had been deferred. No assurance can be given that the
Company will be able to secure partners for exploratory prospects on a promoted
basis.
Management believes, however, that Texoil will benefit from existing and
new opportunities to acquire and develop reserves. The Company has identified
numerous 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 has
improved. Major companies and
10
<PAGE>
large independents are expected to continue or expand divestitures of
"non-core" properties. Smaller companies that were not positioned to withstand
the significant price declines may be forced to sell assets or consolidate or
merge to satisfy creditors or improve shareholder value. Furthermore, costs of
labor and field services and products have declined during the industry downturn
and generally have not increased in relation to oil and gas prices, making
re-engineering and development projects more cost effective.
As a result of these circumstances, management believes the Company is
positioned to benefit from property acquisition, development and exploratory
opportunities. The Company also intends to pursue corporate acquisitions and
mergers. In addition, management continues to focus on capital expenditures that
can result in increased production and operating cost reductions on a per-unit
basis. The current corporate action plan is merely an expansion and adaptation
of the business plan which was conceived and implemented by management 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" 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; continue to solicit
industry or institutional 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 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 to exploration may be reduced.
While the Company does not intend to curtail exploration spending, it will
focus, in the near-term, on projects currently in inventory and situations where
the Company can acquire proprietary seismic data and prospective acreage as part
of a corporate or asset acquisition, rather than initiating new 3-D surveys.
Management believes the current market is conducive to the acquisition of proved
reserves with seismic data and exploratory acreage, at little or no incremental
cost over such proved reserves. While the impact and success of this action plan
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.
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 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
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
11
<PAGE>
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 six months ended June 30, were $162,000 and $331,000 for 1999, and $149,000
and $265,000 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 six months ended June 30, 1999 and 1998, are
interest costs of $122,790 and $235,832 for 1999, and $107,000 and $201,000 for
1998.
At the end of the second 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999, COMPARED TO THREE MONTHS ENDED JUNE 30,
1998.
The Company recorded a net income (loss) of $697,000 and $(876,000) for
three months ended June 30, 1999 and 1998, respectively. The $1,573,000 increase
in the Company's comparative net income resulted primarily from the following
factors:
<TABLE>
<CAPTION>
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
------------------------
<S> <C>
(000'S)
Oil and gas sales.................... $2,479
Lease operating and workover
expenses........................... (177)
Production taxes..................... (215)
General and administrative
expenses -- net.................... (60)
Depletion, depreciation and
amortization expense ("DD&A")...... (569)
Interest expense -- net.............. (365)
Writedown of oil and gas
properties......................... 1,208
Other income -- net.................. 3
Provision for income taxes........... (731)
--------
$1,573
========
</TABLE>
12
<PAGE>
The following discussion applies to the changes in the composition of net
income shown above.
The $2,479,000 or 105% 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 oil prices, as shown in the table
presented immediately below. The reduction on a per BOE basis is due to several
factors including incremental gas and oil volumes and ongoing cost reduction and
re-engineering activities.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERCENT JUNE 30,
INCREASE --------------------
(DECREASE) 1999 1998
---------- --------- ---------
<S> <C> <C> <C>
Gas production (MMcf)................ 271% 1,051 283
Oil production (MBbls)............... 34% 175 131
Barrel of oil equivalent (MBOE)...... 97% 350 178
Average price gas (per Mcf).......... (1%) $ 2.30 $ 2.33
Average price oil (per Bbl).......... 29% $ 15.80 $ 12.24
Average price per BOE................ 9% $ 13.84 $ 12.71
</TABLE>
Lease operating expenses and workover costs increased $177,000 or 13%. On a
unit-of-production, barrel of oil equivalent ("BOE") basis, costs were
actually reduced 43%. The dollar increase is a result of the acquisition and
development of oil and gas properties. On a BOE basis, production volumes
increased 97% over the prior year. Accordingly, lease operating expenses
increased primarily as a result of additional production volumes. The Company
expects further reductions to lease operating expenses on a BOE basis in 1999 as
a result of re-engineering and development activities. Production taxes
increased by $215,000 or 175% due to increased production volumes and revenues.
General and administrative costs increased $60,000 or 15%. The percentage
increase in general and administrative expenses was considerably 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 42% 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 $569,000 or 114% 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 price increases.
Capitalized costs included in the full-cost pool and subject to DD&A were $45.6
and $25.5 million at June 30, 1999 and 1998, respectively. In addition,
estimated future development costs associated with proved undeveloped reserves
in the amount of $14.6 million and $6.5 million at June 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 18.2 million
barrels of oil equivalent. This amount is approximately 12% larger than the
quantities used at year end 1998. The increase is due to upward reserve
revisions resulting from the economics of the higher commodity prices prevailing
at June 30, 1999, and other engineering considerations.
Interest expense increased by $365,000 primarily due to the increased
long-term debt used to finance acquisitions. Interest expense was $535,000 and
$170,000 for the three months ended June 30, 1999 and 1998, respectively, and is
expected to be approximately $2.2 million in 1999; however, the Company plans to
replace some debt with equity and, therefore, reduce projected interest expense.
The net change in the provision for income taxes was $731,000 due to the
recognition of pre-tax income in 1999 versus a 1998 loss.
13
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
The Company recorded a net income (loss) of $870,000 and $(724,000) for the
six months ended 1999 and 1998, respectively. The $1,594,000 increase in the
Company comparative net income resulted primarily from the following factors:
<TABLE>
<CAPTION>
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
------------------------
<S> <C>
(000'S)
Oil and gas sales.................... $4,440
Lease operating and workover
expenses........................... (829)
Production taxes..................... (386)
General and administrative
expenses -- net.................... (69)
Depletion, depreciation and
amortization expense ("DD&A")...... (1,160)
Interest expense -- net.............. (803)
Writedown of oil and gas
properties......................... 1,208
Other income net.................... (63)
Provision for income taxes........... (744)
--------
$1,594
========
</TABLE>
The following discussion applies to the changes in the composition of net
income shown above.
The $4,440,000 or 105% 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERCENT JUNE 30,
INCREASE --------------------
(DECREASE) 1999 1998
---------- --------- ---------
<S> <C> <C> <C>
Gas production (Mmcf)................ 276% 1,961 521
Oil production (MBbls)............... 48% 343 232
Barrel of oil equivalent (MBOE)...... 110% 670 319
Average price gas (per Mcf).......... (8%) $ 2.07 $ 2.26
Average price oil (per Bbl).......... 4% $ 13.43 $ 12.88
Average price per BOE................ (2%) $ 12.94 $ 13.27
</TABLE>
Lease operating expenses and workover costs increased 829,000 or 37%. On a
unit-of production, barrel of oil equivalent ("BOE") basis, costs were
actually reduced 35%. 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 110% over the prior year. Accordingly, lease operating
expenses increased primarily as a result of additional production volumes. The
Company expects further reductions to lease operating expenses on a BOE basis in
1999 as a result of re-engineering and development activities. Production taxes
increased by $386,000 or 171% due to increased production volumes and revenues.
General and administrative costs increased $69,000 or 8%. The percentage
increase in general and administrative expenses was considerably less than the
increases. On a BOE basis, general and administrative expenses actually were
reduced by 48% 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 $1,160,000 or 124% 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 price increases.
Capitalized costs included in the full-cost pool and subject to DD&A were $45.6
and $25.5 million at
14
<PAGE>
June 30, 1999, and 1998, respectively. In addition, estimated future development
costs associated with proved undeveloped reserves in the amount of $14.6 million
and $6.5 million at June 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 18.2 million barrels of oil equivalent. This amount is
approximately 12% larger than the quantities used at the year end 1998. The
increase is due to upward reserve revisions resulting from the economics of
higher commodity prices prevailing at June 30, 1999, and other engineering
considerations.
Interest expense increased by $803,000 primarily due to the increased
long-term debt used to finance acquisitions. Interest expense was $1,082,000 and
$279,000 for the six months ended June 30, 1999 and 1998, respectively, and is
expected to be approximately $2.2 million in 1999; however, the Company plans to
replace some debt with equity and, therefore, reduce projected interest expense.
Other income decreased $63,000 for the six months ended June 30, 1999,
principally due to decreases in interest income and consulting fees.
The provision for income taxes increased $744,000 as a result of the
increase in net income.
IMPACT OF PROPERTY ACQUISITIONS AND DEVELOPMENT
Management expects revenues and cash flows to exceed $18.0 million and $9.0
million, respectively, in 1999, representing an increase of $7.6 million (73%)
and $5.9 million (187%), respectively, over 1998. These estimates are predicated
on the results of operations for the first half of 1999 and anticipated
production levels from proved producing reserves, without significant
development of proved behind-pipe or undeveloped reserves. These estimates
further assume the average prices realized on a year-to-date basis will be
realized in the last half of 1999, and that prevailing cost levels can be
sustained. Estimates are based on independent reserve reports prepared by third
parties in connection with required reporting and financing activities. The
majority of the expected increase in revenues is a direct result of
approximately $28.4 million in capital expenditures incurred in 1998. In
connection with its acquisitions, the Company has initially focused on capital
expenditures designed to increase production (or arrest natural or mechanical
declines), and lower recurring expenses. The Company has identified numerous
projects in its existing property portfolio related to proved behind-pipe and
undeveloped reserves and has further undertaken detailed engineering and
geological field studies to define 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 on new
acquisitions.
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 six months ended June 30, 1999,
of $13.43 per Bbl were 4% higher than the six month comparable period in 1998
and 9% higher than prices realized in 1998, but still 27% and 41% lower than
average prices realized in 1997 and 1996, respectively. Average oil prices for
the month of June 1999 improved to about $16.29 per barrel. 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.
Throughout the low price environment the Company has maintained positive cash
flows including its financing and administrative costs.
CORPORATE EFFORTS TO OFFSET REDUCED PRICES
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 net revenues. Rather than impose
staff reductions of technical and other personnel, the Company chose to
15
<PAGE>
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 acquisition development
activities and further production growth. In addition to general and
administrative savings realized during the industry downturn, the Company
further implemented programs designed to reduce operating expenses and has
deferred certain capital expenditures. The Company has continued, however, to
pursue projects that can add economic producing reserves, enhance current
production levels and lower recurring operating expenses. With increased cash
flows and financial resources, the Company expects to expand development
activities and acquire additional properties in its focus areas.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to finance its future acquisition, development and
exploration activities through cash flow from operating activities, its bank
credit facility, sale of non-strategic assets, various means of corporate and
project finance and ultimately through the issuance of additional securities. 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.
RIMCO FINANCING
On December 31, 1997, Texoil entered into a Note Purchase Agreement and
issued 7.875% Convertible Subordinated General Obligation Notes in the principal
amount of $10 million. The financing matures on December 31, 1999, and is
subject to certain extensions or conversion to common stock pursuant to the
terms of the agreements. Management expects that the indebtedness will be
refinanced, extended, or converted into Texoil common stock, on or before
maturity.
CREDIT FACILITY
At June 30, 1999 and 1998, the Company had available borrowing capacity of
$6.5 million and $3.9 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 June
30, 1999, a $31 million borrowing base was established. The Company intends to
refinance its bank debt through a corporate offering of securities in 1999 that
may provide longer term financing than presently available under its credit
facility. No assurance can be given, however, that the Company will be able to
refinance its debt.
CASH FLOW FROM OPERATING ACTIVITIES
For the six months ended June 30, 1999, the Company's net cash flow
provided by operating activities was $3.0 million up $3.4 million from the prior
year. This increase is attributable to production from acquisition and
development, price increases lower per unit operating expenses and lower cash
requirements to reduce current liabilities.
CAPITAL EXPENDITURES
The Company's net oil and gas capital expenditures for the six months ended
June 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES
FOR THE SIX MONTHS
ENDED
JUNE 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Acquisitions of properties:
Evaluated properties............ $ 1,702 $ 7,598
Unevaluated properties.......... 489 1,143
--------- ---------
$ 2,191 $ 8,741
========= =========
</TABLE>
16
<PAGE>
Capital expenditures for the six months ended June 30, 1999, were financed
principally with cash flows from operations. The above totals do not include
transfers of unevaluated costs to an evaluated status during the period. During
the first half of 1999, the Company has concentrated on integrating its 1998
acquisitions into its operations and on certain re-engineering and development
activities.
As a result of the Company's 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
significant acquisition opportunities. Accordingly, the Company has directed a
greater portion of its current efforts toward new 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.
Accordingly, with increased cash flows 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, recompletions
and, pending completion of geological and engineering field studies, development
drilling. 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 and further expects
to incur certain drilling costs in 1999. Texoil will continue its practice of
soliciting partners, on a promoted basis, for higher risk exploratory and
development projects.
Based solely on its existing portfolio of properties and projects, the
Company expects to incur $3.0 million of capital expenditures during the
remainder of 1999, as follows:
<TABLE>
<CAPTION>
($000'S)
---------
<S> <C>
Development of proved properties:
Re-engineering -- facilities &
equipment...................... $ 400
Well recompletions and
workovers...................... 950
Drilling........................ 1,000
Exploration:
Land, geological &
geophysical.................... 300
Drilling........................ 350
---------
$ 3,000
=========
</TABLE>
The Company believes that it will have sufficient capital available from
its credit facility, cash flows from operating activities, sale of certain
"non-core" proved properties and sale of drilling participations to industry
partners to fund its capital expenditures. Management believes projected
expenditures will result in increased production and cash flows and increases in
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 losses to the Company. A portion of available
cash flow and borrowing capacity will be reserved to fund additional
acquisitions. The Company cannot predict with accuracy the level of capital
expenditures it may incur in connection with acquisitions and development of new
producing properties; however, Texoil has recently acquired a South Texas field
(see Note 6 to the Consolidated Financial Statements) and has set a goal of $20
million for the acquisition and development of new properties over the next 12
months. This goal will require additional corporate or project financing to be
obtained by the Company.
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
17
<PAGE>
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 purchased from and supported by third parties; therefore,
the Company cannot guarantee that it will not incur problems with such software
and business applications.
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.
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, 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 June 21, 1999, the Company filed a
report on Form 8-K, including Item 5, Other Events, related
to a reverse stock split.
18
<PAGE>
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: August , 1999 By: /s/FRANK A. LODZINSKI
FRANK A. LODZINSKI
PRESIDENT AND CEO
19
