UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
- ---------
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From........ to.........
Commission File Number 1-8287
RIO GRANDE, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 74-1973357
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10101 Reunion Place, Suite 210, San Antonio, Texas 78216-4156
(Address of Principal Executive Office) (Zip Code)
Issuer's Telephone Number Including Area Code: 210-308-8000
-------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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.
X Yes No .
- --
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
At May 31, 1998 there were 6,177,550 shares of the registrant's common
stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (unaudited)
April 30, 1998
Assets --------------
------
Current assets:
Cash and cash equivalents $ 626,044
Trade receivables 660,510
Prepaid expenses 17,054
------------
Total current assets 1,303,608
------------
Property and equipment, at cost:
Oil and gas properties, successful efforts method 26,642,585
Transportation equipment 183,011
Other depreciable assets 411,055
------------
27,236,651
Less accumulated depreciation, depletion and amortization (14,692,589)
------------
Net property and equipment 12,544,062
------------
Other assets:
Platform abandonment fund 363,536
Other assets, net 457,098
-----------
820,634
-----------
Total Assets $ 14,668,304
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,043,915
Accrued expenses 1,199,078
Long-term debt 13,243,374
------------
Total current liabilities 15,486,367
Other accrued expenses 503,081
Minority interest in limited partnership 147,688
Redeemable preferred stock, $0.01 par value; $10
redemption value. Authorized 1,700,000 shares; issued
and outstanding 1,017,500 shares 10,077,549
Common stock of $0.01 par value. Authorized
10,000,000 shares; issued and outstanding
6,073,320 shares 61,774
Additional paid-in capital 1,148,026
Deficit (12,756,181)
------------
Contingent liabilities
Total Liabilities and Stockholders' Equity $ 14,668,304
============
See accompanying notes to consolidated financial statements.
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Item 1. FINANCIAL STATEMENTS (continued)
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three Months
Ended
April 30,
---------
1998 1997
---- ----
Revenues:
Oil and gas sales $ 1,179,541 1,934,226
----------- -----------
Costs and expenses:
Lease operating and other production expense 759,707 836,060
Dry hole costs and lease abandonments 81,079 0
Depletion of oil and gas producing properties 481,609 594,633
Depreciation and other amortization 56,455 57,366
Provisions for abandonment expense 11,100 10,500
General and administrative 373,308 372,881
----------- -----------
Total costs and expenses 1,763,258 1,871,440
----------- -----------
Gain (loss) from operations (583,717) 62,786
----------- -----------
Other income (expense):
Interest expense (371,135) (260,981)
Interest income 502 31,149
Gain on sale of assets 262,362 0
Other, net (776) 9,326
Minority interest in earnings of limited
partnership (10,648) (21,800)
----------- -----------
Total other income (expense) (119,695) (242,306)
----------- -----------
Loss before income taxes (703,412) (179,520)
Income taxes 4,257 1,842
----------- -----------
Net income (loss) (707,669) (181,362)
Dividends on preferred stock (250,436) 200,100
----------- -----------
Net income (loss) applicable to common stock $ (958,105) (381,426)
=========== ===========
Net loss per common share $ (0.16) (0.07)
=========== ===========
Weighted average common shares outstanding 6,177,550 5,672,079
=========== ===========
-3-
Item 1. FINANCIAL STATEMENTS (continued)
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Three Months
Ended
April 30,
---------
1998 1997
---- ----
Cash flows from operating activities:
Loss from continuing operations $ (707,669) (181,362)
Adjustments to reconcile loss from continuing
operations to net cash provided by operating activities:
Depreciation and other amortization 56,455 57,366
Depletion of oil and gas producing properties 481,609 594,633
Provision for abandonment expense 11,100 10,500
Gain on sale of assets (262,362) 0
Minority interest in earnings of limited
partnership 10,649 21,800
Decrease (increase) in trade receivables 176,333 837,003
Decrease (increase) in prepaid expenses (200) (89,432)
Increase (decrease) in accounts payable and
accrued expenses 110,894 123,959
Increase (decrease) in other accrued expenses 272,796 (8,519)
---------- -----------
Net cash provided by (used in) continuing
operating activities 149,605 1,365,848
-------- ----------
Cash flows from investing activities:
Purchase of oil and gas producing properties (86,990) (909,893)
Purchase of other property and equipment 0 (1,800)
Deletions from (additions to) platform abandonment fund 82 22,653
Deletions from (additions to) other assets 0 (19,697)
Proceeds from sale of property and equipment (460,000) 0
------------ -----------
Net cash provided by (used in) investing activities 373,092 (908,737)
---------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 0 0
Repayment of long-term debt (8,498) (6,832)
Preferred stock dividends (220,345) 0
Proceeds from issuance of common stock 0 41,645
Distributions to limited partners (7,943) (50,800)
----------- -----------
Net cash provided by (used in) financing activities (236,786) (15,987)
------------ -----------
Net increase (decrease) in cash and cash equivalents 285,911 441,124
Cash and cash equivalents at beginning of period 340,133 1,045,331
----------- -----------
Cash and cash equivalents at end of period $626,044 1,486,455
=========== ===========
-4-
RIO GRANDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Accounting Policies
The accounting policies of Rio Grande, Inc. and Subsidiaries as set
forth in the notes to the Company's audited financial statements in the
Form 10-KSB Report filed for the year ended January 31, 1997 are
incorporated herein by reference.
The consolidated financial statements include the accounts of Rio
Grande, Inc. (the "Company") and its subsidiaries and majority-owned
limited partnerships as follows:
Form of ownership
Name Organization Interest
---- ------------ --------
Rio Grande Drilling Company Texas Corporation 100%
("Drilling")
Rio Grande Desert Oil Company Nevada Corporation 100%
("RG-Desert")
Rio Grande Offshore, Ltd. Texas Limited Partnership 100%
("Offshore")
Rio Grande GulfMex, Ltd. Texas Limited Partnership 80%
("GulfMex")
As a result of the Company's 80% ownership interest, GulfMex's
financial statements are consolidated with the Company's financial
statements. The minority interests of the outside limited partners are
set forth separately in the balance sheet and the statements of
operations of the Company.
All intercompany balances and transactions have been eliminated in the
consolidation.
In the opinion of management, the consolidated financial statements
reflect all adjustments which are necessary for a fair presentation of
the financial position and results of operations. Adjustments made for
the three months ended April 30, 1998 are considered normal and
recurring in nature.
The Company utilizes the successful efforts method of accounting for
its oil and gas properties. Under this method, the acquisition costs of
oil and gas properties acquired with proven reserves are capitalized
and amortized on the unit-of-production method as produced. Development
costs or exploratory costs are capitalized and amortized on the
unit-of-production method if proved reserves are discovered, or
expensed if the well is a dry hole.
-5-
Capitalized costs of proved properties are periodically reviewed for
impairment on a property by property basis, and, if necessary, an
impairment provision is recognized to reduce the net carrying amount of
such properties to their estimated fair values. Fair values for the
properties are based on future net cash flows as reflected by the year
end reserve report.
Earnings Per Share
Earnings per share computations are based on the weighted average
number of shares and dilutive common stock equivalents outstanding
during the respective periods. Fully diluted earnings per share is the
same as earnings per common and common equivalent share.
(2) Long-term Debt
The Company is currently in default under the terms of its senior
credit facility (the "Senior Credit Facility") with Comerica Bank-Texas
(the "Bank"), the Company's senior lender. Pursuant to a letter
agreement executed March 4, 1998 with the Bank, the Company was
required to provide the Bank by April 3, 1998 with additional
collateral to increase the Company's borrowing base ("Borrowing Base")
with the Bank, or reduce the outstanding balance of the Company's
indebtedness to an amount equal to or less than the available Borrowing
Base of the Company as redetermined by the Bank effective February 1,
1998. As previously reported, the Company received a Borrowing Base
Determination Notice from the Bank advising the Company that the
Company's Borrowing Base had been redetermined to be $6,500,000
effective February 1, 1998. The balance of the Company's current
outstanding indebtedness with the Bank is approximately $13,178,000,
which exceeds the Borrowing Base by approximately $6,678,000 (the
"Deficiency").
The Borrowing Base is the amount of borrowing available under the
Senior Credit Facility. The amount of the Borrowing Base is determined
by the Bank, in its sole discretion, based upon an analysis of reserve
and production data with respect to the oil and gas properties of the
Company for the purpose of calculating the present value of future net
revenues from such mineral interests as of a specified date. The
principal factor in determining the Borrowing Base is the present value
of projected future net revenues from the Company's proved producing
reserves as of the determination date. The present value of projected
future net revenues from the Company's proved behind pipe and proved
undeveloped reserves are also factors in determining the Borrowing
Base, but are afforded significantly less value than proved producing
reserves.
Righthand Creek, which represents a significant percentage of the
aggregate reserve value and Borrowing Base of the Company, was acquired
by the Company in January 1997 for $15.3 million. The Company commenced
workover and additional development work at Righthand Creek in March
1997. A workover drilling rig was placed on a previously abandoned well
in the field and was able to recomplete the well in the Wilcox "B"
formation. Recompletion procedures were also performed on the Wilcox
"A" formation to test its production capacity. When the production from
the Wilcox "A" and "B" dropped to an uneconomic level in October 1997,
the Company recompleted this well in the Wilcox "B-1" formation. The
well's current production is approximately 16 BOPD.
The Company also drilled a 11,300 foot Wilcox "B-1" formation
development well in March 1997. This well was completed in June 1997
and oil production was stabilized in August 1997. The average
production has been approximately 120 BOPD. In June 1997, the Company
re-entered a second abandoned well in Righthand Creek. Attempts to
achieve natural production flow from the Wilcox "B" and "B-1"
-6-
formations were unsuccessful. This well was not plugged as it may be
used as a water injection well. In August 1997, two existing Righthand
Creek wells were perforated in the Wilcox "B-1" formation. Production
from these wells increased from an average of 80 BOPD to approximately
160 BOPD. In January 1998, a casing separation in one of the field's
most productive wells, the Powell, resulted in an additional decrease
in production of approximately 140 BOPD. Although the Company attempted
to repair the damage, recompletion efforts were unsuccessful. The
Company is currently evaluating the most prudent means to recomplete or
replace the Powell. As of May 31, 1998, the Company has expended
approximately $2.33 million for recompletion and drilling of the wells
described above.
As a result of the testing performed on existing wells, recompletion of
shut-in wells and drilling of new wells in Righthand Creek, the Company
has concluded that the primary source of energy in the Righthand Creek
Wilcox "B" and "B-1" reservoirs is fluid expansion and not natural
water drive. Accordingly, the Company believes that the reservoir will
require pressure maintenance operations to achieve its maximum
productive potential, which in turn will require significant additional
capital investment. The effect of reclassifying the Righthand Creek
Wilcox "B" reservoir as a depletion drive reservoir has increased the
overall recoverable reserves, but resulted in the reclassification of a
significant portion of previously recognized reserves from "Proved
Producing" to "Proved Behind Pipe," "Proved Undeveloped" and "Probable
and Possible."
The Deficiency in the Borrowing Base occurred primarily as a result of
the reclassification of reserves in the Righthand Creek field, as
described above. In addition, the significant decline in oil prices
from approximately $20 per bbl average to the current average price of
approximately $12 per bbl has significantly and adversely affected the
cash flows and the market value of Righthand Creek. The Company has
been in regular contact with the Bank and has kept the Bank apprised of
its efforts to address the Deficiency. Although the Bank has not
accelerated the indebtedness under the terms of the Senior Credit
Facility, the Bank's willingness to defer its remedies may be premised
upon the Company's continued efforts to address the Deficiency.
The Company has no significant additional properties or assets to
pledge to the Bank, and the Company's ability to pay the Bank an amount
sufficient to eliminate the shortfall would depend on the ability of
the Company to generate sufficient cash from sales of non-strategic
leasehold interests, and/or access to additional sources of financing
through new or amended debt or equity financing or other alternative
financing which may include production and/or mezzanine financing for
the development of Righthand Creek. The value of the Company's oil and
gas properties has been adversely affected by the decline in oil and
gas prices and the reclassification of the reserves in Righthand Creek.
If the Company is unable to satisfy the requirements of the Bank, or
refinance the remaining indebtedness, the Bank may exercise it remedies
under the Senior Credit Facility, which include, but are not limited
to, foreclosure of its security interest in the collateral and offset
of the Company's cash.
(3) Sale of Leasehold Interests
The Company is currently pursuing the orderly sale of its leasehold
interests in an effort to address with the Bank's request to repay the
Senior Credit Facility. The sale may include all oil and gas properties
except Righthand Creek. The Company has retained Energy Spectrum
Advisors, Inc. ("ESA") to assist the Company in selecting the oil and
gas properties to be sold. ESA has prepared a sales brochure which
details the terms and conditions of the proposed sale and has provided
a list of prospective buyers for the Company's leasehold
-7-
interests. Additionally, ESA will advise the Company during any due
diligence and purchase and sale agreement negotiations with prospective
buyers. The Company met with prospective buyers and received final bids
for the leasehold interests by June 15, 1998. The Company is currently
evaluating the bids and is in discussions with the Bank regarding such
bids.
The Company is obligated to pay ESA a sales fee equal to the greater of
$100,000 or $50,000 plus one percent (1%) of the total sales
consideration received from its sale of the leasehold interests for
which ESA assists in selling. In addition, ESA shall receive a maximum
of $15,000 as reimbursement for expenses incurred pursuant to their
assistance in selling the properties, which includes the expense of
printing the sales brochure.
(4) Redeemable Preferred Stock
On January 16, 1997, the Company and Koch Exploration Company ("Koch")
concluded a $10 million private placement ("Koch Private Placement").
Koch acquired 500,000 shares of Series A Preferred Stock for $5 million
and 500,000 shares of Series B Preferred Stock for $5 million. In
addition to the rights set forth below, the Preferred Stock carries a
liquidation preference equal to its aggregate face value ($10,000,000)
plus accrued but unpaid dividends.
The following is a brief summary of the various rights and terms of the
Preferred Stock.
Preferred Stock
--------------------------------------------
Series A Series B Series C
-------- -------- --------
Number of shares issued 500,000 500,000 -0-
Face value per share $10 $10 $10
Cumulative dividends 15% of face 0.35 shares of 14% of face
value (per Series C value (per
annum) (quarterly) annum)
Dividends payable Feb. 1, May 1, Feb. 1, May 1, Feb. 1, May 1,
Aug. 1, Nov. 1 Aug. 1, Nov. 1 Aug. 1, Nov. 1
First dividend payment May 1, 1997 May 1, 1997 Aug. 1, 1997
The Company has paid Koch a cash dividend of $220,377 on May 1, 1997
for the dividends accrued from January 16, 1997 through April 30, 1997
on the Series A Preferred Stock. Koch also received 17,500 shares of
Series C Preferred Stock as the stock dividend accrued on the Series B
Preferred Stock from February 1, 1997 through April 30, 1997.
-8-
As a result of the significant costs incurred with the drilling and
recompletion activities and the significant decline in oil prices, the
Company has not made any additional quarterly cash dividend payments
due on the Series A Preferred Stock and the Series C Preferred Stock
since May 1, 1997. The Company also has not issued the stock dividends
of 17,500 shares of Series C Preferred Stock each due quarterly on the
Series B Preferred Stock since May 1, 1997. The Company has accrued
dividends payable of $918,600 as of April 30, 1998.
If at any time the Company is in arrears in whole or in part with
regard to quarterly dividends and such nonpayment remains in effect for
three consecutive quarters or, if a significant event (as defined in
the Certificate of Designation) occurs, the holders have the right at
any annual or special meeting of the stockholders to nominate and elect
such number of individuals as shall after the election represent a
majority of the number of directors constituting the Company's Board.
The holders also have the right after a default in the payment of
dividends or the occurrence of a significant event to cast such number
of votes at any annual or special stockholders meeting as is equivalent
to fifty-one percent(51%) of the aggregate voting shares. A significant
event shall mean and be deemed to exist if (i) the Company files a
voluntary petition, or there is filed against the Company an
involuntary petition, seeking relief under any applicable bankruptcy or
insolvency law, (ii) a receiver is appointed for any of the Company's
properties or assets, (iii) the Company makes or consents to the making
of a general assignment for the benefit of creditors or (iv) the
Company becomes insolvent or generally fails to pay, or admits in
writing its inability or unwillingness to pay, its debts as they become
due. At such time that there is a cure or waiver received in writing
from the holders of a majority of the Series B Preferred Stock, the
additional board members elected by the holders shall be removed from
the Company's Board.
The Company is currently in arrears on four consecutive dividend
payments on each of the Series A, Series B and Series C Preferred
Stock. Koch has not invoked its rights under the Certificate, which
include but are not limited to, the right to convene a special meeting
of the stockholders at which Koch would have the right to elect a
majority of the number of directors constituting the Company's Board.
Koch currently has two representatives serving on the Company's Board.
(5) Capital Resources and Liquidity
The Company has continued its search for additional equity and/or debt
financing. However, the Company has not been successful in its efforts
to identify additional sources of funding. The Company has explored
refinancing of its indebtedness as well as transactions that would
result in additional equity with concomitant dilution of the interests
of current stockholders. The holder of the Company's preferred stock,
Koch, initially indicated a willingness to consider providing credit
support or additional funding in some form for the Company. However,
Koch has indicated to the Company that it is at this point unwilling to
provide any additional financing or credit support. Currently, the
Company has no specific additional financing transactions under active
consideration and has not identified any alternative funding.
The Company is undertaking efforts to sell oil and gas properties in an
effort to reduce its Bank indebtedness. No assurance can be provided
that the amount realized from such sales will be adequate to reduce the
Bank indebtedness in an amount sufficient to forestall the Bank from
pursuing its remedies against the Company, nor can any assurance be
given that bids received for the properties will provide attractive
sales opportunities for the Company. Similarly, no assurances can be
given that the Company will be able to identify any alternative
financing sources which, in combination with the sale of the oil and
gas properties being offered for sale, would permit the development of
Righthand Creek or continuation of the business of the Company as a
going concern.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
1. Material Changes in Financial Condition
For the three months ended April 30, 1998, the
Company incurred a net loss from operations before
dividends on preferred stock of $627,000 as compared
to a net loss of $181,000 for the three months ended
April 30, 1997. This significant change is due
primarily to decreased revenues associated with
reduced production levels and lower oil prices as
compared to 1997. Dividends of $250,436 have been
accrued for the benefit of preferred stockholders
during the three months ended April 30, 1998. The
quarterly dividends payable August 1, 1997, November
1, 1997, February 1, 1998 and May 1, 1998 to Koch on
the Series A, Series B and Series C Preferred Stock
have not been paid.
The Company is currently in default under the terms
of its Senior Credit Facility with the Bank. The
balance of the Company's current outstanding
indebtedness with the Bank is $13,178,000, which
exceeds the Borrowing Base of $6,500,000 by
approximately $6,678,000. The Deficiency in Borrowing
Base results primarily from the reclassification of
reserves at Righthand Creek. In addition, the
significant decline in oil prices has adversely
affected cash flows and the market value of Righthand
Creek. The Company has been in regular contact with
the Bank and has kept the Bank apprised of its
efforts to address the Deficiency. Although the Bank
has not accelerated the indebtedness under the terms
of the Senior Credit Facility, the Bank's willingness
to defer its remedies may be contingent upon the
Company's continued efforts to address the
Deficiency.
If the Company is unable to satisfy the requirements
of the Bank or refinance the remaining indebtedness,
the Bank may exercise its remedies under the Senior
Credit Facility, which include, but are not limited
to, foreclosure of its security interest in the
collateral and offset of the Company's cash.
2. Material Changes in Results of Operations
Revenues and Lease Operating Expenses
Oil and gas sales decreased from $1,934,000 for the
three months ended April 30, 1997 to $1,179,000 for
the three months ended April 30, 1998. This decrease
is due principally to a significant drop in the
average unit price of oil from approximately $20 per
bbl in the first quarter of 1997 to approximately $16
per bbl in the first quarter of 1998. The drop in
production, from certain key properties, principally
Righthand Creek has contributed to the decrease in
revenues. Oil production for Righthand Creek in 1997
was approximately 34,000 bbls as compared to
approximately 29,000 bbls in 1998. Gas production for
Righthand Creek has also decreased by approximately
40 Mmcf. The Company's sale of several properties
during the year ended January 31, 1997, the most
significant of which the properties located in Upton
County, Texas and Tom Green County, Texas,
-10-
accounted for approximately $120,000 in revenues
during the three months ended April 30, 1997.
Lease operating expenses have decreased from
approximately $1.02 million in 1997 to approximately
$784,000 in 1998. The properties in Upton County and
Tom Green County incurred lease operating expenses of
approximately $140,000 during the quarter ended April
30, 1997. Due to limited working capital availability
during the three months ended April 30, 1998, the
Company has incurred only those recompletion expenses
which are necessary to maintain leasehold interests
and key production properties.
The Company commenced the water injection pilot
program at Righthand Creek in March 1998 and, as a
result, incurred additional lease operating expenses
of approximately $85,000 and capital costs of
approximately $15,000 for the three months ended
April 30, 1998. Since March 1998, the Company has
been injecting approximately 600 barrels of water per
day into the Wilcox "B" formation and has injected
approximately 64,000 barrels of water to date. The
injection pilot has provided some response in the
test wells; however, an additional period of testing
will be necessary before any definitive results may
be quantified.
The following table summarizes the operating activity
for oil and gas properties for the three months ended
April 30, 1998 and 1997. The existing properties are
those oil and gas properties which were acquired by
the Company prior to February 1, 1996.
Acquisition Three Months Ended April 30,
Date 1998 1997
-------------- ---- ----
Oil and gas sales:
Existing properties -- $ 334,247 637,354
Wheeler County properties March 1996 42,709 85,351
Block 76 March 1996 72,404 133,787
Belle properties April 1996 163,708 215,062
Righthand Creek properties January 1997 566,473 862,676
------------ --------
Total oil and gas sales $ 1,179,541 1,934,230
============= ==========
Lease operating expenses:
Existing properties -- $ 242,915 452,802
Wheeler County properties March 1996 17,676 28,930
Block 76 March 1996 5,110 10,059
Belle properties April 1996 166,361 216,304
Righthand Creek properties January 1997 352,093 311,144
----------- --------
Total lease operating expenses $ 784,155 1,019,239
========== ==========
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Acquisition Three Months Ended April 30,
Date 1998 1997
-------------- ---- ----
Depletion of oil and gas producing properties:
Existing properties -- $ 50,424 111,485
Wheeler County properties March 1996 6,795 4,568
Block 76 March 1996 47,160 78,026
Belle properties April 1996 25,723 64,015
Righthand Creek properties January 1997 351,507 336,539
----------- ----------
Total depletion of oil and gas
producing properties $ 481,609 594,633
========== ========
Oil production volume (bbl):
Existing properties -- 7,207 9,666
Wheeler County properties March 1996 0 73
Block 76 March 1996 1,483 1,908
Belle properties April 1996 12,701 10,647
Righthand Creek properties January 1997 28,638 33,928
------- -------
Total oil production volume (bbl) 50,029 56,222
========= =======
Gas production volume (mcf):
Existing properties -- 117,632 168,562
Wheeler County properties March 1996 20,797 36,349
Block 76 March 1996 21,859 25,736
Belle properties April 1996 36 11
Righthand Creek properties January 1997 6,207 41,033
------- --------
Total gas production volume (mcf) 116,531 271,691
========= ========
Average oil price per bbl $ 15.76 $20.37
=========== =========
Average gas price per mcf $ 2.13 $2.89
============ =========
Dry Hole Costs and Lease Abandonments
For the three months ended April 30, 1998, the
Company incurred $81,000 dry hole expenses primarily
from the participation in the drilling of an
exploration well in Mississippi for $64,000 and also
miscellaneous lease abandonments for $17,000. For the
three months ended April 30, 1997, no dry hole costs
or lease abandonment expenses were incurred.
-12-
Depletion of Oil and Gas Producing Properties
The Company amortizes as depletion expense the
capitalized acquisition costs and the capitalized
cost of exploratory wells that find proved reserves
or the development costs that increase proved
reserves by the unit-of-production method. The
unit-of-production method assigns a pro rata portion
of the capitalized cost to each unit of reserves. The
amortization of the capitalized costs of proved
producing reserves may be computed either on a
property-by-property basis or with reference to some
reasonable aggregation of properties in the same
field area.
The Company revises the unit-of-production rate
annually based on the estimates of remaining proved
reserves prepared by independent petroleum reserve
engineers. Reserve estimates for producing oil and
gas properties are inherently imprecise and may,
therefore, change dramatically from year to year.
SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long- Lived Assets to be
Disposed Of" requires that long-lived assets and
certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
This new pronouncement was adopted effective February
1, 1996.
Based upon the evaluation of the net carrying values
of the Company's oil and gas properties relative to
future net cash flows, approximately $4.52 million
charge to depletion expense was recorded as
impairment loss for the fiscal year ended January 31,
1998 due primarily to the impairment loss for an
offshore property recompleted during the year.
Since the Company significantly reduced the net
carrying values of its oil and gas properties as of
January 31, 1998, the unit-of-production rate for the
current fiscal year more closely approximates the
depletion of the remaining producing reserves of the
Company. Depletion expense for the three months ended
April 30, 1998 was approximately $482,000 and
compared to approximately $595,000 for the three
months ended April 30, 1997.
Interest Expense
Pursuant to the letter agreement executed March 4,
1998 with the Bank, the Company agreed that the
outstanding indebtedness of the Senior Credit
Facility would accrue interest at a varying rate per
annum equal to the prime rate of the Bank plus three
percent (3%) per annum. Monthly interest payments
would be payable on the last day of each month based
on the Bank's prime rate of interest plus one-half
percent (1/2%) per annum on the outstanding
indebtedness. The difference between the interest
accrued at the higher rate and the interest paid
monthly will be due and payable on demand at a later
date. Interest expense for the quarter ended April
30, 1998 was approximately $369,500 as compared to
$261,000 for the quarter ended April 30, 1997.
-13-
Gain on Sale of Assets
The Company sold its leasehold interest in the
property located in Lynn County, Texas for $460,000
in April 1998 and recognized a gain of approximately
$262,000 from the sale of that property.
Sales Contract
In August 1997, the Company, on behalf of Offshore,
entered into a commodity futures oil swap agreement
("Oil Swap Agreement") with Koch Oil Company. That
Oil Swap Agreement was made pursuant to an existing
Master Commodity Swap Agreement between the Company
and Koch, at no current cost to the Company, and is
termed a "Costless Put/Call Collar Option," covering
the period between February 1, 1998 and January 31,
1999. The Oil Swap Agreement is based upon 400
barrels oil per day and establishes settlement dates
on the last day of each calendar month during the
contract period. It sets a floating price equal to
Koch Oil Company's monthly average LLS posting plus
$1.50, and strike prices of $18.20 for put options
and $19.97 for call options. On any settlement date,
if the floating price is less than the put option
strike price, then Koch must pay the Company the
price difference, multiplied by the determination
quantity for the month. On any settlement date, if
the floating price exceeds the call option strike
price, the Company must pay Koch the difference,
multiplied by the determination quantity for the
month.
The Company also entered into a commitment with its
contract marketing agent to deliver an average of 600
MMBtu per day for February, March and April 1998. The
Company in turn will receive an average net price of
$2.45 per MMBtu before taxes.
Except as described above, the Company is not
obligated to provide a fixed or determinable quantity
of oil and gas in the future under any existing
contracts, agreements, hedge or swap arrangements.
Recent Operating Developments
The Company's future results of operations and the
other forward looking statements contained in this
Quarterly Report involve a number of risks and
uncertainties. Specifically, but without limitation,
no assurances can be given that any current or future
development or exploration plans and operations will
be successful or that, if successful, production from
the wells and the associated revenues over the
production life of the properties will equal or
exceed the costs associated with properties and their
development.
Sale of Leasehold Interests
The Company is currently pursuing the orderly sale of
its leasehold interests in an effort to address the
Bank's request to repay the Senior Credit Facility.
The sale may include all oil and gas properties
except Righthand Creek. The Company has retained
Energy Spectrum Advisors, Inc. ("ESA") to assist the
Company in selecting the oil and gas properties to be
sold. ESA has prepared a sales brochure which details
the terms and conditions of the proposed sale and has
provided a list of prospective buyers for the
Company's leasehold interests. Additionally, ESA will
advise the Company during any due diligence and
purchase and sale agreement negotiations with
prospective buyers. The Company met with prospective
buyers and received final bids for the leasehold
interests by June 15, 1998. The Company is currently
evaluating the bids and is in discussions with the
Bank regarding such bids.
-14-
The Company is obligated to pay ESA a sales fee equal
to the greater of $100,000 or $50,000 plus one
percent (1%) of the total sales consideration
received from its sale of the leasehold interests
which ESA assists in selling. In addition, ESA shall
receive a maximum of $15,000 as reimbursement for
expenses incurred pursuant to their assistance in
selling the properties, which includes the expense of
printing the sales brochure.
The significant decline in oil prices has adversely
affected the sales value of the properties thereby
limiting the Company's ability to reduce the Bank's
indebtedness by an amount sufficient to enable the
Company the ability to secure alternative financing
and be able to retain Righthand Creek and/or obtain
the additional necessary capital to properly develop
the field.
Capital Resources and Liquidity
The Company has continued its search for additional
equity and/or debt financing. However, the Company
has not been successful in its efforts to identify
additional sources of funding. The Company has
explored refinancing of its indebtedness as well as
transactions that would result in additional equity
with concomitant dilution of the interests of current
stockholders. The holder of the Company's preferred
stock, Koch, initially indicated a willingness to
consider providing credit support or additional
funding in some form for the Company. However, Koch
has indicated to the Company that it is at this point
unwilling to provide any additional financing or
credit support. Currently, the Company has no
specific additional financing transactions under
active consideration and has not identified any
alternative funding.
The Company is undertaking efforts to sell oil and
gas properties in an effort to reduce its Bank
indebtedness. No assurance can be provided that the
amount realized from such sales will be adequate to
reduce the Bank indebtedness in an amount sufficient
to forestall the Bank from pursuing its remedies
against the Company, nor can any assurance be given
that bids received for the properties will provide
attractive sales opportunities for the Company.
Similarly, no assurances can be given that the
Company will be able to identify any alternative
financing sources which, in combination with the sale
of the oil and gas properties being offered for sale,
would permit the development of Righthand Creek or
continuation of the business of the Company as a
going concern.
-15-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Series A Preferred Stock
The cash dividends of $187,500 each due on August 1,
1997, November 1, 1997, February 1, 1998 and May 1,
1998 on Series A Preferred Stock have not been paid.
Series B Preferred Stock
The stock dividends of 17,500 shares of Series C
Preferred Stock each due on August 1, 1997, November
1, 1997, February 1, 1998 and May 1, 1998 on the
Series B Preferred Stock have not been issued.
Series C Preferred Stock
The cash dividends due on August 1, 1997, November 1,
1997, February 1, 1998 and May 1,1998 on Series C
Preferred Stock have not been paid.
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) The exhibits listed on the accompanying Index to
Exhibits on page E-1 are filed as part of this Form
10-QSB. The Company will furnish a copy of any
exhibit to a requesting shareholder upon payment of a
fee of $.25 per page.
None.
(b) Reports on Form 8-K
The Company filed a Form 8-K on February 19,
1998 which described the Borrowing Base
Notification letter received from the Bank.
-16-
The Company filed a Form 8-K on March 25,1998
which described a Letter Agreement between the
Company and the Bank whereby the Company agreed
to reduce the Borrowing Base Deficiency by April
3, 1998 or provide the Bank with additional
collateral.
The Company filed a Form 8-K on June 9, 1998
which provided the unaudited financial
statements for the year ended January 31, 1998
and provided an update on the financial
condition of the Company.
-17-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RIO GRANDE, INC.
Date: June 22, 1998 By: /s/ Guy R. Buschman
----------------------
Guy R. Buschman, President
Date: June 22, 1998 By: /s/ Gary Scheele
-------------------
Gary Scheele, Secretary and Treasurer
(principal financial officer)
-18-
INDEX TO EXHIBITS
The following exhibits are numbered in accordance with Item 601 of Regulation
S-B:
3(a) Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3(a) to Form 8-K dated December 29, 1986 [File No. 1-8287]).
3(b) Bylaws of the Company (incorporated by reference to Exhibit 3(b) to
Form 8-K dated December 29, 1986 [File No. 1-8287]).
3(c) Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated herein by reference from January 31, 1997 Form 10-KSB).
4(a) Specimen stock certificate (incorporated by reference to Exhibit 4(a)
to Form 8-K dated December 29, 1986 [File No. 1-8287]).
4(b) Specimen Stock Purchase Warrant (incorporated by reference to Exhibit
4(b) to Form 8-K dated December 29, 1986 [File No. 1- 8287]).
4(c) Note Purchase Agreement, dated September 27, 1995, by and among the
Company, Rio Grande Drilling Company, and the various purchasers of
11.50% Subordinated Notes due September 30, 2000 (incorporated herein
by reference from October 31, 1995 Form 10-QSB).
4(d) Form of Common Stock Purchase Warrant issued in connection with the
Offering described in this report (incorporated herein by reference
from October 31, 1995 Form 10-QSB).
4(e) Amendments to Note Purchase Agreement, by and among the Company,
Drilling and the Holders (incorporated herein by reference from March
26, 1996 Form 8-K).
4(f) Amendments to Notes, by and among the Company and the Holders
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(g) Consents to Proposed Transactions by the Holders to the Company
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(h) Amendment to Warrant Agreement among the Company and the Holders
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(i) Certificate of Designation, Preferences and Rights of Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock
of Rio Grande, Inc. dated January 15, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
4(j) Preferred Stock Purchase Agreement between Koch Exploration Company and
Rio Grande, Inc. dated January 16, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
4(k) Registration Rights Agreement between Rio Grande, Inc. and Koch
Exploration Company dated January 16, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
E-1
4(l) Stockholders Agreement between Robert A. Buschman, Guy Bob Buschman,
Rio Grande, Inc., and Koch Exploration Company dated January 16, 1997
(incorporated herein by reference from January 31, 1997 Form 8-K).
10(a) Asset Purchase Agreement dated June 26, 1992 by and between SHV Oil and
Gas Company and Rio Grande Drilling Company (incorporated herein by
reference from July 31, 1992 Form 10-Q).
10(b) Agreement of Limited Partnership dated June 25, 1992 for Rio Grande
Offshore, Ltd. between Rio Grande Drilling Company, Robert A. Buschman,
H. Wayne Hightower and H. W. Hightower, Jr. (incorporated herein by
reference from July 31, 1992 Form 10-Q).
10(c) Loan Agreement by and between International Bank of Commerce and Rio
Grande Drilling Company dated June 26, 1992 (incorporated herein by
reference from July 31, 1992 Form 10-Q).
10(d) Purchase and Sale Agreement dated May 24, 1995, between Newfield
Exploration Company and Rio Grande Offshore, Ltd. for the sale of Ewing
Bank Blocks 947/903 and Ship Shoal Block 356 at a sales price of
$1,200,000 (incorporated by reference from July 31, 1995 Form 10-QSB).
10(e) Consulting Agreement dated August 10, 1995, between Hobby A. Abshier
and Rio Grande, Inc. (incorporated by reference from July 31, 1995 Form
10-QSB).
10(f) Closing Agreement between Fortune Petroleum Corporation, Pendragon
Resources, L.L.C. and Rio Grande Offshore, Ltd. dated March 6, 1996 for
the acquisition of South Timbalier Block 76 (incorporated by reference
from March 26, 1996 Form 8-K).
10(g) Loan Agreement between Comerica Bank-Texas, Rio Grande, Inc. and Rio
Grande Drilling Company dated March 8, 1996 for a senior credit
facility of $10,000,000 (incorporated herein by reference from March
26, 1996 Form 8-K).
10(h) Purchase and Sale Agreement between Belle Oil, Inc., Belle Exploration,
Inc., Louisiana Well Service Co., Alton J. Ogden, Jr., Alton J. Ogden,
Sr., Jeff L. Burkhalter and Rio Grande Offshore, Ltd. (incorporated
herein by reference from April 29, 1996 Form 8-K).
10(i) Engagement letter between Reid Investment Corporation and Rio Grande,
Inc. dated August 28, 1996, as exclusive agent to sell equity in Rio
Grande, Inc. (incorporated herein by reference from October 31, 1996
Form 10-QSB).
10(j) Purchase and Sale Agreement between Brechtel Energy Corporation, et al
and Rio Grande Offshore, Ltd. dated November 20, 1996 for the
acquisition of oil and gas properties located in the Righthand Creek
Field, Allen Parish, Louisiana (incorporated herein by reference from
October 31, 1996 Form 10-QSB).
10(k) First Amendment to Loan Agreement between Rio Grande, Inc., Rio Grande
Drilling Company and Comerica Bank - Texas dated January 15, 1997
(incorporated herein by reference from January 31, 1997 Form 8-K).
E-2
10(l) Employment Agreement between Rio Grande, Inc., Rio Grande Drilling
Company and Guy Bob Buschman dated January 16, 1997 (incorporated
herein by reference from January 31, 1997 Form 8-K).
10(m) Employment Agreement between Rio Grande, Inc., Rio Grande Drilling
Company and Gary Scheele dated January 16, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
10(n) Master Commodity Swap Agreement between Rio Grande, Inc. and Koch Oil
Company dated January 16, 1997 (incorporated herein by reference from
January 31, 1997 Form 8-K).
10(o) Participation Agreement between Mortimer Exploration Company and Rio
Grande Offshore, Ltd. for the Texas/Louisiana Yegua Project dated March
10, 1997 with attached amended letter agreement (incorporated herein by
reference from Form 10-KSB from January 31, 1997).
10(p) Confirmation of Costless Collar Put/Call Option subject to Master
Commodity Swap Agreement between Koch Oil Company and Rio Grande, Inc.,
dated August 15, 1997 (incorporated herein by reference from July 31,
1997 Form 10-QSB).
10(q) Letter Agreement between Comerica Bank - Texas and Rio Grande, Inc.
and Rio Grande Drilling Company dated December 22, 1997 (incorporated
herein by reference from October 31, 1997 Form 10-QSB).
10(n) Engagement Letter between Energy Spectrum Advisors, Inc. and Rio
Grande Drilling Company dated February 19, 1998 as agent to sell
certain oil and gas properties held by Rio Grande Offshore, Ltd. and
Rio Grande GulfMex, Ltd. (E-4).
22 The following list sets forth the name of each subsidiary or affiliate
of the Company, with the State of incorporation as noted which are
wholly-owned by the Company (except as noted):
Rio Grande Drilling Company, Texas corporation Rio Grande
Desert Oil Company, Nevada corporation Rio Grande Offshore,
Ltd., a Texas limited partnership Rio Grande GulfMex, Ltd., a
Texas limited partnership (80% interest)
27 Financial Data Schedule (E-7).
99(a) Private Offering Memorandum of the Company dated August 27, 1995
(incorporated herein by reference from October 31, 1995 Form 10-QSB).
E-3
ENERGY SPECTRUM ADVISORS INC.
February 19, 1998
Rio Grande, Inc.
Union Square
10101 Reunion Place, Suite 210
San Antonio, Texas 78216
Attention: Guy Bob Buschman
Chief Executive Officer
Gentlemen:
The purpose of this letter is to confirm the engagement of Energy
Spectrum Advisors Inc. ("ESA") by Rio Grande, Inc. (including its subsidiaries
and affiliates, referred to herein as the "Company") to render financial
advisory and investment banking services to the Company in connection with a
potential sale of certain oil and gas assets currently owned by the Company (the
"Properties") with a third party business entity (a "Candidate").
Section l Services to be Rendered. ESA will perform the
following financial advisory and investment banking services:
(a) ESA will familiarize itself to the extent it
deems appropriate and feasible with the Properties, it being
understood that ESA shall, in the course of such
familiarization, rely entirely upon information as may be
supplied by the Company without independent investigation;
(b) ESA will advise and assist the Company in
developing a strategy for divesting the Properties to a
Candidate, including (i) the possible price or valuation
range that might reasonably be expected by the Company and
(ii) the nature and terms of the consideration to be
received;
(c) ESA will prepare an Offering Memorandum that
details the Properties, and the desired terms and conditions
of the proposed sale. ESA will provide the Company with the
Offering Memorandum for review, and final approval of the
completed document. ESA will also prepare a confidentiality
agreement acceptable to the Company, which will be a
requirement for each candidate to execute prior to receiving
the Offering Memorandum.
E-4
Rio Grande, Inc.
February 19, 1998
Page 2
(d) ESA will develop a list of prospective
Candidates, and subject to the Company's approval, will
contact Candidates on behalf of the Company regarding a
potential Transaction;
(e) ESA will advise the Company in the course of the
Company's negotiations with a Candidate, and if requested by
the Company, will directly participate in such negotiations;
(f) ESA will assist the Company with due diligence
matters concerning Candidates; and
(g) ESA will render such other financial advisory and
investment banking services as may from time to time be
agreed upon by ESA and the Company.
Section 2. Fees. The Company shall pay ESA a cash fee equal
to the greater of $100,000 or $50,000 plus one percent (1 %) of the Aggregate
Consideration upon the closing of the proposed sale transaction. For purposes
hereof, Aggregate Consideration shall mean the total amount of cash and the fair
market value on the day the Transaction is consummated of all securities,
including the amount of debt assumed by a Candidate and other assets that the
Company and/or its shareholders receive in a proposed transaction.
Section 3. Expenses. In addition to any fees that may be
payable to ESA under Section 2, the Company agrees to reimburse ESA for all
direct out-of-pocket expenses (these expenses include phone calls, printing,
travel, etc.) which are actually and reasonably incurred by ESA in connection
with its engagement hereunder, provided that ESA's total reimbursable expenses
shall not exceed $15,000 without prior approval from the Company.
Section 4. Indemnity and Contribution. In addition to the
amounts which the Company has herein agreed to pay to ESA, the Company shall
indemnify and hold ESA (and its directors, officers, employees and agents)
harmless against any losses, claims, damages or liabilities to which ESA may
become subject in connection with the transaction contemplated hereby and shall
reimburse ESA and/or such person for any legal or other expenses reasonably
incurred in connection with investigating, settling or defending any action or
claim in connection therewith, provided that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage or liability is
found in a final judgment of a court of competent jurisdiction to have resulted
from a breach of ESA's obligations to the Company in connection with the
performance by ESA of the services pursuant hereto or from ESA's gross
negligence or willful misfeasance in performing such services.
E-5
Rio Grande, Inc.
February 19,1998
Page 3
Section 5. Term. The term of this agreement shall commence as
of the date hereof and shall continue until terminated (with or without cause)
by either party providing 30 days written notice to the other, provided that for
a period of one year following such termination the Company shall compensate ESA
in accordance with the provisions of Section 2 hereof if the Company consummates
a transaction with a Candidate contacted by ESA during the term of this
agreement pursuant to ESA' 5 services under Section l hereof.
* * *
If the foregoing is in accordance with your understanding, kindly
confirm your acceptance and agreement by signing and returning the enclosed
duplicate of this letter, and it will thereupon constitute a binding agreement
between us.
Very truly yours,
ENERGY SPECTRUM ADVISORS INC.
James P. Benson
Managing Director
ACCEPTED AND AGREED
RIO GRANDE, INC.
By:
Guy Bob Buschman
Chief Executive Officer
E-6