<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report
September 27, 1995
------------------
Rio Grande, Inc.
----------------
(Exact name of registrant as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation)
1-8287 74-1973357
- ------ ----------
(Commission File Number) (I.R.S. Employer Identification Number)
10101 Reunion Place, Suite 210
San Antonio, Texas 78216-4156
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(210) 308-8000
--------------
Page 1 of __ Pages
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ITEM 5. OTHER EVENTS.
The Company consummated on September 27, 1995 an offering (the
"Offering") of 80 Units, each of which consists of an 11.50% Subordinated Note
in the principal amount of $25,000 ("Note" where singular and "Notes" where
plural) and Warrants to purchase shares of Class A Common Stock, par value $.01
per share, of the Company (the "Common Stock") at $.40 per share, as described
below (the "Warrants").
Interest on the Notes is payable quarterly, and the Notes mature on
September 30, 2000. No principal payments will be required during the first
two years. Thereafter, quarterly principal installments equal to 3.125%,
9.375% and 12.5% of the original principal amount of the Notes are payable
during the third, fourth and fifth years, respectively. The Notes may be
prepaid in whole or in part at any time without penalty.
The Warrants entitle the holder to acquire shares of Common Stock of
the Company at $.40 per share for a period of seven years, subject to earlier
expiration under certain circumstances. 1,388,160 shares of Common Stock are
subject to the Warrants. The Warrants are detachable from the Notes; provided,
however, that if the Warrants are transferred separately from the Notes to
someone other than an affiliate, they must be exercised within thirty days of
the assignment or transfer or they will expire. Warrant holders were granted
piggyback registration rights entitling the holders of shares acquired through
the exercise of Warrants to request registration of those shares in the event
the Company files a registration statement to effectuate a public offering of
the Company's Common Stock.
The Company paid a fee of 4.25%, or $85,000 of the proceeds to
Duncan-Smith Securities, Inc. The Company estimates that the other expenses of
the Offering, including printing, legal and engineering fees and expenses
payable by the Company, will be approximately $60,000, which would provide
$1,855,000 to the Company. The Company intends to use the proceeds of the
Offering to initiate a plan of development on and make production enhancements
to certain oil and gas properties acquired in 1994 and operated by the Company.
The Company's development plan includes the recompletion or workover of
approximately 20 marginal producing wells and an infill development drilling
program combined with a pressure maintenance waterflood project on
approximately 4,000 acres in Tom Green County, Texas.
The securities were offered and sold pursuant to a Private Offering
Memorandum, a copy of which has been filed as an exhibit to this report. The
Note Purchase Agreement by and among the Company, Rio Grande Drilling Company,
a Texas corporation and wholly-owned subsidiary of the Company, and the various
purchasers in the offering and the form of Warrant issued to purchasers in the
offering are also attached as exhibits to this report.
Page 2 of __ Pages
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits. The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Number Document
- ------ --------
<S> <C>
4.1 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
4.2 Form of Common Stock Purchase Warrant issued in connection with the Offering described in this
report
99.1 Private Offering Memorandum of the Company dated August 7, 1995
</TABLE>
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<PAGE> 4
SIGNATURES
Pursuant to the requirement 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.
RIO GRANDE, INC.
By:
--------------------------------
Guy Bob Buschman, President
Dated: ____________, 1995
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Sequentially Numbered Page
- ---------- ----------- --------------------------
<S> <C> <C>
4.1 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
4.2 Form of Common Stock Purchase ____
Warrant issued in connection with
the Offering described in this
report
99.1 Private Offering Memorandum of the ____
Company dated August 27, 1995
</TABLE>
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<PAGE> 1
RIO GRANDE, INC. AND RIO GRANDE DRILLING COMPANY
$2,000,000
11.50% Subordinated Notes due September 30, 2000
Warrants to Acquire Up to 1,388,160 Shares of
Common Stock, par value $.01
___________
NOTE PURCHASE AGREEMENT
___________
Dated September 27, 1995
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1. AUTHORIZATION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. SALE AND PURCHASE OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4 SUBORDINATION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.1 Agreement of Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.2 Effect of Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.3 Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.4 Reliance of Subsequent Holders of Senior Indebtedness . . . . . . . . . . . . . . 4
5. CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.2 Performance; No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.3 Compliance Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.4 Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.5 Purchase Permitted By Applicable Law, etc. . . . . . . . . . . . . . . . . . . . . 5
5.6 Proceedings and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANIES . . . . . . . . . . . . . . . . . . . . . 6
6.1 Organization; Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . 6
6.2 Authorization, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.3 Organization and Ownership of Shares of Subsidiaries;
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.4 Compliance with Laws, Other Instruments, etc. . . . . . . . . . . . . . . . . . . 7
6.5 Governmental Authorizations, etc. . . . . . . . . . . . . . . . . . . . . . . . . 7
6.6 Litigation; Observance of Agreements, Statutes and Orders . . . . . . . . . . . . 7
6.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.8 Title to Property; Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.9 Licenses, Permits, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.10 Existing Indebtedness, Future Liens . . . . . . . . . . . . . . . . . . . . . . . 9
7. REPRESENTATIONS OF THE PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.1 Purchase for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.2 Residence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.3 Purchaser Questionnaire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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<TABLE>
<S> <C> <C>
8. INSPECTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9. PREPAYMENT OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9.1 Required Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9.2 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9.3 Allocation of Partial Prepayments . . . . . . . . . . . . . . . . . . . . . . . 11
9.4 Maturity; Surrender, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
9.5 Purchase of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.1 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.2 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.3 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.4 Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.5 Corporate Existence, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.6 Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.7 Compliance Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.8 Notice of Default and Material Adverse Effect . . . . . . . . . . . . . . . . . 13
10.9 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11.1 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11.2 Merger, Consolidation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
11.3 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
11.4 Change of Management and Business . . . . . . . . . . . . . . . . . . . . . . . 15
11.5 Dividends, Distributions and Redemptions . . . . . . . . . . . . . . . . . . . . 16
11.6 Recourse Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13. REMEDIES ON DEFAULT, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
13.1 Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
13.2 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
13.3 Rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
13.4 No Waivers or Election of Remedies, Expenses, etc. . . . . . . . . . . . . . . . 19
14. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES . . . . . . . . . . . . . . . . . . . . . 20
14.1 Registration of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
14.2 Transfer and Exchange of Notes. . . . . . . . . . . . . . . . . . . . . . . . . 20
14.3 Replacement of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15. PAYMENTS ON NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15.1 Place of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15.2 Home Office Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
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<TABLE>
<S> <C> <C>
16. EXPENSES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.1 Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.2 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
18. AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
18.1 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
18.2 Solicitation of Holders of Notes. . . . . . . . . . . . . . . . . . . . . . . . 23
18.3 Binding Effect, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
18.4 Notes held by Companies, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 24
19. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
20. REPRODUCTION OF DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
21. CONFIDENTIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
22. SUBSTITUTION OF PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
23. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
23.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
23.2 Payments Due on Non-Business Days . . . . . . . . . . . . . . . . . . . . . . . 26
23.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
23.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
23.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
23.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
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<TABLE>
<S> <C> <C>
SCHEDULE A -- INFORMATION RELATING TO PURCHASERS
SCHEDULE B -- DEFINED TERMS
EXHIBIT 1 -- Form of 11.50% Subordinated Note due
September 30, 2000
EXHIBIT 2 -- Form of Common Stock Purchase Warrant
EXHIBIT 10.7 -- Form of Compliance Certificate
EXHIBIT 11.3 -- Permitted Liens
</TABLE>
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RIO GRANDE, INC. AND RIO GRANDE DRILLING COMPANY
10101 Reunion Place
Union Square, Suite 210
San Antonio, Texas 78209
11.50% Subordinated Notes due September 30, 2000
Warrants to Acquire 1,388,160 Shares of Common Stock, par value $.01
September 27, 1995
Note Purchasers listed on Exhibit A
Ladies and Gentlemen:
Rio Grande, Inc. ("RGI"), a Delaware corporation, and Rio Grande
Drilling Company ("RGDC"), a Texas corporation (the "COMPANIES"), agree with
you as follows:
1. AUTHORIZATION OF SECURITIES.
The Companies will authorize the issue and sale of $2 million
aggregate principal amount of their Subordinated Notes due September 30, 2000
(singularly, a "NOTE" and collectively, the "NOTES", such term to include any
such notes issued in substitution therefor pursuant to Section 14 of this
Agreement), and the issue and sale of Warrants entitling the Holders of the
Notes to purchase initially an aggregate of 1,388,160 shares of Common Stock at
a price per share of $.40. The Notes shall be substantially in the form set
out in Exhibit 1, with such changes therefrom, if any, as may be approved by
you and the Companies, and the Warrants shall be in substantially the form of
Exhibit 2, with such changes therefrom, if any, as may be approved by you and
the Companies. Certain capitalized terms used in this Agreement are defined in
Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise
specified, to a Schedule or an Exhibit attached to this Agreement.
2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the Companies
will issue and sell to you and you will purchase from the Companies, at the
Closing provided for in Section 3, Notes in the aggregate principal amount of
$2 Million at the purchase price of 100% of the principal amount thereof.
<PAGE> 7
3. CLOSING.
The sale and purchase of the Notes to be purchased by you shall be at
the offices of Cox & Smith Incorporated, Suite 1800, 112 East Pecan, San
Antonio, Texas 78205 at 10:00 a.m. Central Daylight Time, at a closing (the
"CLOSING") on September 27, 1995 or on such other Business Day thereafter on or
prior to October 31, 1995 as may be agreed upon by the Companies and you. At
the Closing, the Companies will deliver to you the Notes to be purchased by
each of you in the form of a single Note (or such greater number of Notes in
denominations of at least $25,000.00 as each of you may request) dated the date
of the Closing and registered in your respective names (or in the name of your
respective nominees) in consideration of your payment to the Companies of the
aggregate principal amount of the Notes. If at the Closing the Companies shall
fail to tender such Notes to you as provided above in this Section 3, or any of
the conditions specified in Section 5 shall not have been fulfilled to your
satisfaction, you shall, at your election, be relieved of all further
obligations under this Agreement, without thereby waiving any rights you may
have by reason of such failure or such nonfulfillment.
4. SUBORDINATION OF NOTES
The Notes referenced herein are expressly subordinated to Senior
Indebtedness of the Companies, as follows:
4.1. AGREEMENT OF SUBORDINATION.
Payment of the principal of and interest on the Notes is hereby
expressly subordinated, to the extent and in the manner in this Section
hereinafter set forth, in right of payment to the prior payment in full of all
Senior Indebtedness of the Companies. No payment on account of the principal
of or interest on any of the Notes shall be made, and no holder of a Note shall
be entitled to receive any such payment if (i) full payment for amounts then
due for principal of and interest on Senior Indebtedness has not been made, or
(ii) at the time of such payment or immediately after giving effect thereto
there shall exist under any Senior Indebtedness or any agreement pursuant to
which any Senior Indebtedness is issued any default or any condition, event or
act, which, with notice or lapse of time, or both, would constitute a default.
Each Holder of a Note, for itself and its successors and assigns, expressly for
the benefit of the present and future holders of Senior Indebtedness, by
purchasing this Note, agrees to and shall be bound by the subordination
provisions of this Section, and agrees to execute and deliver to holders of
Senior Indebtedness, upon written request, separate subordination agreements
consistent with the provisions of this Section.
In the event of any insolvency or bankruptcy proceedings, and any
receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to either of the Companies or to their
creditors, as such, or to the Companies' property, or in the event of any
proceedings for voluntary liquidation, dissolution, or other winding up of
either of the Companies, whether or not involving insolvency or
2
<PAGE> 8
bankruptcy, the holders of Senior Indebtedness shall be entitled to receive
payment in full of all principal, premium, if any, and interest on all Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts
of Senior Indebtedness held by such holders) before any Holder of a Note is
entitled to receive any payment on account of principal or interest upon a
Note, and to that end the holders of Senior Indebtedness shall be entitled to
receive for application to the payment of the Senior Indebtedness any payment
or distribution of any kind or character, whether in cash, property or
securities (other than shares of stock of either of the Companies as
reorganized or readjusted or securities of either of the Companies or any other
corporation provided for by a plan of reorganization or readjustment,
distributions on account of which or the payment of which are subordinated to
the payment of all Senior Indebtedness which may at the time be outstanding)
which may be payable or deliverable in any such proceedings in respect of the
Notes.
In the event that any Note is declared due and payable before its
expressed maturity for any reason (under circumstances when the provisions of
the preceding paragraph shall not be applicable), the holders of Senior
Indebtedness shall be entitled to receive payment in full of all principal,
premium, if any, and interest on all Senior Indebtedness before the Holders of
Notes are entitled to receive any payment on account of the principal or
interest upon the Notes.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of either of the Companies, whether in cash, property or
securities (other than shares of stock of either of the Companies as
reorganized or readjusted or securities of either of the Companies or any other
corporation provided for by a plan of reorganization or readjustment, the
payment of which is subordinated to the payment of all Senior Indebtedness
which may at the time be outstanding), shall be received by the Holders of the
Notes before all Senior Indebtedness is paid in full, or provision made for its
payment in cash, such payment or distribution shall be held in trust for the
benefit of, and shall be paid over or delivered to, the holders of such Senior
Indebtedness or their representative or representatives, or to the trustee or
trustees under any indenture under which any instruments evidencing any of such
Senior Indentures may have been issued, for application to the payment of all
Senior Indebtedness remaining unpaid to the extent necessary to pay all such
Senior Indebtedness after giving effect to any concurrent payment or
distribution, or provision for payment thereof in cash, to the holders of such
Senior Indebtedness.
3
<PAGE> 9
4.2. EFFECT OF SUBORDINATION.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the
Companies or by any act or failure to act, in good faith, by any such holder,
or by the noncompliance by the Companies with the terms, provisions and
covenants of this Agreement regardless of any knowledge thereof which any such
holder may have or otherwise be charged with. Nothing contained in this
Section or elsewhere in this Agreement or in the Notes is intended to or shall
impair, as between the Companies, their creditors other than the holders of
Senior Indebtedness, and the Holders of the Notes, the obligation of the
Companies, which is absolute and unconditional, to pay to the Holders of the
Notes the principal of (and premium, if any) and the interest on the Notes in
accordance with their terms, or is intended to or shall affect the relative
rights of the Holders of the Notes and the creditors of the Companies other
than the holders of Senior Indebtedness, nor shall anything herein or therein
prevent the Holder of any Note from exercising all remedies otherwise permitted
by applicable law upon default under this Agreement, subject to the rights, if
any, under this Section of the holders of Senior Indebtedness, in respect of
cash, property or securities of the Companies received upon the exercise of any
such remedy.
4.3. SUBROGATION.
Subject to the payment in full of all Senior Indebtedness, the rights
of the Holders of the Notes shall be subrogated to the rights of the holders of
Senior Indebtedness to receive payments or distributions of cash, property, or
securities of the Companies applicable to the Senior Indebtedness until the
principal amount of (and premium, if any) and interest on the Notes shall be
paid in full; and, for the purposes of such subrogation, no payments or
distributions to the holders of the Senior Indebtedness of any cash, property
or securities to which the Holders of the Notes would be entitled except for
the provisions of this Section, and no payment over pursuant to the provisions
of this Section to or for the benefit of the holders of Senior Indebtedness by
Holders of the Notes, shall, as between the Companies, their creditors other
than holders of Senior Indebtedness, and the Holders of the Notes be deemed to
be a payment by the Companies to or on account of the Senior Indebtedness. It
is understood that the provisions of this Section are and are solely for the
purpose of defining the relative rights of the Holders of the Notes on the one
hand, and the holders of the Senior Indebtedness, on the other.
4.4. RELIANCE OF SUBSEQUENT HOLDERS OF SENIOR INDEBTEDNESS.
Each holder of Senior Indebtedness whether outstanding at the date of
the Notes or incurred after the date hereof, shall be deemed to have acquired
such Senior Indebtedness in reliance upon the subordination provision contained
herein.
4
<PAGE> 10
5. CONDITIONS TO CLOSING.
Your obligation to purchase and pay for the Notes to be sold to you at
the Closing is subject to the fulfillment to your satisfaction, prior to or at
the Closing, of the following conditions:
5.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Companies in this Agreement
shall be correct when made and at the time of the Closing.
5.2. PERFORMANCE; NO DEFAULT.
The Companies shall have performed and complied with all agreements
and conditions contained in this Agreement required to be performed or complied
with by it prior to or at the Closing and after giving effect to the issue and
sale of the Notes.
5.3. COMPLIANCE CERTIFICATES.
(a) Officer's Certificate. The Companies shall have
delivered to you an Officer's Certificate, dated the date of the Closing,
certifying that the conditions specified in Sections 5.1 and 5.2 have been
fulfilled.
(b) Secretary's Certificate. The Companies shall have
delivered to you a certificate certifying as to the resolutions attached
thereto and other corporate proceedings relating to the authorization,
execution and delivery of the Notes and the Agreements.
5.4. OPINIONS OF COUNSEL.
You shall have received an opinion in form and substance satisfactory
to you, dated the date of the Closing, from Cox & Smith Incorporated, counsel
for the Companies.
5.5. PURCHASE PERMITTED BY APPLICABLE LAW, ETC.
On the date of the Closing your purchase of Notes shall (i) be
permitted by the laws and regulations of each jurisdiction to which you are
subject, (ii) not violate any applicable law or regulation and (iii) not
subject you to any tax, penalty or liability under or pursuant to any
applicable law or regulation, which law or regulation was not in effect on the
date hereof.
5.6. PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the
transactions contemplated by this Agreement and all documents and instruments
incident to such transactions shall be satisfactory to you and your counsel,
and you and your counsel
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shall have received all such counterpart originals or certified or other copies
of such documents as you or they may reasonably request.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANIES.
The Companies represent and warrant to you that:
6.1. ORGANIZATION; POWER AND AUTHORITY.
Each of the Companies is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and is duly qualified as a foreign corporation and is in good
standing in each jurisdiction in which such qualification is required by law,
other than those jurisdictions as to which the failure to be so qualified or in
good standing could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. Each of the Companies has the
corporate power and authority to own or hold under lease the properties it
purports to own or hold under lease, to transact the business it transacts and
proposes to transact, to execute and deliver this Agreement and the Other
Agreements and the Notes and to perform the provisions hereof and thereof.
6.2. AUTHORIZATION, ETC.
This Agreement and the Notes have been duly authorized by all
necessary corporate action on the part of the Companies, and this Agreement
constitutes, and upon execution and delivery thereof each Note will constitute,
a legal, valid and binding obligation of the Companies enforceable against the
Companies in accordance with its terms, except as such enforceability may be
limited by bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and to principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at
law).
6.3. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES.
(a) All of the outstanding shares of capital stock or
similar equity interests of each Subsidiary owned by either of the Companies
and their Subsidiaries have been validly issued, are fully paid and
nonassessable and are owned by either RGI or RGDC or another Subsidiary free
and clear of any Lien (except as otherwise disclosed by the Companies to you).
(b) Each Subsidiary is a corporation or other legal
entity duly organized, validly existing and in good standing under the laws of
its jurisdiction of organization, and is duly qualified as a foreign
corporation or other legal entity and is in good standing in each jurisdiction
in which such qualification is required by law, other than those jurisdictions
as to which the failure to be so qualified or in good standing could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Each such Subsidiary has the corporate or other power and
authority
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to own or hold under lease the properties it purports to own or hold under
lease and to transact the business it transacts and proposes to transact.
(c) No Subsidiary is a party to, or otherwise subject to
any legal restriction or any agreement (other than this Agreement, the Bank
Loan Documents and customary limitations imposed by corporate law statutes)
restricting the ability of such Subsidiary to pay dividends out of profits or
make any other similar distributions of profits to the Companies or any of
their Subsidiaries that owns outstanding shares of capital stock or similar
equity interests of such Subsidiary.
6.4. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.
The execution, delivery and performance by the Companies of this
Agreement and the Notes will not (i) contravene, result in any breach of, or
constitute a default under, or result in the creation of any Lien in respect of
any property of the Companies or any Subsidiary under, any indenture, mortgage,
deed of trust, loan, purchase or credit agreement, lease, corporate charter or
by-laws, or any other agreement or instrument to which the Companies or any
Subsidiary is bound or by which the Companies or any Subsidiary or any of their
respective properties may be bound or affected, (ii) conflict with or result in
a breach of any of the terms, conditions or provisions of any order, judgment,
decree, or ruling of any court, arbitrator or Governmental Authority applicable
to the Companies or any Subsidiary or (iii) violate any provision of any
statute or other rule or regulation of any Governmental Authority applicable to
the Companies or any Subsidiary.
6.5. GOVERNMENTAL AUTHORIZATIONS, ETC.
No consent, approval or authorization of, or registration, filing or
declaration with, any Governmental Authority is required in connection with the
execution, delivery or performance by the Companies of this Agreement or the
Notes.
6.6. LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS.
(a) Except as otherwise disclosed to you, there are no
actions, suits or proceedings pending or, to the knowledge of the Companies,
threatened against or affecting the Companies or any Subsidiary or any property
of the Companies or any Subsidiary in any court or before any arbitrator of any
kind or before or by any Governmental Authority that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) Neither of the Companies nor any Subsidiary is in
default under any term of any agreement or instrument to which it is a party or
by which it is bound, or any order, judgment, decree or ruling of any court,
arbitrator or Governmental Authority or is in violation of any applicable law,
ordinance, rule or regulation (including without limitation Environmental Laws)
of any Governmental Authority, which default or
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violation, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect.
6.7. TAXES.
The Companies and their Subsidiaries have filed all tax returns that
are required to have been filed in any jurisdiction, and have paid all taxes
shown to be due and payable on such returns and all other taxes and assessments
levied upon them or their properties, assets, income or franchises, to the
extent such taxes and assessments have become due and payable and before they
have become delinquent, except for any taxes and assessments (i) the amount of
which is not individually or in the aggregate Material or (ii) the amount,
applicability or validity of which is currently being contested in good faith
by appropriate proceedings and with respect to which RGI, RGDC or a Subsidiary,
as the case may be, has established adequate reserves in accordance with GAAP.
The Companies know of no basis for any other tax or assessment that could
reasonably be expected to have a Material Adverse Effect. The charges,
accruals and reserves on the books of the Companies and their Subsidiaries in
respect of Federal, state or other taxes for all fiscal periods are adequate.
The Federal income tax liabilities of the Companies and their Subsidiaries have
been determined by the Internal Revenue Service and paid for all fiscal years
up to and including the fiscal year ended January 31, 1994.
6.8. TITLE TO PROPERTY; LEASES.
The Companies and their Subsidiaries have good and sufficient title to
their respective properties that individually or in the aggregate are Material,
in each case free and clear of Liens prohibited by this Agreement. All leases
that individually or in the aggregate are Material are valid and subsisting and
are in full force and effect in all material respects.
6.9. LICENSES, PERMITS, ETC.
Except as otherwise disclosed to you,
(a) the Companies and their Subsidiaries own or possess
all licenses, permits, franchises, authorizations, patents,
copyrights, service marks, trademarks and trade names, or rights
thereto, that individually or in the aggregate are Material, without
known conflict with the rights of others;
(b) to the best knowledge of the Companies, no product of
the Companies infringes in any material respect any, license, permit,
franchise, authorization, patent, copyright, service mark, trademark,
trade name or other right owned by any other Person; and
(c) to the best knowledge of the Companies, there is no
Material violation by any Person of any right of the Companies or any
of their Subsidiaries with respect to any patent, copyright, service
mark, trademark,
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trade name or other right owned or used by the Companies or any of
their Subsidiaries.
6.10. EXISTING INDEBTEDNESS; FUTURE LIENS.
(a) Neither of the Companies nor any Subsidiary is in default and
no waiver of default is currently in effect, in the payment of any principal or
interest on any Indebtedness of the Companies or any Subsidiary and no event or
condition exists with respect to any Indebtedness of the Companies or any
Subsidiary that would permit (or that with notice or the lapse of time, or
both, would permit) one or more Persons to cause such Indebtedness to become
due and payable before its stated maturity or before its regularly scheduled
dates of payment.
(b) Neither of the Companies nor any Subsidiary has agreed or
consented to cause or permit in the future (upon the happening of a contingency
or otherwise) any of its property, whether now owned or hereafter acquired, to
be subject to a Lien other than a Permitted Lien.
7. REPRESENTATIONS OF THE PURCHASER.
7.1. PURCHASE FOR INVESTMENT.
You understand that the Notes have not been registered under the
Securities Act and may be transferred, assigned or resold only if registered
pursuant to the provisions of the Securities Act or if an exemption from
registration is available, except under circumstances where neither such
registration nor such an exemption is required by law. The Companies are not
and shall not be under any circumstances required to register the Notes.
7.2. RESIDENCE.
You affirm to the Companies that you are a resident of the state of
Texas, that you have no present intention to change your residence and that the
Notes will not be sold, transferred or assigned by you to a nonresident of
Texas for a period of at least nine months after the Closing.
7.3. INVESTOR SUITABILITY QUESTIONNAIRE.
You have completed a Investor Suitability Questionnaire in the form
required by the Companies, and you affirm as of the Closing that all
statements, representations and warranties and responses therein are true and
correct in all respects.
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8. INSPECTIONS
Upon the written request of (i) Holders of Notes in an aggregate
amount greater than or equal to 33 1/3% of the then outstanding principal
amount of the Notes; (ii) Holders of Notes in an aggregate amount greater than
or equal to 10% of the then outstanding principal amount of the Notes, if a
Default or Event of Default then exists; or (iii) a Significant Holder, and in
all cases subject to execution by the Holders and their representatives of
appropriate confidentiality agreements containing substantially the same
provisions as those set forth in Section 21 hereof, the Companies shall permit
the Holders or representatives of Holders of Notes to visit and inspect any of
the offices or Properties of the Companies or any Subsidiary, to examine all
their respective books of account, records, reports (including, without
limitation, Reserve Reports) and other papers, to make copies and extracts
therefrom, and to discuss their respective affairs, finances and accounts with
their respective officers and independent public accountants (and by this
provision the Companies authorize said accountants to discuss the affairs,
finances and accounts of the Companies and their Subsidiaries), all at such
times and as often as may be reasonably requested.
9. PREPAYMENT OF THE NOTES.
9.1. REQUIRED PREPAYMENTS.
The Companies will prepay a portion of the principal of the Notes in
the amounts and at the times as set forth in the Notes (or such lesser
principal amount as shall then be outstanding) at par and without payment of
any premium, provided that upon any partial prepayment of the Notes pursuant to
Section 9.2 the principal amount of each required prepayment of the Notes
becoming due under this Section 9.1 on and after the date of such prepayment
shall be reduced in the same proportion as the aggregate unpaid principal
amount of the Notes is reduced as a result of such prepayment.
9.2. OPTIONAL PREPAYMENTS.
The Companies may, at their option, upon notice as provided below,
prepay at any time all, or from time to time any part of, the Notes, in an
amount not less than $500,000.00 in the case of an optional partial prepayment,
at 100% of the principal amount so prepaid without payment of any premium or
prepayment penalty of any kind, provided that no such optional partial
prepayment will be allowed that would reduce the aggregate outstanding
principal balance of the Notes to less than $500,000.00. The Companies will
give each holder of Notes written notice of each optional prepayment under this
Section 9.2 not less than 10 days and not more than 60 days prior to the date
fixed for such prepayment. Each such notice shall specify such date, the
aggregate principal amount of the Notes to be prepaid on such date, the
principal amount of each Note held by such holder to be prepaid (determined in
accordance with Section 9.3), and the interest to be paid on the prepayment
date with respect to such principal amount being prepaid.
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9.3. ALLOCATION OF PARTIAL PREPAYMENTS.
In the case of each partial prepayment of the Notes under Subsection
9.2, the principal amount of the Notes to be prepaid shall be allocated among
all of the Notes at the time outstanding (other than any Notes owned directly
or indirectly by the Companies or any of their Subsidiaries or Affiliates) in
proportion, as nearly as practicable, to the respective unpaid principal
amounts thereof not theretofore called for prepayment.
9.4. MATURITY; SURRENDER, ETC.
In the case of each prepayment of Notes pursuant to this Section 9,
the principal amount to be prepaid shall mature and become due and payable on
the date fixed for such prepayment, together with interest on such principal
amount accrued to such date. From and after such date, unless the Companies
shall fail to pay such principal amount when so due and payable, together with
the interest, as aforesaid, interest on such principal amount shall cease to
accrue. Any Note paid or prepaid in full shall be surrendered to the Companies
and cancelled and shall not be reissued, and no Note shall be issued in lieu of
any prepaid principal amount of any Note.
9.5. PURCHASE OF NOTES.
Except as provided below, the Companies will not and will not permit
any Subsidiary or Affiliate to purchase, redeem, prepay or otherwise acquire,
directly or indirectly, any of the outstanding Notes except upon the payment or
prepayment of the Notes in accordance with the terms of this Section 9.
Notwithstanding the foregoing, the Companies may, with the consent of the
Required Holders, redeem or repurchase, without penalty or premium and without
the necessity of any consent by any Holder (other than the consent of the
Required Holders as provided above), any Note by paying to the Holder of such
Note the then outstanding principal balance of such Note plus all accrued and
unpaid interest so long as the aggregate principal amount of the Notes redeemed
or repurchased does not exceed $200,000.00. The Companies will promptly cancel
all Notes acquired by them or any Affiliate pursuant to any payment,
prepayment, redemption or purchase of Notes pursuant to any provision of this
Agreement and no Notes may be issued in substitution or exchange for any such
Notes.
10. AFFIRMATIVE COVENANTS.
The Companies covenant that so long as any of the Notes are
outstanding:
10.1. COMPLIANCE WITH LAW.
The Companies will and will cause each of their Subsidiaries to comply
with all laws, ordinances or governmental rules or regulations to which each of
them is subject, including, without limitation, Environmental Laws, and will
obtain and maintain in effect
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all licenses, certificates, permits, franchises and other governmental
authorizations necessary to the ownership of their respective properties or to
the conduct of their respective businesses, in each case to the extent
necessary to ensure that non-compliance with such laws, ordinances or
governmental rules or regulations or failures to obtain or maintain in effect
such licenses, certificates, permits, franchises and other governmental
authorizations could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
10.2. INSURANCE.
The Companies will and will cause each of their Subsidiaries to
maintain, with financially sound and reputable insurers, insurance with respect
to their respective properties and businesses against such casualties and
contingencies, of such types, on such terms and in such amounts (including
deductibles, co-insurance and self-insurance, if adequate reserves are
maintained with respect thereto) as is customary in the case of entities of
established reputations engaged in the same or a similar business and similarly
situated.
10.3. MAINTENANCE OF PROPERTIES.
The Companies will and will cause each of their Subsidiaries to
maintain and keep, or cause to be maintained and kept, their respective
properties in good repair, working order and condition (other than ordinary
wear and tear), so that the business carried on in connection therewith may be
properly conducted at all times, provided that this Section shall not prevent
the Companies or any Subsidiary from discontinuing the operation and the
maintenance of any of their properties if such discontinuance is desirable in
the conduct of their business and the Companies have concluded that such
discontinuance could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
10.4. PAYMENT OF TAXES AND CLAIMS.
The Companies will and will cause each of their Subsidiaries to file
all tax returns required to be filed in any jurisdiction and to pay and
discharge all taxes shown to be due and payable on such returns and all other
taxes, assessments, governmental charges, or levies imposed on them or any of
their properties, assets, income or franchises, to the extent such taxes and
assessments have become due and payable and before they have become delinquent
and all claims for which sums have become due and payable that have or might
become a Lien on properties or assets of the Companies or any Subsidiary,
provided that neither the Companies nor any Subsidiary need pay any such tax or
assessment or claims if (i) the amount, applicability or validity thereof is
contested by the Companies or such Subsidiary on a timely basis in good faith
and in appropriate proceedings, and the Companies or a Subsidiary has
established adequate reserves therefor in accordance with GAAP on the books of
one of the Companies or such Subsidiary or (ii) the nonpayment of all such
taxes and
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assessments in the aggregate could not reasonably be expected to have a
Material Adverse Effect.
10.5. CORPORATE EXISTENCE, ETC.
The Companies will at all times preserve and keep in full force and
effect their corporate existence. Subject to Section 11.2, the Companies will
at all times preserve and keep in full force and effect the corporate existence
of each of their Subsidiaries (unless merged into the Companies or a
Subsidiary) and all rights and franchises of the Companies and their
Subsidiaries unless, in the good faith judgment of the Companies, the
termination of or failure to preserve and keep in full force and effect such
corporate existence, right or franchise would not, individually or in the
aggregate, have a Material Adverse Effect.
10.6. FINANCIAL REPORTING.
The Companies will furnish to the Holders, for so long as the Notes
remain outstanding, (i) audited financial statements annually within one
hundred twenty (120) days following the end of their fiscal year, and (ii)
unaudited internally prepared financial statements quarterly within ninety (90)
days after the end of each fiscal quarter. Each financial statement shall
consist of a combined balance sheet at the end of the reporting period, a
combined statement of operations from the beginning of the fiscal year to the
end of the reporting period, and a combined statement of cash flows, together
with the notes thereto, all of which shall be prepared in accordance with GAAP.
The Companies may furnish to the Holders, in full satisfaction of their
reporting obligations pursuant to this paragraph 10.6, copies of RGI's Form
10-K or 10-Q for the referenced periods, or any successor or similar periodic
report, as filed with Securities and Exchange Commission.
10.7 COMPLIANCE CERTIFICATES.
The Companies shall deliver to the Holders annually within one hundred
twenty (120) days following the end of their fiscal year a compliance
certificate in the form attached hereto as Exhibit 10.7 executed by an officer
of the Companies certifying that the ratio of the Recourse Indebtedness to the
Qualified Reserves Value does not exceed 75%.
10.8 NOTICE OF DEFAULTS AND MATERIAL ADVERSE EFFECT.
The Companies shall promptly give notice to the Holders of any Event
of Default known to the Companies and of any default known to the Companies
with respect to the Senior Indebtedness that would permit the holder of the
Senior Indebtedness to cause the Senior Indebtedness to become due and payable
before its stated maturity or before its regularly scheduled dates of payment,
and notice of any event or circumstance that has a Material Adverse Effect
other than changes in the market prices of hydrocarbons.
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10.9. FURTHER ASSURANCES.
The Companies will promptly cure or cause to be cured any defects in
the creation and issuance of the Notes or in the execution and delivery of this
Agreement and all other documents incident to this Agreement. The Companies at
their expense will promptly execute and deliver to any Holder upon its request
all such further documents, agreements and instruments to comply with or
accomplish the covenants and agreements of the Companies in this Agreement and
in the Notes.
11. NEGATIVE COVENANTS.
The Companies covenant that so long as any of the Notes are
outstanding, without the prior written consent of the Required Holders:
11.1. TRANSACTIONS WITH AFFILIATES.
The Companies will not and will not permit any Subsidiary to enter
into directly or indirectly any transaction or Material group of related
transactions (including without limitation the purchase, lease, sale or
exchange of properties of any kind or the rendering of any service) with any
Affiliate (other than the Companies or another Subsidiary), except in the
ordinary course and upon fair and reasonable terms no less favorable to the
Companies or such Subsidiary than would be obtainable in a comparable
arm's-length transaction with a Person not an Affiliate.
11.2. MERGER, CONSOLIDATION, ETC.
The Companies, and each of them, shall not, and shall not permit or
cause any Subsidiary to, consolidate with or merge with any other corporation
or convey, transfer or lease substantially all of its assets in a single
transaction or series of transactions to any Person without the consent of the
Required Holders unless:
(a) the successor formed by such consolidation or the
survivor of such merger or the Person that acquires by conveyance,
transfer or lease substantially all of the assets of one of the
Companies or a Subsidiary as an entirety, as the case may be, shall be
a solvent corporation organized and existing under the laws of the
United States or any State thereof (including the District of
Columbia), and, if neither of the Companies is such corporation,(i)
such corporation shall have executed and delivered to each holder of
any Notes its assumption of the due and punctual performance and
observance of each covenant and condition of this Agreement and the
Notes and (ii) shall have caused to be delivered to each holder of any
Notes an opinion of nationally recognized independent counsel, or
other independent counsel reasonably satisfactory to the Required
Holders, to the effect that all agreements or instruments effecting
such assumption are enforceable in accordance with their terms and
comply with the terms hereof; and
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(b) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing.
No such conveyance, transfer or lease of substantially all of the assets of
either of the Companies or any Subsidiary shall have the effect of releasing
either of the Companies or any successor corporation that shall theretofore
have become such in the manner prescribed in this Section 11.2 from its
liability under this Agreement or the Notes.
11.3. LIENS.
The Companies will not create, incur, or suffer to exist any Lien on
any of their properties, except the following which shall be "Permitted Liens":
(i) Liens for taxes, assessments, or governmental charges or levies on their
properties, provided the same shall not at any time be delinquent or thereafter
can be paid without penalty or are being contested in good faith and by
appropriate proceedings and with respect to which reserves in conformity with
GAAP have been adequately provided for on the books of the Companies; (ii)
Liens imposed by law, such as carriers', warehouseman's and mechanic's liens
and other similar Liens arising in the ordinary course of their business which
secure payment of obligations not more than 60 days past due; (iii) Liens
arising out of pledges or deposits under workman's compensation laws,
unemployment insurance, old age pensions, or other Social Security or
retirement benefits, or similar legislation; (iv) Liens resulting from utility
easements, building restrictions, and such other encumbrances or charges
against real property as of are of a nature generally existing with respect to
properties of a similar character and which do not in any material way affect
the marketability of the same or interfere with the use thereof in the ordinary
course of business of the Companies; (v) Liens resulting from a lessor's
interest under financing leases; (vi) Liens existing on the date hereof and
disclosed on Exhibit "11.3"; (vii) first priority Liens given to secure any
Senior Indebtedness; (viii) Liens incurred by the Companies in connection with
or relating to the acquisition of personal property, provided (a) at the time
of such acquisition of property, no default exists; and (b) each such Lien
shall attach only to the personal property acquired in the transaction by which
such Lien was created or assumed.
11.4. CHANGE OF MANAGEMENT OR BUSINESS.
The Companies will not substantially change the present executive or
management personnel of the Companies, or change the general character of
business conducted by the Companies at the date hereof, or engage in any type
of business not reasonably related to their business as presently and normally
conducted.
11.5. DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS.
The Companies shall not:
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(a) Declare or pay any dividends, either in cash or
property, on any shares of their capital stock of any class (except
dividends or other distributions payable solely in shares of common
stock of the Companies);
(b) Directly or indirectly, or through any Subsidiary,
purchase, redeem or retire any shares of their capital stock of any
class or any warrants, rights or options to purchase or acquire any
shares of their capital stock; or
(c) Make any other payment or distribution, either
directly or indirectly or through any Subsidiary, in respect of any
class of their capital stock;
provided, however, that the Companies may purchase, redeem or otherwise acquire
(a) any Odd Lot, individually or in an offering for the purpose of redeeming
some or all of the Company's shares of common stock held in Odd Lots and (b)
Warrants, in accordance with the terms thereof.
11.6. RECOURSE INDEBTEDNESS.
The Companies will not allow the ratio of the Recourse Indebtedness to
the Qualified Reserves Value to exceed 75%. The Companies will not permit any
Subsidiary, other than Drilling, to incur, assume or otherwise be liable for
any Recourse Indebtedness.
12. EVENTS OF DEFAULT.
An "EVENT OF DEFAULT" shall exist if any of the following conditions
or events shall occur and be continuing:
(a) the Companies default in the payment of any principal
on any Note when the same becomes due and payable, whether at maturity
or at a date fixed for prepayment or by declaration or otherwise, for
more than five (5) Business Days after the same becomes due or
payable; or
(b) the Companies default in the payment of any interest
on any Note for more than five (5) Business Days after the same
becomes due and payable; or
(c) the Companies default in the performance of or
compliance with the obligations contained in Sections 8, 11.2, 11.3,
11.4, 11.5 or 11.6;
(d) the Companies default in the performance of or
compliance with any term contained herein (other than those referred
to in paragraphs (a), (b) and (c) of this Section 12) and such default
is not remedied within thirty (30) days; or
(e) any representation or warranty made in writing by or
on behalf of the Companies or by any officer of either of the
Companies in this Agreement or
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in any writing furnished in connection with the transactions
contemplated hereby proves to have been false or incorrect in any
material respect on the date as of which made; or
(f) (i) the Companies or any Subsidiary is in default (as
principal or as guarantor or other surety) in the payment of any
principal of or premium or interest on any Senior Indebtedness that is
outstanding in an aggregate principal amount of at least $200,000 or
on the Bank Indebtedness beyond any period of grace provided with
respect thereto, or(ii) the Companies or any Subsidiary is in default
in the performance of or compliance with any term of any evidence of
any Indebtedness in an aggregate outstanding principal amount of at
least $200,000 or of any mortgage, indenture or other agreement
relating thereto or any other condition exists, and as a consequence
of such default or condition such Indebtedness has become, or has been
declared (or one or more Persons are entitled to declare such
Indebtedness to be), due and payable before its stated maturity or
before its regularly scheduled dates of payment, or
(g) either of the Companies or any Subsidiary (i) is
generally not paying, or admits in writing its inability to pay, its
debts as they become due,(ii) files, or consents by answer or
otherwise to the filing against it of, a petition for relief or
reorganization or arrangement or any other petition in bankruptcy, for
liquidation or to take advantage of any bankruptcy, insolvency,
reorganization, moratorium or other similar law of any jurisdiction,
(iii) makes an assignment for the benefit of its creditors, (iv)
consents to the appointment of a custodian, receiver, trustee or other
officer with similar powers with respect to it or with respect to any
substantial part of its property, (v) is adjudicated as insolvent or
to be liquidated, or (vi) takes corporate action for the purpose of
any of the foregoing; or
(h) a court or governmental authority of competent
jurisdiction enters an order appointing, without consent by either of
the Companies or any of their Subsidiaries, a custodian, receiver,
trustee or other officer with similar powers with respect to either of
the Companies or a Subsidiary or with respect to any substantial part
of its property, or constituting an order for relief or approving a
petition for relief or reorganization or any other petition in
bankruptcy or for liquidation or to take advantage of any bankruptcy
or insolvency law of any jurisdiction, or ordering the dissolution,
winding-up or liquidation of either of the Companies or any of their
Subsidiaries, or any such petition shall be filed against either of
the Companies or any of their Subsidiaries and such petition shall not
be dismissed within 60 days; or
(i) a final judgment or judgments for the payment of
money aggregating in excess of $200,000 are rendered against either of
the Companies or their Subsidiaries and which judgments are not,
within 60 days after entry thereof, bonded, discharged or stayed
pending appeal, or are not discharged within 60 days after the
expiration of such stay; or
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(j) if (i) any Plan shall fail to satisfy the minimum
funding standards of ERISA or the Code for any plan year or part
thereof or a waiver of such standards or extension of any amortization
period is sought or granted under section 412 of the Code, (ii) a
notice of intent to terminate any Plan shall have been or is
reasonably expected to be filed with the PBGC or the PBGC shall have
instituted proceedings under ERISA section 4042 to terminate or
appoint a trustee to administer any Plan or the PBGC shall have
notified the Companies or any ERISA Affiliate that a Plan may become a
subject of any such proceedings, (iii) the aggregate "amount of
unfunded benefit liabilities" (within the meaning of section
4001(a)(18) of ERISA) under all Plans, determined in accordance with
Title IV of ERISA, shall exceed $200,000; (iv) either of the Companies
or any ERISA Affiliate shall have incurred or is reasonably expected
to incur any liability pursuant to Title I or IV of ERISA or the
penalty or excise tax provisions of the Code relating to employee
benefit plans,(v) either of the Companies or any ERISA Affiliate
withdraws from any Multi-employer Plan, or(vi) either of the Companies
or any Subsidiary establishes or amends any employee welfare benefit
plan that provides post-employment welfare benefits in a manner that
would increase the liability of either of the Companies or any
Subsidiary thereunder; and any such event or events described in
clauses(i) through (vi) above, either individually or together with
any other such event or events, could reasonably be expected to have a
Material Adverse Effect.
As used in Section 11 (j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE
WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms
in Section 3 of ERISA.
13. REMEDIES ON DEFAULT, ETC.
13.1. ACCELERATION.
(a) If an Event of Default with respect to the Companies described
in paragraph (g) or (h) of Section 12 (other than an Event of Default described
in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) to
the extent such Event of Default relates to clause (i) of paragraph (g)) has
occurred, all the Notes then outstanding shall automatically become immediately
due and payable.
(b) If any Event of Default described in paragraph (a) or (b) of
Section 12 has occurred and is continuing, any Holder or Holders of Notes at
the time outstanding affected by such Event of Default may at any time, at its
or their option, by notice or notices to the Companies, declare all the Notes
held by it or them to be immediately due and payable.
(c) If any other Event of Default has occurred and is continuing,
the Required Holders may at any time at their option, by notice or notices to
the Companies, declare all the Notes then outstanding to be immediately due and
payable.
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Upon any Notes becoming due and payable under this Section 13.1,
whether automatically or by declaration, such Notes will forthwith mature and
the entire unpaid principal amount of such Notes, plus all accrued and unpaid
interest thereon shall all be immediately due and payable, in each and every
case without presentment, demand, protest or further notice, all of which are
hereby waived.
13.2. OTHER REMEDIES.
If any Default or Event of Default has occurred and is continuing, and
irrespective of whether any Notes have become or have been declared immediately
due and payable under Section 13.1, the Holder of any Note at the time
outstanding may proceed to protect and enforce the rights of such Holder by an
action at law, suit in equity or other appropriate proceeding, whether for the
specific performance of any agreement contained herein or in any Note, or for
an injunction against a violation of any of the terms hereof or thereof, or in
aid of the exercise of any power granted hereby or thereby or by law or
otherwise.
13.3. RESCISSION.
At any time after any Notes have been declared due and payable
pursuant to clause (b) or (c) of Section 13.1, the Required Holders, by written
notice to the Companies, may rescind and annul any such declaration and its
consequences if (a) the Companies have paid all overdue interest on the Notes,
all principal on any Notes that is due and payable and is unpaid other than by
reason of such declaration, and all interest on such overdue principal and (to
the extent permitted by applicable law) any overdue interest in respect of the
Notes, at the Default Rate, (b) all Events of Default and Defaults, other than
non-payment of amounts that have become due solely by reason of such
declaration, have been cured or have been waived pursuant to Section 18, and
(c) no judgment or decree has been entered for the payment of any monies due
pursuant hereto or to the Notes. No rescission and annulment under this
Section 13.3 will extend to or affect any subsequent Event of Default or
Default or impair any right consequent thereon.
13.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC.
No course of dealing and no delay on the part of any holder of any
Note in exercising any right, power or remedy shall operate as a waiver thereof
or otherwise prejudice such Holder's rights, powers or remedies. No right,
power or remedy conferred by this Agreement or by any Note upon any Holder
thereof shall be exclusive of any other right, power or remedy referred to
herein or therein or now or hereafter available at law, in equity, by statute
or otherwise. Without limiting the obligations of the Companies under Section
16, the Companies will pay to the holder of each Note on demand such further
amount as shall be sufficient to cover all costs and expenses of such holder
incurred in any enforcement or collection under this Section 13, including,
without limitation, reasonable attorneys' fees, expenses and disbursements.
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14. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
14.1. REGISTRATION OF NOTES.
The Companies shall keep at their principal executive office a
register for the registration and registration of transfers of Notes. The name
and address of each Holder of one or more Notes, each transfer thereof and the
name and address of each transferee of one or more Notes shall be registered in
such register. Prior to due presentment for registration of transfer, the
Person in whose name any Note shall be registered shall be deemed and treated
as the owner and Holder thereof for all purposes hereof, and the Companies
shall not be affected by any notice or knowledge to the contrary.
14.2. TRANSFER AND EXCHANGE OF NOTES.
Upon surrender of any Note at the principal executive office of the
Companies for registration of transfer or exchange (and in the case of a
surrender for registration of transfer, duly endorsed or accompanied by a
written instrument of transfer duly executed by the registered Holder of such
Note or his attorney duly authorized in writing and accompanied by the address
for notices of each transferee of such Note or part thereof), the Companies
shall execute and deliver, at the Companies' expense (except as provided
below), one or more new Notes (as requested by the holder thereof) in exchange
therefor, in an aggregate principal amount equal to the unpaid principal amount
of the surrendered Note. Each such new Note shall be payable to such Person as
such Holder may request and shall be substantially in the form of Exhibit 1.
Each such new Note shall be dated and bear interest from the date to which
interest shall have been paid on the surrendered Note or dated the date of the
surrendered Note if no interest shall have been paid thereon. The Companies
may require payment of a sum sufficient to cover any stamp tax or governmental
charge imposed in respect of any such transfer of Notes. Notes shall not be
transferred in denominations of less than $50,000, provided that if necessary
to enable the registration of transfer by a holder of its entire holding of
Notes, one Note may be in a denomination of less than $50,000. Any transferee,
by its acceptance of a Note registered in its name (or the name of its
nominee), shall be deemed to have made the representations set forth in Section
7.
14.3. REPLACEMENT OF NOTES.
Upon receipt by the Companies of evidence reasonably satisfactory to
them of the ownership of and the loss, theft, destruction or mutilation of any
Note, and
(a) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to it, or
(b) in the case of mutilation, upon surrender and
cancellation thereof,
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<PAGE> 26
the Companies at their own expense shall execute and deliver, in lieu
thereof, a new Note, dated and bearing interest from the date to which
interest shall have been paid on such lost, stolen, destroyed or
mutilated Note or dated the date of such lost, stolen, destroyed or
mutilated Note if no interest shall have been paid thereon.
15. PAYMENTS ON NOTES.
15.1. PLACE OF PAYMENT.
Subject to Section 15.2, payments of principal, and interest becoming
due and payable on the Notes shall be made in San Antonio, Texas at the
principal office of the Companies in such jurisdiction. The Companies may at
any time, by notice to each holder of a Note, change the place of payment of
the Notes so long as such place of payment shall be either the principal office
of the Companies in such jurisdiction or the principal office of a bank or
trust company in such jurisdiction.
15.2. HOME OFFICE PAYMENT.
So long as you or your nominee shall be the Holder of any Note, and
notwithstanding anything contained in Section 15.1 or in such Note to the
contrary, the Companies will pay all sums becoming due on such Note for
principal and interest by the method and at the address specified for such
purpose below your name in Schedule A, or by such other method or at such other
address as you shall have from time to time specified to the Companies in
writing for such purpose, without the presentation or surrender of such Note or
the making of any notation thereon, except that upon written request of the
Companies made concurrently with or reasonably promptly after payment or
prepayment in full of any Note, you shall surrender such Note for cancellation,
reasonably promptly after any such request, to the Companies at their principal
executive office or at the place of payment most recently designated by the
Companies pursuant to Section 15.1. Prior to any sale or other disposition of
any Note held by you or your nominee you will, at your election, either endorse
thereon the amount of principal paid thereon and the last date to which
interest has been paid thereon or surrender such Note to the Companies in
exchange for a new Note or Notes pursuant to Section 14.2.
16. EXPENSES, ETC.
16.1. TRANSACTION EXPENSES.
The Companies will pay all costs and expenses (including reasonable
attorneys' fees of a special counsel and, if reasonably required, local or
other counsel) incurred by you and each other purchaser or Holder of a Note in
connection with any amendments, waivers or consents under or in respect of this
Agreement or the Notes (whether or not such amendment, waiver or consent
becomes effective), including, without limitation: (a) the costs and expenses
incurred in enforcing or defending (or determining whether or how to enforce or
defend) any rights under this Agreement or
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<PAGE> 27
the Notes or in responding to any subpoena or other legal process or informal
investigative demand issued in connection with this Agreement or the Notes, or
by reason of being a Holder of any Note, and (b) the costs and expenses,
including financial advisors' fees, incurred in connection with the insolvency
or bankruptcy of either of the Companies or any Subsidiary or in connection
with any work-out or restructuring of the transactions contemplated hereby and
by the Notes. The Companies will pay, and will save you and each other Holder
of a Note harmless from, all claims in respect of any fees, costs or expenses
if any, of brokers and finders (other than those retained by you).
16.2. SURVIVAL.
The obligations of the Companies under this Section 16 will survive
the payment or transfer of any Note, the enforcement, amendment or waiver of
any provision of this Agreement or the Notes, and the termination of this
Agreement.
17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
AGREEMENT.
All representations and warranties contained herein shall survive the
execution and delivery of this Agreement and the Notes, the purchase or
transfer by you of any Note or portion thereof or interest therein and the
payment of any Note, and may be relied upon by any subsequent Holder of a Note,
regardless of any investigation made at any time by or on behalf of you or any
other Holder of a Note. All statements contained in any certificate or other
instrument delivered by or on behalf of the Companies pursuant to this
Agreement shall be deemed representations and warranties of the Companies under
this Agreement. Subject to the preceding sentence, this Agreement and the
Notes embody the entire agreement and understanding between you and the
Companies and supersede all prior agreements and understandings relating to the
subject matter hereof.
18. AMENDMENT AND WAIVER.
18.1. REQUIREMENTS.
This Agreement and the Notes may be amended, and the observance of any
term hereof or of the Notes may be waived (either retroactively or
prospectively), with (and only with) the written consent of the Companies and
the Required Holders, except that (a) no amendment or waiver of any of the
provisions of Section 1, 2, 3, 5, 6, 7 or 22 hereof, or any defined term (as it
is used therein), will be effective as to you unless consented to by you in
writing, and (b) no such amendment or waiver may, without the written consent
of the Holder of each Note at the time outstanding affected thereby, (i)
subject to the provisions of Section 13 relating to acceleration or rescission,
change the amount or time of any prepayment or payment of principal of, or
reduce the rate or change the time of payment or method of computation of
interest on the Notes, (ii) change the percentage of the principal amount of
the Notes the Holders of which are
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required to consent to any such amendment or waiver, or (iii) amend any of
Sections 9, 12(a), 12 (b), 13, 18 or 21.
18.2. SOLICITATION OF HOLDERS OF NOTES.
(a) Solicitation. The Companies will provide each Holder of the
Notes (irrespective of the amount of Notes then owned by it) with sufficient
information, sufficiently far in advance of the date a decision is required, to
enable such Holder to make a reasonably informed and considered decision with
respect to any proposed amendment, waiver or consent in respect of any of the
provisions hereof or of the Notes. The Companies will deliver executed or true
and correct copies of each amendment, waiver or consent effected pursuant to
the provisions of this Section 18 to each Holder of outstanding Notes promptly
following the date on which it is executed and delivered by, or receives the
consent or approval of, the requisite holders of Notes.
(b) Payment. The Companies will not directly or indirectly pay or
cause to be paid any remuneration, whether by way of supplemental or
additional interest, fee or otherwise, or grant any security, to any Holder of
Notes as consideration for or as an inducement to the entering into by any
Holder of Notes or any waiver or amendment of any of the terms and provisions
hereof unless such remuneration is concurrently paid, or security is
concurrently granted, on the same terms, ratably to each Holder of Notes then
outstanding even if such Holder did not consent to such waiver or amendment.
18.3. BINDING EFFECT, ETC.
Any amendment or waiver consented to as provided in this Section 18
applies equally to all Holders of Notes and is binding upon them and upon each
future Holder of any Note and upon the Companies without regard to whether such
Note has been marked to indicate such amendment or waiver. No such amendment
or waiver will extend to or affect any obligation, covenant, agreement, Default
or Event of Default not expressly amended or waived or impair any right
consequent thereon. No course of dealing between the Companies and the Holder
of any Note nor any delay in exercising any rights hereunder or under any Note
shall operate as a waiver of any rights of any Holder of such Note. As used
herein, the term "this Agreement" and references thereto shall mean this
Agreement as it may from time to time be amended or supplemented.
18.4. NOTES HELD BY COMPANIES, ETC.
Solely for the purpose of determining whether the Holders of the
requisite percentage of the aggregate principal amount of Notes then
outstanding approved or consented to any amendment, waiver or consent to be
given under this Agreement or the Notes, or have directed the taking of any
action provided herein or in the Notes to be taken upon the direction of the
Holders of a specified percentage of the aggregate principal amount of Notes
then outstanding, Notes directly or indirectly owned by the Companies or any of
their Affiliates shall be deemed not to be outstanding.
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<PAGE> 29
19. NOTICES.
All notices and communications provided for hereunder shall be in
writing and sent (a) by telecopy if the sender on the same day sends a
confirming copy of such notice by a recognized overnight delivery service
(charges prepaid), or (b) by registered or certified mail with return receipt
requested (postage prepaid), or (c) by a recognized overnight delivery service
(with charges prepaid). Any such notice must be sent:
(i) if to you or your nominee, to you or it at the
address specified for such communications in Schedule A, or at such
other address as you or it shall have specified to the Companies in
writing,
(ii) if to any other Holder of any Note, to such Holder at
such address as such other Holder shall have specified to the
Companies in writing, or
(iii) if to the Companies, to the Companies at their
address set forth at the beginning hereof to the attention of Guy Bob
Buschman, their President, or at such other address as the Companies
shall have specified to the Holder of each Note in writing.
Notices under this Section 19 will be deemed given only when actually received.
20. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation,(a) consents, waivers and modifications that may hereafter be
executed, (b) documents received by you at the Closing (except the Notes
themselves), and (c) financial statements, certificates and other information
previously or hereafter furnished to you, may be reproduced by you by any
photographic, photostatic, microfilm, microcard, miniature photographic or
other similar process and you may destroy any original document so reproduced.
The Companies agree and stipulate that, to the extent permitted by applicable
law, any such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made by you
in the regular course of business) and any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
This Section 20 shall not prohibit the Companies or any other Holder of Notes
from contesting any such reproduction to the same extent that it could contest
the original, or from introducing evidence to demonstrate the inaccuracy of any
such reproduction.
21. CONFIDENTIAL INFORMATION.
For the purposes of this Section 21, "Confidential Information" means
information delivered to you by or on behalf of the Companies or any Subsidiary
in connection with the transactions contemplated by or otherwise pursuant to
this
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Agreement that is proprietary in nature and that was clearly marked or labeled
or otherwise adequately identified when received by you as being confidential
information of the Companies or such Subsidiary, provided that such term does
not include information that (a) was publicly known or otherwise known to you
prior to the time of such disclosure, (b) subsequently becomes publicly known
through no act or omission by you or any person acting on your behalf, (c)
otherwise becomes known to you other than through disclosure by the Companies
or any Subsidiary or (d) constitutes financial statements delivered to you
under Section 8 that are otherwise publicly available. You agree to maintain
the confidentiality of such Confidential Information; provided that you may
deliver or disclose Confidential Information to (i) your directors, officers,
employees, agents, attorneys and affiliates (to the extent such disclosure
reasonably relates to the administration of the investment represented by your
Notes), (ii) your financial advisors and other professional advisors who agree
to hold confidential the Confidential Information substantially in accordance
with the terms of this Section 21, (iii) any other holder of any Note, (iv) any
Institutional Investor to which you sell or offer to sell such Note or any part
thereof or any participation therein (if such Person has agreed in writing
prior to its receipt of such Confidential Information to be bound by the
provisions of this Section 21), (v) any Person from which you offer to purchase
any security of the Companies (if such Person has agreed in writing prior to
its receipt of such Confidential Information to be bound by the provisions of
this Section 21), (vi) any federal or state regulatory authority having
jurisdiction over you, or (vii) any other Person to which such delivery or
disclosure may be necessary or appropriate (w) to effect compliance with any
law, rule, regulation or order applicable to you, (x) in response to any
subpoena or other legal process, (y) in connection with any litigation to which
you are a party or (z) if an Event of Default has occurred and is continuing,
to the extent you may reasonably determine such delivery and disclosure to be
necessary or appropriate in the enforcement or for the protection of the rights
and remedies under your Notes and this Agreement. You acknowledge that such
Confidential Information may include material information that has not been
publicly disclosed by the Companies, that you are aware of the proscriptions of
the Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder with regard to the purchase or sale of securities while in
possession of material nonpublic information, and that you will not purchase or
sell securities of the Companies while in possession of material, nonpublic
information, other than to Persons possessing such information. Each Holder of
a Note, by its acceptance of a Note, will be deemed to have agreed to be bound
by and to be entitled to the benefits of this Section 21 as though it were a
party to this Agreement. On reasonable request by the Companies in connection
with the delivery to any Holder of a Note of any Confidential Information
required to be delivered to such Holder under this Agreement or requested by
such Holder (other than a Holder that is a party to this Agreement or its
nominee), such Holder will enter into an agreement with the Companies embodying
the provisions of this Section 21.
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22. SUBSTITUTION OF PURCHASER.
You shall have the right to substitute any one of your Affiliates as
the purchaser of the Notes that you have agreed to purchase hereunder, by
written notice to the Companies, which notice shall be signed by both you and
such Affiliate, shall contain such Affiliate's agreement to be bound by this
Agreement and shall contain a confirmation by such Affiliate of the accuracy
with respect to it of the representations set forth in Section 7. Upon receipt
of such notice, wherever the word "you" is used in this Agreement (other than
in this Section 22), such word shall be deemed to refer to such Affiliate in
lieu of you. In the event that such Affiliate is so substituted as a purchaser
hereunder and such Affiliate thereafter transfers to you all of the Notes then
held by such Affiliate, upon receipt by the Companies of notice of such
transfer, wherever the word "you" is used in this Agreement (other than in this
Section 22), such word shall no longer be deemed to refer to such Affiliate,
but shall refer to you, and you shall have all the rights of an original holder
of the Notes under this Agreement.
23. MISCELLANEOUS.
23.1. SUCCESSORS AND ASSIGNS.
All covenants and other agreements contained in this Agreement by or
on behalf of any of the parties hereto bind and inure to the benefit of their
respective successors and assigns (including, without limitation, any
subsequent Holder of a Note), whether so expressed or not.
23.2. PAYMENTS DUE ON NON-BUSINESS DAYS.
Anything in this Agreement or the Notes to the contrary
notwithstanding, any payment of principal of or interest on any Note that is
due on a date other than a Business Day shall be made on the next succeeding
Business Day without including the additional days elapsed in the computation
of the interest payable on such next succeeding Business Day.
23.3. SEVERABILITY.
Any provision of this Agreement that is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall (to the full extent permitted by law) not invalidate or
render unenforceable such provision in any other jurisdiction.
23.4. CONSTRUCTION.
Each covenant contained herein shall be construed (absent express
provision to the contrary) as being independent of each other covenant
contained herein, so that compliance with any one covenant shall not (absent
such an express contrary provision) be deemed to excuse compliance with any
other covenant. Where any
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provision herein refers to action to be taken by any Person, or which such
Person is prohibited from taking, such provision shall be applicable whether
such action is taken directly or indirectly by such Person.
23.5. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall be an original but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.
23.6. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the law of the State of Texas
excluding choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.
* * * * *
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If you are in agreement with the foregoing, please sign the form of
agreement on the accompanying counterpart of this Agreement and return it to
the Companies, whereupon the foregoing shall become a binding agreement between
you and the Companies.
Very truly yours,
RIO GRANDE, INC.
By
---------------------------------
Guy Bob Buschman, President
RIO GRANDE DRILLING COMPANY
By
---------------------------------
Guy Bob Buschman, President
28
<PAGE> 1
No. of Shares: __________________
RIO GRANDE, INC.
[FORM OF COMMON STOCK PURCHASE WARRANT]
THIS WARRANT AND THE SHARES PURCHASABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES (REASONABLY SATISFACTORY TO THE
COMPANY AND ITS COUNSEL), OR AN OPINION OF THE COMPANY'S COUNSEL, STATING THAT
SUCH SALE, TRANSFER, OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
FOR VALUE RECEIVED, _______________________ (the "Holder") is entitled
to purchase from Rio Grande, Inc., a Delaware corporation, (the "Company"),
subject to the terms and conditions herein set forth, at any time before 5:00
p.m. San Antonio, Texas time on September 15, 2002, or the first business day
thereafter if such date is not a business day or such other date as may be
established in accordance with the terms of this Warrant (September 15, 2002 or
such other date being referred to herein as the "Expiration Date"), _________
of the shares of duly authorized, validly issued, fully paid and nonassessable
Common Stock of the Company, $____ par value (the "Warrant Stock"), subject to
adjustment of the number or kind of shares constituting Warrant Stock as
hereinafter provided. The Holder is entitled to purchase the Warrant Stock for
$.40 per share, subject to adjustment as hereinafter provided, (the "Exercise
Price") and is entitled also to exercise the other appurtenant rights, powers,
and privileges hereinafter set forth.
Article 1 Definitions.
For all purposes of this Warrant, unless the context otherwise
requires, the following terms have the following meanings:
1.1 "Affiliate" shall mean, with respect to any Person, any other
Person that directly or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with the Person specified.
<PAGE> 2
1.2 "Anti-dilutive Incentive Options Shares" shall mean shares of
Common Stock issued upon proper exercise of options outstanding under [Company
Incentive Plans] on [reference date].
1.3 "Common Stock" means the Company's authorized common stock,
par value $.01 per share.
1.4 "Company" means Rio Grande, Inc., a corporation organized and
existing under the laws of the State of Delaware, and any successor
corporation.
1.5 "Exercise Price" means the exercise price for the Warrant
Stock established in accordance with Article 4.
1.6 "Existing Stock" shall have the meaning ascribed to that term
in Section 4.4 hereof.
1.7 "Expiration Date" means September 15, 2002, or the first
business day thereafter if such date is not a business day, or such other date
as may be established in accordance with the terms of this warrant.
1.8 "Fair Market Value" in reference to the Common Stock means, in
the event such stock is traded on a national securities exchange or in the over
the counter market as reported by the National Association of Securities
Dealers Automated Quotation System (stock being so traded or reported being
referred to herein as "Publicly Traded"), the average closing bid price of such
stock on the ten (10) trading days immediately preceding the date as of which
such value is to be determined, and in the event the Common Stock is not so
traded or reported, the value of such stock on an going-concern basis, as
determined by the Board of Directors of the Company or an appraiser mutually
acceptable to the Holder and the Company, the determination of such appraiser
to be final in the absence of fraud or bad faith. In the event the Common
Stock is not Publicly Traded, Fair Market Value in reference to a share of the
Common Stock shall mean the Fair Market Value of the equity of the Company
allocable to the issued Common Stock divided by the number of shares of Common
Stock that would have been outstanding had (i) this Warrant, (ii) all options
to purchase Common Stock, and (iii) all securities convertible into Common
Stock at a price per share no greater than Fair Market Value, been exercised or
converted on the date as of which value is to be determined (with appropriate
adjustment by appraisal to reflect the proceeds of the assumed exercise or
conversion of outstanding securities). As applicable to Warrants, Fair Market
Value shall mean the Fair Market Value of the Common Stock subject to such
Warrants minus the Exercise Price of such Warrants established in accordance
with Article 4.
1.9 "Holder" means [Initial Note Purchaser], and its successors or
assigns as Holder of this Warrant.
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<PAGE> 3
1.10 "Note" or "Notes" shall mean the 11.5% Subordinated Notes
issued and sold by the Company in accordance with the terms of that certain
Note Purchase Agreement dated as of September 15, 1995.
1.11 "Person" means any natural person, sole proprietorship,
general partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, private or governmental
entity, or party.
1.12 "Publicly Traded" has the meaning ascribed in Section 1.7.
1.13 "Warrant" means this Warrant and any Warrants issued on or in
substitution for this Warrant including warrants issued in exchange for this
Warrant pursuant to Article 2 hereof.
1.14 "Warrant Stock" means the shares of Common Stock or other
securities acquired or to be acquired upon the exercise of the Warrant.
Article 2 Exercise of Warrant
2.1 Partial Exercise. This Warrant may be exercised in whole or
in part. In the event of a partial exercise, the Company shall execute and
deliver to the Holder (or to such other Person as shall be designated in the
Subscription Notice) a new Warrant covering the unexercised portion of the
Warrant Stock.
2.2 Procedure. To exercise this Warrant, the Holder shall deliver
to the Company at its principal office:
(a) a written notice, in substantially the form of the
Subscription Notice appearing at the end of this Warrant, of the Holder's
election to exercise this Warrant;
(b) a check payable to the Company in the amount of the
Exercise Price; and
(c) this Warrant.
The Company shall as promptly as practicable, an in any event within
twenty (20) days after receipt of such notice, execute and deliver or cause to
be executed and delivered one or more certificates representing the aggregate
number of shares of Warrant Stock to which the Holder is entitled and, if this
Warrant is exercised in part, a new Warrant as set forth in Section 2.1.
2.3 Name and Effective Date. The stock certificate(s) so
delivered shall be issued in the name of the Holder or such other name as shall
be designated in the notice specified in Section 2.2. Such certificate(s)
shall be deemed to have been issued and such Holder or any other Person so
designated to be named therein shall be deemed for all purposes to have
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become a Holder of record of such shares as of the date the Company actually
receives the notice specified in Section 2.2.
2.4 Expenses. The Company shall pay all expenses, taxes, and other
charges payable in connection with the preparation, issue, and delivery of such
stock certificate(s), except that, in case such stock certificate(s) shall be
registered in a name or names other than the name of the Holder of this
Warrant, stock transfer taxes that are payable upon the issuance of such stock
certificate(s) shall be paid by the Holder hereof.
2.5 Legal Requirements. The Warrant Stock issued upon the
exercise of this Warrant shall be validly issued, fully paid, and
nonassessable.
2.6 No Fractional Shares. The Company shall not issue a stock
certificate representing any fraction of a share upon partial exercise by a
Holder of such Holder's rights hereunder.
2.7 Registration. The Company will keep at is principal office a
register in the Company that will provide for the registration and transfer of
the Warrant.
Article 3 Transfer
3.1 Permitted Transfers. This Warrant shall be freely
transferable, in whole or in part to any Affiliate of the Holder, subject to
the limitations specified in Section 3.2 herein. This Warrant shall not be
transferable to any other Person except in connection with the transfer or
assignment, in whole or in part, of the Note or Notes registered in the name of
the Holder, and subject to the limitations specified in Section 3.2 herein.
3.2. Securities Laws. Neither this Warrant nor the Warrant Stock
shall be transferable unless:
(a) either a registration statement under the Securities Act of
1933 (the "1933 Act") is in effect covering the Warrant or the Warrant Stock,
as the case may be, or the Company has received an opinion from Company counsel
to the effect that such registration is not required, or the Holder has
furnished to the Company an opinion of Holder's counsel, which counsel shall be
reasonably satisfactory to the Company, to the effect that such registration is
not required; and
(b) the transfer complies with any applicable state securities
laws.
In the event Holder seeks an opinion as to transfer without
registration from Holder's counsel, the Company shall provide such factual
information to Holder's counsel as Holder's counsel may reasonably request for
the purpose of rendering such opinion and such counsel may rely on the accuracy
and
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completeness of such information in rendering such opinion. Upon issuance at a
time when the Stock of the Company is not publicly traded, the Warrant Stock
will bear a legend describing the restrictions on transfer set forth in this
Section 3.2.
3.3 Procedure. (a) The holder of this Warrant, or of any warrant
substituted therefor pursuant to the provisions of this Section 3.3, may,
subject to the limitations set forth in Section 3.1, in person or by duly
authorized attorney, surrender the same for exchange at such principal office
of the Company and, within a reasonable time thereafter and without expense
(other than transfer taxes, if any) receive in exchange therefor one or more
duly executed warrants each evidencing the right to receive one share of Common
Stock of the Company or such other number of shares as may be designated by the
holder at the time of surrender.
The Company and any agent of the Company may treat the person in whose
name a warrant is registered as the owner of the warrant for all purposes
hereunder and neither the Company nor such agent shall be affected by notice to
the contrary. The Company covenants and agrees to take and cause to be taken
all action necessary to effect such registrations, transfers and exchanges.
(b) The Holder may transfer this Warrant on the books of the
Company by surrendering to the Company:
(i) this Warrant;
(ii) a written assignment of this Warrant, in substantially the
form of the Assignment appearing at the end of this Warrant, naming the
assignee duly executed by the Holder; and
(iii) funds sufficient to pay any stock transfer taxes payable upon
the making of such transfer.
The Company shall thereupon execute and deliver a new Warrant in the
name of the assignee specified in such instrument of assignment, and if this
Warrant is transferred in part, the Company shall also execute and deliver in
the name of the Holder a new Warrant covering the untransferred portion of the
Warrant. Upon issuance of the new Warrant or Warrants, the Warrant surrendered
for transfer shall be canceled by the Company.
3.4 Expenses. The Company shall pay all expenses, taxes (other
than transfer taxes), and other charges payable in connection with the
preparation issue, and delivery of any new Warrant under this Article 3.
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Article 4 Exercise Price and Adjustments
4.1 Exercise Price. The initial Warrant Price for the Warrant
Stock shall be $.40 per share.
4.2 Stock Splits, Stock Dividends and Reverse Stock Splits. If at
any time the Company shall subdivide (by reclassification, by the issuance of a
Common Stock dividend on Common Stock, or otherwise) its outstanding shares of
Common Stock into a greater number, the number of shares of Common Stock that
may be purchased hereunder shall be increased proportionately and the Exercise
Price per share of Common Stock shall be decreased proportionately as of the
effective date of such action. The effective date of a stock dividend shall be
the date on which the dividend is declared. Issuance of a Common Stock
dividend shall be treated as a subdivision of the whole number of shares of
Common Stock outstanding immediately before the record date for such dividend
into a number of shares equal to such whole number of shares so outstanding
plus the number of shares issued as a stock dividend. If at any time the
Company shall combine (by reclassification or otherwise) its outstanding number
of shares of Common Stock into a lesser number, the number of shares of Common
Stock that may be purchased hereunder shall be reduced proportionately and the
Exercise Price per share of Common Stock shall be increased proportionately as
of the effective date of such action.
4.3 Dividends Other than in Common Stock or Cash; Other
Distributions. If at any time while this Warrant is outstanding the Company
shall declare or make for the benefit of all holders of its Common Stock any
dividend or distribution upon its Common Stock other than ordinary cash
dividends, or distributions to which Section 4.2 or 4.4 apply (whether payable
in stock of any class or classes other than its Common Stock or payable in
evidences of indebtedness or assets or in rights, options, or warrants or
convertible or exchangeable securities), then in each such case the number of
shares of Common Stock that may be purchased hereunder shall be determined by
multiplying the number of shares of Common Stock theretofore comprising the
Warrant Stock by a fraction, the numerator of which shall be the Fair Market
Value per share of the Common Stock determined in accordance with Section 1.6
as of the record date for such dividend or distribution and the denominator of
which shall be the Fair Market Value per share, as so determined, less the fair
value as of such date, as reasonably determined by the Board of Directors of
the Company, of the portion of such dividend or distribution applicable to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of distribution
retroactive to the record date for the determination of shareholders entitled
to receive the distribution. In the event the Company determines that the
adjustment provided for above is unduly difficult or expensive to effect
because of difficulties of valuation, the Company may, at its option and as an
alternative to the adjustment, distribute and place in escrow for the Holder
that portion of
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such dividend or distribution which the Holder would have received had it
exercised this Warrant before the declaration of the dividend or the making of
the distribution. Upon exercise of this Warrant, the Holder shall receive its
portion of the dividend, distribution, or rights.
4.4 Issuance on Common Stock of Options, Warrants or Rights. If
at any time while this Warrant is outstanding the Company shall grant to all
holders of its Common Stock any rights, options, or warrants (referred to in
this Section 4.4 as "Rights") entitling them to purchase shares of Common Stock
at a price per share that is lower at the record date for such issuance than
the Fair Market Value of the Common Stock on such date determined in accordance
with Section 1.6, the number of Shares of Common Stock that may be purchased
hereunder shall be determined by multiplying the number of Shares of Common
Stock theretofore comprising the Warrant Stock by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding or subject
to issuance at prices at or below the Fair Market Value of the Common Stock on
such record date (the "Existing Stock") plus the number of shares subject to
issuance pursuant to the Rights and of which the denominator shall be the
number of shares of Existing Stock plus the number of shares which the
aggregate offering price of the total number of shares of Common Stock so
offered would purchase at the then current Fair Market Value per share of
Common Stock. Such adjustment shall be made whenever such rights, options, or
warrants or issued and shall become effective retroactively immediately after
the record date for the determination of shareholders entitled to receive such
rights, options or warrants. In the event the Company determines that the
adjustment provided for above in this Section is unduly difficult or expensive
to effect because of difficulties of valuation, the Company may, at its option
and as an alternative to the adjustment, grant and convey to the Holder of the
Rights which the Holder would have received had it exercised this Warrant
before issuance of the Rights.
On the expiration or termination of any of the Rights, the number of
shares of Common Stock then purchasable upon the exercise of each Warrant and
the exercise price then in effect shall be subject to readjustment and the
number of shares of Common Stock subject to the Warrants shall forthwith be
decreased and the exercise price under the Warrants shall forthwith be
increased to that which would have been in effect at the time of such
expiration or termination had such Right, to the extent outstanding immediately
prior to such expiration or termination, never had been issued.
4.5 Exercise of Management Options. If at any time while this
Warrant is outstanding any Anti-dilutive Option Shares are properly issued,
then in each case the number of shares of Common Stock purchasable hereunder
shall be increased by the product of each Warrant complete with the number
equal to (a) [percentage of equity issued in all Warrants multiplied by (b)
[percentage of all
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Warrants represented by this Warrant] multiplied by the number of Anti-dilutive
Incentive Option Shares so issued.
4.6 Anti-dilution Adjustment in Exercise Price.
(a) In case the Company shall at any time after the date
of this Warrant issue for consideration any shares of Common Stock or any
securities or other rights convertible into Common Stock or any other equity
security entitled to participate with the Common Stock in the earnings or
assets of the Company (but not any equity security entitled to a fixed
preference in such earnings or assets rather than a participation therein)
(such other securities or rights herein called "Common Stock Equivalents") for
a price per share less than the Exercise Price in effect immediately preceding
the issuance of such additional Common Stock or Common Stock Equivalents, the
Exercise Price in effect immediately prior to the issuance of such additional
shares of Common Stock Equivalents shall forthwith be reduced to a price
determined by:
(i) An amount equal to the sum of
(x) the total number of shares of Common Stock
deemed to be outstanding immediately prior to such
issuance multiplied by the Exercise Price in effect
immediately prior to such issuance,
(y) the total number of additional shares of
Common Stock so sold multiplied by the price per
share, if any, for which such shares are sold, and
(z) the aggregate amount paid for the Common
Stock Equivalents so sold plus the aggregate amount
subsequently required to be paid under the terms of
such Common Stock Equivalents to acquire additional
shares of Common Stock.
(ii) The total number of shares of Common Stock deemed to
be outstanding immediately after the issuance of such additional shares of
Common Stock or Common Stock Equivalents.
(b) For purposes of clauses (i) and (ii) of Subsection
4.6(a), the total number of shares of Common Stock deemed to be outstanding
shall include that number of shares of Common Stock actually outstanding plus
that number of shares of Common Stock then issuable under this Warrant plus
that number of shares of Common Stock then issuable pursuant to terms of the
Common Stock Equivalents at a price per share, computed pursuant to Subsection
4.6(d), that is less than the Exercise Price.
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(c) For purposes of this Section 4.6, the price per share
for which additional shares of Common Stock and Common Stock Equivalents are
issued or sold shall, to the extent such price consists of cash, be computed on
the basis of the amount of cash received by the Company (and in the case of
Common Stock Equivalents, such amount plus the amount of cash required to be
paid to acquire additional shares of Common Stock), after deduction of any
expenses payable by the Company and any underwriting or similar commissions,
compensations or concessions paid or allowed by the Company in connection with
such issue or sale. To the extent that the consideration for such additional
shares and Common Stock Equivalents is property or services other than cash,
the amount thereof shall be the value received by or required to be paid to the
Company as fixed in good faith by the Board of Directors of the Company
(d) The Exercise Price shall never be increased pursuant
to this Section 4.6 except as provide in this Subsection 4.6(d). Upon the
expiration unexercised of the entitlement to receive shares of Common Stock
under any Common Stock Equivalents the issuance of which resulted in a an
adjustment to the Exercise Price under this Section 4.6, then the Exercise
Price shall thereupon be increased by the amount that the issuance or sale of
such Common Stock Equivalent caused the Exercise Price to be decreased (subject
to any applicable adjustment thereunder) and thereafter adjustments will be
made to the Exercise Price in accordance with this Section 4.6.
4.7 Reorganization and Reclassification. In case of any capital
reorganization or any reclassification of the capital stock of the Company
while the Warrant remains outstanding, the Holder of the Warrant shall
thereafter be entitled to purchase pursuant to the Warrant (in lieu of the kind
and number of shares of Common Stock comprising Warrant Stock that such Holder
would have been entitled to purchase or acquire immediately before such
reorganization or reclassification) the kind and number of shares of stock of
any class or classes or other securities or property for or into which such
shares of Common Stock would have been exchanged, converted or reclassified if
the Warrant Stock had been purchased immediately before such reorganization or
reclassification. In case of any such reorganization or reclassification,
appropriate provision (as determined by resolution of the Board of Directors of
the Company) shall be made with respect to the rights and interest thereafter
of the Holder of the Warrant, to the end that all the provisions of the Warrant
(including adjustment provisions) shall thereafter be applicable, as nearly as
reasonably practicable, in relation to such stock or other securities or
property.
4.8 Statement of Adjustment of Warrant Stock. Whenever the number
or kind of shares comprising Warrant Stock or the Exercise Price is adjusted
pursuant to this Article 4, the Company shall promptly give notice to the
Holder of record of the outstanding Warrant, stating that such an adjustment
has been effected and setting forth the number and kind of shares purchasable
and the
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amount of the then-current Exercise Price, and stating in reasonable detail the
facts requiring such adjustment and the calculation of such adjustment.
4.9 No Other Adjustments. No adjustments in the number or kind or
price of shares constituting Warrant Stock shall be made except as provided in
this Article 4.
Article 5 Covenants of the Company.
The Company covenants and agrees that:
5.1 Reservation of Shares. At all times, the Company will reserve
and set apart and have, free from preemptive rights, a sufficient number of
shares of authorized but unissued Common Stock or other securities, if
applicable, to enable it at any time to fulfill all its obligations hereunder.
5.2 Adjustment of Par Value. Before taking any action that
would cause an adjustment reducing the Exercise Price per share below the then
par value of the shares of Warrant Stock issuable upon exercise of the Warrant,
the Company will take any corporate action that may be necessary in order that
the Company may validly and legally issue fully paid and nonassessable shares
of such Warrant Stock at such adjusted price.
5.3 Notice of Significant Events. In case the Company proposes:
(a) to pay any dividend, payable in stock (of any class
or classes) or in convertible securities, upon its Common Stock or to make any
distribution (other than ordinary cash dividends) to the holders of its Common
Stock; or
(b) to subdivide as a whole (by reclassification, by the
issuance of a stock dividend on Common Stock, or otherwise) the number of
shares of Common Stock then outstanding into a greater number of shares of
Common Stock, with or without par value; or
(c) to grant to the holders of its Common Stock generally
any rights or options; or
(d) to effect any capital reorganization or
reclassification of capital stock of the Company; or
(e) to consolidate with, or merge into, any other
corporation or business or transfer its property as an entirety or
substantially as an entirety; or
(f) to effect the liquidation, dissolution, or winding up
of the Company; or
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(g) to make any other fundamental change in respect of
which the Holder of this Warrant would have been entitled to vote, pursuant to
the corporation law of Delaware, if the Warrant had been previously exercised;
then the Company shall cause notice of any such intended action to be given to
the Holder of record of the Warrant (i) not less than thirty (30) days before
the date on which the transfer books of the Company shall close or a record be
taken for such stock dividend, distribution, granting of rights or options, or
for determining rights to vote in respect of any fundamental change, including
any capital reorganization, reclassification, consolidation, merger, transfer,
liquidation, dissolution, winding up, or any other fundamental change, and (ii)
in the case of any such capital reorganization, reclassification,
consolidation, merger, transfer, liquidation, dissolution, winding up, or other
fundamental change not less than thirty (30) days before the same shall be
effective.
Article 6 Limitation of Liability.
No provision of this Warrant shall be construed as conferring upon the
Holder hereof the right to vote or to consent or to receive dividends or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of directors of the Company or any other matter whatsoever as
stockholders of the Company. In the absence of affirmative action by the
Holder hereof to purchase shares of Common Stock, no provision hereof shall
give rise to any liability of such Holder for the purchase price or as a
stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
Article 7 Merger, Consolidation, or Change.
7.1 Continuation of Warrant. Except as provided in Section 7.2,
in the event that the Company proposes to consolidate with, or merge into, any
other corporation or business or to transfer its property as an entirety or
substantially as an entirety, or to effect the liquidation, dissolution, or
winding up of the Company, or to change the Common Stock in any manner (other
than to change its par value), then after the Company causes notice of such
proposed action to be given to the Holder of record as provided in Section 5.3,
the Holder shall be entitled, on or before the effective date of such merger,
consolidation, transfer, liquidation, dissolution, winding up, or change to
require the Company of the successor or purchasing entity, as the case may be,
to (a) execute with the Holder an agreement providing that the Holder shall
have the right thereafter and throughout the remaining term of the Warrant upon
payment of the exercise price per Warrant Share in effect immediately prior to
such action to purchase with respect to each share of Warrant Stock issuable
upon exercise of this Warrant the kind and amount of shares of stock and other
securities, property (including cash) or any combination thereof which the
Holder would have owned or have been entitled to receive after the happening of
such consolidation, merger, sale, conveyance, or change had this Warrant been
exercised with
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respect to such share of the Warrant Stock immediately prior to such action and
(b) make effective provision in its Articles of Incorporation or otherwise, if
necessary, in order to effect such agreement. Such agreement shall provide for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Article 4 of this Warrant. The provisions of this Section 7.1
shall similarly apply to successive consolidations, mergers, sales, conveyances
or changes.
7.2 Exception. Section 7.1 shall not apply to a consolidation or
merger with a Person in which the Company is the surviving entity.
Article 8 Registration Rights
8.1 Piggyback Registration Rights. If, at any time on or before
the expiration of the Warrant, the Company proposes to file a registration
statement for the public sale of any of its Common Stock under the Securities
Act of 1933 the Company shall, not later than thirty (30) days prior to the
initial filing of the registration statement, deliver notice of its intent to
file such registration statement to the Holder, setting forth the minimum and
maximum proposed offering price, commissions, and discounts in connection with
the offering, and other relevant information. Within twenty (20) days after
receipt of notice of the Company's intent to file a registration statement, the
Holder shall be entitled to request that the Warrant Stock be included in such
registration statement, and the Company will use its best efforts to cause such
Warrant Stock to be included in the offering covered by such registration
statement. In the event the Warrant Stock is included in the registration
statement, the Holder may transfer the Warrant to an underwriter or broker for
exercise by such underwriter or broker in connection with a distribution of the
Warrant Stock.
8.2 Filing Obligations of the Company. In connection with any
registration of the Warrant Stock effected under Section 8.1, the Company
shall:
(a) prepare and file the registration statement and such
amendments and supplements to the registration statement and the prospectus or
offering circular used in connection therewith as may be necessary to keep the
registration statement effective for a period of ninety (90) days and to comply
with the provisions of the 1933 Act and the rules and regulations thereunder
with respect to the disposition of the Warrant Stock covered by the
registration statement for the period required to effect the distribution
thereof, but in no event shall the Company be required to do so for a period of
more than ninety (90) days following the effective date of such registration
statement;
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(b) furnish to the Holder such number of copies of any
prospectus or offering circular, including a preliminary prospectus, and of a
full registration statement and exhibits in conformity with the requirements of
the 1933 Act and rules and regulations thereunder, as the Holder may reasonably
request in order to facilitate the disposition of such securities;
(c) use its best efforts to register or qualify the
Warrant Stock covered by the registration statement, as the case may be, under
the securities or blue sky laws of such jurisdictions as the Holder may
reasonably request, and accomplish any and all other acts and things which may
be necessary or advisable to permit sale in such jurisdictions of such Warrant
Stock; provided, however, that the Company shall not be required to register as
a dealer or to qualify as a foreign corporation in any such jurisdictions or to
escrow any shares of its capital stock.
8.3 Expenses. All expenses incurred by the Company in connection
with any registration of the Warrant Stock effected under Section 8.1,
including, without limitation, all registration or filing fees, fees and
expenses of complying with state securities and blue sky laws, printing
expenses, fees and expenses of the Company's counsel and accountants and fees
and expenses of counsel for the Holder, shall be paid by the Company; provided,
however, that all underwriting discounts and selling commission applicable to
the Warrant Stock shall be borne by the Company but shall be borne by the
Holder.
8.4 Indemnification.
(a) By the Company. In connection with the filing of any
registration statements and sales of the Warrant Stock thereunder, the Company
shall indemnify and hold harmless the Holder of this Warrant, any underwriter,
and each other Person, if any, who controls the Holder or the underwriter
within the meaning of the 1933 Act, against losses, claims, damages or
liabilities, joint or several (or actions in respect thereto) ("Losses"), to
which any such Holder, underwriter, or controlling Person may become subject
under the 1933 Act or otherwise, insofar as such Losses arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which the Warrant Stock was
registered under the 1933 Act, any preliminary prospectus, offering circular or
final prospectus contained therein, or any amendment or supplement thereto, or
any report filed with the Securities and Exchange Commission (the "Disclosure
Documents"), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse any such Holder,
underwriter, or controlling Person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claims, excluding any amounts paid in settlement of litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
the Company;
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provided, however, that the Company shall not be liable in any such case to the
extent that such Losses arise out of or are based upon any untrue statement,
alleged untrue statement or omission or alleged omission made in such
Disclosure Document in reliance upon and in conformity with information
furnished to the Company in writing by or on behalf of the Holder of this
Warrant for use specifically in connection with the preparation of such
Disclosure Document.
(b) By the Holder. In connection with the filing of any
registration statement and sales of the Warrant Stock thereunder, the Holder
shall indemnify the Company, each of its directors, each of its officers who
signed such registration statement, and each other Person, if any, who controls
the Company within the meaning of the 1933 Act, against any Losses to which the
Company, any of its directors, officers, or controlling Persons may become
subject under the 1933 Act or otherwise, insofar as such Losses arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any of the Disclosure Documents or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, and any of its directors, officers,
or controlling Persons for any legal or any other expenses reasonably incurred
in connection with investigating or defending any such claims, excluding any
amounts paid in settlement of litigation, commenced or threatened, if such
settlement is effected without the prior written consent of the Holder;
provided, however, that such indemnification or reimbursement shall be payable
in any such case only to the extent that such statement or alleged statement or
omission or alleged omission is made in reliance on information furnished to
the Company in writing by or on behalf of the Holder for use specifically in
connection with the preparation of such Disclosure Document.
8.5 Assignability. The rights of the Holder under this Article 8
may not be assigned except in accordance with Section 3.1 of this Agreement and
subject to assumption by the assignee of the corresponding obligations
hereunder.
8.6 Discharge of Registration Obligations. In the event the
Holder requests the Warrant Stock be registered pursuant to Section 8.1 herein,
the Company shall have the right to discharge the registration obligations set
forth in Section 8.1 by repurchasing all or any part of the Warrant or Warrant
Stock, as designated by the Holder, for cash at Fair Market Value as of the
date the Holder demands registration or the date the Company delivers notice of
its election to repurchase, whichever is higher. The Company must deliver
written notice to the Holder of its election to repurchase the Warrant within
fifteen (15) days after receipt of a request by the Holder for registration and
such notification must be accompanied by a non-refundable cash deposit equal to
the purchase price of the Warrant or Warrant Stock under this Section 8.6. The
Company
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shall deliver the balance of the purchase price to the holder upon delivery of
the Warrant or Warrant Stock. In the event the Company does not deliver cash
to the Holder as required under this Section 8.6, the Company's right to
repurchase under this Section 8.6, the Company's shall be terminated.
Article 9 Miscellaneous.
9.1 Governing Law. The rights of the parties arising under this
Warrant shall be construed and enforced under the laws of the State of Texas
without giving effect to any choice of law or conflict of law rules.
9.2 Notices. Any notice or other communication required or
permitted to be given or delivered pursuant to this Warrant shall be in writing
and shall be deemed effective as of the date of receipt if delivered personally
or by facsimile transmission (if receipt is confirmed by the facsimile operator
of the recipient), or delivered by overnight courier service or mailed by
registered or certified mail (return receipt requested), postage prepaid, to
the parties at the following addresses (or at such other address in the United
States of America for a party as shall be specified by like notice; provided
that notices of change of address be effective only upon receipt thereof):
(i) to the Holder as follows:
[address of Holders]
(ii) to the Company as follows:
Rio Grande, Inc.
10101 Reunion Place
Union Square, Suite 210
San Antonio, Texas 78209
9.3 Severability. If any provision of this Warrant shall be held
invalid, such invalidity shall not affect any other provision of the Warrant
that can be given effect without the invalid provision, and to this end, the
provisions hereof are separable.
9.4 Headings. The headings in this Warrant are for reference
purposes only and shall not affect in any way the meaning of interpretation of
this Warrant.
9.5 Amendment. This Warrant cannot be amended or modified except
by a written agreement executed by the Company and the Holder.
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9.6 Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns except that no party may assign or
transfer its rights or obligations under this Agreement except to the extent
explicitly permitted herein.
9.7 Entire Agreement. This Agreement, together with its
attachments, contains the entire understanding among the parties hereto with
respect to the subject matter hereof and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written, except as herein contained.
IN WITNESS WHEREOF, the Company has cause this Warrant to be signed in
its name by its President or a Vice President thereunto duly authorized.
Dated: __________________________
RIO GRANDE, INC.
By: ______________________________
Its:______________________________
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SUBSCRIPTION NOTICE
The undersigned, the Holder of a Common Stock Purchase Warrant issued
by Rio Grande, Inc. pursuant to a Note Purchase Agreement dates as of
______________, hereby elects to exercise purchase rights represented by such
Warrant for, and to purchase thereunder, _______________ shares of the Common
Stock covered by such Warrant and herewith makes payment in full therefor of
________________________ and requests that certificates for such shares (and
any securities or the property issuable upon such exercise) be issued in the
name of and delivered to _________________ whose address is
_______________________________________________.
If said number of shares of Common Stock is less than the number of
shares of Warrant Stock purchasable hereunder, the undersigned requests that a
new Warrant representing the balance of the Warrant Stock be registered in the
name of and issued and delivered to _________________ whose address is
_______________________________________________.
The undersigned hereby agrees to pay any transfer taxes on the
transfer of all or any portion of the Warrant or Warrant Stock requested
herein.
The undersigned agrees that, in the absence of an effective
registration statement with respect to Common Stock issued upon this exercise,
the undersigned is acquiring such Common Stock for investment and not, with a
view to distribution thereof and the certificate or certificates representing
such Common Stock may bear a legend substantially as follows: "The shares
represented by this certificate have not been registered under the Securities
Act of 1933, as amended, and may not be transferred except as provided in
Article 3 of the Warrant to purchase Common Stock of Rio Grande, Inc., a copy
of which is on file at the principal office of Rio Grande, Inc."
__________________________________
Signature guaranteed:
Dated:_______________________
17
<PAGE> 18
ASSIGNMENT
FOR VALUED RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________ the rights represented by the foregoing
Warrant of Rio Grande, Inc., and appoints __________________ its attorney to
transfer said rights on the books of said corporation, with full power of
substitution in the premises.
___________________________
Signature guaranteed:
Dated:_______________________
18
<PAGE> 1
CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
RIO GRANDE, INC.
$2,000,000
11.50% SUBORDINATED NOTES
DUE SEPTEMBER 30, 2000 AND
WARRANTS TO PURCHASE COMMON STOCK
$25,000 PER UNIT
MINIMUM SUBSCRIPTION: TWO UNITS
--------------------------------------------------
Rio Grande, Inc., a Delaware corporation (the "Company"), is engaged
in the acquisition, production, sale and development of oil and gas properties
through its subsidiary, Rio Grande Drilling Company, a Texas corporation, and
Rio Grande Offshore, Ltd., a Texas Limited Partnership in which Rio Grande
Drilling Company is the general partner and owner of an 80% partnership
interest. The Company is offering the Units described herein for the purposes
of financing a development program on certain oil and gas properties in which
the Company or its affiliates have an interest and of providing additional
working capital.
A minimum of $1,500,000 and a maximum of $2,000,000 in principal
amount of 11.50% Subordinated Notes and Warrants to purchase a minimum of
979,860 and a maximum of 1,388,160 shares of the Company's Class A Common
Stock, par value $.01 per share, are being offered in minimum increments of
$25,000 (each $25,000 increment hereinafter referred to as a Unit), with a
minimum purchase of two Units, subject to reduction at the discretion of the
Company. The number of shares of Common Stock subject to Warrants in a Unit
will be between 16,331 and 17,352 shares, depending upon the total amount of
the offering, at a price of $.40 per share, subject to adjustment under certain
circumstances. The purchase price for each Unit is payable in full in cash at
the time of subscription.
THIS INVESTMENT IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
--------------------
<PAGE> 2
<TABLE>
<CAPTION>
Price to Purchasers Selling Proceeds to
Commissions(1) Company(2)
<S> <C> <C> <C>
Per Unit $25,000.00 $1,062.50 $23,937.50
Minimum Offering $1,500,000 $63,750 $1,436,250
Maximum Offering $2,000,000 $85,000 $1,915,000
</TABLE>
(1) The Units are being offered through Duncan-Smith Securities, Inc.
("Agent") as sales agent on a best efforts basis. The Agent will
receive a fee of 4.25% of the purchase price of the Units sold.
Officers and directors of the Company will also participate in
placement of the Units, but will not be compensated based on their
sales of Units. See "Terms of the Offering - Agent" for information
concerning such fees and regarding indemnification of the Agent by the
Company.
(2) Proceeds after fees to Agent but before deductions for legal, printing
and engineering fees and expenses associated with the Offering, which
are estimated to be $60,000. See "Use of Proceeds."
ii
<PAGE> 3
NONE OF THE UNITS, NOTES OR WARRANTS HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER STATE
SECURITIES LAWS AND THE SECURITIES OFFERED HEREBY ARE BEING OFFERED AND SOLD IN
RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND SUCH LAWS. THE UNITS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER
REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS
MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND THE PURCHASE OF THE
UNITS WILL ENTAIL A HIGH DEGREE OF RISK. SEE "RISK FACTORS." THESE SECURITIES
ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF PURCHASING THE UNITS FOR AN INDEFINITE PERIOD OF
TIME.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE UNITS TO ANYONE IN ANY
STATE OR JURISDICTION IN WHICH SUCH AN OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL.
THE SECURITIES OFFERED HEREBY ARE BEING OFFERED SOLELY TO TEXAS
RESIDENTS. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY
THE UNITS DESCRIBED HEREIN IN ANY JURISDICTION OTHER THAN THE STATE OF TEXAS.
THIS MEMORANDUM IS SUBMITTED SOLELY FOR THE BENEFIT OF QUALIFIED
INVESTORS ACCEPTABLE TO THE COMPANY IN CONNECTION WITH THE PRIVATE OFFERING OF
THE UNITS (SEE "WHO MAY INVEST"). THIS MEMORANDUM MAY NOT BE REPRODUCED OR
USED FOR ANY OTHER PURPOSE, AND ANY DISTRIBUTION OR REPRODUCTION OF THIS
MEMORANDUM IN WHOLE OR IN PART OR THE DISCLOSURE OF ANY OF ITS CONTENTS,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY, IS PROHIBITED AND MAY
CONSTITUTE A VIOLATION OF FEDERAL AND/OR STATE SECURITIES LAWS. ANY
PROSPECTIVE INVESTOR AGREES TO RETURN THIS MEMORANDUM AND ALL DOCUMENTS
CONCERNING THIS OFFERING IF SUCH INVESTOR DOES NOT PURCHASE ANY OF THE UNITS
OFFERED HEREBY. THE COMPANY
iii
<PAGE> 4
RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION FOR UNITS IN WHOLE OR IN PART.
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS
MEMORANDUM OR ANY OTHER PRIOR OR SUBSEQUENT COMMUNICATION FROM THE COMPANY, THE
AGENT, OR THEIR RESPECTIVE EMPLOYEES OR AGENTS AS LEGAL, TAX OR ACCOUNTING
ADVICE. EACH INVESTOR SHOULD CONSULT HIS OR HER OWN FINANCIAL ADVISOR,
ACCOUNTANT, AND COUNSEL AS TO LEGAL, TAX AND ACCOUNTING MATTERS CONCERNING A
PURCHASE OF UNITS.
UNITS MAY BE PURCHASED BY OFFICERS AND DIRECTORS OF THE COMPANY OR BY
OTHER PERSONS WHO WILL RECEIVE FEES OR OTHER COMPENSATION OR GAIN DEPENDENT
UPON THE SUCCESS OF THE OFFERING. SUCH PURCHASERS WILL BE COUNTED IN
DETERMINING WHETHER THE REQUIRED MINIMUM LEVEL OF PURCHASERS HAS BEEN MET.
INVESTORS THEREFORE SHOULD NOT EXPECT THAT THE SALE OF UNITS TO REACH THE
MINIMUM OFFERING, OR IN EXCESS THEREOF, INDICATES THAT SUCH SALES HAVE BEEN
MADE TO INVESTORS WHO HAVE NO FINANCIAL OR OTHER INTEREST IN THE OFFERING, OR
WHO OTHERWISE ARE EXERCISING INDEPENDENT INVESTMENT DISCRETION.
THE STATEMENTS HEREIN ARE MADE AS OF THE DATE HEREOF, EXCEPT AS
OTHERWISE INDICATED. NEITHER THE DELIVERY OF THIS MEMORANDUM, NOR ANY SALE
MADE HEREUNDER, SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
THE INFORMATION SET FORTH HEREIN IS A SUMMARY OF ONLY THE MAJOR
FACTORS WHICH, IN THE OPINION OF THE COMPANY, ARE RELEVANT TO AN INVESTMENT
DECISION. DURING THE COURSE OF THE OFFERING AND PRIOR TO THE SALE OF UNITS,
EACH OFFEREE IS ENCOURAGED TO ASK QUESTIONS OF AND OBTAIN ADDITIONAL
INFORMATION FROM THE COMPANY REGARDING THE MATTERS SUMMARIZED HEREIN OR OTHER
MATTERS RELATING TO THE COMPANY OR THE NOTES. SUCH INFORMATION WILL BE
PROVIDED TO THE EXTENT THE COMPANY POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT
WITHOUT UNREASONABLE EFFORT OR EXPENSE. OFFEREES OR THEIR REPRESENTATIVES
HAVING QUESTIONS OR DESIRING SUCH INFORMATION MAY CONTACT THE COMPANY.
CERTAIN PROVISIONS IN THE NOTE PURCHASE AGREEMENT, THE WARRANT
AGREEMENT AND OTHER DOCUMENTS ARE SUMMARIZED IN THIS MEMORANDUM. REFERENCE IS
MADE TO THE NOTE PURCHASE AGREEMENT AND THE WARRANT AGREEMENT, COPIES OF WHICH
ARE INCLUDED HEREIN,
iv
<PAGE> 5
AND SUCH OTHER DOCUMENTS FOR COMPLETE INFORMATION CONCERNING THEIR CONTENTS.
OTHER INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM THE COMPANY AND FROM
OTHER SOURCES DEEMED RELIABLE. ALL DOCUMENTS RELATING TO THIS INVESTMENT SHALL
BE MADE AVAILABLE TO THE PROSPECTIVE INVESTOR AND/OR HIS OR HER ADVISORS UPON
REQUEST WITHOUT CHARGE. NO REPRESENTATIONS OR INFORMATION OTHER THAN THOSE SET
FORTH HEREIN OR IN SUCH DOCUMENTS MAY BE RELIED UPON.
THE OFFERING OF THESE UNITS OF THE COMPANY IS MADE EXCLUSIVELY BY THIS
MEMORANDUM AND THE SUBSCRIPTION FORMS. NO PERSON HAS BEEN AUTHORIZED TO MAKE
ANY REPRESENTATION OR GIVE ANY INFORMATION INCONSISTENT WITH THE
REPRESENTATIONS AND INFORMATION CONTAINED THEREIN.
CERTAIN OF THE INFORMATION CONTAINED HEREIN MAY BE DEEMED TO BE
MATERIAL, NONPUBLIC INFORMATION WITHIN THE MEANING OF THE SECURITIES EXCHANGE
ACT OF 1934 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. IT IS
UNLAWFUL TO PURCHASE OR SELL SECURITIES OF AN ISSUER WHILE IN POSSESSION OF
MATERIAL, NONPUBLIC INFORMATION.
v
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Selected Combined Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SUMMARY OF RESERVE EVALUATION REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Summary of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Condensed Combined Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Condensed Combined Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 26
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Price Volatility; Industry Conditions; Impact on Company's Profitability . . . . . . . . . 33
Leverage and Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Reliance on Estimates of Proved Reserves . . . . . . . . . . . . . . . . . . . . . . . . . 34
Dependence on Key Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Operating Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Operating Hazards; Uninsured Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Acquisition Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Government Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
TERMS OF THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Investor Suitability Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
WHO MAY INVEST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
DESCRIPTION OF NOTES AND NOTE PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 41
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Interest, Repayment, Default and Subordination . . . . . . . . . . . . . . . . . . . . . . 41
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
vi
<PAGE> 7
<TABLE>
<S> <C>
Events of Default and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Amendment of Note Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
TERMS OF SENIOR INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
DESCRIPTION OF WARRANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
GLOSSARY OF CERTAIN OIL AND GAS TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
EXHIBITS:
Exhibit A-1 - Form 10-K for the Fiscal Year ended 1-31-95 and
Exhibit A-2 - Form 10-QSB for the Fiscal Quarter ended 4-30-95
Exhibit A-3 - Proxy Statement for 1995 Annual Meeting, held June 1, 1995
Exhibit B - Note Purchase Agreement and Form of Note
Exhibit C - Warrant Agreement
Exhibit D - Evaluation of Oil and Gas Properties by Paul R. Clevenger, P.E.
Exhibit E - Loan Agreement dated July 14, 1994 among Rio Grande Drilling
Company, Rio Grande, Inc., and International Bank of Commerce
Exhibit F - Investor Suitability Questionnaire
Exhibit G - Subscription Agreement
vii
<PAGE> 8
SUMMARY
The following is a summary of certain information contained in this
Confidential Private Placement Memorandum (the "Memorandum"). This summary is
qualified in its entirety by the detailed information appearing elsewhere in
this Memorandum and in the exhibits to the Memorandum.
THE COMPANY
Rio Grande, Inc. (the "Company"), which hereinafter in general refers
to Rio Grande, Inc., its subsidiaries, and affiliates, is a Delaware
corporation. The Company is engaged in the acquisition, production, sale and
development of oil and gas properties located in Texas, Oklahoma, onshore and
offshore Louisiana, Michigan, Montana and Wyoming.
Rio Grande Drilling Company ("Drilling"), a Texas corporation and
wholly-owned subsidiary of the Company, formed a Texas Limited Partnership, Rio
Grande Offshore, Ltd. ("Offshore") in June 1992 to purchase non-operated oil
and gas working interests. Drilling serves as general partner of and has an
80% ownership interest in Offshore. From June 1992 to July 1994, Offshore
completed five significant acquisitions in which it acquired a total of 13.3
Bcfe of proved oil and gas reserves for an aggregate purchase price of $7.5
million, or $0.57 Mcfe. Substantially all of the mineral properties in which
the Company has an interest are owned by Offshore, with the Company's interest
being derived through the eighty percent (80%) partnership interest in Offshore
owned by Drilling. The Company's acquired properties contain several attractive
development opportunities, and a portion of the proceeds of this offering will
be used to exploit those opportunities. In the future it is the Company's
intention to continue to acquire and operate properties that have development
or exploration potential and that are located in areas complementary to the
Company's existing assets and operations.
The Company's proved producing and non-producing reserves are
diversified geographically. Oil and natural gas account for 65% and 35%,
respectively, of total proved reserves. The summary table below reflects the
Company's estimated net reserves as of June 1, 1995, assuming consummation of
the Offering, application of the proceeds as described herein, and successful
implementation of the proposed development projects, all as more fully set
forth in a reserve evaluation report prepared by Paul R. Clevenger, an
independent petroleum engineer. See "Summary of Reserve Evaluation Report" and
Exhibit D.
8
<PAGE> 9
<TABLE>
<CAPTION>
Net Capital
Oil Gas Oil/Gas PV @ 10% Expenditures
(Mbbls) (MmCF) Mix (%) (in thousands) (in thousands)
------- ------ ------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Proved Producing Reserves 420 3,812 40/60 $ 4,849 $ 0
Proved Non-Producing Reserves 106 3,262 16/84 3,734 866
Proved Undeveloped Reserves 2,038 1,377 90/10 12,876 9,013
------ ------ ------ -------- ---------
Total Proved Reserves 2,564 8,451 65/35 21,459 9,879
</TABLE>
NOTE: The reserve evaluation report included as Exhibit D reflects
Offshore's 100% ownership interest in its properties as well as those
properties in which Drilling has a 100% ownership interest. The reserve
information in the table above has been reduced to reflect only the Company's
net ownership interest in its properties. Net capital expenditures are the
estimated expenditures net to the Company's interest necessary to develop the
proved non-producing and proved undeveloped reserves as set out in the reserve
evaluation report.
9
<PAGE> 10
THE OFFERING
The Company is offering (the "Offering") a minimum of 60 and a maximum
of 80 Units, each of which consists of an 11.50% Subordinated Note in the
principal amount of $25,000 ("Note" where singular and "Notes" where plural)
and Warrants to purchase shares of Class A Common Stock, par value $.01, of the
Company (the "Common Stock") at $.40 per share, as described below (the
"Warrants"). The minimum subscription is two Units, subject to reduction at
the discretion of the Company.
Interest on the Notes is payable quarterly, and the Notes mature on
September 30, 2000. No principal payments will be required during the first
two years. Thereafter, quarterly principal installments equal to 3.125%,
9.375% and 12.5% of the original principal amount of the Notes are payable
during the third, fourth and fifth years, respectively. The Notes may be
prepaid in whole or in part at any time without penalty. See "Description of
Notes and Note Purchase Agreement."
The Warrants entitle the holder to acquire shares of Common Stock of
the Company at $.40 per share for a period of seven years after the Closing,
subject to earlier expiration under certain circumstances. A minimum of
979,860 and a maximum of 1,388,160 shares of Common Stock shall be subject to
the Warrants, depending upon the total number of Units sold in the Offering.
The Warrants are detachable from the Notes; provided, however, that if the
Warrants are transferred separately from the Notes to someone other than an
Affiliate, they must be exercised within thirty days of the assignment or
transfer or they will expire. Warrant holders will be granted piggyback
registration rights entitling the holders of shares acquired through the
exercise of Warrants to request registration of those shares in the event the
Company files a registration statement to effectuate a public offering of the
Company's Common Stock. See "Description of Warrants."
The Units are being offered on a "best efforts" basis by Duncan-Smith
Securities, Inc. See " Terms of the Offering." The sale of Units is subject
to receipt by the Company of acceptable subscriptions for a minimum of sixty
(60) Units (the "Minimum Offering") and a maximum of eighty (80) Units (the
"Maximum Offering") no later than September 13, 1995, unless extended at the
sole discretion of the Company to a date not later than October 31, 1995 (the
"Termination Date"). If subscriptions for the Minimum Offering are not
accepted prior to the Termination Date, this Offering will terminate and all
proceeds will be refunded in full with interest.
Subscription proceeds will be deposited in an escrow account promptly
after receipt by the Company. Closing may occur as soon as subscriptions
aggregating a minimum of $1,500,000 have been accepted by the Company. See
"Terms of Offering."
10
<PAGE> 11
The Offering is being made only to Texas residents pursuant to an
exemption from the registration requirements of the Securities Act of 1933 (the
"Securities Act") contained in Section 3(b) of the Securities Act and Rule 505
of Regulation D ("Regulation D") promulgated thereunder and similar provisions
of applicable state securities laws. In no event will there be more than 35
non-accredited investors, within the meaning of Regulation D, or any
non-residents of Texas participating in the Offering.
USE OF PROCEEDS
The proceeds, before the payment of fees and expenses of the Offering,
will be $1,500,000, in the case of the Minimum Offering, and $2,000,000, in the
case of the Maximum Offering. The Company will pay a fee of 4.25% of the
proceeds to Duncan-Smith Securities, Inc., which fee would equal $63,750 in the
case of the Minimum Offering and $85,000 in the case of the Maximum Offering.
The Company estimates that the other expenses of the Offering, including
printing, legal and engineering fees and expenses payable by the Company, will
be approximately $60,000, which will provide $1,376,250 net proceeds, in the
case of the Minimum Offering, and $1,855,000, in the case of the Maximum
Offering ("Proceeds"), to the Company. The Company intends to use the proceeds
of the Offering to initiate a plan of development on and make production
enhancements to certain oil and gas properties acquired in 1994 and operated by
the Company. The Company's development plan includes the recompletion or
workover of approximately 20 marginal producing wells and an infill development
drilling program combined with a pressure maintenance waterflood project on
approximately 4,000 acres in Tom Green County, Texas.
RISK FACTORS
The Subordinated Notes and Warrants offered hereby are speculative and
purchase of the Units entails a high degree of risk. The Company's financial
performance is substantially dependent on the prices it obtains for crude oil
and natural gas and numerous other factors over which it has little or no
control. In addition, substantially all of the Company's assets are pledged to
secure bank indebtedness, to which the subordinated Notes are subordinated in
all respects. The Subordinated Notes and Warrants are subject to restrictions
on transferability, and investors may be required to bear the financial risks
of purchasing the Units for an indefinite period of time. The purchase of
Units is suitable only for investors who have no need for liquidity in this
investment, who have adequate means of providing for their current needs and
contingencies, and who can assume a complete loss as a result of investment in
the Units. See "Risk Factors."
11
<PAGE> 12
SELECTED COMBINED FINANCIAL DATA
The following table includes selected combined financial data of the
Company for 1993 through 1995 and for the four months ended May 31, 1995. The
summary data for 1993 through 1995 has been derived from the consolidated
financial statements of the Company as set forth in its annual report on Form
10-K for the periods indicated. The summary data for the four months ended May
31, 1995 has been derived from the Company's unaudited interim financial
statements and is not necessarily indicative of the results to be expected for
the full year. In addition, the table includes summary pro forma consolidated
financial data which gives effect to the Offering and the application of the
proceeds therefrom. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations". The summary pro forma financial data
does not purport to represent the Company's consolidated results of operations
and financial condition had the Offering been completed on such dates and does
not purport to project the Company's consolidated results of operations and
financial condition for any future period. The summary financial data is
qualified in its entirety by, and should be read in conjunction with, the
Company's consolidated financial statements and notes thereto as set forth in
the Company's Form 10-K for the period ended January 31, 1995 and Form 10-QSB
for the period ended April 30, 1995, which are included in Exhibit A hereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operation" included elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
Pro Forma (A) Fiscal years ended January 31
Four Months Four Months -----------------------------
Ended Ended 1995 1994 1993
May 31, 1995 May 31, 1995 ---- ---- ----
(unaudited) (unaudited)
------------ ------------
(all dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues $1,306 $1,306 $4,205 $3,752 $2,368
Net earnings (loss) 516 516 (457) 258 210
Cash flow from operations 240 240 1,032 1,591 1,073
Net earnings per share 0.07 0.09 (0.08) 0.04 0.03
Cash flow per share 0.03 0.04 0.18 0.26 0.17
Wtd. avg. common shares
(fully diluted) 7,851,420 (B) 5,927,760 5,609,467 6,012,663 6,146,870
Balance Sheet Data:
Working capital (deficit) $ 2,020 $ 165 $ (298) $ 669 $ 563
Total assets 9,400 7,400 8,123 5,365 5,894
Long-term debt 3,623 1,623 3,018 672 1,498
Shareholders' equity 2,838 2,838 2,322 2,778 2,521
</TABLE>
(A) Assumes maximum offering of $2,000,000.
(B) Includes 1,388,160 Warrant shares associated with the Offering and all
shares of Common Stock subject to existing and anticipated stock
options. See "Management, Exhibit A-3."
12
<PAGE> 13
THE COMPANY
Rio Grande, Inc. (the "Company"), which hereinafter in general refers
to Rio Grande, Inc., its subsidiaries and affiliates, is a Delaware corporation
engaged in the acquisition, development and production of oil and gas
properties located principally in Texas, Oklahoma, and onshore and offshore
Louisiana. The Company was engaged in the contract drilling of oil and gas
wells from its incorporation in 1978 to May, 1992. At one time the Company
owned, managed and operated up to eleven drilling rigs, all of which have been
sold or returned to the respective secured lenders or lessors. Primarily as a
result of its contract drilling operations, the Company has a significant
unused net operating loss carryforward that may be used to reduce future
federal income tax liabilities. (See Note 4, Notes to Combined Financial
Statement, Form 10-K attached as Exhibit A-1).
Rio Grande Drilling Company ("Drilling"), a Texas corporation and
wholly-owned subsidiary of Rio Grande, Inc., formed a Texas limited
partnership, Rio Grande Offshore Ltd. ("Offshore"), in June 1992 to purchase
certain oil and gas working interests. Drilling serves as general partner of
and has an 80% ownership interest in Offshore. Robert A. Buschman, Chairman
of the Company, is a 10% limited partner in Offshore. Substantially all of the
oil and gas properties in which the Company has an interest are owned by
Offshore, with the Company's interest being derived through the eighty percent
(80%) partnership interest in Offshore owned by Drilling. The Company has an
ownership interest in 413 wells. The Company has the operating responsibility
for 245 of those wells, of which 130 are active wells.
The Company believes that Offshore owns several properties that have
significant development potential. The principal purpose for the Offering is
to provide funds to finance the Company's portion of the cost of these
development projects.
13
<PAGE> 14
USE OF PROCEEDS
The Company intends to use the proceeds of the Offering to initiate a
comprehensive plan of development and production enhancement to certain oil and
gas properties acquired and operated by the Company. The plan includes an
extensive waterflood project in the KWB Field of Tom Green County, Texas and
the recompletion or workover of other properties (See "Business - Development
Projects").
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
---------------- ----------------
<S> <C> <C>
KWB, Tom Green County, Texas 240,000 240,000
Workover/Recompletion Projects 575,000 575,000
Other Projects 321,250 418,000
Unidentified Capital Projects 240,000 622,000
Expenses of Offering 123,750 145,000
--------- ---------
1,500,000 2,000,000
</TABLE>
If the pilot program at KWB is successful, the Company expects to
apply a substantial portion of the funds allocated to unidentified capital
projects to subsequent activities in that field. The Company may also use some
of the funds allocated to unidentified capital projects to repay its bank
indebtedness or to make future acquisitions of oil and gas properties. See
"Risk Factors - Leverage and Debt Service."
Expenses of the Offering, as set forth above, including fees of the placement
agent and legal, printing and engineering expenses, will be paid out of the
proceeds of the Offering.
14
<PAGE> 15
BUSINESS
The Company is engaged in the acquisition, development and production
of oil and gas properties located principally in Texas, Oklahoma, and onshore
and offshore Louisiana.
The Company initially acquired non-operated properties, but the 1994
acquisition of properties owned and operated by Pyramid Energy, Inc.
("Pyramid") of San Antonio allowed the Company to hire Pyramid's senior
production staff, field superintendents, pumpers, bookkeeping and clerical
staff to complement its existing executive staff. The addition of experienced
operating personnel has permitted the Company to pursue acquisition and
development of operated properties as well as non-operated interests. Since
1992, Offshore has completed five significant acquisitions in which it acquired
a total of 13.3 Bcfe of proved oil and gas reserves for an aggregate purchase
price of $7.5 million, or $0.57 Mcfe. The acquisitions were financed by
contributions from Offshore's limited partners proportionate to their interests
in Offshore and, with regard to Drilling's eighty percent (80%) interest in
Offshore, by conventional bank financing. All of the interests in Offshore's
properties attributable to Drilling have been pledged by Drilling and the
Company to secure the bank debt, to which the Notes offered hereby are
subordinated in all respects. See "Senior Indebtedness; Description of Notes
and Note Purchase Agreement - Subordination."
DEVELOPMENT PROJECTS
The Company believes that Offshore owns several properties that have
significant development potential. The principal purpose for the Offering is
to provide funds to finance the Company's portion of these development
projects. It is anticipated that approximately $1.4 million of the proceeds of
the Offering will be used in the following areas:
KWB Field, Tom Green County, Texas
The Company intends to use a portion of the proceeds of the Offering
to initiate an infill drilling program in the KWB Field in Tom Green County,
Texas. The Company owns a 98% working interest and operates this property,
which includes approximately 80 producing and shut-in wells drilled on 40-acre
spacing and 3 water supply wells. The unitized lease consists of approximately
4,000 acres that produce from the Strawn formation at a depth of approximately
6,500 feet.
Geological and geophysical studies have been made by the Company to
determine the viability of a comprehensive waterflood program in an effort to
recover additional volumes of oil and gas. A study of a successful waterflood
conducted by Sun Oil Company in the nearby North Jameson Strawn Field, Mitchell
County, Texas, suggests the need for 20- acre spacing with the additional
implementation of a waterflood program in the KWB Field. The North Jameson
Strawn Field was originally developed on 40-acre spacing (like the KWB Field)
but was successfully waterflooded on 20-acre spacing. The previous owner of
the KWB Field attempted to waterflood the field with a perimeter injection
program and determined that the oil production decline could be
15
<PAGE> 16
controlled, but that the 40-acre spacing required an uneconomic amount of time
to deplete the field. The Company does not believe that the producing
formation has been adversely affected by the previous waterflood programs.
Moreover, because of the previous waterflood program, water injection
facilities are in place that can be used by the Company in its waterflood
program.
The proposed project involves the creation of a 5-spot waterflood
pattern by drilling a test production well on 20 acre spacings and converting
four existing wells to injection wells for the purpose of providing pressure
maintenance. If initial efforts prove successful, additional development of the
project would proceed until the year 2001, would involve the drilling of
approximately 40 infill development wells, and would require approximately $8.8
million of capital expenditures by the Company. It is anticipated that most of
the future capital requirements would be financed on a non-recourse basis with
an institutional investor or would be self-funded over time from the project's
future cash flows. If the infill drilling and waterflood project is
implemented successfully, based on estimates from the Company's independent
petroleum engineers, the Company's net producing reserves could increase by
approximately 2 million Bbls of oil and 1.1 Bcf of gas at a development cost of
about $4 per BOE. See Exhibit D, The Evaluation Report. The Company plans to
use $240,000 of the Offering proceeds to complete the first 5-spot pattern in
the KWB Field.
Workover/Recompletion Projects
A portion of the proceeds from the Offering will be used to begin a
plan of development on and make production enhancements to certain oil and gas
properties acquired in 1994 and operated by the Company. The plan includes the
recompletion or workover of approximately 20 existing wells. If successful,
reserve estimates evaluated by an independent petroleum engineer indicate that
these activities could convert approximately 106,000 Bbls of oil and 3.3 Bcf of
gas in proved developed non-producing reserves to producing reserves. The
Company's net capital expenditures on these projects over the next several
years are expected to be approximately $866,000, or $0.22 per Mcfe of
incremental production. The Company plans to use $575,000 of the Offering
proceeds in these recompletion and workover projects.
Other Projects
The Company has additional projects, including workovers on several
wells and the purchase of 3-D seismic data, which it believes to be attractive
and which are not reflected in the reserve estimates shown in Exhibit D.
Depending upon the size of the Offering, between $321,000 and $418,000 of the
proceeds of the Offering could be used in these other projects.
UNIDENTIFIED CAPITAL PROJECTS
Consistent with the nature of the oil and gas exploration and
development business, the Company routinely is offered the opportunity to
participate in capital projects of various kinds. These projects could include
acquisitions of oil and gas properties, acquisitions of additional working
interests in leases already owned by the Company or new development projects.
The Company expects to identify suitable projects for these funds during the
next 12 months. It is also
16
<PAGE> 17
possible that some of these funds could be used to repay a portion of the
Company's bank indebtedness or could be used for the development of the KWB
Field.
Recent Developments and Strategic Focus
Three oil and gas properties recompleted since January 1, 1995 have
increased the Company's reserves by approximately 15,000 Bbls oil and 239 Mmcf
gas, with future net cash flows of $543,000. The net cost for the
recompletions on these properties was $54,000, which is approximately $0.16 per
Mcfe for the incremental proved producing reserves.
The Company does not have a specific acquisition budget for the
purchase of additional oil and gas properties since the timing and size of
acquisitions are difficult to forecast. The Company seeks to buy properties
that will complement its operations and assets, provide exploitation and
development opportunities, and present cost-reduction potential. The Company
regularly reviews acquisition opportunities but does not have pending
agreements to purchase oil and gas properties at this time. Evaluation of
acquisition opportunities involves significant personnel time for the study of
oil and gas reserve reports, due diligence, the submission of an indication of
interest, preliminary negotiations, submission of a letter of intent, and if
successful, a definitive agreement. In selecting areas for future
acquisitions, the Company will consider ways to capitalize on efficiencies in
its current operational areas so that the Company may use its operating
personnel to evaluate the acquisition opportunities and assist in subsequent
development that reduce risk and accelerate the financial return of such
acquisitions.
The Company periodically evaluates and from time to time has elected
to sell certain of its producing properties. The proceeds from such sales
enable the Company to reduce debt or invest in properties that potentially may
have a greater financial return.
Although the Company intends to devote most of its resources to
acquisitions and the enhancement and development of producing properties
acquired, the Company may from time to time selectively participate with
industry partners exploring for new reserves of crude oil and natural gas. The
Company has a goal to increase its net oil and gas revenues by maintaining a
carefully monitored program insuring that the new reserves are added with
minimum risk and operating costs. The Company believes that this objective can
be accomplished by the program described above.
17
<PAGE> 18
SUMMARY OF RESERVE EVALUATION REPORT
The following is a summary of the evaluation report of the oil and gas
properties owned by Offshore and Drilling that was prepared by Paul R.
Clevenger, an independent petroleum engineer, a copy of which is attached as
Exhibit D to this Memorandum (the "Evaluation Report"). BOTH THIS SUMMARY AND
THE EVALUATION REPORT INCLUDE THE INCREASED PRODUCTION VOLUMES AND RELATED
CAPITAL AND OPERATING COSTS ASSOCIATED WITH SUCCESSFUL IMPLEMENTATION OF THE
DEVELOPMENT PROJECTS DISCUSSED ABOVE. NO ASSURANCE CAN BE GIVEN THAT THE
DEVELOPMENT PROJECTS CAN OR WILL BE SUCCESSFULLY IMPLEMENTED, THAT THE
PROJECTED PRODUCTION VOLUMES CAN OR WILL BE REALIZED, OR THAT THE ASSUMED
PRICES FOR OIL AND NATURAL GAS CAN OR WILL BE OBTAINED. IF THE PROJECTED
VOLUMES ARE NOT OBTAINED, WHETHER DUE TO THE FAILURE OF THE PROPOSED
DEVELOPMENT PROJECTS OR OTHERWISE, AND/OR IF THE PROJECTED PRICES FOR PRODUCT
CANNOT BE REALIZED, ACTUAL REVENUES MAY VARY MATERIALLY AND ADVERSELY FROM
THOSE PROJECTED.
The following schedules A through D have been included to summarize
the Evaluation Report, and are qualified in their entirety by the Evaluation
Report itself. In accordance with the rules and regulations of the Securities
and Exchange Commission ("SEC"), the Company is required to have an annual
"SEC-10" evaluation report prepared of its proved reserves which uses unit
prices and costs prescribed by the SEC. As a standard procedure, the Company
also has an additional Evaluation Report prepared which provides for the
escalation of unit prices and operating expenses in a manner the Company
believes more closely reflects the anticipated actual performance from such oil
and gas properties. The attached Evaluation Report was prepared for the
Company as an update to the January 1, 1995 evaluation report with an effective
date of June 1, 1995. This Evaluation Report provides an updated estimate of
Offshore's and Drilling's working interest ownership in the reserves, future
production and related income for its oil and gas properties, subject to the
qualifications set forth herein and therein.
The projected revenues attributable to the estimated recoverable crude
oil and natural gas reserves depend on the unit prices that are assumed to be
realized from the sale of those products. Prices for crude oil and natural gas
are subject to fluctuations as a result of changes in supply and demand, market
conditions and a variety of additional factors beyond the control of the
Company. See "Risk Factors - Industry Conditions; Impact on Company's
Profitability." The Evaluation Report projects an average unit natural gas
price of $1.66 per Mcf for the remaining months of 1995 which is equivalent to
the average unit price received for natural gas during the first five months of
1995. This unit price was held constant until January 1, 1996, and then
escalated annually by five percent (5%) to a maximum unit price of $3.00 per
Mcf. The unit oil price assumption for the same period in 1995 was projected
to average $15.60 per barrel which is equivalent to the average price per
barrel received for crude oil during 1994. The unit price of oil was held
constant until January 1, 1996 and then escalated annually by five percent (5%)
to a maximum unit price of $30.00 per barrel.
In general, Registered Petroleum Evaluation Engineers use evaluation
methods studied and recommended by the professional engineering societies.
These procedures include extrapolation of historical performance data,
volumetric analysis, pressure production
18
<PAGE> 19
relationships, and various analogous field studies. The estimated reserves
shown in the attached Evaluation Report were determined by using methods
believed to be most generally accepted with regard to the various oil and gas
properties. THE AMOUNT OF RESERVES CALCULATED AND SHOWN IN THE EVALUATION
REPORT MAY OR MAY NOT BE RECOVERED, AND IF RECOVERED, THE INCOME RECEIVED MAY
BE MORE OR LESS THAN ESTIMATED AND MAY INCREASE OR DECREASE AS A RESULT OF
FUTURE OPERATIONS. For more information regarding the assumptions used by the
independent petroleum engineer for preparing the Evaluation Report, refer to
Exhibit D, Evaluation Report, pages i-iv.
SUMMARY OF SCHEDULES
ON THE ENCLOSED SUMMARY SCHEDULES, THE MINORITY INTEREST OF LIMITED
PARTNERS REPRESENTS THE ADJUSTMENT TO OPERATING EARNINGS AND CAPITAL
CONTRIBUTIONS FOR THE TWENTY PERCENT (20%) OWNERSHIP OF THE LIMITED PARTNERS IN
OFFSHORE. EXPENSE AMOUNTS SHOWN ON THE ENCLOSED SCHEDULES DO NOT INCLUDE ANY
GENERAL AND ADMINISTRATIVE EXPENSES OF THE COMPANY OR ANY PROVISION FOR DEBT
SERVICE.
Schedule A - This schedule is a composite of the proved developed
producing reserves, proved developed non- producing reserves, and proved
undeveloped reserves. The schedules include the actual results of operations
and any capital expenditures incurred for the period from January 1, 1995
through May 31, 1995. The pro-forma results of operations and capital
expenditures for June 1995 through calendar year 2000 were extracted from the
Evaluation Report. The expense amounts shown on Schedule A do not include any
general and administrative expenses of the Company or any provision for debt
service. (Refer to Table 3, page 3 and Table 19, page 28 of the Evaluation
Report for additional details relative to this schedule.)
Schedule B - This schedule includes the actual results of operations
of the Company's producing oil and gas properties for the period of January 1,
1995 through May 31, 1995 and summarizes the estimate of proved producing oil
and gas properties from June 1995 through the calendar year 2000 as extracted
from the Evaluation Report. The evaluation of proved producing oil and gas
properties considers only wells that are currently producing. Future
production rates are adjusted for the estimated rate of decline necessary to
deplete the reserves. Historical production is usually utilized to determine a
decline trend; however, if no historical information is available for any well,
the decline trend may be extrapolated from other wells with similar production
characteristics. The future production rates may be more or less than
estimated because of changes in market demand or curtailments set by regulatory
agencies. (Refer to Table 4 through Table 11, pages 4 - 13 and Table 20, page
29 of the Evaluation Report for additional details relative to proved developed
producing reserves.)
Schedule C - This pro forma schedule summarizes Table 14, page 14 of
the Evaluation Report for proved developed non-producing reserves. (Refer to
the section indexed "Proved Non-Producing" for additional details relative to
this schedule.) The proved developed non-producing reserves included herein
are comprised of shut-in and "behind pipe" categories. Although the Evaluation
Report assumes certain time schedules for development of such reserves and
assumptions of initial production rates and decline trends, there can be no
assurance that the
19
<PAGE> 20
reserve volumes projected will be recovered or that the related cash flows will
be realized or that the capital expenditures reflected will be adequate to fund
the projected development projects. The initial non-producing properties to be
developed by the Company will be to certain wells currently producing from the
Morrow Formation in Wheeler County, Texas. It is anticipated that certain
"behind pipe" reserves may add 2.2 Mcfe net reserves to the Company's interest.
Schedule D - This pro forma schedule summarizes Table 16, page 25 of
the Evaluation Report for proved undeveloped properties, principally a
waterflood project in the KWB Field of Tom Green County, Texas. The
development time schedules, projected production rates and decline trends are
based on certain assumptions which may or may not be realized. The
development of the waterflood project would follow if positive results are
obtained from the drilling and completion of the test production well and the
initial 5-spot waterflood pattern. The Company will closely control and
monitor the operation of this test well in order to determine if the complete
development of this field will be economically feasible. Although the Company
has performed extensive studies for this waterflood project, there are no
assurances that the volume of recoverable reserves will be equivalent to that
projected by the Evaluation Report. (Refer to the attached Evaluation Report,
page iii, for more information relative to the waterflood project. Also refer
to Tables 16-18, pages 25-27 and Table 21, page 31 for additional details
relative to the proved undeveloped reserves.)
20
<PAGE> 21
RIO GRANDE, INC.
PRO FORMA SCHEDULE OF REVENUES, OPERATING EXPENSES
AND CAPITAL EXPENDITURES
TOTAL PROVED RESERVES
(AS SUMMARIZED FROM RESERVE REPORT EXHIBIT ___)
<TABLE>
<CAPTION>
Actual Pro forma Total
5 months 7 months 12 months
1995 1995 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net units of production
Oil (MBbls) 43,266 73,025 116,291 174,602 254,313 325,271 381,547
Gas(MMcf) 538,386 1,003,130 1,541,516 1,872,207 1,419,409 1,151,598 970,609
Unit price assumptions
Oil $17.62 $15.58 $16.34 $16.24 $17.09 $17.88 $18.55
Gas $1.64 $1.87 $1.79 $1.90 $2.01 $2.17 $2.35
Revenues -
Oil $762,442 $1,137,746 $1,900,188 $2,835,946 $4,345,474 $5,816,266 $7,076,158
Gas 882,835 1,876,716 2,759,551 3,552,394 2,851,738 2,504,052 2,278,981
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues $1,645,277 $3,014,462 $4,659,739 $6,388,340 $7,197,212 $8,320,318 $9,355,139
Expenses:
Production taxes 53,244 204,961 258,205 337,488 376,799 427,431 484,680
Operating 813,333 784,488 1,597,821 1,648,327 1,627,144 1,871,684 2,050,280
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 866,577 989,449 1,856,026 1,985,815 2,003,943 2,299,115 2,534,960
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating margin 778,700 2,025,013 2,803,713 4,402,525 5,193,269 6,021,203 6,820,179
Less: Minority interest of
limited partners (151,742) (372,324) (524,066) (829,765) (1,004,413) (1,176,996) (1,342,442)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net operating margin to
Company $626,958 $1,652,689 $2,279,647 $3,572,760 $4,188,856 $4,844,207 $5,477,737
----------- ----------- ----------- ----------- ----------- ----------- -----------
Capital expenditures 0 $1,010,227 $1,010,227 $1,628,796 $1,858,646 $1,880,310 $2,063,474
Less: Minority interest of
limited partners 0 (191,945) (191,945) (315,659) (371,729) (376,062) (412,695)
----------- ----------- ----------- ----------- ----------- -----------
Net capital expenditure for
Company 0 $818,282 $818,282 $1,313,137 $1,486,917 $1,504,248 $1,650,779
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
2000
----
<S> <C>
Net units of production
Oil (MBbls) 444,080
Gas(MMcf) 848,259
Unit price assumptions
Oil $19.71
Gas $2.50
Revenues -
Oil $8,753,443
Gas 2,122,354
-------------
Total revenues $10,875,796
Expenses:
Production taxes 587,044
Operating 2,121,036
-------------
Total operating expenses 2,708,080
-------------
Operating margin 8,167,716
Less: Minority interest of
limited partners (1,616,588)
-------------
Net operating margin to
Company $6,551,128
-------------
Capital expenditures $1,988,032
Less: Minority interest of
limited partners (397,606)
-------------
Net capital expenditure for
Company $1,590,426
-------------
</TABLE>
Note: The expenses shown on the above schedule do not include any general and
administrative expenses of the Company or any provision for debt service.
21
<PAGE> 22
RIO GRANDE, INC.
PRO FORMA SCHEDULE OF REVENUES, OPERATING EXPENSES
AND CAPITAL EXPENDITURES
PROVED PRODUCING RESERVES
(AS SUMMARIZED FROM RESERVE REPORT EXHIBIT ___)
<TABLE>
<CAPTION>
Actual Pro forma Total
5 months 7 months 12 months
1995 1995 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net units of production
Oil (MBbls) 43,266 58,377 101,643 83,549 70,494 57,635
Gas(MMcf) 538,386 700,951 1,239,337 882,108 554,684 445,243
Unit price assumptions
Oil $17.62 $15.47 $16.39 $16.05 $16,84 $17.69
Gas $1.64 $1.88 $1.78 $1.95 $2.02 $2.13
Revenues -
Oil $762,442 $903,368 $1,665,810 $1,340,603 $1,186,813 $1,019,324
Gas 882,835 1,318,252 2,201,087 1,721,593 1,122,163 946,562
----------- ------------ ------------ ----------- ----------- ------------
Total revenues $1,645,277 $2,221,620 $3,866,897 $3,062,196 $2,308,975 $1,965,887
Expenses:
Production taxes 53,244 106,389 159,633 154,040 136,531 119,219
Operating 813,333 701,887 1,515,220 1,212,422 950,686 841,528
----------- ------------ ------------ ----------- ----------- ------------
Total operating expenses 866,577 808,276 1,674,853 1,366,462 1,087,217 960,747
----------- ------------ ------------ ----------- ----------- ------------
Operating margin 778,700 1,413,344 2,192,044 1,695,734 1,221,758 1,005,140
Less: Minority interest of
limited partners (151,742) (270,477) (422,219) (322,458) (231,231) (190,277)
----------- ------------ ------------ ----------- ----------- ------------
Net operating margin to
Company $626,958 $1,142,867 $1,769,825 $1,373,277 $990,527 $814,863
----------- ------------ ------------ ----------- ----------- ------------
<CAPTION>
1999 2000 Remaining
---- ---- ---------
<S> <C> <C> <C>
Net units of production
Oil (MBbls) 44,201 36,960 172,663
Gas(MMcf) 373,316 320,289 1,430,350
Unit price assumptions
Oil $18.73 $19.63 $24.47
Gas $2.21 $2.30 $2.66
Revenues -
Oil $827,703 $725,382 $4,225,572
Gas 824,759 735,073 3,797,814
Total revenues $1,652,462 $1,460,455 $8,023,386
----------- ----------- -----------
Expenses:
Production taxes 105,799 93,488 547,620
Operating 903,768 682,693 4,460,470
Total operating expenses 1,009,567 776,181 5,008,090
----------- ----------- -----------
Operating margin 642,895 684,274 3,015,296
Less: Minority interest of
limited partners (119,777) (129,724) (613,105)
----------- ----------- -----------
Net operating margin to
Company $523,118 $554,551 $2,402,191
----------- ----------- -----------
</TABLE>
Note: The expenses shown on the above schedule do not include any general and
administrative expenses of the Company or any provision for debt service.
22
<PAGE> 23
RIO GRANDE, INC.
PRO FORMA SCHEDULE OF REVENUES, OPERATING EXPENSES
AND CAPITAL EXPENDITURES
PROVED NON-PRODUCING RESERVES
(AS SUMMARIZED FROM RESERVE REPORT EXHIBIT ___)
<TABLE>
<CAPTION>
Pro forma
7 months
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net units of production
Oil (MBbls) 8,278 29,972 25,464 20,977 12,947
Gas(MMcf) 249,273 815,104 673,305 483,720 351,015
Unit price assumptions
Oil $16,08 $16.69 $18.14 $18.43 $12.57
Gas $1.73 $1.75 $1.83 $1.93 $2.04
Revenues -
Oil $133,095 $500,334 $461,876 $386,678 $162,729
Gas 431,242 1,426,432 1,232,148 933,580 716,071
---------- ----------- ----------- ----------- ----------
Total revenues $564,337 $1,926,766 $1,694,024 $1,320,258 $878,800
Expenses:
Production taxes 84,370 107,352 78,904 58,517 43,587
Operating 47,183 220,554 249,246 293,336 148,247
---------- ----------- ----------- ----------- ----------
Total operating expenses 131,553 327,906 328,330 351,853 191,834
---------- ----------- ----------- ----------- ----------
Operating margin 432,784 1,598,860 1,365,694 968,405 686,966
Less: Minority interest of
limited partners (86,557) (319,772) (273,139) (193,681) (137,393)
---------- ----------- ----------- ----------- ----------
Net operating margin to $346,227 $1,279,088 $1,092,555 $774,724 $549,573
---------- ----------- ----------- ----------- ----------
Capital expenditures $718,837 $64,637 $56,787 $6,184 $160,442
Less: Minority interest of
limited partners (143,767) (12,927) (11,357) (1,237) (32,088)
---------- ----------- ----------- ----------- ----------
Net capital expenditure for
Company $575,070 $51,710 $45,430 $4,947 $128,354
---------- ----------- ----------- ----------- ----------
<CAPTION>
2000 Remaining Total
---- --------- -----
<S> <C> <C> <C>
Net units of production
Oil (MBbls) 6,990 25,545 130,173
Gas(MMcf) 273,324 1,074,919 3,920,660
Unit price assumptions
Oil $20.82 $23.35
Gas $2.12 $2.46
Revenues -
Oil $145,499 $596,487 $2,386,699
Gas 579,447 2,644,301 7,963,220
----------- ------------ -------------
Total revenues $724,946 $3,240,788 $10,349,919
Expenses:
Production taxes 70,352 170,626 613,708
Operating 163,087 736,307 1,858,140
----------- ------------ -------------
Total operating expenses 233,439 906,933 2,471,848
----------- ------------ -------------
Operating margin 491,507 2,333,855 7,878,071
Less: Minority interest of
limited partners (98,301) (466,771) (1,575,614)
----------- ------------ -------------
Net operating margin to $393,206 $1,867,084 $6,302,457
----------- ------------ -------------
Capital expenditures $85,000 $0 $1,091,887
Less: Minority interest of
limited partners (17,000) 0 (218,377)
----------- ------------ -------------
Net capital expenditure for
Company $68,000 $0 $873,510
----------- ------------ -------------
</TABLE>
Note: The expenses shown on the above schedule do not include any general and
administrative expenses of the Company or any provision for debt service.
23
<PAGE> 24
RIO GRANDE, INC.
PRO FORMA SCHEDULE OF REVENUES, OPERATING EXPENSES
AND CAPITAL EXPENDITURES
PROVED UNDEVELOPED RESERVES
(AS SUMMARIZED FROM RESERVE REPORT EXHIBIT ___)
<TABLE>
<CAPTION>
Pro forma
7 months
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net units of production
Oil (MBbls) 6,370 61,081 158,355 246,659 324,399 400,130
Gas(MMcf) 52,906 174,995 191,420 222,635 246,278 254,646
Unit price assumptions
Oil $15.90 $16.29 $17.03 $17.88 $18.76 $19.70
Gas $2.40 $2.31 $2.60 $2.80 $3.00 $3.17
Revenues -
Oil $101,283 $995,009 $2,696,786 $4,410,263 $6,085,725 $7,882,561
Gas 127,222 404,369 497,427 623,910 738,152 807,834
---------- ------------ ------------ ----------- ----------- ------------
Total revenues $212,744 $1,307,403 $3,135,920 $4,987,724 $6,786,863 $8,660,900
Expenses:
Production taxes 14,202 76,096 161,364 249,695 335,294 423,204
Operating 35,418 215,351 427,032 736,820 998,265 1,275,256
---------- ------------ ------------ ----------- ----------- ------------
Total operating expenses 49,620 291,447 588,396 986,515 1,333,559 1,698,460
---------- ------------ ------------ ----------- ----------- ------------
Operating margin 163,124 1,015,956 2,547,524 4,001,209 5,453,304 6,962,440
Less: Minority interest of
limited partners (15,291) (187,536) (500,043) (793,038) (1,085,272) (1,388,563)
---------- ------------ ------------ ----------- ----------- ------------
Net operating margin to
Company $147,833 $828,420 $2,047,481 $3,208,171 $4,368,032 $5,573,877
---------- ------------ ------------ ----------- ----------- ------------
Capital expenditures $291,390 $1,564,159 $1,801,859 $1,874,126 $1,903,032 $1,903,032
Less: Minority interest of
limited partners (48,178) (302,732) (360,372) (374,825) (380,606) (380,606)
---------- ------------ ------------ ----------- ----------- ------------
Net capital expenditure for
Company $243,212 $1,261,427 $1,441,487 $1,499,301 $1,522,426 $1,522,426
---------- ------------ ------------ ----------- ----------- ------------
<CAPTION>
Remaining TOTAL
--------- -----
<S> <C> <C>
Net units of production
Oil (MBbls) 1,350,576 2,547,570
Gas(MMcf) 526,576 1,669,456
Unit price assumptions
Oil $22.25
Gas $3.38
Revenues -
Oil $30,052,830 $52,224,457
Gas 1,781,711 4,960,625
------------ ------------
Total revenues $31,834,541 $56,926,095
Expenses:
Production taxes 1,519,229 2,779,084
Operating 6,422,486 10,110,628
------------ ------------
Total operating expenses 7,941,715 12,889,712
------------ ------------
Operating margin
Less: Minority interest of 23,892,826 44,036,383
limited partners (4,772,722) (8,742,465
------------ ------------
Net operating margin to
Company $19,120,104 $35,293,918
------------ ------------
Capital expenditures
Less: Minority interest of $1,903,032 $11,240,630
limited partners (380,606) (2,227,926)
------------ ------------
Net capital expenditure for
Company $1,522,426 $9,012,704
------------ ------------
</TABLE>
Note: The expenses shown on the above schedule do not include any general and
administrative expenses of the Company or any provision for debt service.
24
<PAGE> 25
FINANCIAL INFORMATION
Set forth below are condensed combined financial statements for the
four month period ended May 31, 1995.
RIO GRANDE, INC. AND SUBSIDIARIES
Condensed Combined Balance Sheets(1)
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
-------------- --------------- --------------
May 31, 1995 Adjustment(2) May 31, 1995
-------------- --------------- --------------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,855 2,253
398
Receivables: Trade and other 603 - 603
Prepaid expenses and other 47 - 47
-------------- ------- ----------
Total current assets 1,048 - 2,903
- -----
Property and equipment, at cost 8,081 - 8,081
Less accumulated depreciation, 2,829 - 2,829
-------------- ------- ----------
depletion and amortization
Net property and 5,252 - 5,252
equipment
Other assets 1,100 145 1,245
-------------- ------- ----------
$ 7,400 $9,400
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable 291 - 291
= ===
Accrued expenses 77 - 77
Current installments of long-term debt 515 - 515
-------------- ------- ----------
Total current liabilities 883 - 883
Accrued platform abandonment expense 961 961
Minority interest combined limited partnership 1,095 - 1,095
Long-term debt, excluding current installments 1,623 2,000 3,623
-------------- ------- ----------
Total Liabilities 4,562 - 5,679
Shareholders' equity 2,838 - 2,838
============== ======= ==========
$ 7,400 - $9,400
============== ======= ==========
</TABLE>
(1) The notes to the financial statements contained in Form 10-K for the
period ended January 31, 1995 and Form 10- QSB for the period ended
April 30, 1995 are an integral part of these financial statements.
See Exhibit A-1, A-2.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Pro Forma Adjustments" for description of pro
forma adjustments.
25
<PAGE> 26
Rio Grande, inc. and subsidiaries
Condensed Combined Statements of Operations
(Dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Four Months Ended May 31
-----------------------------------------
1995 1994
---------------- ---------------
<S> <C> <C>
REVENUES:
Oil and gas leases $ 1,306 1,258
------------- -----------
Total revenues 1,306 1,258
------------- -----------
COSTS AND EXPENSES:
Lease operating and other production 652 376
expense
Dry hole costs -- --
Depreciation, depletion and 457 375
amortization
Provisions for abandonment 60 68
General and administrative 414 300
------------- -----------
Total costs and expenses
1,583 1,119
------------- -----------
EARNINGS (LOSS) FROM OPERATIONS (277) 139
------------- -----------
OTHER INCOME (EXPENSES):
Interest expense (105) (18)
Interest income 16 10
Gain on sale of assets 1,095 42
Other (net) (8) 13
Minority interest in earnings of
combined limited partnership (203) (86)
------------- -----------
Total other income (expenses) 795 (39)
------------- -----------
Earnings (loss) from continuing operations 518 100
State income and franchise taxes 2 6
------------- -----------
NET EARNINGS (LOSS) 516 94
============= ===========
</TABLE>
The notes to the financial statements contained in Form 10-K for the period
ended January 31, 1995 and Form 10-QSB for the period ended April 30, 1995 are
an integral part of these financial statements. See Exhibit A-1, A-2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operation Reference should be made to Rio Grande, Inc. and
Subsidiaries' Form 10-K report filed for the year ended January 31, 1995 and
the Form 10-QSB report filed for the quarter ended April 30, 1995 for
additional details of the Company's results of operations for fiscal year 1995
and the four-month period ended May 31, 1995. All material items included in
the accompanying notes to those reports
26
<PAGE> 27
have not changed except as a result of normal transactions during the interim
and items disclosed below.
Four Months Ended May 31, 1995 For the first quarter and one month
ended May 31, 1995, consolidated revenues from the sale of oil and gas products
was approximately $1,306,000. Total product sold for the four month period was
approximately 36,000 Bbls oil and condensate and 435 Mmcf gas. The average
price of oil and gas products sold during this period was approximately $17.19
per barrel and $1.63 per Mcf. Production costs and other related miscellaneous
expenses were approximately $652,000. The provision for the plugging and
abandonment cost of the offshore platforms and wells owned by Offshore for the
first quarter and one month ended May 31, 1995 was approximately $60,000.
During the same period, approximately $44,500 received from the sale of oil and
gas was deposited to Offshore's escrow account maintained by an independent
trust agent.
Depletion of oil and gas properties for the first quarter and one
month ended May 31, 1995 based on the units of production method was
approximately $435,000.
General and administrative expenses for the first quarter and one
month ended May 31, 1995 were approximately $414,000. Interest expense of
approximately $105,000 was incurred on the Company's outstanding debt for the
funding of oil and gas property acquisitions.
The loss from operations of ($277,000) was primarily attributable to
generally lower prices for oil and gas and to increased operating expenses
related to the Pyramid acquisition.
During May 1995, Offshore sold its interest in a certain oil and gas
property located offshore of Louisiana recognizing a gain on the sale of
approximately $1,085,000. Other gain recognized by the Company was for sale of
salvage equipment.
Due to the Company's existing net operating loss carryforward, income
tax effect on the Company's net income for the first quarter and one month
ended May 31, 1995 will be minimal. Therefore, no income tax provision was
considered necessary.
Increases in revenues, costs and expenses for the four month period
ended May 31, 1995 compared to the same period ended May 31, 1994 are primarily
attributable to the operations of the properties acquired in 1994.
Liquidity and Capital Resources In May 1995, Rio Grande Offshore, Ltd.
sold its interest in a certain oil and gas property located offshore of
Louisiana. Proceeds from the sale of this property were approximately
$1,290,000, which resulted in a gain on sale to the partnership of
approximately $1,085,000. Drilling, as an eighty percent (80%) partner,
received a cash distribution of approximately $1,032,000 from the sale,
27
<PAGE> 28
of which $800,000 was applied as a principal reduction on the Company's
outstanding bank indebtedness, which is secured by substantially all of the
Company's interest in the properties owned by Offshore. Effective July 27,
1995, the Company sold its interest in certain additional properties for
approximately $184,000 and applied $170,000 of the proceeds to a further
reduction of its bank indebtedness. As a result of this most recent reduction,
the bank has agreed to restructure the Company's monthly principal and interest
payments through May 31, 1996. The monthly payments of principal and interest
will be set at $50,000 through August 1995, $55,000 through December 1995 and
$61,000 through May 1996, the maturity date for the bank debt. The bank, at its
sole discretion, has the option to renew or extend the maturity date of the
Company's bank indebtedness. It is expected that the principal balance
remaining on the bank indebtedness will be approximately $1.4 million at May
31, 1996, the current maturity date. No assurances can be given that the Bank
will agree to renew, extend or restructure the Company's bank debt.
Based upon the current level of operations, the Company believes that
its cash flow from operations, together with the proceeds from the sale of the
Units offered hereby, will be adequate to meet its anticipated requirements for
working capital, capital expenditures, interest payments and scheduled
principal payments through May 1996. If the Company is unable to generate cash
flow from operations in the future which is adequate to service its debt or the
bank is unwilling to renew or extend the maturity date of the current bank
debt, the Company may be required to refinance all or a portion of its existing
debt or to obtain additional financing. There can be no assurance that such
refinancing would be possible or that any additional financing could be
obtained. The Company's ability to meet its debt service obligations and to
reduce its total debt will be dependent upon its future performance, which, in
turn, will be subject to general economic conditions and to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control.
Lower gas prices are the primary reason for the decline in the
Company's financial performance during the first quarter and one month ended
May 31, 1995. Approximately seventy percent (70%) of the Company's sales
production volume is from gas. The average price for the first quarter and one
month ended May 31, 1995 was approximately sixty cents per MCF less than the
average for the first quarter and one month ended May 31, 1994.
The Company has monitored operating expenses closely during this
period of lower gas prices. The workover of wells necessary to maintain
production will be funded from working capital, however, any significant
recompletions or additional acquisitions will require the Company to obtain
additional working capital.
The Company is not obligated to provide a fixed or determinable
quantity of oil or gas in the future under any existing contracts, agreements
or any hedge or swap arrangements.
28
<PAGE> 29
Pro Forma Adjustment
The pro forma adjustments are prepared assuming that the Maximum
Offering occurred on May 31, 1995. Prior to the application of the proceeds,
the Company cash would increase by $1.855 million, deferred cost would increase
by the $145,000 in estimated total costs of the Offering and long-term debt
would increase by the face value of the subordinated debt. It is assumed that
the detachable warrants would have no material value on the offering date.
At July 31, 1995, 5,552,760 shares were outstanding and 375,000
incentive and non-qualified options had been granted for a total of 5,927,760
fully diluted shares. An additional 535,500 options are anticipated to be
granted during August 1995 under the 1995 Incentive Stock Option Plan and the
1995 Non-Qualified Stock Option Plan, both of which were approved at the
Company's Annual Meeting on June 1, 1995. See "Management." The Maximum
Offering provides for warrants to purchase 1,388,160 shares which, when
combined with currently outstanding shares and shares to be issued upon the
exercise of existing and currently anticipated stock options, would result in a
total of, 7,851,420 fully diluted shares outstanding. Per share amounts set
forth herein have been calculated using 7,851,420 as the number of fully
diluted shares outstanding.
29
<PAGE> 30
MANAGEMENT
Robert A. Buschman, 68, is Chairman of the Board of Directors and the
Chief Executive Officer of the Company. Prior to joining the Company in
February 1979, Mr. Buschman was President, Chief Executive Officer and a
Director of Dixilyn-Field Drilling Company, a subsidiary of Panhandle Eastern
Pipeline Company, from April 1978 to February 1979. Mr. Buschman has served as
President and a member of the Board of Directors of the International
Association of Drilling Contractors and the Texas Mid-Continent Oil and Gas
Association.
Guy Bob Buschman, 44, President and a Director, organized the Company
in April 1978. Mr. Buschman was employed by Field International Drilling
Company from August 1973 through March 1978 and held various positions with
that company, including domestic and international safety and insurance manager
and supervisor of shipyard construction of offshore drilling rigs. He also
held foreign assignments in Trinidad-Tobago, the Republic of Singapore and
Egypt. He is a past director of the International Association of Drilling
Contractors and is presently a director of the Texas Mid-Continent Oil and Gas
Association.
John G. Hurd, a Director, 80, has been managing general partner of
Hurd Enterprises, Ltd. and Hurd Investments, Ltd., both limited partnerships
which are engaged in the business of oil production, ranching and investments,
for more than the past five years. Mr. Hurd served as United States Ambassador
to the Republic of South Africa from 1970-1975.
H. M. (Johnny) Shearin, Jr., 72, a Director, was President of SPG
Exploration Corporation from 1971 to 1988. Prior to 1971, Mr. Shearin was Vice
President and Manager of Engineering for Core Laboratories, Inc. In 1988, he
retired from Quantum Chemical (formerly National Distillers who acquired SPG).
From 1988 to present, Mr. Shearin has performed consulting services for various
independent operators and oil field service and engineering companies.
Hobby A. Abshier, 63, a Director, is a General Partner of the AM Fund
and for the past 10 years has been a General Partner and co-founder of Triad
Ventures Limited. Prior to entering the venture capital business, he spent 21
years at Rotan Mosle, Inc., a regional investment banking firm, as a partner
and a member of its Board of Directors. Mr. Abshier is on the Board of
Directors of Technology Works, DTM Corp., B'trieve Technologies, all in Austin,
Texas and Dawson Well Servicing, Inc., San Antonio, Texas.
Ralph F. Cox, 62, a Director, is currently self-employed as an energy
management consultant. For four years prior thereto, Mr. Cox was President of
Greenhill Petroleum Corporation, a subsidiary of Western Mining Corporation.
From 1985 through 1990, he served as President and Chief Operating Officer of
Union Pacific Resources Company, a petroleum exploration and production
company. Before 1985, Mr. Cox spent 31 years with Atlantic Richfield Company
("ARCO"), joining the
30
<PAGE> 31
ARCO board in 1978, assuming responsibility for ARCO's worldwide petroleum
exploration and production activities and minerals exploration and production
activities in 1984, and culminating with his election as Vice Chairman of ARCO
in 1985. Mr. Cox serves as a director of Bonneville Pacific Corporation, an
independent power company, as a director of Cham Hill, engineering consulting
firm, and as Independent Trustee for The Fidelity Group of Funds. Mr. Cox
holds a Bachelor of Science in Petroleum Engineering and a Bachelor of Science
in Mechanical Engineering from Texas A & M University.
Guy Bob Buschman is the son of Robert A. Buschman. Ralph Cox is the
brother-in-law to Robert A. Buschman and uncle to Guy Bob Buschman. There are
no other family relationships in the Company
At the Annual Meeting of Shareholders held June 1, 1995, the Company's
shareholders approved the 1995 Incentive Stock Option Plan, which reserved
500,000 shares of the Company's common stock for the plan, and the 1995
Non-Qualified Stock Option Plan, which reserved 525,000 shares of the Company's
common stock for the non-qualified option plan. The 1995 Non-Qualified Stock
Option Plan provides that non-employee directors who, at the date of their
election to the Board of Directors, have not previously been granted options in
the 1995 Non-Qualified Option Plan, are automatically granted options to
purchase 50,000 shares pursuant to the plan. Each year thereafter, upon
reelection to the Board, the non-employee directors will be granted additional
options to purchase 5, 000 shares of the Company's common stock. On June 1,
1995, four (4) non-employee directors, Messrs. Abshier, Hurd, Shearin and Cox,
were elected who are qualified to receive 50,000 options each for a total of
200,000 options. It is anticipated that these options will be granted to the
non-employee directors by the Company's Compensation Committee in August 1995
at an option price of $.45 per share.
It is anticipated that the Company's Compensation Committee will also
grant 335,500 options pursuant to the 1995 Incentive Stock Option Plan to
employees of the Company in August 1995 at an option price of $.40 per share.
Among the incentive stock options to be granted are 100,000 to Robert A.
Buschman and 100,000 to Guy Bob Buschman, directors and officers of the
Company.
The total fully-diluted shares of Common Stock outstanding inclusive
of the shares to be issued upon the exercise of all existing and currently
anticipated stock options and the Warrant shares assuming the Maximum Offering
would be 7,851,420.
CERTAIN TRANSACTIONS
Under the terms of the Offshore Partnership Agreement, the limited
partners are required to contribute their proportionate part of any acquisition
costs or development costs that Drilling, as General Partner, determines to
incur. If they choose not to participate, their interests are adjusted to take
into account their non-participation.
31
<PAGE> 32
Since formation of the Offshore, Robert A. Buschman, Chairman and Chief
Executive Officer, has made capital contributions to Offshore equal to
approximately $817,000, equivalent to his ten percent ownership interest in
Offshore, for acquisitions and development costs.
Under the Partnership Agreement, Drilling may have Offshore's direct
expenses billed directly to and paid by Offshore and is entitled to
reimbursement out of Offshore funds for any and all actual costs and expenses
incurred while acting on behalf of Offshore. These direct expenses generally
include actual operating expenses of the oil and gas properties owned by
Offshore. As operator of the oil and gas properties acquired in July 1994,
Drilling assesses the participating working interest owners, including
Offshore, for overhead based on the Council of Petroleum Accountants Societies
("COPAS") monthly rates. COPAS overhead rates are charged on an individual
well basis to reimburse the operator for the general costs of executive and
administrative functions incurred by the corporate office for operating the
wells. The COPAS overhead rate per well is normally adjusted annually based on
published inflationary increases. The COPAS overhead fees charged to Offshore
for the period from July 1994 through January 31, 1995 were $432,000, and for
the four month period ended May 31, 1995 were $229,000. The COPAS charges
attributable to Drilling's eighty percent (80%) partnership interest in
Offshore for the respective periods were $345,600 and $183,200, respectively.
Robert A. Buschman's partnership interest incurred a charge of $43,200 and
$22,900, respectively, for the same periods.
Under the Partnership Agreement, Drilling is not entitled to
reimbursement for costs and expenses associated with the maintenance of the
books and records of Offshore or the preparation of any type of financial
statement or report with respect to Offshore operations unless such documents
are prepared by a third party. In addition to the fees discussed above,
Drilling receives a monthly fee of $1,000 per month as compensation for the
services it renders to Offshore. This fee may not be changed without the
unanimous consent of the partners. In accordance with the terms of the
Partnership Agreement, Drilling has received $12,000 for each of the years
ended January 31, 1995 and 1994 and $4,000 for the four month period ended May
31, 1995. For fiscal years ended January 31, 1994 and 1995 and the four month
period ended May 31, 1995, the Company's total general and administrative
expenses were $907,000, $1,152,000, and $414,000, respectively. The Company
intends to request consents from the limited partners of Offshore to increase
the allocation of general and administrative expenses of Drilling to Offshore
and to request retroactive adjustment of the overhead allocations to the
beginning of the current fiscal year. No assurance can be given that the
requisite consents will be obtained.
During fiscal 1994 and 1995, certain officers and directors
participated with the Company in the acquisition of oil and gas leases. The
officers and directors paid approximately $44,000 for their proportionate share
of acquisitions for such properties.
32
<PAGE> 33
RISK FACTORS
THE UNITS OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE PURCHASERS SHOULD
CAREFULLY READ THIS ENTIRE MEMORANDUM AND SHOULD CAREFULLY CONSIDER, ALONG WITH
OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
PRICE VOLATILITY; INDUSTRY CONDITIONS; IMPACT ON COMPANY'S PROFITABILITY
The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas.
Crude oil and natural gas prices can be extremely volatile and in recent years
have been depressed by excess total domestic and imported supplies. Prices are
also affected by actions of state and local agencies, the United States and
foreign governments and international cartels. These external factors and the
volatile nature of the energy markets make it difficult to estimate future
prices of crude oil and natural gas. Any material decline in the prices of
crude oil and natural gas could have a material adverse effect on the Company's
financial condition and results of operations and would result in reduced cash
flow and borrowing capacity. In such event, no assurances can be given that
the Company would be able to meet its current obligations.
Sales of crude oil and natural gas are seasonal in nature, leading to
substantial differences in cash flow at various times throughout the year.
Federal and state regulation of crude oil and natural gas production and
transportation, general economic conditions, changes in supply and changes in
demand all could adversely affect the Company's ability to produce and market
its crude oil and natural gas. If market factors were to change, the financial
impact on the Company could be substantial. The availability of markets and
the volatility of product prices are beyond the control of the Company and thus
represent a significant risk.
In addition, declines in crude oil and natural gas prices might, under
certain circumstances, require a write- down of the book value of the Company's
crude oil and natural gas properties. If such declines were substantial, they
could result in the occurrence of an event of default under the Company's
financing agreements with its bank lender that could require the sale of some
of the Company's producing properties under unfavorable market conditions or
require the Company to seek additional equity capital or an alternative source
of borrowed funds. Substantially all of the assets of the Company, including
the producing properties, are pledged as security to the Company's bank debt,
to which the Notes offered hereby are subordinated in all respects. See "Risk
Factors - Leverage and Debt Service."
LEVERAGE AND DEBT SERVICE
As of May 31, 1995, the Company's total debt and stockholders' equity
were approximately $2.1 and $2.8 million, respectively. As a result of the
sale of certain oil
33
<PAGE> 34
and gas properties on July 27, 1995 and the application of $170,000 of the
$184,000 proceeds from such sale to the reduction of the Company's indebtedness
with the bank, the Company's bank lender has agreed to restructure the
Company's monthly principal and interest payments through May 31, 1996. The
restructured monthly payments of principal and interest would be $50,000
through August 1995, $55,000 through December 1995 and $61,000 through May
1996. The bank, in its sole discretion, may determine whether to permit the
Company to renew and/or extend the maturity date of the Company's indebtedness.
On May 31, 1996, the current maturity date of the bank indebtedness,
approximately $1.4 million is expected to be outstanding on the Company's loan.
No assurance can be given that the Bank will agree to renew, extend or
restructure the Company's bank debt.
Based upon the current level of operations, the Company believes that
its cash flow from operations will be adequate to meet its anticipated
requirements for working capital, capital expenditures, interest payments and
scheduled principal payments through May 1996. If the Company is unable to
generate cash flow from operations in the future adequate to service its debt,
or the bank does not extend the maturity date of the current debt, the Company
may be required to refinance all or a portion of its existing debt, to obtain
additional financing, or to apply some of the proceeds of the Offering to
reduce the bank debt. There can be no assurance that such refinancing would be
possible or that any additional financing could be obtained. The Company's
ability to meet its debt service obligations and to reduce its total debt will
be dependent upon its future performance, which, in turn, will be subject to
prevailing prices for crude oil and natural gas, to general economic conditions
and to financial, business and other factors affecting the operations of the
Company, many of which are beyond its control.
Substantially all of the assets of the Company are pledged to secure
the Company's bank debt, to which the Notes offered hereby are subordinated in
all respects. If the Company were to default under the agreement with its bank
lender and did not otherwise have the ability to pay the Bank, the Bank could
accelerate the indebtedness and commence foreclosure procedures on the
collateral securing the loan, which consists of substantially all of the
Company's oil and gas properties. See "Senior Indebtedness" and "Description
of Notes and Note Purchase Agreement."
RELIANCE ON ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUES; DEPLETION OF
RESERVES
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth in this Memorandum represent only
estimates and the actual reserves may vary materially from the estimated
reserves. In addition, the estimates of future net revenues from proved
reserves of the Company and the present value thereof are based upon certain
assumptions about future production levels, prices and costs that may not prove
to be correct over time and that may vary materially and adversely from
34
<PAGE> 35
assumed levels. The rate of production from crude oil and natural gas
properties declines as reserves are depleted. Except to the extent the Company
acquires additional properties containing proved reserves, conducts successful
exploration and development activities or, through engineering studies,
identifies additional behind-pipe zones or secondary recovery reserves, the
proved reserves of the Company will decline as reserves are produced. Future
crude oil and natural gas production is therefore highly dependent upon the
Company's level of success in acquiring or finding additional reserves.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on Robert A. Buschman, Guy Bob
Buschman and H. M. Shearin, Jr. for its management and business and industry
contacts. The unavailability of any of the foregoing individuals could have a
material adverse effect on the Company's financial condition and results of
operations. The Company's success is also dependent upon its ability to employ
and retain skilled technical personnel. While the Company has not to date
experienced difficulties in employing or retaining such personnel, its failure
to do so in the future could adversely affect its financial condition and
results of operations.
OPERATING LEVERAGE
The Company's production costs and its general and administrative
expenses increased significantly as a result of an acquisition of operated
properties during 1994. The Company intends to increase its future revenues
through development and exploratory drilling activities and through
acquisitions. The Company's ability to operate profitably in the future will
be dependent upon the Company's ability to achieve such revenue growth and/or
to effect meaningful expense reductions.
LIQUIDITY
The Units offered hereby, including the Notes, Warrants, and shares of
Common Stock purchasable upon exercise of the Warrants, are being sold in
reliance on exemptions from the Securities Act of 1933 and the provisions of
applicable state securities laws, and may not be resold unless they are
subsequently registered under the Act and applicable state securities laws or
an opinion of counsel satisfactory to the Company has been obtained that such
registration is not required. The Company is not currently contemplating any
such registration. Although the Company's Common Stock is available for
trading on the pink sheets, there is no active trading market for the Common
Stock. There is no market for the Units, Notes, or Warrants, and it is
unlikely that a market will be available in the future.
The Notes are transferable only in accordance with the Note Purchase
Agreement, and the Warrants are transferable only in accordance with the
Warrant Agreement. Holders of Units may not be able to liquidate their
investments in the event
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of an emergency or for any other reason, and should therefore be aware of the
lack of liquidity of the Units, Notes, Warrants, and shares of Common Stock
underlying the Warrants. See "Description of Warrants" and "Description of
Notes and Note Purchase Agreement."
OPERATING HAZARDS; UNINSURED RISKS
The nature of the crude oil and natural gas business involves certain
operating hazards such as crude oil and natural gas blowouts, explosions,
formations with abnormal pressures, cratering and crude oil spills and fires,
any of which could result in damage to or destruction of crude oil and natural
gas wells, destruction of producing facilities, damage to life or property,
suspension of operations, environmental damage and possible liability to the
Company. In accordance with customary industry practices, the Company
maintains insurance against some, but not all, of such risks and some, but not
all, of such losses. The occurrence of such an event not fully covered by
insurance could have a material adverse effect on the financial condition and
results of operations of the Company.
COMPETITION
The Company operates in a highly competitive environment. In seeking
to acquire desirable producing properties or new leases for future exploration
and in marketing its crude oil and natural gas production, the Company faces
intense competition from both major and independent crude oil and natural gas
companies, as well as from numerous individuals, drilling programs and
marketers. Many of these competitors have financial and other resources
substantially in excess of those available to the Company.
ACQUISITION RISKS
The Company intends to continue to pursue acquisition of producing
crude oil and natural gas properties. Although the Company performs a review
of the acquired properties that it believes is consistent with industry
practices, such reviews are inherently incomplete. Generally, it is not
feasible to review in depth every individual property involved in each
acquisition. Ordinarily, the Company will focus its review efforts on the
higher-valued properties and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential problems nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies
and capabilities. Inspections may not always be performed on every well, and
environmental problems, such as ground water contamination, are not necessarily
observable even when an inspection is undertaken. In addition, there can be
no assurance that the Company will be able to identify attractive acquisition
opportunities or consummate acquisitions in the future.
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TITLE TO PROPERTIES
As is customary in the crude oil and natural gas industry, the Company
performs a minimal title investigation before acquiring undeveloped properties,
which generally consists of obtaining a title report from legal counsel
covering title to the major properties and due diligence reviews by independent
landmen of the remaining properties. The Company believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the crude oil and natural gas industry. A title opinion is
obtained prior to the commencement of any drilling operations on such
properties. The Company's properties are subject to customary royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens none of which the Company believes materially interfere with the
use of, or affect the value of, such properties. Substantially all of the
Company's interests in properties are also subject to the liens of the
Company's bank lender.
GOVERNMENT REGULATION
The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for and development,
production and marketing of crude oil and natural gas, as well as environmental
and safety matters. Such laws and regulations have generally become more
stringent in recent years, often imposing greater liability on a larger number
of potentially responsible parties. Because the requirements imposed by such
laws and regulations are frequently changed, the Company is unable to predict
the ultimate cost of compliance with such requirements. There can be no
assurance that laws and regulations enacted in the future will not adversely
affect the Company's financial condition and results of operations.
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TERMS OF THE OFFERING
INVESTOR SUITABILITY STANDARDS
In order to ensure that the offering and sale of the Units is made in
compliance with applicable federal and state securities laws and only to
persons for whom an investment in the Units is suitable, each investor must
meet the criteria of an accredited investor or meet certain non-accredited
investor suitability standards.
In addition, each investor, either alone or with his or her purchaser
representative, must have such knowledge and experience in financial and
business matters that he or she is capable of evaluating the merits and risks
of an investment in the Company.
AGENT
The Units will be offered and sold through the Agent as sales agent on
a "best efforts" basis for the Company. There is no firm commitment on the
part of the Agent and it is under no obligation to purchase or pay for any of
the Units. As compensation for its services and contingent upon the sale of
all of the Units offered hereby, the Agent will receive from the Company a fee
equal to 4.25% of the aggregate sales price of the Units.
The Company has agreed to indemnify the Agent against certain civil
liabilities, including liabilities arising under the Act.
PLAN OF DISTRIBUTION
A minimum of sixty (60) and a maximum of eighty (80) Units, consisting
of Notes of an aggregate principal amount of $1.5 and $2 million, respectively,
and Warrants to purchase a minimum of 979,860 and a maximum of 1,388,160 shares
of Common Stock of the Company (depending upon the total amount of the
Offering), will be offered to qualified investors. Subject to certain
adjustments, the total number of shares of Common Stock of the Company subject
to the Warrants varies, depending upon the amount of the Offering, between 15
and 20% of the total shares of Common Stock outstanding on the date hereof, as
more fully described herein. See "Description of Warrants."
The Units will be offered exclusively to investors who are residents
of the state of Texas, and under no circumstances will there be more than 35
non-accredited investors. The Agent will receive fees for sales of the Units
as described above. If for any reason the Closing does not take place prior to
October 31, 1995, all subscription amounts received from investors will be
returned with interest, if any, but net of escrow fees.
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Closing of the Offering may occur as soon as subscriptions aggregating
a minimum of $1,500,000 have been accepted by the Company. The Company expects
to conclude the Offering on or before September 13, 1995. However, the Company
reserves the right in its sole discretion to extend the Offering to a date not
later than October 31, 1995. If the Offering is extended to a date later than
the filing date for the Company's Form 10-QSB for the quarter ended July 31,
1995, the Company intends to supplement this Memorandum by providing
prospective investors with a copy of the filed Form 10-QSB for the period
ending July 31, 1995 and to provide any investor who has previously subscribed
for Units the opportunity to withdraw their subscription. In the event the
Offering is not concluded on or before September 13, 1995, the Form 10-QSB for
the period ended July 31, 1995 would be deemed to be incorporated by reference
in this Memorandum.
No general solicitation will be permitted in connection with the sale
of the Units and offers will be made only to prospective investors who meet the
suitability standards set forth above. No general advertising of, or
supplemental sales literature will be used in connection with this Offering.
All offers will be made solely by delivery of this Memorandum and any amendment
or supplement to this Memorandum.
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WHO MAY INVEST
EACH PROSPECTIVE INVESTOR WILL BE REQUIRED TO MEET CERTAIN SUITABILITY
REQUIREMENTS. THE PURCHASE OF UNITS IS SUITABLE ONLY FOR INVESTORS WHO HAVE NO
NEED FOR LIQUIDITY IN THIS INVESTMENT, WHO HAVE ADEQUATE MEANS OF PROVIDING FOR
THEIR CURRENT NEEDS AND CONTINGENCIES, AND WHO CAN ASSUME A COMPLETE LOSS AS A
RESULT OF AN INVESTMENT IN THE UNITS.
Investors should carefully consider the risk factors and other special
considerations described under "RISK FACTORS" and the limitations described
thereunder with respect to the lack of a market for the Units and the resulting
long-term nature of an investment in the Company. The only persons who should
subscribe for the Units are those who have adequate financial means to assume
such risks.
Investors are urged to seek independent advice from their tax and
legal advisors relating to the suitability of an investment in the Units in the
light of their overall financial and tax needs and the legal and tax
implications of such an investment.
Each prospective investor must complete and provide the Agent and the
Company with the Confidential Investor Suitability Questionnaire, and the
accuracy of the information provided must be warranted by the investor in the
Subscription Agreement. A corporation, partnership, trust or other entity
desiring to subscribe for Units may be subject to additional requirements.
Units will be offered and sold only to residents of the State of Texas.
Offerees and purchasers of Units are entitled, and in some cases may
be required by the Company, to employ a purchaser representative (as defined in
Regulation D under the Securities Act) to assist them in evaluating the merits
and risks of an investment in the Units. Any purchaser representative so
employed must comply with the requirements of Regulation D. Any such purchaser
representative must be unaffiliated with, and not compensated directly or
indirectly by, the Company, the Agent or any affiliate of such persons.
The Company may require additional information about any prospective
investor to assist it in determining whether an investment is suitable for the
investor, and the final determination of suitability shall be made by the
Company. The Company may also require additional information about any
prospective investor to assist it in determining whether the investor qualifies
as an accredited investor (as that term is defined in Regulation D and as
modified by applicable state securities requirements). In no event shall there
be investors who are not accredited investors.
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DESCRIPTION OF NOTES AND NOTE PURCHASE AGREEMENT
The Notes are to be issued pursuant to a Note Purchase Agreement by
and among the Company, Drilling, and the purchasers of Notes (the "Note
Purchase Agreement"). The following description of certain provisions of the
Notes and the Note Purchase Agreement is a summary only, does not purport to be
complete, and is qualified in its entirety by reference to all of the
provisions of the Note Purchase Agreement (including the form of the Notes
attached thereto), a copy of which is attached as Exhibit B to this Memorandum.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned to them in the Note Purchase Agreement. Company and Drilling are
obligors on the Notes, but will collectively be referred to in this section of
the Memorandum as the "Company".
GENERAL
The Notes will be limited in the aggregate principal amount to
$2,000,000. The Notes are subordinated to Senior Indebtedness of the Company,
as hereinafter described. The Notes will be issued in denominations of $25,000
and integral multiples thereof. The Notes will not be secured.
INTEREST, REPAYMENT, DEFAULT AND SUBORDINATION
The Notes will mature on September 30, 2000 and will bear interest
prior to default at 11.50% per annum from the date of issuance or from the most
recent payment date to which interest has been paid or provided for, payable in
quarterly installments on the last day of December, March, June, and September
of each year commencing December 31, 1995. Past due amounts shall bear
interest at the interest rate of 14.50% per annum.
Principal on the Notes shall be paid in quarterly principal payments
in amounts calculated in accordance with the quarterly principal payment
schedule described below commencing December 31, 1997 and continuing thereafter
on the last day of each December, March, June, and September until September
30, 2000, at which time all unpaid principal, together with all accrued and
unpaid interest, shall be due and payable. The quarterly principal payment
schedule is as follows:
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<TABLE>
<CAPTION>
PRINCIPAL PAYMENTS AS AGGREGATE AMOUNTS
A PERCENTAGE OF THE OF PRINCIPAL PAYMENTS
ORIGINAL PRINCIPAL BALANCE (ASSUMING NO OPTIONAL
(ASSUMING NO OPTIONAL PREPAYMENTS ARE MADE AMOUNT OF PRINCIPAL
PREPAYMENTS ARE MADE) AND ALL UNITS SOLD) PAYMENT PER UNIT DATE DUE AND PAYABLE
--------------------- ------------------------- -------------------- --------------------
<S> <C> <C> <C>
3.125% $ 62,500 $ 781.25 December 31, 1997
3.125% $ 62,500 $ 781.25 March 31, 1998
3.125% $ 62,500 $ 781.25 June 30, 1998
3.125% $ 62,500 $ 781.25 September 30, 1998
9.375% $187,500 $2,343.75 December 31, 1998
9.375% $187,500 $2,343.75 March 31, 1999
9.375% $187,500 $2,343.75 June 30, 1999
9.375% $187,500 $2,343.75 September 30, 1999
12.500% $250,000 $3,125.00 December 31, 1999
12.500% $250,000 $3,125.00 March 31, 2000
12.500% $250,000 $3,125.00 June 30, 2000
12.500% $250,000 $3,125.00 September 30, 2000
</TABLE>
The Company may make prepayments on the Notes, each in an amount not
less than $500,000, without payment of any premium or prepayment penalty,
provided that no such optional partial prepayment will be allowed that would
reduce the aggregate outstanding principal balance of the Notes to less than
$500,000. Prepayments shall be applied pro rata to the Notes outstanding at
the time of the prepayment.
Payment of the principal and interest on the Notes is subordinated and
junior in right of payment to all Senior Indebtedness, whether now existing or
hereafter created. "Senior Indebtedness" means indebtedness of the Company
secured by a first priority lien on Property owned by the Company or any
Subsidiary, including, but not limited to, debt incurred to refinance, take
up, renew or extend the current indebtedness under a loan (the "Senior Loan")
from International Bank of Commerce (the "Bank") to the Company evidenced by a
Loan Agreement dated July 14, 1994 by and between the Company and the Bank (the
"Senior Loan Agreement"), all of which are more fully described below.
The maturity of the Notes is subject to acceleration upon the
occurrence of an Event of Default as hereinafter described.
REPRESENTATIONS AND WARRANTIES
The Note Purchase Agreement contains a number of representations and
warranties by the Company relating to, among other things: (a) organization,
good standing, corporate power and authority; (b) authorization, execution,
delivery and enforceability of the Note Purchase Agreement and the Notes; (c)
ownership of shares of Subsidiaries; (d) compliance with laws and other
agreements; (e) certain consents and approvals; (f) absence of material
litigation; (g) absence of material defaults under other agreements; (h) taxes;
(i) title to property and leases; (j) licenses, permits,
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franchises, authorizations, patents, copyrights, service marks, trademarks and
trade names, and similar matters; (k) absence of payment default under other
indebtedness; and (l) absence of any agreement to grant a lien other than a
Permitted Lien.
The Note Purchase Agreement also contains certain representations and
warranties by the purchasers of Notes relating to, among other things: (a)
knowledge that the Notes have not been registered under the Securities Act of
1933 (as amended from time to time); (b) each purchaser of Notes being a
resident of the State of Texas; and (c) the completion of a Purchaser
Questionnaire.
The Note Purchase Agreement provides that all representations and
warranties contained in the Note Purchase Agreement survive the execution and
delivery of the Note Purchase Agreement, the purchase or transfer of any Note
or portion thereof and the payment of any Note, and may be relied upon by any
subsequent holder of a Note.
The Note Purchase Agreement provides for varying levels of rights with
respect to inspections of the Company books and records based on the amount of
indebtedness held by the Note Holder, the percentage of outstanding principal
balance held by a group of Note Holders wishing to perform inspections, and on
whether there is a Default or Event of Default.
COVENANTS
The Note Purchase Agreement contains certain affirmative covenants
requiring, among other things, compliance with law in all material respects,
maintenance of insurance, maintenance of properties, payment of taxes and
claims, and certain other matters. The Company has agreed to provide the
Holders periodic financial reports and to give notice to the Holders of any
default with respect to the Senior Indebtedness.
The Note Purchase Agreement also contains certain negative covenants.
In the Note Purchase Agreement, the Company covenants that so long as any of
the Notes are outstanding, without the prior written consent of the Required
Holders (i.e., the Holders of at least 51% in principal amount of the Notes at
the time outstanding):
Recourse Indebtedness. The Company will not allow the ratio of the
Recourse Indebtedness to the Qualified Reserves Value to exceed 75% or permit
any Subsidiary, other than Drilling, to incur Recourse Indebtedness. Recourse
Indebtedness is defined as any Indebtedness of the Company or any Wholly-Owned
Subsidiary other than Non-Recourse Indebtedness (i.e., indebtedness with
respect to which liability limited solely to the collateral for such
indebtedness), but excluding any Indebtedness of the Company owed to any
Wholly-Owned Subsidiary or to Offshore and any Indebtedness of any Wholly-Owned
Subsidiary owed to the Company or to any other Wholly-Owned Subsidiary or to
Offshore. Qualified Reserves Value means the present value of the Future Net
Cash Flows (i.e., the sum of net oil sales and net gas sales minus all
operating expenses) of the Qualified Reserves discounted at 10% per annum, as
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determined by the most recent Reserve Report. Reserve Report means a report
prepared by Paul R. Clevenger or such other independent engineering firm not
objected to by the Required Holders, on the basis of findings and data and on
the basis of (a) price parameters or assumptions that have been provided to the
Company by the holder of the Senior Indebtedness or that are otherwise
acceptable to the holder or holders of Senior Indebtedness, or (b) if price
parameters and assumptions are not provided to the Company by any such holder
of the Senior Indebtedness or otherwise agreed by the Companies and any holder
or holders of Senior Indebtedness, the current spot market prices of
hydrocarbons as of the last day of the previous year assuming a five percent
(5%) escalation of prices and operating costs each year thereafter.
Liens. The Company will not create, incur, or suffer to exist any
Lien, except the following which shall be "Permitted Liens": (i) Liens for
taxes, assessments, or governmental charges or levies on their properties,
provided the same shall not at any time be delinquent or thereafter can be paid
without penalty or are being contested in good faith and by appropriate
proceedings and with respect to which reserves in conformity with GAAP have
been adequately provided for on the books of the Company; (ii) Liens imposed by
law, such as carriers', warehouseman's and mechanic's liens and other similar
Liens arising in the ordinary course of the Company's business which secure
payment of obligations not more than 60 days past due; (iii) Liens arising out
of pledges or deposits under workman's compensation laws, unemployment
insurance, old age pensions, or other Social Security or retirement benefits,
or similar legislation; (iv) Liens resulting from utility easements, building
restrictions, and such other encumbrances or charges against real property as
of are of a nature generally existing with respect to properties of a similar
character and which do not in any material way affect the marketability of the
same or interfere with the use thereof in the ordinary course of business of
the Company; (v) Liens resulting from a lessor's interest under financing
leases; (vi) Liens existing on the date hereof and disclosed on Exhibit 11.3 to
the Note Purchase Agreement; (vii) first priority Liens given to secure any
Senior Indebtedness; (viii) Liens incurred by the Company in connection with or
relating to the acquisition of personal property, provided (a) at the time of
such acquisition of property, no default exists; and (b) each such Lien shall
attach only to the personal property acquired in the transaction by which such
Lien was created or assumed.
Other Negative Covenants. In the Note Purchase Agreement, the Company
also agrees, inter alia, that without the consent of the Required Holders (i)
it will not enter into certain transactions with an Affiliate except in the
ordinary course of business and upon terms no less favorable to the Company
than would be obtainable in a comparable arm's length transaction with a
non-affiliate; (ii) it will not consolidate or merge with another entity or
convey, transfer or lease all or substantially all of its assets unless the
successor is a solvent corporation or entity that assumes the obligations
referenced by the Notes and immediately after giving effect to the transaction
no Default or Event of Default shall have occurred and be continuing; (iii) it
will not substantially change the present executive personnel of the Company or
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<PAGE> 45
change the general character of its business; and (iv) it will not declare or
pay a dividend or other distribution or redeem or retire any of its common
stock, except that the Company may purchase, redeem or otherwise acquire Odd
Lots.
EVENTS OF DEFAULT AND REMEDIES
The Note Purchase Agreement defines an Event of Default as (i) the
failure of the Company to pay installments of principal or interest on any Note
when due and the continuance of any such failure for five (5) Business Days,
(ii) the failure of the Company to comply with the obligations contained in
Sections 8, 11.2, 11.3, 11.4, 11.5 or 11.6 of the Note Purchase Agreement,
(iii) the failure of the Company in the performance of or in compliance with
any of the other terms of the Note Purchase Agreement and the continuance of
any such failure for thirty (30) days, (iv) any written representation or
warranty by the Company being materially false or incorrect when made, (v) the
default by the Company or any Subsidiary in the payment of principal, interest
or any premium on the Senior Indebtedness that is outstanding in an aggregate
principal amount of at least $200,000.00 beyond any period of grace applicable
thereto, or the default by the Company or any Subsidiary in the performance of
or in compliance with any term of any evidence of indebtedness in an aggregate
principal amount of at least $200,000.00 or of any mortgage, indenture or other
agreement relating thereto, or any other condition exists, and as a consequence
of such default or condition such indebtedness has been or could be accelerated
prior to its stated maturity, (vi) certain events of bankruptcy, insolvency or
reorganization in respect of either of the Company or any Subsidiary, (vii) a
final judgment or judgments aggregating in excess of $200,000 are rendered
against the Company or any Subsidiary which are not, within 60 days after their
entry, bonded, discharged or stayed pending appeal, or not discharged within 60
days after the expiration of such stay, or (viii) certain events relating to
any "employee benefit plan" (as defined in Section 3 of ERISA) of the Company
or certain of the Company's Affiliates.
If an Event of Default occurs and is continuing under clause (vi), all
of the Notes then outstanding shall automatically become due and payable. If
any Event of Default described in clause (i) has occurred and is continuing,
any Holder of any Note at the time outstanding effected by such Event of
Default may declare such Note to be immediately due and payable. If any other
Event of Default has occurred and is continuing the Required Holders may
declare all of the Notes then outstanding to be immediately due and payable.
If any Notes have been due and payable by reason of any Event of
Default other than an Event of Default as described in clause (vi), the
Required Holders may rescind any such acceleration if (a) the Company has paid
all overdue interest on the Notes, all principal due and payable on any Notes
(other than principal due by reason of such acceleration), and all interest on
such overdue principal and overdue interest, at the Default Rate, (b) all of
the Events of Default and Defaults (other than the failure to pay amounts that
become due fully by reason of such acceleration) have been cured or
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<PAGE> 46
have been waived pursuant to the terms of the Note Purchase Agreement, and (c)
no judgment or decree has been entered for the payment of any monies due
pursuant to the Note Purchase Agreement or the Notes.
The Note Purchase Agreement provides that the Company will pay all
costs and expenses of the Holders incurred in any enforcement or collection
under the remedies provisions of the Note Purchase Agreement including, without
limitation, reasonable attorneys fees.
AMENDMENT OF NOTE PURCHASE AGREEMENT
The Note Purchase Agreement provides that the Note Purchase Agreement
and the Notes may be amended and the observance of any term thereof may be
waived with the written consent of the Company and the Required Holders,
subject to two (2) limitations. The first limitation is that no amendment or
waiver of any of the provisions of Section 1 (dealing with the authorization of
the issuance of the Notes), Section 2 (dealing with the sale and purchase of
the Notes), Section 3 (dealing with the closing of the sale of the Notes),
Section 5 (dealing with conditions to closing), Section 6 (dealing with
representations and warranties of the Company), Section 7 (dealing with
representations and warranties of the purchasers of the Notes), or Section 22
(dealing with miscellaneous matters) of the Note Purchase Agreement, or of any
defined term set forth in the Note Purchase Agreement will be effective as to a
particular Holder unless consented to by such Holder. The other limitation is
that no such amendment or waiver may, without the written consent of the Holder
of each Note at the time outstanding affected thereby, (a) change the amount or
time of any prepayment or payment of principal of, or reduce the rate or change
the time of payment or method of computation of interest on the Notes, except
as provided in the provisions of Section 13 of the Note Purchase Agreement
relating to acceleration or rescission, (b) change the percentage of the
principal amount of the Notes the Holders of which are required to consent to
any such amendment or waiver, or (c) amend any of Section 9 (dealing with the
repayment of the Notes), Section 12(a) (providing that the failure to pay
principal due and owing under any Note is an Event of Default if it continues
for more than five days), Section 12(b) (providing that the failure to pay
interest due and owing under any Note is an Event of Default if it continues
for more than five days), Section 13 (dealing with remedies upon an Event of
Default), Section 18 (dealing with amendment and waiver) or Section 21 (dealing
with Confidential Information). The Note Purchase Agreement provides that the
Company will provide each Holder with sufficient information to allow such
Holder to make a reasonably informed decision with respect to any proposed
amendment, waiver or consent with respect to the Note Purchase Agreement or the
Notes. The Company is prohibited from compensating any Holder in order to
induce that Holder to enter into any such waiver or amendment unless such
compensation is granted on the same terms ratably to each Holder of Notes then
outstanding even if such Holder did not consent to such waiver or amendment.
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<PAGE> 47
CONFIDENTIAL INFORMATION
The Note Purchase Agreement provides that the purchasers of Notes will
maintain the confidentiality of confidential information provided by the
Company.
TERMS OF SENIOR INDEBTEDNESS
The following summary of the terms of the Company's Senior
Indebtedness does not purport to be complete and is qualified in its entirety
by reference to the specific terms of the Loan Agreement between the Company
and the Senior Lender, a copy of which is attached hereto as Exhibit E.
The Senior Indebtedness is presently evidenced by the Senior Loan
Agreement and by two promissory notes, one in the original principal amount of
$5,000,000.00 maturing on May 1, 1996, and one in the original principal amount
of $1,000,000.00 maturing on May 1, 1996 (collectively, the "Senior Notes").
The aggregate outstanding balance under the Senior Notes on July 31, 1995 is
$1.9 million. The Senior Loan Agreement and the Senior Notes have been
modified by letters dated February 27, 1995, May 26, 1995, June 30, 1995 and
August 7, 1995 from Senior Lender to the Company. The Senior Indebtedness is
secured by liens (the "Mortgages") on substantially all the assets of the
Company, including various mineral interests owned by Drilling and Offshore
located in Texas, Louisiana, Oklahoma and Montana, and by a Security Agreement
given by Offshore covering certain assets of Offshore not otherwise covered by
the Mortgages.
The Company's and Drilling's borrowings under the Senior Loan
Agreement is limited to a borrowing base (the "Borrowing Base") equal to the
lesser of (i) fifty percent (50%) of the present worth of the future net
revenue (discounted at 10%) of the proved producing "Security Properties"
(which are defined in the Senior Loan Agreement), or (ii) sixty-five percent
(65%) of the present worth of the future net revenue (discounted at 20%) of the
proved producing Security Properties. Borrowings under the Senior Loan
Agreement are also subject to a "Cash Flow Test" which is a test to determine
the amount of net cash flow available for the amortization of the principal
balance due under the Senior Notes on a monthly basis within the economic
half-life of the income producing Security Properties included in the test.
The Senior Loan Agreement, as amended, provides that a principal and interest
payment in the amount of $55,000 is to be made monthly through December 1995,
followed by monthly payments of principal and interest in the amount of
$61,000.00 each until the maturity of the Senior Notes. The Senior Loan
Agreement provides that the Senior Notes may be prepaid in whole or in part
without penalty.
The Senior Loan Agreement provides that, upon the occurrence of an
event of default under the Senior Loan Agreement, or if the Cash Flow Test or
the Borrowing Base requirements set forth in the Senior Loan Agreement are
violated causing an
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event of default under the Senior Loan Agreement, the Senior Lender may require
payments on the Senior Notes of up to one hundred percent (100%) of the
proceeds of the sale of production of oil and gas from the Security Properties.
The Senior Loan Agreement contains a number of affirmative covenants
including, among others: (a) a covenant stating that the Company and Drilling
will grant liens on certain additional property interests relating to the
Security Properties if the Company and Drilling acquire such additional
interests; (b) a covenant whereby the Company and Drilling agree to maintain,
at all times, a minimum net worth of $1,500,000.00 on a consolidated basis for
the Company and its subsidiaries; and (c) a covenant whereby the Company and
Drilling agree to indemnify Senior Lender with respect to environmental
liabilities relating to the Security Properties.
The Senior Loan Agreement contains a number of negative covenants,
including, among others, negative covenants wherein the Company and Drilling
agree that they will not: (a) grant or permit any liens on the Security
Properties; (b) violate or fail to comply with any covenant or agreements with
regard to other debt; (c) create any additional indebtedness for borrowed money
in excess of $250,000.00 in the aggregate (with respect to which negative
covenant the Senior Lender has consented to the offering and issuance of the
Units described herein); (d) sell, transfer or assign any of the Security
Properties, or mortgage, pledge or encumber any oil and gas leases or other oil
and gas properties or the income or proceeds of production therefrom, which are
not covered by the Mortgages; and (e) permit the sale, transfer, encumbrance or
other disposition of any of the assets of Offshore which is not in the ordinary
course of Offshore's business.
The Senior Loan Agreement provides that each of the following
constitutes an event of default entitling the Senior Lender to terminate its
obligation to lend under the Senior Loan Agreement and declare the Senior
Indebtedness immediately due and payable: (a) the failure in the payment when
due of any installment of principal and interest on the Senior Notes or of any
other indebtedness owed by the Company and Drilling to the Senior Lender if
such failure continues for five business days; (b) any representation or
warranty furnished or made to the Senior Lender pursuant to the Senior Loan
Agreement being untrue in any material respect as of the date of such
representation or warranty, or such representation or warranty becoming untrue
in any material respect at any time, if such circumstance remains uncured for a
period of ten days; (c) default occurs under the terms of any instrument or
agreement executed in connection with the Senior Loan if such default remains
unremedied for a period of ten days; (d) default in the performance of any
other covenant or agreement of the Company and Drilling in the Senior Loan
Agreement if such default shall be willful or shall continue for a period of
ten days; (e) certain events of bankruptcy, insolvency or reorganization in
respect of the Company or Drilling; and (f) the existence of any judgment
against the Company or Drilling or the attachment or other levy against the
property of the Company or Drilling with respect to a claim which remains
unpaid, unstayed, not bonded or not dismissed for a period of 90 days.
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The Senior Loan Agreement provides that the Senior Lender shall not be
required to release any lien or security interest securing payment of the
Senior Loan until all indebtedness of the Company and Drilling to the Senior
Lender (other than loans on motor vehicles) are paid in full.
The Senior Notes provide that the Senior Lender may, at its
discretion, declare all sums owing under the Senior Notes immediately due and
payable upon deeming itself adversely affected and/or insecure by reason of any
material change in the Company's and Drilling's net worth, or by reason of any
other material change or condition.
DESCRIPTION OF WARRANTS
The Units described in this Memorandum include Warrants to purchase
shares of Common Stock of the Company. The following description of certain
terms of the Warrants is a summary only, does not purport to be complete, and
is qualified in its entirety by the form of Warrant attached hereto as Exhibit
C. Capitalized terms used herein and not otherwise defined shall have the
meanings associated to them in the Warrant.
The total number of shares of Common Stock of the Company subject to
the Warrants varies, depending upon the number of Units sold, between 15 and
20% of the total shares of Common Stock outstanding on the date hereof, as more
fully described herein. The Warrants remain outstanding for seven years from
the date of the Closing, unless they are detached from the Notes and
transferred to persons who are not Affiliates of the holder of the Warrants, in
which case they expire on the 31st date following such transfer.
The exercise price of the Warrants is $.40 per share, subject to
adjustment under certain circumstances as described below. The number of
shares of Common Stock of the Company subject to purchase pursuant to the
Warrant also adjusts under certain circumstances, as described below.
The percentage equity interest in the Company underlying the Warrants
varies from 15 to 20%, depending on the total number of Units sold in the
Offering, and is equal to the total number of Units sold divided by four. In
that regard, the initial number of shares subject to each of the Warrants can
be calculated as follows: (i) 5,552,760 (the number of shares of Common Stock
outstanding on the date of this Memorandum) divided by (ii) 400 minus the total
Units sold in the Offering. For example, in the case of the Minimum Offering,
each Unit would include Warrants to purchase 16,331 shares of Common Stock
(i.e., 5,552,760 / (400 - 60), and in the case of the Maximum Offering, each
Unit would include Warrants to purchase 17,352 shares of Common Stock (i.e.,
5,552,760 / (400 - 80) = 17,352).
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The number of shares subject to the Warrants shall be adjusted
proportionately, and the exercise price shall be adjusted proportionately, for
any stock splits or stock dividends. If the Company declares and pays any
dividends other than common stock or cash, or any other distributions, to
holders of common stock, then the holders of the Warrants, upon exercise of the
Warrants, are entitled to receive their respective pro-rata share of the
dividend, distribution, or right which they would have received if they had
exercised the Warrant before the declaration of the dividend, distribution, or
right, or, at the Company's option, the number of shares subject to the Warrant
shall be adjusted appropriately.
If at any time while the Warrant is outstanding the Company grants to
all holders of its common stock any rights, options or warrants entitling them
to purchase shares of common stock at a price per share lower at the record
date for such issuance than the fair market value on such date, then the number
of shares of common stock subject to the Warrants shall be adjusted
proportionately. Alternatively, the Company may grant and convey to the holder
of the Warrants the rights that such holder would have received had it
exercised the Warrant before issuance of the rights. An appropriate
readjustment would be made to the number of shares of common stock subject to
the Warrants upon expiration or termination of any of the rights.
In case of any capital reorganization or reclassification of the
capital stock of the Company, the holder of the Warrant shall thereafter be
entitled to purchase pursuant to the Warrant the kind and number of shares of
any stock or class or classes or other securities or property for or into which
such shares of common stock would have been exchanged, converted, or
reclassified if the Warrant stock had been purchased immediately before such
reorganization or reclassification.
The number of shares subject to the Warrant and/or the exercise price
of the Warrants shall also be adjusted in the event certain options to purchase
shares of Common Stock pursuant to stock option plans of the Company are
exercised.
Under the Warrants, the Company is required to give 30 days prior
written notice to holders of record of the Warrants of significant events,
including payment of dividends, reorganization or reclassification, merger,
liquidation, dissolution, or other fundamental changes.
The Warrants carry piggyback registration rights requiring the Company
to deliver notice of its intent to file registration statement for the public
sale of its common stock to the holders of the Warrants not later than 30 days
prior to the initial filing of the registration statement, setting forth the
minimum and maximum proposed offering price, commissions, discounts in
connection with the offering, and other relevant information. Within twenty
days after receipt of the notice, holders of Warrants are entitled to request
that the Warrant stock be included in such registration statement and the
Company will use its best efforts to cause such Warrant stock to be included in
the offering covered by such registration statement. In the event the
underwriter of the
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Offering determines that the inclusion of all of the stock requested to be
registered (including the Warrant Stock) would adversely affect the Offering,
the inclusion of shares owned by holders other than the Company are subject to
pro rata reduction in accordance with the number of shares requested to be
included by such Holders.
LEGAL MATTERS
There are no legal proceedings pending or threatened against the
Company that would adversely affect the financial condition of the Company.
Cox & Smith Incorporated has acted as legal counsel to the Company in
the preparation of this Memorandum, but has not conducted any independent
review or undertaken due diligence concerning the Company or any other matter
within the scope of operations described in this Memorandum. Legal counsel has
relied on such information and representations in the preparation of this
Memorandum as has been made available by the Company. Cox & Smith Incorporated
is not counsel for the investors and undertakes no responsibility to the
investors with respect to any matter related to this Offering. CONSEQUENTLY,
EACH PROSPECTIVE INVESTOR SHOULD SATISFY HIMSELF OF THE ACCURACY OF THE
INFORMATION IN THIS MEMORANDUM WITH SUCH INDEPENDENT LEGAL ADVICE OR OTHER
COUNSEL AS EACH SUCH INVESTOR THINKS IS APPROPRIATE.
ADDITIONAL INFORMATION
THE COMPANY IS SUBJECT TO THE INFORMATIONAL REQUIREMENTS OF THE SECURITIES
EXCHANGE ACT OF 1934 AND HAS FILED REPORTS AND OTHER INFORMATION WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO SUCH REQUIREMENTS. THE COMPANY
WILL PROVIDE A COPY OF ANY SUCH REPORT, OR ANY EXHIBITS TO SUCH REPORTS, UPON
REQUEST.
INFORMATION, IN ADDITION TO THAT CONTAINED IN THIS MEMORANDUM, MAY BE DESIRED
BY A PROSPECTIVE INVESTOR IN ORDER TO MAKE AN INFORMED INVESTMENT DECISION IN
RELATION TO THE UNITS. FOR FURTHER INFORMATION WITH RESPECT TO THE COMPANY AND
THE UNITS OFFERED HEREBY, CALL OR WRITE TO RIO GRANDE, INC., 10101 REUNION
PLACE, SUITE 210, SAN ANTONIO, TEXAS, 78216- 4156, TELEPHONE (210) 308-8000.
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GLOSSARY OF CERTAIN OIL AND GAS TERMS
When used in this Memorandum, the following terms have the meanings
indicated below.
"Bbl" means standard a barrel of 42 U.S. gallons and represents the
basic unit for measuring the production of crude oil and condensate.
"Bcf" means billion cubic feet.
"Bcfe" means billion cubic feet equivalent.
"BOE" means barrel-of-oil-equivalent, and is a customary convention
used in the United States to express oil and gas volumes on a comparable basis.
It is determined on the basis of the estimated relative energy content of
natural gas to oil, being approximately 6 Mcf of natural gas per Bbl of oil.
"gross" acre or well means an acre or well in which a working interest
is owned.
"MBbl" means thousand Bbls.
"MBOE" means thousand BOEs.
"Mcf" means thousand cubic feet under prescribed conditions of
pressure and temperature, and represents the basic unit for measuring the
production of natural gas.
"MMcf" means million cubic feet.
"Mcfe" means an Mcf-equivalent, and is also used in the United States
to express oil and gas volumes on a comparable basis. It is determined on the
basis of the estimated relative energy content of oil to natural gas, being
approximately one Bbl of oil converted to 6 Mcf of natural gas.
"MMcfe" means million cubit feet equivalent.
"net" acres or wells are determined by multiplying the gross acres or
wells, as the case may be, by the applicable working interest in those gross
acres or wells.
"net cash flow" means, the sum of net oil sales and net gas sales
minus all operating expenses, including, without limitation, ad valorem taxes,
production taxes, other taxes, direct operating expenses and capital
expenditures.
"Proved Reserves" means those estimated quantities of crude oil and
natural gas that geological and engineering data demonstrate with reasonable
certainty to be
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recoverable in future years from known oil and gas reservoirs under existing
economic and operating conditions. Proved reserves are limited to those
quantities of oil and gas that can be expected to be recoverable commercially
at current prices and costs, under existing regulatory practices and with
existing conventional equipment and operating methods.
"Proved Producing" are those reserves recoverable from zones currently
open and producing.
"Proved Non-Producing" (Behind Pipe) are those proved reserves in
zones behind casing in producing wells.
"Proved Undeveloped" are those proved reserves assigned to undrilled
spacing units that geological mapping show to be within limits of known
hydrocarbon reservoirs.
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