UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From....................... to.......................
Commission File Number 1-8287
RIO GRANDE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 74-1973357
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organizati Identification No.)
10101 Reunion Place, Suite 210, San Antonio, Texas 78216-4156
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number Including Area Code: 210-308-8000
Securities registered pursuant to Section12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class: Class A Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Total revenues for the year ended January 31, 1996 were $3,632,171.
At March 31, 1996, there were 5,552,760 shares of the registrant's common stock
outstanding. Of this amount, 1,344,000 shares were held by non-affiliates. There
has been no established market for the Registrant's common stock since the end
of 1985.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Part
Portions of the Proxy Statement for the Annual Meeting Part III
of Stockholders to be held July 1, 1996
<PAGE>
PART I
Item 1.
General
Rio Grande, Inc. (the "Company"), which hereinafter in general refers
to Rio Grande, Inc., its subsidiaries and affiliates, is a Delaware corporation
originally formed as a Texas corporation in 1978. 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, Mississippi,
Montana, and Wyoming.
Rio Grande Drilling Company ("Drilling"), a Texas corporation and
wholly-owned subsidiary of the Company, as general partner, formed a Texas
limited partnership, Rio Grande Offshore, Ltd. ("Offshore") in June 1992, in
which Drilling had an 80% ownership interest. In August 1994, Rio Grande Desert
Oil Company ("Desert"), a Nevada corporation and wholly-owned subsidiary of
Drilling, was formed and Drilling conveyed to Desert a 40% partnership interest
in Offshore. Desert became a limited partner in Offshore, ultimately owning a
79% limited partnership interest. Drilling remained as the general partner of
Offshore with a 1% general partnership interest. Substantially all of the
leasehold interests owned by the Company as of January 31, 1996 were held
through Offshore with Drilling as the 1% general partner and the limited
partners being as follows: Desert, with a 79% limited partnership interest;
Robert A. Buschman ("Buschman"), Chairman of the Board, Chief Executive Officer
and shareholder of the Company, with a 10% limited partnership interest; and H.
Wayne Hightower and H. Wayne Hightower, Jr. (collectively, "Hightowers") with 7%
and 3% limited partnership interests, respectively.
In September 1995, the Company concluded a private offering of 11.50%
subordinated notes ("Notes") in the principal amount of $2,000,000 and issued
warrants to the holders of the Notes ("Holders") which provided for the purchase
of 1,388,160 shares of Class A Common Stock, par value $.01 per share, of the
Company at an initial exercise price of $0.40 per share, subject to adjustment
under certain circumstances. In connection with the modifications and amendments
to the Notes discussed below, the warrant exercise price was reduced to $0.20
per share. The Notes were issued primarily to finance further development and
production enhancements to certain oil and gas properties owned and operated by
the Company.
In March 1996, the Company entered into a commitment letter with a new
lender to replace the Company's then existing bank indebtedness of approximately
$1,575,000. The commitment letter required that the Company obtain certain
modifications and amendments from the Holders before the new credit facility
could be concluded. Such consents and amendments, including restructuring of the
payment terms of the Notes, were approved by the Holders on March 8, 1996, at
which time the Company executed the loan agreement which provided a new senior
credit facility ("Senior Credit Facility") in an aggregate principal amount of
up to $10,000,000, subject to limitations on availability as a result of the
borrowing base determination.
The Company also obtained the consent of the Holders to restructure
Offshore in order to permit the Company to realize certain efficiencies through
the proportionate allocation of working interest expenses and overhead to the
then existing minority limited partners of Offshore. As a result of the
restructuring, Buschman and the Hightowers became proportionate individual
working interest owners of
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the onshore oil and gas properties previously owned by them through their
proportionate limited partnership interests in Offshore. The offshore oil and
gas properties held by Offshore were conveyed into a new Texas limited
partnership, Rio Grande GulfMex, Ltd. ("GulfMex"), which holds the same
beneficial ownership in the offshore oil and gas properties as Offshore held
prior to the restructure. Offshore is the sole general partner of GulfMex. The
partnership agreement for GulfMex is substantially the same as the existing
Offshore partnership agreement.
As a result of the restructuring, Buschman and the Hightowers directly
own (1) 20% of the onshore leasehold working interests formerly owned by them
through Offshore; and (2) a 20% limited partnership interest in GulfMex.
Buschman and the Hightowers no longer are limited partners in Offshore, however,
the reorganized Offshore ("Offshore-New") remains in existence as a Texas
limited partnership with Drilling as the general partner with a 1.25%
partnership interest and Desert a 98.75% limited partnership interest.
As additional consideration for the restructuring, Buschman and the
Hightowers retained the right to participate in acquisitions of oil and gas
properties in those areas where Offshore had properties as of the effective date
of the restructuring. The effective date of the restructuring was February 1,
1996. Any participation in the subsequent acquisition of oil and gas properties
in those areas of mutual interest will be on a basis proportionate to the
percentage interests of Buschman and the Hightowers in Offshore prior to the
restructuring and would provide for sharing of economic benefits and burdens in
accordance with the relative ownership interests.
As a result of the Company's 80% ownership interest, Offshore's
financial statements are combined with the Company's financial statements
prepared as of January 31, 1996. The minority interests of Buschman and the
Hightowers are set forth separately in the balance sheet and the statement of
operations of the Company. Subsequent to January 31, 1996, Offshore-New will be
100% indirectly owned by the Company and GulfMex will be 80% indirectly owned by
the Company which will be reflected in the combined financial statements
prepared subsequent to January 31, 1996. Except as otherwise indicated, all
financial and production data included in this report are net to the Company's
interest.
From June 1992 to January 1996, Offshore has acquired non-operated oil
and gas leasehold interests with total proved reserves of 500,000 bbls oil and 7
Bcf gas. In July 1994, Offshore acquired certain operating oil and gas leasehold
interests with net total proved reserves of 383,000 bbls and 2 Bcf gas. These
operated oil and gas properties, in which Offshore is the principal working
interest owner, are located primarily in Jack and Young Counties in North Texas
and Tom Green County in West Texas.
On March 11, 1996, Offshore-New acquired a 3.125% leasehold interest in
a non-operated producing federal oil and gas lease and platform located offshore
Louisiana for $900,000 which has net total proved reserves of approximately
927,000 mcf gas and 61,000 bbls of condensate. Although this acquisition is an
interest in only one offshore well and therefore presents a greater degree of
risk then the acquisition of multiple properties, the current cash flow received
from the well, if sustained, provides for less than a three year payout of the
acquisition costs.
On March 26, 1996, Offshore-New acquired various leasehold interests in
three gas wells located in Wheeler County, Texas for a net purchase price of
$370,500. The total net proved reserves acquired by this acquisition were
approximately 3,000 bbls oil and condensate and 868,000 mcf gas. Drilling will
operate the gas wells. Buschman and the Hightowers exercised their right under
the area of mutual interest agreement by purchasing their proportionate 20%
interests in these leasehold interests.
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On April 12, 1996, Offshore-New acquired various leasehold interests in
31 oil wells located in Mississippi and Louisiana for a net purchase price of
approximately $2,800,000, which includes 23 wells to be operated by Drilling.
The total net proved reserves acquired were approximately 725,000 bbls oil and
condensate.
It is the Company's intention to continue focusing its efforts on
acquiring oil and gas production for the account of Offshore-New. The Company
expects to make its own geological and geophysical evaluations of potential oil
and gas property acquisitions. The Company's criteria for potential acquisitions
include, but are not limited to, operated properties having what management
believes are attractive exploration and development potentials.
Exploration, Production and Acquisition Risks
The business of acquiring producing oil and gas properties is an
inherently speculative activity that involves a high degree of business and
financial risk. Property acquisition decisions generally are based on various
assumptions and subjective judgments relating to achievable production and price
levels which are inherently uncertain and unpredictable. Although available
geological and geophysical information can provide information on the potential
for previously overlooked or untested formations, it is impossible to determine
accurately the ultimate production potential, if any, of a particular well.
Actual oil and gas production may vary considerably from anticipated results.
Moreover, the acquisition of a property or the successful recompletion of an oil
or gas well does not assure a profit on the investment or return of the cost
thereof. There can be no assurance that the Company will succeed in its efforts
to acquire additional older oil and gas wells or in its development efforts
aimed at increasing or restoring production from either currently owned or
acquired wells. If the Company over-estimates the potential oil and gas reserves
of a property to be acquired, or if its subsequent operations on the property
are unsuccessful, the acquisition of the property could result in losses to the
Company. Except to the extent that the Company acquires additional recoverable
reserves or conducts successful exploration and development programs on its
existing properties, the proved reserves of the Company will decline over time
as they are produced. There can be no assurances that the Company will be able
to increase or replace reserves through acquisitions, exploration and
development or that recent production levels can be sustained or increased.
Access to Working Capital
The oil and gas industry is capital intensive. Depending upon the
production levels of the Company's oil and gas properties and the prices
received for products produced, the Company may need additional financing to
continue acquisition and development of producing oil and gas properties. Such
financing may consist of bank or other commercial debt, forward sales of
production, debt securities, equity securities or any combination thereof. The
Company experienced net losses of $465,000 and $457,000 for the fiscal years
ended January 31, 1996 and 1995, respectively, and continued losses could
adversely affect the Company's ability to obtain such additional financing. The
Company has no commitment for additional financing and there can be no assurance
that the Company will be successful in obtaining financing when required. The
Company's ability to meet its financial requirements under the terms of existing
debt agreements is dependent upon the deliverability and price received for
products produced. If the Company is unable to obtain additional financing when
needed, it would consider, among other alternatives, sale of certain of its
leasehold interests for additional capital, the curtailment of property
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acquisitions or development activities until internally generated funds become
available, or other strategic alternatives in an effort to meet its financial
requirements.
Estimates of Oil and Gas Reserves
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and cash flows attributable to such reserves,
including factors beyond the control of the Company and its engineers. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner. The accuracy of an
estimate of quantities of reserves, or of cash flows attributable to such
reserves, is a function of the available data, assumptions regarding future oil
and gas prices and expenditures for future development and exploitation
activities, and of engineering and geological interpretation and judgment.
Additionally, reserves and future cash flows may be subject to material downward
or upward revisions, based upon production history, development and exploitation
activities and prices of oil and gas. Actual future production, revenue, taxes,
development expenditures, operating expenses, quantities of recoverable reserves
and the value of cash flows from such reserves may vary significantly.
Price Risks
In addition to production levels, the Company's revenues,
profitability, cash flow, future growth and the carrying value of its oil and
gas properties are affected by changes in oil and gas prices. The Company's
ability to maintain or increase its borrowing capacity and to obtain additional
capital on economic terms is substantially dependent upon such prices. Prices
for oil and gas are subject to large fluctuations in response to changes in
supply, market uncertainty and a variety of additional factors beyond the
control of the Company. These factors include weather conditions in the United
States, the condition of the national economy, the actions of the Organization
of Petroleum Exporting Countries, governmental regulation, political stability
in the Middle East and elsewhere, foreign supply of oil and gas, the price of
foreign imports and the availability of alternate fuel sources. Decreases in the
prices of oil and gas have had and could continue to have an adverse effect on
the carrying value of the Company's proved reserves, borrowing capacity,
revenues, profitability, and cash flow.
Volatile oil and gas prices also make it difficult to estimate the
value of producing properties for acquisition as well as budget for and project
the return on development projects. Volatile prices often cause disruption in
the market for oil and gas producing properties as buyers and sellers have
difficulty agreeing on the value of properties.
Competition
The oil and gas industry is highly competitive. The Company's
competitors include major integrated oil companies, substantial independent
energy companies, affiliates of major interstate pipelines and national and
local gas gatherers. Many such competitors are larger and have substantially
greater financial resources than the Company. The market for acquisition of
existing oil and gas properties is particularly competitive, and no assurance
can be provided that acquisitions of additional properties, if successfully
identified, can be concluded on favorable economic terms.
Markets
The Company's ability to market oil and gas from its wells depends upon
numerous factors beyond its control, including the extent of domestic production
and imports of oil and gas, the proximity of the Company's gas production to gas
pipelines, the availability of capacity in pipelines, the demand for oil
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and gas by utilities and other end users, the effects of inclement weather,
state and federal regulation of oil and gas production, and federal regulation
of gas sold or transported in interstate commerce. There is no assurance that
the Company will be able to market all of the oil or gas produced by it or that
favorable prices can be obtained for the oil and gas produced.
Regulation of Oil and Gas Producing Activity
The interstate transportation and certain sales for resale of natural
gas in interstate commerce are regulated by the Federal Energy Regulatory
Commission ("FERC") pursuant to the Natural Gas Act of 1938 ("NGA"), the Natural
Gas Policy Act of 1978 ("NGPA") and other related statutes. In recognition of
the current highly competitive market for natural gas, FERC has authorized
certain other types of gas shelters which remain subject to FERC's interstate
sale-for-resale jurisdiction, such as intrastate pipeline companies and local
distribution companies, to make sales at market prices in direct competition
with deregulated "first sellers" such as the Company. The FERC continues to
regulate interstate natural gas pipeline transportation rates and service
conditions pursuant to the NGA and NGPA. Federal regulations of interstate
transporters affects the marketing of natural gas produced by the Company as
well as the revenues received by the Company for sales of such natural gas.
The State of Texas as well as other states require permits for
drilling, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. The
statutes and regulations for the State of Texas and certain other states limit
the rate at which oil and gas can be produced from certain oil and gas
properties.
Other statutes and regulations address conservation matters, provisions
for the unitization or pooling of oil and gas properties, the establishment of
spacing requirements, and the plugging and abandonment of oil and gas wells.
Environmental Regulations
The Company's oil and gas properties are subject to numerous federal,
state and local laws and regulations related to protection of the environment.
The Company believes its oil and gas properties and the related operations are
in substantial compliance with applicable material environmental laws and
regulations. The Company is not a party to any litigation involving
environmental matters and has not been notified by any federal, state, or local
governmental agency that it is responsible for any environmental cleanup. The
trend in environmental legislation is towards stricter standards; however, the
Company is not aware of any future environmental standards that are reasonably
likely to be adopted that will materially affect the Company.
Operating Hazards and Insurance
The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, blowouts, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures, and discharges of toxic gases. The occurrence of any of the
above could result in substantial losses to the Company as a result of injuries,
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, cleanup responsibilities,
regulatory investigations, penalties, and suspension of operations. In addition
to the foregoing, all of the Company's operations that are currently offshore
are subject to the additional hazards of marine operations, such as capsizing,
collision, and adverse weather and sea conditions.
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The Company maintains customary insurance in accordance with industry
practice against some, but not all, of the risks described above. The Company's
insurance does not cover business interruption or protect against loss of
revenues. There can be no assurance that any insurance obtained by the Company
will be adequate to cover all losses or liabilities. The Company cannot predict
the continued availability of insurance or the availability of insurance at
premium levels that justify the premium cost. The occurrence of a significant
event not fully insured or indemnified against could materially and adversely
affect the Company's financial condition and operations.
Employees
At January 31, 1996, the Company and its affiliates had 14 employees,
three of whom are in executive positions.
Item 2. Properties
Oil and Gas Properties
The following table details the Company's working interest in oil and
gas properties as of January 31, 1996. All of the properties are located within
the United States.
Acreage
The following table sets forth the developed and undeveloped oil and
gas acreage in which the Company has an interest as of January 31, 1996.
Undeveloped acreage is considered to be those lease acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and natural gas, regardless of whether or not such
acreage contains proved reserves.
Developed Acreage Undeveloped Acreage
------------------ ------------------
Gross Net(1) Gross Net (1)
Acres Acres Acres Acres
------ ------ ------ -----
Location:
Offshore-Louisiana 8,960 487 46,040 2,093
Montana 320 136 -- --
Louisiana 2,122 7 -- --
Oklahoma 13,639 1,424 -- --
Texas 25,409 16,898 -- --
Wyoming 960 75 -- --
Michigan 152 5 -- --
------ ------ ------ -----
Total 51,562 19,032 46,040 2,093
====== ====== ====== =====
(1) For further information regarding the Company's oil and gas activities,
see Note 8 of Notes to Combined Financial Statements which is
incorporated herein by reference.
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Gross and Net Productive Wells
The following table sets forth the gross and net number of productive,
dry, and development or exploratory wells in which the Company had ownership
interests in fiscal 1996. "Gross wells" refers to the total wells in which the
Company has an interest. "Net wells" refers to the percentage of interest owned
by the Company in the gross wells.
Oil/Condensates Natural Gas
------------------- ------------------
Gross Net (1) Gross Net (1)
------ ------ ------ ------
Location:
Offshore - Louisiana 16 1.0 13 1.1
Montana 2 1.0 -- --
Louisiana -- -- 6 --
Oklahoma 7 6.0 23 1.0
Texas 249 203.0 70 57.0
Wyoming 8 1.0 -- --
Michigan -- -- 1 --
------ ------ ------ ------
Total 282 212.0 113 59.1
====== ====== ====== ======
(1) For further information regarding the Company's oil and gas activities,
see Note 8 of Notes to Combined Financial Statements which is
incorporated herein by reference.
Title to Properties
The Company believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and gas
industry. The Company's properties are subject to customary royalty interests,
liens for existing indebtedness, liens incident to operating agreements, liens
for current taxes and other burdens which the Company believes do not materially
interfere with the use of or affect the value of the oil and gas properties.
Executive Office
The Company's executive offices occupy approximately 8,900 square feet
of leased space in San Antonio, Texas. The mailing address, telephone and
telefax, respectively, for the executive offices is: 10101 Reunion Place, Suite
210, San Antonio, Texas 78216-4156, (210) 308-8000, (210) 308-8111.
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Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings now
pending and has no knowledge that any such proceedings are contemplated.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There are presently no listed market quotes for the Company's common
stock. The Company has no immediate plans for seeking a listing on a nationally
recognized exchange.
As of March 31, 1996, there were approximately 632 shareholders of
record.
The Company has never paid cash dividends and does not anticipate
payment of any dividends in the future. The Senior Credit Facility and Notes
restrict the payment of dividends.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
In March 1994, Offshore purchased working interests in 24 producing oil
and gas wells located in Polk County, Texas for approximately $160,000. In May
1994, an additional 38 producing non-operated oil and gas properties were
acquired in Oklahoma, Wyoming and North Texas for approximately $807,000. In
July 1994, Offshore completed the acquisition of leasehold interests in 152 oil
and gas wells located in Texas, Oklahoma, and Montana for approximately
$2,605,000. With this acquisition, Drilling assumed the operating
responsibilities of the seller. The acquisition price also included some
non-operated properties, real estate, furniture, fixtures, and other office
equipment.
In May 1995, Offshore sold its interest in a certain oil and gas
property located offshore Louisiana. The Company's decision to sell its interest
in this offshore property was motivated by several factors, principally the
planned suspension of production from the property pending completion of a
development program by the operator and majority interest owner of this
property, projected development costs of approximately $300,000 to the Company's
interest, and management's belief that the Company's resources could be more
productively employed in development efforts associated with other properties
owned and operated by the Company. In July 1995, Offshore sold additional oil
and gas properties located in West Texas. Drilling received cash distributions
attributable to its 80% interest of $1,032,000 and $184,000 from the sale of the
described offshore and West Texas properties, respectively. From the proceeds of
these sales, $800,000 and $170,000, respectively, were applied to reduce bank
indebtedness of the Company.
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Prior to February 1, 1996, Drilling's ownership interest in the oil and
gas properties acquired by Offshore was 80%. Buschman and the Hightowers owned
the remaining 20% interest. As a result of the Company's 80% ownership interest,
Offshore's financial statements are combined with the Company's financial
statements as of January 31, 1996. The minority interests of Buschman and the
Hightowers are separately set forth in the balance sheet and the statements of
operations of the Company.
Effective February 1, 1996, Buschman and the Hightowers agreed to
restructure Offshore whereby the aggregate 20% minority limited partnership
interests of Buschman and the Hightowers would be redeemed, and as a result of
in-kind distributions, Buschman and the Hightowers became proportionate working
interest owners of the onshore oil and gas properties previously held by
Offshore. All existing interest in the offshore oil and gas properties held by
Offshore at January 31, 1996, were conveyed to GulfMex, a newly formed Texas
limited partnership, which has the same proportionate ownership structure as
that of Offshore prior to the restructuring. Buschman and the Hightowers no
longer are limited partners of Offshore-New and are now 20% limited partners in
GulfMex. Subsequent to January 31, 1996, Offshore-New will be 100% indirectly
owned by the Company and GulfMex will be 80% indirectly owned by the Company,
which will be reflected in the combined financial statements prepared subsequent
to January 31, 1996.
The Company has adopted the successful efforts method of accounting for
the oil and gas properties purchased. Under this method of accounting, the
acquisition costs of the oil and gas properties applicable to proved reserves
are amortized as produced on the unit-of-production method. Future development
costs or exploratory costs applicable to purchased properties are capitalized
and amortized on the unit-of-production method if proved reserves are discovered
or expensed if the well is a dry hole.
The existing oil and gas properties which are located in federal waters
offshore Louisiana consist of a series of platforms for each "OCS" lease which
accommodate one or more producing oil and gas wells. Federal regulations mandate
strict rules for the plugging and abandonment of the offshore wells and
platforms. Due to the offshore locations, the costs related with such plugging
and abandonment can be substantial; therefore, the operator of the offshore oil
and gas properties has scheduled monthly deductions from production proceeds of
the working interest owners of certain properties to fund the total estimated
liability at the completion of the productive life of the wells and platform.
Offshore's, and subsequent to January 31, 1996, GulfMex's estimated ultimate
plugging and abandonment requirements may increase due to inflation or other
circumstances, or may decrease as a result of the sale of the platform with the
buyer assuming plugging and abandonment liabilities. The operator estimates the
total plugging and abandonment liability to be $1,650,000, of which
approximately $1,040,000 has been accrued. Offshore's abandonment escrow account
as of January 31, 1996 is approximately $1,036,000. This escrow account was
conveyed to GulfMex subsequent to January 31, 1996.
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This Statement is effective for financial statements for fiscal
years beginning after December 15, 1995. The effect of adopting this Statement
is not expected to be material to the Company.
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Fiscal Year Ended January 31, 1996
For the fiscal year ended January 31, 1996, combined revenues from the
sale of oil and gas products were approximately $3,632,000. Total product sold
in fiscal year 1996 was approximately 97,000 bbls oil and condensate and
1,208,000 mcf gas. Production costs and other related miscellaneous expenses
were approximately $2,002,000. Dry hole costs and lease abandonments incurred
during the fiscal period were approximately $276,000. The provision for the
plugging and abandonment cost of the offshore platforms and wells owned by
Offshore for fiscal 1996 was approximately $180,000.
Depletion of oil and gas properties for the fiscal year ended 1996
based on the units of production method was approximately $1,096,000.
General and administrative expenses for the year ended January 31, 1996
were approximately $1,336,000. The increase in general and administrative
expenses is the result of the addition of office space and employees necessary
to operate the properties acquired in July 1994. Interest expense of
approximately $318,000 was incurred on the Company's outstanding debt. For the
fiscal year ended January 31, 1996, interest expense increased due to the
addition of $2,600,000 debt with the acquisition of oil and gas properties in
July 1994 and the issuance on September 27, 1995 of $2,000,000 of 11.50% Notes
to finance a development program on certain oil and gas properties located in
Texas.
During the fiscal year ended January 31, 1996, Offshore recognized a
$1,108,800 gain on the sale of producing properties located offshore Louisiana,
and $100,000 gain on the sale of producing properties located in Texas. Other
gain recognized by the Company was for the sale of salvage equipment.
The decrease in production revenues noted in fiscal 1996 as compared to
fiscal 1995 primarily resulted from the sale by Offshore of the oil and gas
property located offshore Louisiana effective April 1, 1995. During the year
ended January 31, 1995, this offshore property accounted for approximately
$579,000 in production revenues and $63,000 in operating expenses, as compared
to $88,000 in production revenues and $10,000 in operating expenses generated
during the year ended January 31, 1996.
Fiscal Year Ended January 31, 1995
For the fiscal year ended January 31, 1995, combined revenues from the
sale of oil and gas products were approximately $4,205,000. Total product sold
in fiscal 1995 was approximately 94,000 bbls oil and condensate and 1,347,000
mcf gas. Production costs and other related miscellaneous expenses were
approximately $1,729,000. Dry hole costs and lease abandonments incurred during
the fiscal period were approximately $281,000. The provision for the plugging
and abandonment cost of the offshore platforms and wells owned by Offshore for
fiscal 1995 was approximately $183,000. During the same period, approximately
$109,000 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 fiscal year ended 1995
based on the units of production method was approximately $1,141,000.
Interest expense of approximately $197,000 was incurred on the
Company's outstanding debt for the funding of oil and gas property acquisitions.
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During the fiscal year ended January 31, 1995, Offshore sold producing
property in Texas, recognizing a gain on the sale of approximately $109,000.
Other gain recognized by the Company was for the sale of salvage equipment.
In July 1994, Offshore completed the acquisition of ownership interests
in 152 oil and gas wells located in Texas, Oklahoma and Montana. With this
acquisition, Drilling assumed the operating responsibilities of the seller. The
acquisition price included some non-operated properties, real estate, furniture,
fixtures and other office equipment. Increases in revenues, costs and expenses
in fiscal year 1995 compared to 1994 are primarily as a result of this
acquisition. General and administrative expenses for the year ended January 31,
1995 were approximately $1,152,000 as compared to $907,000 during the year ended
January 31, 1994 as a result of the additional employees required for Drilling's
operating responsibilities.
Liquidity and Capital Resources
During the fiscal year ended January 31, 1995, the Company expended
approximately $3,572,000 for the purchase of oil and gas producing properties.
The Company funded its interest in these acquisitions through additional bank
financing of $3,025,000 from its existing lender. Drilling retired approximately
$755,000 of its outstanding debt during the fiscal year ended January 31, 1995.
Debt outstanding at January 31, 1995 was $3,017,804.
In May 1995, Offshore sold its interest in a certain oil and gas
property located offshore 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 80% partner, received a
cash distribution of approximately $1,032,000 from the sale, of which $800,000
was applied as a principal reduction on the Company's then outstanding bank
indebtedness, which was secured by substantially all of the Company's interest
in the properties owned by Offshore. Effective July 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 bank indebtedness. As a
result of the reductions in outstanding indebtedness, the bank agreed to
restructure the Company's principal and interest payments through the maturity
date for the bank debt. The scheduled monthly payments of principal and
interest, as restructured, were $50,000 through August 1995, $55,000 through
December 1995, and $61,000 to May 1996, the maturity of the then existing bank
indebtedness.
On September 27, 1995, the Company consummated a private offering of
11.50% Notes in the aggregate principal amount of $2,000,000 with warrants
providing for the purchase of an aggregate of 1,388,160 shares of Class A Common
Stock, par value $.01 per share, of the Company at an initial exercise price of
$0.40 per share, subject to adjustment under certain circumstances. In
connection with the modifications and amendments to the Notes discussed below,
the warrant exercise price was reduced to $0.20 per share. The Notes were issued
primarily to finance further development and production enhancements to certain
oil and gas properties acquired by the Company in 1994. Net proceeds of
approximately $1,852,000 were provided to the Company by the private offering.
In March 1996, the Company entered into a commitment letter with a new
lender to replace the Company's then existing bank indebtedness of approximately
$1,575,000. The commitment letter required that the Company obtain certain
modifications and amendments from the Holders before the new credit facility
could be concluded. Such consents and amendments were approved by the Holders on
March 8,
-11-
<PAGE>
1996. As amended, the Notes provide for a final maturity on September 30, 2002
(instead of September 30, 2000) and the quarterly amortization of principal over
four years, commencing in December 1998, at annual rates of 12.5%, 12.5%, 37.5%
and 37.5% of the original principal amount (instead of amortization of principal
over three years, commencing in December 1997, at annual rates of 12.5%, 37.5%
and 50% of the original principal amount). In addition to other provisions
amended, the exercise price of the warrants granted was reduced from $.40 per
share to $.20 per share.
The Company's new Senior Credit Facility provides for up to $10,000,000
in borrowings, subject to limitations on availability as a result of the
Borrowing Base determination. The initial borrowing base ("Borrowing Base")
under the Senior Credit Facility is $4,967,000. The Borrowing Base will be
redetermined by the lender each year on February 1 or sooner, if specially
requested by the Company. The Borrowing Base is an amount as determined by the
lender, at its sole discretion, using procedures and standards customary for its
petroleum industry customers, as the amount which the Company's oil and gas
properties will support the principal balance outstanding under the Senior
Credit Facility. Initial proceeds from the Borrowing Base were used to refinance
the Company's existing senior indebtedness of $1,575,000 on March 11, 1996 and
provide $900,000 to purchase a 3.125% working interest in an existing producing
oil and gas lease located offshore Louisiana which increased the Company's net
proved gas reserves by 927,000 mcf.
On March 26, 1996, Offshore-New acquired leasehold interests in three
gas wells located in Wheeler County, Texas for a net purchase price of
approximately $370,500. Funds of $320,500 from the Borrowing Base and working
capital of $50,000 were used by the Company to make the acquisition of these
wells. The total net proved reserves acquired by this acquisition were 3,000
bbls oil and condensate and 868,000 mcf gas. Drilling will operate the gas
wells.
On April 12, 1996, Offshore-New acquired various leasehold interests in
approximately 31 onshore oil and gas wells located in Mississippi and Louisiana
for an acquisition of price of approximately $2,800,000, which includes 23 wells
to be operated by Drilling. The total net proved reserves acquired were 725,000
bbls oil and condensate. At closing, the Company paid for half of the
acquisition price with funds of approximately $1,100,000 from the Borrowing Base
and approximately $300,000 of working capital. By agreement with the seller, the
remaining balance of approximately $1,400,000 was financed by a note issued to
the seller ("Seller's Note") which will be payable with interest payable at
prime on August 30, 1996.
On April 30, 1996, approximately $1,100,000 of the Company's Borrowing
Base remains available to fund a portion of the Seller's Note. Under the terms
of the Senior Credit Facility, monthly reductions of $82,000 to the Borrowing
Base commenced April 1, 1996. Beginning March 1, 1997, the Borrowing Base will
be subject to further monthly reductions of $108,833 through January 1, 1998.
When the outstanding principal under the Senior Credit Facility exceeds the
Borrowing Base, the Company must make principal payments to reduce the
outstanding balance to amount equal to or less then the Borrowing Base. On
February 1, 1998, which is the maturity date of the Senior Credit Facility, the
principal debt then outstanding shall be due and payable. The interest rate to
be charged on the outstanding principal balance is based on the lender's prime
rate plus 1%. All of the Company's interests (direct and indirect) in existing
oil and gas properties, miscellaneous assets, and future oil and gas property
acquisitions serve as collateral for the Senior Credit Facility. The Senior
Credit Facility contains various restrictions including, but not limited to,
restrictions on payments of dividends or distributions other than capital
distributions to Buschman and the Hightowers in GulfMex, maintenance of positive
working capital, and no change in the ownership control or the President of the
Company.
-12-
<PAGE>
Lower oil and gas prices during calendar year 1995 adversely affected
the Company's financial performance and cash flow. Approximately 54% of the
Company's sales production volume during fiscal year ended January 31, 1996 was
from gas. The average gas price for fiscal year 1995 was approximately $1.88 per
Mcf which decreased to an average of approximately $1.68 per Mcf for fiscal year
ended January 31, 1996. Although posted gas and oil prices increased
significantly during the fourth quarter of the fiscal year ended January 31,
1996, regional prices for those products did not increase at the same rate.
The Company's ability to meet its current financial commitments,
including those imposed by existing debt agreements, and to have access to
additional working capital to operate and develop its existing oil and gas
properties is principally dependent on the market prices for oil and natural
gas, the production levels of the Company's properties, and the success of the
development program commenced by the Company. The Company has no commitment for
additional financing and there can be no assurance that the Company will be
successful in obtaining financing when and if required. If the Company is unable
to obtain additional financing when needed, it would consider, among other
alternatives, sale of certain of its leasehold interests for additional capital,
the curtailment of property acquisitions or development activities until
internally generated funds become available, or other strategic alternatives in
an effort to meet its financial requirements.
The Company is not obligated to provide a fixed or determinable
quantity of oil or gas in the future under any existing contracts, agreements,
hedge or swap arrangements.
Recent Operating Developments
The Company operates a number of wells in the KWB Field in West Texas,
in which Offshore-New has approximately 80% of the working interest. With a
portion of the proceeds of the Notes, the Company initiated a pilot secondary
recovery waterflood project in that field. The pilot development well and
conversion of the surrounding production wells to water injection wells required
capital expenditures of approximately $315,500 as of January 31, 1996. The
waterflood pilot test was initially delayed at least thirty days due to
equipment failures and freezing weather, but the water injection has been
proceeding since January 1996. While the water injection wells are causing a
build-up in reservoir pressure, no material additional incremental oil
production has been experienced in the pilot development well.
The Company expected that it would take several months before any
noticeable increase in secondary recovery production, if any, would be realized.
If the waterflood pilot proves successful, the projected number of additional
development wells drilled would be 29 with projected development costs to the
Company of approximately $5,800,000 and a projected increase in reserves of
1,100,000 bbls of oil equivalent. Should the waterflood pilot prove to be
uneconomical, the Company would likely abandon the field. The Company
anticipates that the sale of salvageable equipment would exceed plugging and
abandonment expense for the existing production and water injection wells.
The Company attempted reworking three gas wells in Wheeler County,
Texas during the last quarter of fiscal year 1996 by recompleting the wells in
the Granite Wash production intervals. Although drilling logs and information
gathered from adjacent gas wells which produced in the same horizon indicated
good production potential, the Company encountered unexpected conditions in the
wellbore which caused an incursion of water. The Company's effort to remedy the
water incursion in the well bores proved unsuccessful, and in late March 1996,
the Company abandoned the Granite Wash formation in two of the three wells. One
gas well is continuing to produce from the Granite Wash, but such
-13-
<PAGE>
production is only marginally economical. The Company has expended approximately
$248,000 for the workover and completion efforts for these wells as of January
31, 1996, of which approximately $203,000 was expensed as dry hole costs.
Subsequent to January 31, 1996, an additional amount of approximately $141,000
has been expended, of which approximately $129,000 will be expensed as dry hole
costs during the next fiscal year.
Oil and gas exploration and production operations involve considerable
economic risks. No assurances can be given that any current or future
development plans and operations will be successful or that, if successful,
production from the wells and the associated revenues over the productive life
of the properties will equal or exceed the costs associated with properties and
their development.
Item 7. Financial Statements
1) The financial statements of the Company beginning on page F-1 are
filed as part of this Form 10-KSB.
It was impracticable for the Company to obtain the historical financial
records for the acquisition of South Timbalier Block 76 and Belle properties
prior to filing of this Form 10-KSB. It is anticipated that the required
financial statements for these acquisitions will be filed in a Form 8-K prior to
May 24, 1996.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company has never changed accountants nor reported a disagreement
on any matter of accounting principles.
PART III
Item 9. Directors and Executive Officers of the Registrant
See "Election of Directors" incorporated herein by reference from the
Proxy Statement to the Company's Shareholders.
Item 10. Executive Compensation
See "Executive Compensation" incorporated herein by reference from the
Proxy Statement to the Company's Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
See "Voting Securities and Principal Shareholders" incorporated herein
by reference from the Proxy Statement to the Company's Shareholders.
-14-
<PAGE>
Item 12. Certain Relationships and Related Transactions
See "Related Transactions" incorporated herein by reference from the
Proxy Statement to the Company's Shareholders.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the accompanying Index to
Exhibits on page E-1 are filed as part of this Form
10-KSB. The Company will furnish a copy of any
exhibit to a requesting shareholder upon payment of a
fee of $.25 per page.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
last quarter ended January 31, 1996.
-15-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RIO GRANDE, INC.
By: /s/ ROBERT A. BUSCHMAN
ROBERT A. BUSCHMAN, Chairman of the Board
Date: April 30, 1996
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ ROBERT A. BUSCHMAN Chairman of the Board April 30, 1996
- ------------------------- (Principal Executive
ROBERT A. BUSCHMAN Officer and Director)
/s/ GUY R. BUSCHMAN President and Director April 30, 1996
- -------------------------
GUY R. BUSCHMAN
/s/ GARY SCHEELE Vice President and April 30, 1996
- ------------------------- Secretary/Treasurer
GARY SCHEELE (Principal Financial and
Accounting Officer)
/s/ JOHN G. HURD Director April 30, 1996
- -------------------------
JOHN G. HURD
/s/ H. M. SHEARIN, JR Director April 30, 1996
- -------------------------
H. M. SHEARIN, JR
/s/ RALPH F. COX Director April 30, 1996
- -------------------------
RALPH F. COX
/s/ HOBBY A. ABSHIER, JR Director April 30, 1996
- -------------------------
HOBBY A. ABSHIER, JR
-16-
<PAGE>
INDEX TO EXHIBITS
The following exhibits are numbered in accordance with Item 601 of Regulation
S-B:
3(a) Certificate of Incorporation of the Company
3(b) Bylaws of the Company
4(a) Specimen stock certificate (incorporated by reference to Exhibit 4(a)
to Form 8-K dated December 29, 1986 (File No. 1-8287))
4(b) Specimen Stock Purchase Warrant (incorporated by reference to Exhibit
4(b) to form 8-K dated December 29, 1986 (File No. 1- 8287)
4(c) Note Purchase Agreement, dated September 27, 1995, by and among the
Company, Rio Grande Drilling Company, and the various purchasers of
11.50% Subordinated Notes due September 30, 2000 (incorporated herein
by reference from October 31, 1995 Form 10-QSB).
4(d) Form of Common Stock Purchase Warrant issued in connection with the
Offering described in this report (incorporated herein by reference
from October 31, 1995 Form 10-QSB).
4(e) Amendments to Note Purchase Agreement, by and among the Company,
Drilling and the Holders (incorporated herein by reference from March
26, 1996 Form 8-K).
4(f) Amendments to Notes, by and among the Company and the Holders
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(g) Consents to Proposed Transactions by the Holders to the Company
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(h) Amendment to Warrant Agreement among the Company and the Holders
(incorporated herein by reference from March 26, 1996 Form 8-K).
10(a) Asset Purchase Agreement dated June 26, 1992 by and between SHV Oil and
Gas Company and Rio Grande Drilling Company.
10(b) Agreement of Limited Partnership dated June 25, 1992 for Rio Grande
Offshore, Ltd. between Rio Grande Drilling Company, Robert A. Buschman,
H. Wayne Hightower and H. W. Hightower, Jr.
10(c) Loan Agreement by and between International Bank of Commerce and Rio
Grande Drilling Company dated June 26, 1992.
10(d) Purchase and Sale Agreement dated May 24, 1995, between Newfield
Exploration Company and Rio Grande Offshore, Ltd. for the sale of Ewing
Bank Blocks 947/903 and Ship Shoal Block 356 at a sales price of
$1,200,000 (incorporated by reference from July 31, 1995 Form 10-QSB).
E-1
<PAGE>
10(e) Consulting Agreement dated August 10, 1995, between Hobby A. Abshier
and Rio Grande, Inc. (incorporated by reference from July 31, 1995 Form
10-QSB).
10(f) Closing Agreement between Fortune Petroleum Corporation, Pendragon
Resources, L.L.C. and Rio Grande Offshore, Ltd. dated March 6, 1996 for
the acquisition of South Timbalier Block 76 (incorporated by reference
from March 26, 1996 Form 8-K).
10(g) Loan Agreement between Comerica Bank-Texas, Rio Grande, Inc. and Rio
Grande Drilling Company dated March 8, 1996 for a senior credit
facility of $10,000,000 (incorporated herein by reference from March
26, 1996 Form 8-K).
10(h) Purchase and Sale Agreement between Belle Oil, Inc., Belle Exploration,
Inc., Louisiana Well Service Co., Alton J. Ogden, Jr., Alton J. Ogden,
Sr., Jeff L. Burkhalter and Rio Grande Offshore, Ltd. (incorporated
herein by reference from April 29, 1996 Form 8-K).
22 The following list sets forth the name of each subsidiary or affiliate
of the Company, with the State of incorporation as noted which are
wholly-owned by the Company (except as noted):
Rio Grande Drilling Company, Texas corporation Rio Grande
Desert Oil Company, Nevada corporation Rio Grande Offshore,
Ltd., a Texas limited partnership Rio Grande GulfMex, Ltd., a
Texas limited partnership (80% interest)
27 Financial Data Schedule (F-20).
99(a) Private Offering Memorandum of the Company dated August 27, 1995
(incorporated herein by reference from October 31, 1995 Form 10-QSB).
E-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Rio Grande, Inc.:
We have audited the combined balance sheet of Rio Grande, Inc. and Subsidiaries
as of January 31, 1996, and the related combined statements of operations,
shareholders' equity, and cash flows for the years ended January 31, 1996 and
1995. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Rio Grande, Inc. and
Subsidiaries as of January 31, 1996, and the results of their operations and
their cash flows for the years ended January 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
April 26, 1996
F-1
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Combined Balance Sheet
January 31, 1996
Assets
Current assets:
Cash and cash equivalents $1,244,268
Trade receivables 637,292
Prepaid expenses 13,555
----------
Total current assets 1,895,115
Property and equipment, at cost:
Oil and gas properties, successful efforts
method (notes 3 and 8) 7,979,389
Transportation equipment 96,558
Other depreciable assets 387,071
----------
8,463,018
Less accumulated depreciation, depletion
and amortization 3,331,866
Net property and equipment 5,131,152
Other assets:
Platform abandonment fund (note 2) 1,035,570
Other assets, net 205,565
----------
1,241,135
Total Assets $8,267,402
==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable 424,740
Accrued expenses 278,671
Current installments of long-term debt (note 3) 893,622
----------
Total current liabilities 1,597,033
Accrued platform abandonment expense 1,039,358
Long-term debt, excluding installments (note 3) 2,790,593
Minority interest in combined limited partnership 983,990
----------
Total liabilities 6,410,974
Shareholders' equity (note 5):
Common stock of $.01 par value. Authorized
10,000,000 shares, issued and outstanding
5,552,760 shares in 1996 55,528
Additional paid-in capital 1,029,338
Retained earnings 771,562
----------
Total shareholders' equity 1,856,428
Contingent liabilities (note 2) --
----------
Total Liabilities and Shareholders' Equity $8,267,402
==========
See accompanying notes to combined financial statements.
F-2
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Combined Statements of Operations
Year ended January 31,
--------------------------
1996 1995
----------- ----------
Revenues:
Oil and gas sales $ 3,632,171 4,204,900
----------- ----------
Costs and expenses:
Lease operating 2,002,218 1,729,475
Dry hole costs and lease abandonments 276,058 280,915
Depreciation, depletion and amortization 1,171,042 1,187,538
Provision for abandonment expense 180,000 182,997
General and administrative 1,336,309 1,162,621
----------- ----------
Total costs and expenses 4,965,627 4,543,546
----------- ----------
Loss from operations (1,333,456) (338,646)
----------- ----------
Other income (expenses):
Interest expense (318,222) (196,670)
Interest income 59,629 42,594
Gain on sale of assets 1,258,688 136,664
Minority interest in earnings of combined
limited partnership (128,794) (97,828)
----------- ----------
Total other income (expenses) 871,301 (115,240)
----------- ----------
Loss before income taxes (462,155) (453,886)
Income taxes (note 4) 2,924 3,000
----------- ----------
Net loss $ (465,079) (456,886)
=========== ==========
Net loss per common and common equivalent
share $ (0.09) (0.08)
=========== ==========
Weighted average common and common
equivalent shares outstanding 5,231,177 5,609,467
=========== ==========
See accompanying notes to combined financial statements.
F-3
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Combined Statements of Shareholders' Equity
Additional Total
Common Paid-in Retained Shareholders'
Stock Capital Earnings Equity
------- --------- --------- ---------
Balances at January 31, 1994 $55,528 1,029,338 1,693,527 2,778,393
Net loss -- -- (456,886) (456,886)
------- --------- --------- ---------
Balances at January 31, 1995 55,528 1,029,338 1,236,641 2,321,507
Net loss -- -- (465,079) (465,079)
------- --------- --------- ---------
Balances at January 31, 1996 $55,528 1,029,338 771,562 1,856,428
======= ========= ========= =========
See accompanying notes to combined financial statements.
F-4
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Combined Statements of Cash Flows
Year ended January 31,
------------------------
1996 1995
------------ ---------
Cash flows from operating activities:
Net loss $ (465,079) (456,886)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 75,217 46,964
Depletion of oil and gas producing properties 1,095,825 1,140,574
Provision for abandonment expense 180,000 182,997
Gain on sale of assets (1,258,688) (136,664)
Minority interest in equity of limited partnership 128,794 97,828
Decrease in accounts receivable 122,542 40,955
Decrease in prepaid expenses 16,524 69,292
Increase in accounts payable and accrued
expenses 315,617 228,767
Increase (decrease) in accrued platform
abandonment expense (122,196) 8,168
----------- ---------
Net cash provided by operating activities 88,556 1,221,995
----------- ---------
Cash flows from investing activities:
Purchase and development of oil and gas
producing properties (828,061) (4,009,042)
Additions to other property and equipment (33,119) (221,816)
Deletions from (additions to) platform abandonment fund 23,955 (122,256)
Additions to other assets (147,650) (74,413)
Proceeds from the sale of property and equipment 1,646,834 354,039
----------- ---------
Net cash provided by (used in) investing activities 661,959 (4,073,488)
----------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 2,000,000 3,100,737
Repayment of long-term borrowings (1,333,589) (755,158)
Contribution from limited partners of
combined limited partnership 97,833 746,414
Distribution to limited partners (465,183) (385,627)
----------- ---------
Net cash provided by financing activities 299,061 2,706,366
Net increase (decrease) in cash and cash equivalents 1,049,576 (145,127)
Cash and cash equivalents at beginning of year 194,692 339,819
----------- ---------
Cash and cash equivalents at end of year $ 1,244,268 194,692
=========== =========
See accompanying notes to combined financial statements.
F-5
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
Organization and Principles of Combination
The combined financial statements include the accounts of Rio Grande, Inc.
(the "Company") and its subsidiaries and majority-owned limited
partnership as follows:
Form of Ownership
Name Organization Status Interest
Rio Grande Drilling Company Corporation Active 100%
("Drilling")
Rio Grande Desert Oil Company Corporation Active 100%
("RG-Desert")
Rio Grande Offshore, Ltd. Partnership Active 80%
("Offshore")
Prior to February 1, 1996, Drilling's ownership interest in the oil and
gas properties acquired by Offshore was 80%. Robert A. Buschman
("Buschman"), H. Wayne Hightower and H. Wayne Hightower, Jr. (the
"Hightowers") owned the remaining 20% interest. As a result of the
Company's 80% ownership interest, Offshore's financial statements are
combined with the Company's financial statements prepared as of January
31, 1996. The minority interests of Buschman and the Hightowers are
separately set forth in the balance sheet and the statements of operations
of the Company.
Effective February 1, 1996, Buschman and the Hightowers agreed to
restructure Offshore whereby the aggregate 20% minority limited
partnership interests of Buschman and the Hightowers would be redeemed,
and as a result of in kind distributions, became proportionate working
interest owners of the onshore oil and gas properties previously held by
Offshore. All existing interest in the offshore oil and gas properties
held by Offshore at January 31, 1996, were conveyed to Rio Grande GulfMex,
Ltd. ("GulfMex"), a newly formed Texas limited partnership, which has the
same proportionate ownership structure as that of Offshore prior to the
restructuring. Buschman and the Hightowers no longer are limited partners
of Offshore and are now 20% limited partners in GulfMex. Subsequent to
January 31, 1996, Offshore will be 100% indirectly owned by the Company
and GulfMex will be 80% indirectly owned by the Company which will be
reflected in the combined financial statements prepared subsequent to
January 31, 1996.
All intercompany balances and transactions have been eliminated in
combination.
F-6
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
Business
The Company had been engaged in the contract drilling of oil and gas wells
since its incorporation in Texas in 1978 until May 1992.
In June 1992, Drilling formed a Texas limited partnership, Rio Grande
Offshore, Ltd., to acquire certain non-operated oil and gas properties
located offshore Louisiana in the Gulf of Mexico and onshore properties
located in Louisiana, Texas, and Michigan. Offshore subsequently has
acquired additional non-operated oil and gas properties in Texas,
Oklahoma, and Wyoming.
In July 1994, Offshore acquired certain operated oil and gas properties
which are located primarily in Jack, Young, and Tom Green Counties, Texas.
Drilling assumed the operating responsibilities of the seller. As the
operator of the oil and gas wells, Drilling charges the other
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 general costs of executive and administrative
functions incurred at the home office. The COPAS overhead is normally
adjusted on an annual basis based on inflationary increases.
The business of acquiring producing oil and gas properties is an
inherently speculative activity that involves a high degree of business
and financial risk. Property acquisition decisions generally are based on
various assumptions and subjective judgments relating to achievable
production and price levels which are inherently uncertain and
unpredictable. Although available geological and geophysical information
can provide information on the potential for previously overlooked or
untested formations, it is impossible to determine accurately the ultimate
production potential, if any, of a particular well. Actual oil and gas
production may vary considerably from anticipated results. Moreover, the
acquisition of a property or the successful recompletion of an oil or gas
well does not assure a profit on the investment or return of the cost
thereof. There can be no assurance that the Company will succeed in its
efforts to acquire additional older oil and gas wells or in its
development efforts aimed at increasing or restoring production from
either currently owned or acquired wells. If the Company over-estimates
the potential oil and gas reserves of a property to be acquired, or if its
subsequent operations on the property are unsuccessful, the acquisition of
the property could result in losses to the Company. Except to the extent
that the Company acquires additional recoverable reserves or conducts
successful exploration and development programs on its existing
properties, the proved reserves of the Company will decline over time as
they are produced. There can be no assurances that the Company will be
able to increase or replace reserves through acquisitions, exploration and
development.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents are
characterized as having high liquidity with little market risk and include
checking accounts and money market accounts.
F-7
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
Oil and Gas Properties
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Under this method, the acquisition costs of oil
and gas properties acquired with proven reserves are capitalized and
amortized on the unit-of-production method as produced. Development costs
or exploratory costs are capitalized and amortized on the
unit-of-production method if proved reserves are discovered, or expensed
if the well is a dry hole.
Other Property and Equipment
Depreciation on other property and equipment is provided using the
straight-line method over their estimated useful lives. Maintenance and
repairs are expensed as incurred.
Federal Income Taxes
The Company utilizes the asset and liability method to account for income
taxes as prescribed by Statement of Financial Accounting Standards No.
109. Under this method, deferred income tax assets and liabilities are
recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates expected to apply in future years to
differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under statement 109, the effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company files a combined Federal income tax return with its
subsidiaries. For Federal income tax purposes, intangible drilling costs,
dry holes and abandonment expense are deducted when paid.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Earnings Per Share
Earnings per share computations are based on the weighted average number
of shares and dilutive common stock equivalents outstanding during the
respective periods. Fully diluted earnings per share is the same as
earnings per common and common equivalent share.
F-8
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
Fair Value of Financial Instruments
Because of their maturities and/or interest rates, the Company's financial
instruments have a fair value approximating their carrying value. These
instruments include trade receivables and long-term debt.
Recently Issued Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation, which requires adoption of the disclosure
provisions no later than fiscal years beginning after December 15, 1995.
Companies are permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," but will be required to disclose in a note to the financial
statements pro forma net income and, if presented, earnings per share as
if the company had applied the new method of accounting, as outlined in
SFAS No. 123. The Company has not yet determined the effect the new
standard will have on net income and earnings per share should it elect to
make such a change. Adoption of the new standard will have no effect on
the Company's cash flows.
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. This Statement is effective
for financial statements for fiscal years beginning after December 15,
1995. The effect of adopting this Statement is not expected to be material
to the Company.
(2) Platform Abandonment Fund
A portion of monthly revenues from the offshore properties is deducted by
the operator to fund future estimated abandonment costs. The funds
deducted are forwarded to a bank and are held in trust for the benefit of
Offshore. The amount deducted each month is based upon a ratio of that
month's production to the estimated remaining proved producing reserves of
each property. Actual expenses incurred for the plugging or abandonment of
offshore wells or platform facilities are invoiced by the operator to the
trust agent.
(3) Long-Term Debt
Long-term debt consists of the following:
11.5% Subordinated Notes payable $2,000,000
Senior indebtedness 1,623,152
Vehicle loans 61,063
----------
3,684,215
Less current installments of long-term debt 893,622
----------
$2,790,593
==========
F-9
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
On September 27, 1995, the Company consummated a private offering of 11.5%
subordinated notes ("Notes") for a total principal amount of $2,000,000.
The Notes were issued primarily to finance further development and
production enhancements to certain West Texas oil and gas properties
acquired by the Company in 1994.
On March 8, 1996, the Company executed a loan agreement with Comerica Bank
- Texas ("Comerica") which provides a new senior credit facility ("Senior
Credit Facility") in an aggregate principal amount of up to $10,000,000.
The initial available credit under this credit facility was $4,967,000
(the "Borrowing Base"). The Senior Credit Facility was used to refinance
the Company's existing senior indebtedness of $1,575,000 on March 11, 1996
($1,623,152 at January 31, 1996) and provide $900,000 to purchase a 3.125%
working interest in an existing producing oil and gas lease located
offshore Louisiana for an acquisition price of $900,000.
On March 26, 1996, the Company acquired various leasehold interests in
three gas wells located in Wheeler County, Texas for a net purchase price
of approximately $370,500 of which approximately $320,500 was financed
with Comerica.
On April 12, 1996, the Company acquired various leasehold interests in 31
onshore oil wells located in Mississippi and Louisiana for a net
acquisition price of approximately $2,800,000 of which approximately
$1,100,000 was financed by Comerica for a total outstanding bank
indebtedness of approximately $3,800,000 on that date. Approximately,
$300,000 was funded from working capital. By agreement with the seller,
the remaining balance of approximately $1,400,000 was financed by a
seller's note (" Seller's Note) which will be payable on August 30, 1996.
On April 30, 1996, approximately $1,100,000 of the Company's Borrowing
Base remains available to fund a portion of the Seller's Note. Under the
terms of Senior Credit Facility, monthly reductions of $82,000 to the
Borrowing Base commenced April 1, 1996. Beginning March 1, 1997, the
Borrowing Base will be subject to further monthly reductions of $108,833
through January 1, 1998. When the outstanding principal under the Senior
Credit Facility exceeds the Borrowing Base, the Company must make
principal payments to reduce the outstanding balance to amount equal to or
less then the Borrowing Base. On February 1, 1998, which is the maturity
date of the Senior Credit Facility, the principal then outstanding shall
be due and payable. The interest rate to be charged on the outstanding
principal balance is based on Comerica's prime rate plus 1%. All of the
Company's interests (direct or indirect) in existing oil and gas
properties, miscellaneous assets, and future oil and gas property
acquisitions will serve as collateral for the credit facility. The Senior
Credit Facility contains various restrictions including, but not limited
to, restrictions on payments of dividends or distributions other than
those capital distributions to Buschman and the Hightowers in GulfMex,
maintenance of positive working capital, and no change in the ownership
control or the President of the Company.
Comerica's commitment to provide the Company a Senior Credit Facility
required that the Company obtain certain modifications and amendments from
the holders ("Holders") of the 11.50% Notes before the Comerica loan
agreement could be concluded. Such consents and amendments were
F-10
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
approved by the Holders on March 8, 1996. The repayment terms of the Notes
were amended to provide for a final maturity on September 30, 2002
(instead of September 30, 2000) and the quarterly amortization of
principal over four years, commencing in December 1998, at annual rates of
12.5%, 12.5%, 37.5% and 37.5% of the original principal amount (instead of
amortization of principal over three years, commencing in December 1997,
at annual rates of 12.5%, 37.5% and 50% of the original principal amount).
Interest expense paid during the years ended January 31, 1996 and 1995,
was approximately $318,000 and $197,000, respectively.
The reductions to principal outstanding at January 31, 1996 for each of
the fiscal years ending January 31, based on the terms of monthly
reductions to the Senior Credit Facility and the modified repayment
schedule for the Notes, are as follows:
1997 $ 893,622
1998 772,739
1999 73,841
2000 256,513
2001 375,000
Thereafter 1,312,500
----------
$3,684,215
==========
(4) Income Taxes
The Company utilizes the asset and liability method to account for income
taxes as prescribed by Statement of Financial Accounting Standards No.
109. Under this method, deferred income tax assets or liabilities are
recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of
existing assets and liabilities.
Due to a loss from operations and change in valuation allowance, there was
no federal income tax expense for the years ended January 31, 1996 and
1995. State income tax for the years ended January 31, 1996 and 1995,
incurred in those states of operation where income is taxed was $2,924 and
$3,000, respectively.
Actual tax expense in 1996 and 1995 differs from the "expected" tax
benefit (at 34%) primarily due to the change in the beginning of the year
valuation allowance resulting from net operating loss and general business
credits carryforwards and state income taxes.
F-11
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
The Company has significant tax carryforwards available to reduce its
future tax liability. The following table summarizes the Company's tax
carryforwards at January 31, 1996:
Description Amount Expiration Date
Net operating losses $17,642,000 1999 through 2011
General business credits 54,000 1997 through 2000
Alternative minimum tax credits 15,000 None
Percentage depletion 409,000 None
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
January 31, 1996 and 1995 are as follows:
1996 1995
-------- --------
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation, depletion
and amortization $ 31,000 166,000
---------- ----------
Deferred tax assets:
Net operating loss carryforwards 6,704,000 6,694,000
General business credit carryforwards 54,000 1,317,000
Alternative minimum tax credit carryforwards 15,000 23,000
Deferred abandonment costs and other 253,000 113,000
---------- ----------
Total gross deferred tax assets 7,026,000 8,147,000
---------- ----------
Total net deferred tax assets 6,995,000 7,981,000
Less valuation allowance 6,995,000 7,981,000
---------- ----------
Net deferred tax asset $ -- --
========== ==========
A valuation allowance has been established to decrease total gross
deferred tax assets to the amount of the total gross deferred tax
liabilities due to the uncertainties involved in the ultimate realization
of the deferred tax assets. The valuation allowance decreased by
approximately $986,000 during 1996 and $517,000 during 1995 due to the
change in the corresponding gross deferred tax assets and liabilities.
No income taxes were paid during the year ended January 31, 1996. Income
tax of $23,000 was paid during the year ended January 31, 1995.
F-12
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
(5) Stockholders' Equity
Common Stock Options
The Company's 1986 Non-Qualified Stock Option Plan and 1986 Incentive
Stock Option Plan (collectively, the "86 Plans"), terminated June 1, 1995.
As of January 31, 1996, options for a total of 375,000 shares of common
stock at exercise prices (not less than fair market value at the time the
options were issued) of $0.385 to $0.44 per share granted, pursuant to the
86 Plans remained outstanding. All outstanding options under the 86 Plans
shall remain in effect until they have been exercised or have expired.
On June 1, 1995, the Company adopted the 1995 Non-Qualified Stock Option
Plan and 1995 Incentive Stock Option Plan to replace the 86 Plans, under
which a total of 1,025,000 shares of common stock has been reserved. As of
January 31, 1996, options for a total of 534,500 shares of common stock at
exercise price (not less than fair market value at the time the options
were issued) of $0.40 to $0.45 per share have been granted, none of which
have been exercised. All outstanding options were exercisable at January
31, 1996.
On September 27, 1995, the Holders of the Notes (see Note 3) were issued
warrants which provide for the purchase of up to 1,388,160 shares of Class
A Common Stock, par value $0.01 per share at an exercise price of $0.40
per share, subject to adjustment under certain circumstances. The exercise
price of the warrants was reduced from the initial $0.40 per share to
$0.20 per share in connection with the amendments and modifications
necessary to finalize the Senior Credit Facility. Management has estimated
these warrants to have nominal value.
(6) Related Party Transactions
One of the limited partners in Offshore is Robert A. Buschman, Chairman of
the Board and Chief Executive Officer of the Company. Buschman has made
capital contributions equivalent to his ten percent (10%) ownership
interest in Offshore. Fees of $676,000 and $444,000 for fiscal years 1996
and 1995, respectively, have been charged to Offshore as reimbursement to
the Company for managing the affairs of the partnership.
The Company obtained the consent of the Holders to restructure Offshore in
order to permit the Company to realize certain efficiencies through the
proportionate allocation of working interest expenses and overhead to the
minority limited partners of Offshore. As a result of the restructuring,
Buschman and the Hightowers became proportionate individual working
interest owners of the onshore oil and gas properties previously owned by
them through their proportionate limited partnership interests in
Offshore. The offshore oil and gas properties held by Offshore were
conveyed to GulfMex, a newly formed Texas limited partnership, which holds
the same beneficial ownership in the offshore oil and gas properties as
Offshore held prior to the restructure. Offshore is the sole general
partner of GulfMex. The partnership agreement for GulfMex is substantially
the same as the existing Offshore partnership agreement.
F-13
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
As a result of the restructuring, Buschman and the Hightowers directly own
(1) 20% of the onshore leasehold working interests formerly owned by them
through Offshore; and (2) a 20% limited partnership interest in GulfMex.
Buschman and the Hightowers no longer are limited partners in Offshore,
however, the reorganized Offshore remains in existence as a Texas limited
partnership with Drilling as the general partner with a 1.25% partnership
interest and Desert a 98.75% limited partnership interest.
As additional consideration for the restructuring, Buschman and the
Hightowers retained the right to participate in acquisitions of oil and
gas properties in those areas where Offshore had properties as of the
effective date of the restructuring. The effective date of the
restructuring was February 1, 1996. Any participation in the subsequent
acquisition of oil and gas properties in those areas of mutual interest
will be on a basis proportionate to the percentage interests of Buschman
and the Hightowers in Offshore prior to the restructuring and would
provide for sharing of economic benefits and burdens in accordance with
the relative ownership interests.
During fiscal year 1995, certain officers and directors participated with
the Company in the acquisition of oil and gas properties. The officers and
directors paid approximately $44,000 for their proportionate share of the
acquisitions for such properties.
(7) Major Customers and Other Information
The Company had two purchasers that accounted for $1,182,400 and $421,500
of production revenue for the year ended January 31, 1996 and accounted
for 45% of the trade receivables balance at January 31, 1996.
The Company had one purchaser that accounted for $2,146,000 of production
revenue for the year ended January 31, 1995 and accounted for 52% of the
trade receivables balance at January 31, 1995.
Maintenance and repair expenses for the years ended January 31, 1996 and
1995 were approximately $27,400 and $21,800, respectively.
Taxes, other than payroll and income taxes, for the years ended January
31, 1996 and 1995 were approximately $8,555 and $2,700, respectively.
Rental expense under an operating lease for office space, which terminates
July 31, 1998, was approximately $109,000 and $87,000, for the years ended
January 31, 1996 and 1995, respectively.
Future minimum rental payments are approximately $111,000 for 1997 and
$55,500 for 1998.
F-14
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
(8) Oil and Gas Activities (unaudited)
Capitalized Costs Incurred Relating to Oil and Gas Producing Activities
The following tables set forth the aggregate capitalized costs and
accumulated depreciation, depletion, and amortization for oil and gas
properties, all of which are proved, at January 31, 1996 and 1995.
1996 1995
---------- ---------
Capitalized costs of proved properties $7,979,389 8,180,840
Accumulated depreciation, depletion and
amortization 3,033,474 2,386,860
---------- ---------
Net capitalized costs 4,945,915 5,793,980
Less minority interest of limited partner 923,014 1,086,400
---------- ---------
Net to Company $4,022,901 4,707,580
========== =========
For the year ended January 31, 1996 and 1995, the following costs were incurred:
1996 1995
---------- ---------
Producing properties $ 828,061 3,986,635
Exploratory properties 277,471 304,144
---------- ---------
Total $1,105,532 4,290,779
========== =========
F-15
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
Results of Operations from Oil and Gas Producing Activities
The following tables set forth the results of operations for oil and gas
producing activities in the aggregate for the years ended January 31, 1996
and 1995. All of the Company's oil and gas producing properties are
located in the United States.
1996 1995
----------- ---------
Oil and gas sales $ 3,632,171 4,204,900
Lease operating expenses (2,002,218) (1,740,419)
Dry hole costs and lease
abandonments (276,058) (280,915)
Provision for abandonment (180,000) (182,997)
Depletion (1,095,825) (1,140,574)
----------- ----------
Pretax results of operations 78,070 859,995
Income tax expense 2,924 3,000
----------- ----------
Results of operations from oil
and gas producing activities
(excluding corporate overhead
and interest costs) 75,146 856,995
Less minority interest of limited
partners (105,235) 90,611
----------- ----------
Net to Company $ 180,381 766,384
=========== ==========
F-16
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
Estimated Quantities of Proved Oil and Gas Reserves
The following table represents the Company's estimate of its proved oil
and gas reserves, developed and undeveloped, as of January 31, 1996 and
1995. Proved undeveloped reserves include approximately 1,227,800 bbls of
oil and 880,100 mcf of gas. The reserve estimates have been prepared by
Paul Clevenger and Ryder-Scott Company, independent petroleum reserve
engineers. Reserve estimates for producing oil and gas properties are
inherently imprecise. Even more imprecise are reserve estimates for new
discoveries.
Combined
-------------------------
Oil/Condensates Gas
--------------- -----
(Bbls) (Mmcf)
Proved Reserves:
Balance at January 31, 1994 319,060 3,970
Purchases of reserves 1,683,961 7,764
Exploration and development 7,627 444
Production (93,734) (1,347)
Revisions of previous estimates 22,654 127
--------- ------
Balance at January 31, 1995 1,939,568 10,958
Production (97,082) (1,208)
Revisions of previous estimates (101,532) (4,807)
--------- ------
Balance at January 31, 1996 1,740,954 4,943
========= ======
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Reserves
The following table sets forth the computation of the standardized measure
of discounted future net cash flows relating to proved reserves for 1996.
The standardized measure is the estimated excess future cash inflows from
proved reserves less estimated future production and development costs,
estimated future income taxes and a discount factor. Future cash inflows
represent expected revenues from production of year-end quantities of
proved reserves based on year-end prices and fixed and determinable future
escalation provided by contractual arrangements in existence at year-end.
Escalation based on inflation, federal regulatory changes, and supply and
demand are not considered. Estimated future production costs related to
year-end reserves are based on year-end costs. Such costs include, but are
not limited to, production taxes and direct operating costs. Inflation and
other anticipatory costs are not considered until the actual cost change
takes effect. Estimated future income tax expenses are computed using the
appropriate year-end statutory tax rates. Consideration
F-17
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
is given for the effects of operating loss carryforwards, permanent
differences, tax credits and allowances. A discount rate of 10% is applied
to the annual future net cash flows after income taxes.
The methodology and assumptions used in calculating the standardized
measure are those required by Statement of Financial Accounting Standards
No. 69. It is not intended to be representative of the fair market value
of the Company's proved reserves. The valuations of revenues and costs do
not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
January 31, January 31,
1996 1995
Combined Combined
------------ ----------
Future cash inflows $ 38,929,500 47,602,100
Future production costs (13,616,900) (13,686,600)
Future development costs (7,338,300) (12,237,500)
Future provision for abandonment, in
excess of revenue deductions (527,500) (519,700)
----------- ----------
Future net cash flows before income tax
expense 17,446,800 21,158,300
Future income tax expense, after
consideration of the effect of net
operating loss carryforwards (453,100) (577,600)
----------- ----------
Future net cash flows 16,993,700 20,580,700
Future net cash flows 10% annual
discount to reflect timing of net cash
flows (8,007,200) (8,052,600)
----------- ----------
Standardized measure of discounted
future net cash flows relating to proved
reserves $ 8,986,500 12,528,100
=========== ==========
F-18
<PAGE>
RIO GRANDE, INC. AND SUBSIDIARIES
Notes to Combined Financial Statements
January 31, 1996 and 1995
January 31, January 31,
1996 1995
Combined Combined
------------ -----------
Changes in discounted net cash flows:
Beginning of Year $ 12,528,100 5,682,800
------------ -----------
Increase (decrease):
Additions to proved reserves resulting
from extensions and discoveries less
related costs -- 526,800
Purchase of minerals in place -- 16,048,700
Accretion of discount 131,300 (7,667,619)
Sales of oil and gas net of production
costs (1,630,000) (2,464,481)
Revisions of previous estimates
Changes in prices 3,952,900 (338,400)
Changes in quantities (6,120,300) 283,700
Changes in estimated income taxes 124,500 456,600
------------ -----------
Net increase (decrease) (3,541,600) 6,845,300
------------ -----------
End of year $ 8,986,500 12,528,100
============ ===========
F-19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from January
31, 1996 Form 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Jan-31-1996
<PERIOD-END> Jan-31-1996
<CASH> 1244268
<SECURITIES> 0
<RECEIVABLES> 637292
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1895115
<PP&E> 8463018
<DEPRECIATION> 3331866
<TOTAL-ASSETS> 8267402
<CURRENT-LIABILITIES> 1597033
<BONDS> 2790593
0
0
<COMMON> 55528
<OTHER-SE> 1800900
<TOTAL-LIABILITY-AND-EQUITY> 8267402
<SALES> 3632171
<TOTAL-REVENUES> 3632171
<CGS> 3629318
<TOTAL-COSTS> 4965627
<OTHER-EXPENSES> 1336309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 318222
<INCOME-PRETAX> (462155)
<INCOME-TAX> 2924
<INCOME-CONTINUING> (465079)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (465079)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
