UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[root] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From................... to....................
Commission File Number 1-8287
RIO GRANDE, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 74-1973357
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10101 Reunion Place, Suite 210, San Antonio, Texas 78216-4156
(Address of Principal Executive Office) (Zip Code)
Issuer's Telephone Number Including Area Code: 210-308-8000
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[root] No .
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
At September 2, 1997 there were 5,882,566 shares of the registrant's
common stock outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (unaudited)
July 31, 1997
-------------
Assets
Current assets:
Cash and cash equivalents $ 309,867
Trade receivables 986,521
Prepaid expenses 133,016
------------
Total current assets 1,429,404
------------
Property and equipment, at cost:
Oil and gas properties, successful efforts method 27,923,402
Transportation equipment 182,037
Other depreciable assets 406,469
------------
28,511,908
Less accumulated depreciation, depletion and amortization (5,362,309)
------------
Net property and equipment 23,149,599
------------
Other assets:
Platform abandonment fund 937,428
Other assets, net 584,431
-----------
1,521,859
-----------
Total Assets $ 26,100,862
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,386,409
Accrued expenses 497,039
Current installments of long-term debt 4,027,961
------------
Total current liabilities 5,911,409
-------------
Accrued platform abandonment expense 1,063,186
Long-term debt, excluding current installments 9,861,499
Minority interest in limited partnership 194,728
Redeemable preferred stock, $0.01 par value; $10
redemption value. Authorized 1,700,000 shares; issued
and outstanding 1,017,500 shares 10,012,593
Common stock of $0.01 par value. Authorized
10,000,000 shares; issued and outstanding
5,847,744 shares 58,477
Additional paid-in capital 1,085,386
Deficit (2,086,416)
------------
Contingent liabilities
Total Liabilities and Stockholders' Equity $ 26,100,862
============
See accompanying notes to consolidated financial statements.
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Item 1. FINANCIAL STATEMENTS (continued)
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three Months Six Months
Ended Ended
July 31, July 31,
------------------------ -----------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Oil and gas sales $ 1,804,339 1,244,268 3,738,565 2,393,156
--------- ---------- ---------- ----------
Costs and expenses:
Lease operating and other
production expense 936,563 606,163 1,772,623 1,147,623
Dry hole costs and lease
abandonments 63 30,081 63 189,903
Depletion of oil and gas
producing properties 633,823 232,384 1,228,456 451,148
Depreciation and other
amortization 60,532 35,870 117,898 89,683
Provisions for abandonment
expense 10,500 43,646 21,000 90,000
General and administrative 431,712 348,033 804,593 655,222
--------- -------- --------- ---------
Total costs and expenses 2,073,193 1,296,177 3,944,633 2,623,579
--------- -------- --------- ---------
Loss from operations (268,854) (51,909) (206,068) (230,423)
--------- -------- ---------- ---------
Other income (expense):
Interest expense (285,269) (151,364) (546,250) (266,780)
Interest income 19,820 295 50,969 23,528
Gain on sale of assets 11,775 112,726 11,775 134,586
Other, net 608 2,022 9,934 3,522
Minority interest in earnings
of limited partnership (9,145) (16,207) (30,945) (44,865)
---------- -------- --------- --------
Total other income
(expense) (262,211) (52,528) (504,517) (150,009)
---------- -------- ---------- --------
Loss before income taxes (531,065) (104,437) (710,585) (380,432)
Income taxes 57,176 1,955 59,018 3,891
---------- -------- ---------- --------
Net loss (588,241) (106,392) (769,603) (384,323)
Dividends on preferred stock (200,258) 0 (400,358) 0
---------- -------- ---------- --------
Net loss applicable to common
stock $(788,499) (106,392) (1,169,961) (384,323)
========== ========= ========== ========
Net loss per common share $ (0.14) (0.02) (0.20) (0.07)
========== ========= ========== ========
Weighted average common shares
outstanding 5,800,592 5,552,760 5,737,401 5,552,760
========== ========= ========== ========
See accompanying notes to consolidated financial statements.
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Item 1. FINANCIAL STATEMENTS (continued)
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six Months
Ended
July 31,
1997 1996
---- ----
Cash flows from operating activities:
Loss from continuing operations $(769,603) (384,323)
Adjustments to reconcile loss from continuing
operations to net cash provided by operating activities:
Depreciation and other amortization 117,898 89,683
Depletion of oil and gas producing properties 1,228,456 451,148
Provision for abandonment expense 21,000 90,000
Gain on sale of assets (11,775) (134,586)
Minority interest in earnings of limited
partnership 30,945 44,865
Decrease (increase) in trade receivables 822,142 (469,858)
Decrease (increase) in prepaid expenses (96,197) 4,324
Increase (decrease) in accounts payable and
accrued expenses 481,086 111,134
Increase (decrease) in accrued platform
abandonment expense (8,519) (112,592)
Increase in note payable 0 1,407,859
----------- ----------
Net cash provided by (used in) continuing operating
activities 1,815,433 1,097,654
----------- ----------
Cash flows from investing activities:
Purchase of oil and gas producing properties (2,950,174) (4,481,687)
Purchase of other property and equipment (70,035) (48,909)
Deletions from (additions to) platform abandonment
fund 64,535 61,546
Deletions from (additions to) other assets (22,180) (142,388)
Proceeds from sale of property and equipment 26,017 145,346
------------ ----------
Net cash provided by (used in) investing activities (2,951,837) (4,466,092)
------------ ----------
Cash flows from financing activities:
Proceeds from long-term debt 552,619 4,185,961
Repayment of long-term debt (24,469) (1,636,811)
Cash dividends on preferred stock (220,377) 0
Proceeds from issuance of common stock 58,997 0
Contributions from limited partners 95,570 0
Distributions to limited partners (61,400) (44,800)
----------- ----------
Net cash provided by (used in) financing activities 400,940 2,504,350
----------- ----------
Net increase (decrease) in cash and cash equivalents (735,464) (864,088)
Cash and cash equivalents at beginning of period 1,045,331 1,244,268
----------- ----------
Cash and cash equivalents at end of period $ 309,867 380,180
=========== ==========
See accompanying notes to consolidated financial statements.
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RIO GRANDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Accounting Policies
The accounting policies of Rio Grande, Inc. and Subsidiaries as set forth
in the notes to the Company's audited financial statements in the Form
10-KSB Report filed for the year ended January 31, 1997 are incorporated
herein by reference. Refer to those notes for additional details of the
Company's financial condition, results of operations and cash flows. All
material items included in those notes have not changed except as a result
of normal transactions in the interim, or any items which are disclosed in
this report.
The consolidated financial statements include the accounts of Rio Grande,
Inc. (the "Company") and its subsidiaries and majority-owned limited
partnerships as follows:
Form of Ownership
Name Organization Interest
Rio Grande Drilling Company Texas Corporation 100%
("Drilling")
Rio Grande Desert Oil Company Nevada Corporation 100%
("RG-Desert")
Rio Grande Offshore, Ltd. Texas Limited Partnership 100%
("Offshore")
Rio Grande GulfMex, Ltd. Texas Limited Partnership 80%
("GulfMex")
As a result of the Company's 80% ownership interest, GulfMex's
financial statements are consolidated with the Company's financial
statements. The minority interests of the outside limited partners are
set forth separately in the balance sheet and the statements of
operations of the Company.
All intercompany balances and transactions have been eliminated in the
consolidation.
In the opinion of management, the consolidated financial statements
reflect all adjustments which are necessary for a fair presentation of
the financial position and results of operations. Adjustments made for
the six months ended July 31, 1997 are considered normal and recurring
in nature.
The Company utilizes the successful efforts method of accounting for
its oil and gas properties. Under this method, the acquisition costs of
oil and gas properties acquired with proven reserves are capitalized
and amortized on the unit-of-production method as produced. Development
costs or exploratory costs are capitalized and amortized on the
unit-of-production method if proved reserves are discovered, or
expensed if the well is a dry hole.
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Capitalized costs of proved properties are periodically reviewed for
impairment on a property by property basis, and, if necessary, an
impairment provision is recognized to reduce the net carrying amount of
such properties to their estimated fair values. Fair values for the
properties are based on future net cash flows as reflected on the year
end reserve report.
Earnings Per Share
Earnings per share computations are based on the weighted average
number of shares and dilutive common stock equivalents outstanding
during the respective periods. Fully diluted earnings per share is the
same as earnings per common and common equivalent share.
Recently Issued Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which establishes standards for
computing and presenting earnings per share. This standard, effective
for financial statements issued for periods ending after December 15,
1997, replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. In addition, this standard
requires dual presentation of basic and diluted earnings per share on
the face of the statement of operations. The Company does not
anticipate the adoption of SFAS No. 128 will have an impact on earnings
per share for 1997 and 1996.
(2) Acquisition of Oil and Gas Properties
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 oil and gas properties 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.
On January 16, 1997, Offshore completed the acquisition of producing
oil and gas properties in the Righthand Creek Field ("Righthand Creek")
located in Allen Parish, Louisiana. The effective date of the Righthand
Creek acquisition was November 1, 1996. The acquisition price for
Righthand Creek was approximately $15.3 million for total estimated
remaining proved producing reserves as of the effective date of
approximately 2 million bbls of oil and 2 bcf natural gas net to
Offshore's
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interest. Due to timing of closing the acquisition, the revenues and
related lease operating expenses for November 1996 through January 1997
were recorded as an adjustment to the acquisition price.
(3) Long-Term Debt
Effective January 16, 1997, the Company and Drilling executed the First
Amendment to the loan agreement with a senior lender which provided for
the increase of the senior credit facility ("Senior Credit Facility")
from $10 million to $50 million and the increase of the credit
available under the Senior Credit Facility (the "Borrowing Base") from
approximately $5 million to approximately $17 million on January 16,
1997. The First Amendment also provided for extending the maturity date
of the Senior Credit Facility to February 1, 2000. The Borrowing Base
is the credit line available under the Senior Credit Facility, and is
periodically redetermined by the senior lender. The amount of the
Borrowing Base is determined by the senior lender in its sole
discretion based upon an analysis of reserve and production data with
respect to the oil and gas properties of the Company for the purpose of
calculating the present value of future net revenues from such mineral
interests as of the specified date. The principal factor in determining
the Borrowing Base is the present value of projected future net
revenues from the Company's proved producing reserves as of the
determination date. The present value of projected future net revenues
from the Company's proved behind pipe and proved undeveloped reserves
are also factors in determining the Borrowing Base, but are afforded
significantly less value than proved producing reserves.
The Borrowing Base established in January 1997 is subject to monthly
reductions, currently in the amount of $333,000, which began on April
1, 1997. The amount of the monthly reduction of the Borrowing Base can
be adjusted by the senior lender upon redetermination of the Borrowing
Base. The next scheduled redetermination of the Borrowing Base is on
February 1, 1998. The Company may, at its sole expense, request a
redetermination prior to February 1, 1998. The Senior Credit Facility
likewise permits the senior lender the option to effectuate a
redetermination of the Borrowing Base prior to February 1, 1998. If the
redetermination of the Borrowing Base results in the outstanding
principal balance of the Company's debt exceeding the amount of the
Borrowing Base, the senior lender is to notify the Company of such
deficiency. Within thirty days of receiving such notice, the Company
must elect to either (1) prepay an amount which will reduce the
principal balance of the debt to the amount of the Borrowing Base, or
(2) mortgage such additional collateral as is acceptable to the senior
lender. The assets presented as additional collateral must have
sufficient present values on a discounted basis to increase the
Borrowing Base, in the opinion of the senior lender, to an amount equal
to or greater than the outstanding principal balance of the debt. The
Company also has the option of prepaying and providing additional
collateral in any combination. The failure of the Company to make
sufficient prepayment and/or to mortgage sufficient additional
collateral is a default under the Senior Credit Facility.
Substantially all of the Company's assets, including all its interests
(direct or indirect) in existing oil and gas properties and
miscellaneous assets, already serve as collateral for the Senior Credit
Facility. The Senior Credit Facility also provides that properties
acquired in the future shall be pledged by the Company to secure 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 those capital distributions to
the outside minority interest limited partners in GulfMex, maintenance
of positive working capital, and no change in the ownership control or
the President of the Company.
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During the three months ended July 31, 1997, the Company was in
violation of a Senior Credit Facility covenant which requires the
Company to maintain positive working capital, defined as current assets
less current liabilities excluding current maturities of long-term
debt. During this time, the Company incurred significant costs
associated with drilling and recompletion activities in the Righthand
Creek Field, and an offshore property, and an exploration activity in
Mississippi. On June 30, 1997, the Company borrowed $500,000 against
its available Borrowing Base to pay part of the costs incurred from
these drilling activities. On August 15, 1997, the Company received a
waiver of such non-compliance from the senior lender and borrowed an
additional $600,000 which was used to reduce its outstanding accounts
payable. As of August 31, 1997, the Company is in compliance with the
financial covenants contained in the Senior Credit Facility.
The First Amendment to the Senior Credit Facility permits the payment
of dividends on the various classes of preferred stock acquired by Koch
Exploration Company ("Koch") unless an event of default under the
Senior Credit Facility has occurred and is continuing. The stock
purchase agreement with Koch provides for certain restrictions on the
Company's total indebtedness. The Company can increase indebtedness
through the Senior Credit Facility; however, with respect to any other
additional debt, if the incurrence of such other additional debt
results in the Company's total indebtedness exceeding 65% of the
present value of the Company's proved reserves discounted at 12%, the
Company cannot incur any additional other debt.
The Company pays interest on the outstanding balance owed on the senior
secured indebtedness. The Company has the option to have the interest
rate on all or any portion of that outstanding balance determined under
either a prime rate formula or an Eurodollar rate formula. Interest
expense paid pursuant to the Senior Credit Facility during the six
months ended July 31, 1997 and 1996, was approximately $542,000 and
$148,000, respectively. The average interest rate for the six months
ended July 31, 1997 and 1996 was 8.16% and 9.23%, respectively.
(4) Redeemable Preferred Stock
On January 15, 1997, the Company filed a Certificate of Designation,
Preferences and Rights of Series A Preferred Stock, Series B Preferred
Stock, and Series C Preferred Stock ("Certificate") with the Secretary
of State, Delaware. The Certificate amended the Company's Certificate
of Incorporation to establish three new series of preferred stock
consisting of 700,000 shares of Series A Preferred Stock, 500,000
shares of Series B Preferred Stock, and 500,000 shares of Series C
Preferred Stock, each having a par value of $.01 per share. The
remaining 1,300,000 preferred shares of the Company's 3,000,000
authorized preferred stock remain undesignated. The Certificate
provides for the rights, preferences, powers, restrictions and
limitations of the respective series of preferred stock, and the
summary of the rights, preferences and other terms of the respective
series of preferred stock.
On January 16, 1997, the Company and Koch Exploration Company ("Koch"),
an affiliate of Koch Industries, Inc., concluded a $10 million private
placement for the designated preferred stock as described above. Koch
acquired 500,000 shares of Series A Preferred Stock for $5 million and
500,000 shares of Series B Preferred Stock for $5 million. The Koch
Private Placement provides Koch the right and option to purchase up to
an additional 200,000 shares of Series A Preferred Stock at the face
value of $10 per share of Series A Preferred Stock at any time after
January 16, 1999 but on or before January 16, 2000. The option may be
exercised in whole or in part. The Koch Private Placement also provides
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for a financing right of first refusal. If the Company intends to issue
new securities, it shall give Koch written notice of such intention,
describing the amount of funds the Company wishes to raise, the type of
new securities to be issued, the price and general terms. Koch has 15
days from the date of receipt of notice to agree to purchase all or
part of such new securities.
Series A Preferred Stock. Pursuant to the Koch Agreement, 500,000
shares of Series A Preferred Stock were initially issued by the Company
for consideration of $10 per share. Holders of the Series A Preferred
Stock, which has a face value of $10, are entitled to receive, out of
funds legally available, cumulative dividends at the rate of 15% per
annum payable in quarterly installments of $187,500 on the first day of
February, May, August and November of each year. The Company paid cash
dividends of $220,377 to Koch on May 1, 1997, which included $32,877
for the period from January 16, 1997 to January 31, 1997. The quarterly
dividend of $187,500 due on August 1, 1997 has not been paid.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, holders of Series A Preferred Stock shall
have preference, second only to the Senior Credit Facility, to the
distribution of the assets of the Company up to an amount equal to the
aggregate face value of the then outstanding Series A Preferred Stock
plus accrued but unpaid dividends. The Company's merger, consolidation
or any other combination into another corporation, partnership or other
entity which results in the exchange of more than 50% of the voting
securities of the Company requires the consent of the majority of the
holders of the Series A Preferred Stock; however, the holders of the
Series A Preferred Stock are not entitled to any other voting rights.
Series B Preferred Stock. Pursuant to the Koch Agreement, 500,000
shares of Series B Preferred Stock were issued by the Company for
consideration of $10 per share. Holders of the Series B Preferred
Stock, which has a face value of $10 per share, are entitled to
receive, out of funds legally available, cumulative quarterly dividends
at the rate of .035 shares of Series C Preferred Stock, which also has
a face value of $10 per share. The dividend payment dates for the
Series B Preferred Stock are the first day of February, May, August and
November of each year. Dividends on the Series C Preferred Stock are
payable in preference and priority to payment of dividends on the
Series B Preferred Stock. The Company issued 17,500 shares of Series C
Preferred Stock to Koch on May 1, 1997 as the dividend on the Series B
Preferred Stock. The quarterly dividend on the Series B Preferred Stock
due to be paid on August 1, 1997, which consists of 17,500 shares of
Series C Preferred Stock, was not issued.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, holders of Series B Preferred Stock shall
have preference in the distribution of the assets of the Company after
and subject to the payment of the Senior Credit Facility and payment in
full of all amounts, including accrued but unpaid dividends, required
to be distributed to the holders of Series A Preferred Stock. The
Series B Preferred Stock liquidation preference shall be in an amount
equal to the aggregate face value of the then outstanding Series B
Preferred Stock plus accrued but unpaid dividends.
Voting Rights - Series B Preferred Stock. Holders of all the issued and
outstanding 500,000 shares of Series B Preferred Stock will
collectively be eligible to cast votes equivalent to 24% of the then
issued and outstanding shares of common stock on all matters submitted
to the stockholders for vote at any annual or special stockholders
meeting. If at any time the Company is in arrears in whole or in part
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with regard to quarterly dividends and such nonpayment remains in
effect for three consecutive dividend payment dates, the holders of the
Series B Preferred Stock may notify the Company of their election to
exercise rights to cast votes equivalent to 51% of the then issued and
outstanding shares of common stock. At any time that the holders hold
less than 500,000 shares of Series B Preferred Stock, the voting
percentage of either 24% or 51% is reduced on a pro-rata basis.
Board of Directors. The holders of Series B Preferred Stock shall have
the right to nominate and elect to the Company's Board of Directors
nominees representing not less than one-third of the number of members
constituting the Board of Directors so long as there are more than
200,000 shares of Series B Preferred Stock issued and outstanding. If
at any time the issued and outstanding shares of Series B Preferred
Stock are less than 200,000, the holders shall have the right to elect
only one director to the Company's Board. Two Koch employees are
currently serving as Directors on the Board.
If at any time the Company is in arrears in whole or in part with
regard to quarterly dividends and such nonpayment remains in effect for
three consecutive quarters or, if a significant event (as defined in
the Certificate) occurs, the holders have the right at any annual or
special meeting of the stockholders to nominate and elect such number
of individuals as shall after the election represent a majority of the
number of directors constituting the Company's Board. A significant
event shall mean and be deemed to exist if (i) the Company files a
voluntary petition, or there is filed against the Company an
involuntary petition, seeking relief under any applicable bankruptcy or
insolvency law, (ii) a receiver is appointed for any of the Company's
properties or assets, (iii) the Company makes or consents to the making
of a general assignment for the benefit of creditors or (iv) the
Company becomes insolvent or generally fails to pay, or admits in
writing its inability or unwillingness to pay, its debts as they become
due. At such time that there is a cure or waiver received in writing
from the holders of a majority of the Series B Preferred Stock, the
additional board members elected by the holders shall be removed from
the Company's Board.
Series C Preferred Stock. The holders of Series C Preferred Stock,
which has a face value of $10, are entitled to receive cumulative
dividends, out of funds legally available, at the rate of 14% per annum
on the face value payable on the first day of February, May, August and
November of each year. Pursuant to the Koch Private Placement, 17,500
shares of Series C Preferred Stock were issued as dividends on the
Series B Preferred Stock on May 1, 1997. No shares of Series C
Preferred Stock were issued for the Series B Preferred Stock due August
1, 1997. The August 1, 1997 quarterly dividend payment of $6,125 on the
Series C Preferred Stock was not paid.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the then outstanding
Series C Preferred Stock shall have preference in the distribution of
the assets of the Company, after and subject to the payment in full of
all amounts required to be distributed to the holders of Series A and
Series B Preferred Stock. The Series C Preferred Stock liquidation
preference shall be in an amount equal to the aggregate face value of
the then outstanding Series C Preferred Stock plus accrued but unpaid
dividends. Series C Preferred Stock shall not be entitled to any voting
rights other than provided by law.
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(5) Subordinated Debt
On January 31, 1997, the Company paid in full the 11.50% subordinated
notes which were issued for a total principal amount of $2 million in
September 1995.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
1. Material Changes in Financial Condition
For the six months ended July 31 1997, the Company
incurred a net loss from operations before preferred
dividends of $770,000 compared to the net loss of
$384,000 for the six months ended July 31, 1996. This
significant change in the Company's financial
condition is due primarily to the additional interest
expense incurred for the oil and gas properties
acquired in January 1997 ("Righthand Creek") and
increased depletion of oil and gas producing
properties. Dividends of $400,000 have been accrued
for the benefit of the preferred stockholders during
the six months ended July 31, 1997 of which $187,500
was paid May 1, 1997. The quarterly dividends payable
August 1, 1997 to Koch on the Series A , Series B and
Series C Preferred Stock have not been paid.
2. Material Changes in Results of Operations
Revenues and Lease Operating Expenses
Oil and gas sales increased from $2,393,000 for the
six months ended July 31, 1996 to $3,739,000 for the
six months ended July 31, 1997, a 56% increase. This
increase is due to the acquisition of Righthand Creek
in January 1997, which generated $1,680,000 of oil
and gas sales for the six months ended July 31, 1997.
The Wheeler County properties, Block 76 and Belle
properties contributed $823,000 year to date through
July 31, 1997 compared to $625,000 year to date
through July 31, 1996. Although this is a 31%
increase in related revenues, the 1996 revenues for
these properties reflect three months of operations
versus six months of operations for 1997.
Lease operating expenses increased from $1,148,000
for the six months ended July 31, 1996 to $1,773,000
for the six months ended July 31, 1997, a 54%
increase which correlates with the related increase
in revenues. The increase in lease operating expenses
is also due to the acquisition of Righthand Creek
which resulted in $679,000 of lease operating
expenses for the six months ended July 31, 1997.
Included in lease operating expenses for Righthand
Creek properties is approximately $75,000 for lease
rentals and $106,000 for various workovers and frac
services performed on several wells.
Lease operating expenses as a percentage of revenues
for existing properties, Wheeler County properties,
and Block 76 remained constant between 1996 and 1997.
However, lease operating expenses as a percentage of
revenue for Belle properties has significantly
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increased from 61% to 89%. This increase is due to
greater than expected declining revenues coupled with
higher than expected operating costs.
The following table summarizes the operating activity
for oil and gas properties for the six months ended
July 31, 1997 and 1996. The existing properties are
those oil and gas properties which were acquired by
the Company prior to February 1, 1996.
Acquisition Six Months
Date Ended July 31,
1997 1996
---- ----
Oil and gas sales:
Existing properties -- $1,235,499 1,767,787
Wheeler County properties(1) March 1996 136,248 115,680
Block 76(1) March 1996 217,807 128,792
Belle properties(1) April 1996 468,954 380,897
Righthand Creek properties(2) January 1997 1,680,057 0
--------- ---------
Total oil and gas sales $3,738,565 2,393,156
========== =========
Lease operating expenses:
Existing properties -- $611,710 859,229
Wheeler County properties March 1996 43,933 36,836
Block 76 March 1996 19,605 18,315
Belle properties April 1996 417,547 233,243
Righthand Creek properties January 1997 679,828 0
--------- --------
Total lease operating expenses $1,772,623 1,147,623
========= =========
Depletion of oil and gas producing properties:
Existing properties -- $226,845 371,443
Wheeler County properties March 1996 8,406 13,430
Block 76 March 1996 148,441 19,701
Belle properties April 1996 143,959 46,574
Righthand Creek properties January 1997 700,805 0
--------- ---------
Total depletion of oil and gas
producing properties $1,228,456 451,148
========= ========
Operating profit (loss) %:
Existing properties -- 32% 30%
Wheeler County properties March 1996 62% 57%
Block 76 March 1996 23% 70%
Belle properties (3) April 1996 (20)% 27%
Righthand Creek properties January 1997 18% 0%
----- ----
Total operating profit % 20% 33%
===== ====
-12-
<PAGE>
Acquisition Six Months
Date Ended July 31,
1997 1996
---- ----
Oil production volume (bbl):
Existing properties -- 21,116 40,051
Wheeler County properties March 1996 73 158
Block 76 March 1996 3,341 1,498
Belle properties April 1996 24,325 19,037
Righthand Creek properties January 1997 69,959 0
--------- --------
Total oil production volume (bbl) 118,814 60,744
========= ========
Gas production volume (mcf):
Existing properties -- 392,136 222,674
Wheeler County properties March 1996 69,109 52,645
Block 76 March 1996 50,525 35,391
Belle properties April 1996 8 92
Righthand Creek properties January 1997 94,867 0
--------- --------
Total gas production volume (mcf) 606,645 310,802
========= ========
Average oil price per bbl $19.81 $19.59
========= =======
Average gas price per mcf $2.27 $2.42
========== =======
Average price per bbl oil equivalent (BOE) $17.00 $16.77
========== ======
Lease operating expense per BOE $8.06 $8.04
========== =======
- --------------
(1) Revenue and expenses commenced effective April 1, 1996.
(2) Revenue and expenses commenced effective February 1, 1997.
(3) The operating loss reflected by the Belle properties is primarily the result
of greater than expected operating costs and lower than expected revenues.
Dry Hole Costs and Lease Abandonments
For the six months ended July 31, 1996, the Company
recognized $189,900 related to dry hole expense for a
dry hole in Wheeler County. For the six months ended
July 31, 1997, no dry hole costs or lease abandonment
expenses were incurred.
Depletion of Oil and Gas Producing Properties
Depletion expense increased from $451, 000 for the
six months ended July 31, 1996 to $1,228,000 for the
six months ended July 31, 1997. The increase in
depletion expense is primarily due to the
amortization as depletion of the capitalized
acquisition costs for oil and gas properties acquired
during fiscal year 1997.
-13-
<PAGE>
Depletion expense for those oil and gas properties
acquired during fiscal year 1997 was $1,002,000 and
$80,000 for the six months ended July 31, 1997 and
1996, respectively.
General and Administrative
General and administrative expenses have increased
from $655,000 to $805,000 for the six months ended
July 31, 1996 and 1997, respectively. This increase
is primarily the result of hiring three additional
employees during the quarter ended April 30, 1997 and
salary cost of living and merit increases provided to
all staff and clerical employees in January 1997.
As a condition to closing the Koch stock purchase
agreement, the President and Chief Financial Officer
were required to enter into employment agreements
with the Company and Drilling for initial terms of
five years. The employment agreements may be renewed
annually thereafter. The base salaries of $125,000
and $100,000 per annum, respectively, as provided by
the employment agreements increased the combined
annual salaries of the President and Chief Financial
Officer by approximately $60,000.
Interest Expense
Interest expense increased from $267,000 in 1996 to
$546,000 in 1997. The increase is due to the
additional debt outstanding during the six months
ended July 31, 1997. On January 31, 1997, the Company
paid in full the 11.50% subordinated notes which were
issued for a total principal amount of $2 million in
September 1995. The Company has the option to have
the interest rate on all or any portion of the
outstanding balance under the Senior Credit Facility
determined under either a prime rate formula or an
Eurodollar rate formula. The average interest rate
related to the Senior Credit Facility for the six
months ended July 31, 1997 was 8.16% as compared to
9.23% for the six months ended July 31, 1996.
For any unused portion of the Borrowing Base, a
commitment fee of 3/8ths of one percent per annum
will be charged to the Company. The senior lender was
paid a loan origination fee of $75,000 to facilitate
the First Amendment. The outstanding principal
balance of the Senior Credit Facility was $13.8
million at July 31, 1997 and $14.4 million at August
31, 1997.
Gain on Sale of Assets
The Company recognized approximately $135,000 gain on
sale of assets during the six months ended July 31,
1996 and only $12,000 gain on assets sold during the
six months ended July 31, 1997.
-14-
<PAGE>
Sales Contract
Effective February 1, 1997, Offshore's contract
marketing agent entered into a one year sales
contract with an independent oil purchaser to deliver
up to an average of 650 barrels of oil per day from
the Company's Righthand Creek Field. The sales
contract provides for pricing based upon the posted
price for Louisiana Light Sweet Crude at St. James,
Louisiana ("LLS"), plus a bonus of $1.50 per barrel
("Bonus"), but with a floor price of $20.00 per
barrel and a ceiling price of $23.45 per barrel. The
sales contract requires delivery of 650 barrels per
day (averaged monthly), but has no penalty for
underdeliveries of those volumes unless the LLS
posted price plus Bonus exceeds $23.45 per barrel.
Although the Righthand Creek Field wells are
currently producing less than 650 barrels per day,
the LLS plus Bonus price has been less than $23.45
per barrel, so no penalties have been in effect. If a
penalty should become applicable, it would be
computed as follows: ([650 barrels x # days in month]
- barrels delivered) x (LLS plus Bonus - $23.45).
In August 1997, the Company, on behalf of Offshore,
entered into a commodity futures oil swap agreement
with Koch Oil Company. That swap agreement was made
pursuant to an existing Master Commodity Swap
Agreement between the Company and Koch, at no current
cost to the Company, and is termed a "Costless
Put/Call Collar Option," covering the period between
February 1, 1998 and January 31, 1999. The new swap
agreement is based upon a determination quantity of
400 barrels oil per day and establishes settlement
dates on the last day of each calendar month during
the contract period. It sets a floating price equal
to Koch Oil Company's monthly average LLS posting
plus $1.50, and strike prices of $18.20 for put
options and $19.97 for call options. On any
settlement date, if the floating price is less than
the put option strike price, then Koch must pay the
Company the price difference, multiplied by the
determination quantity for the month. On any
settlement date, if the floating price exceeds the
call option strike price, the Company must pay Koch
the difference, multiplied by the determination
quantity for the month.
Except as described above, the Company is not
obligated to provide a fixed or determinable quantity
of oil and gas in the future under any existing
contracts, agreements, hedge of swap arrangements.
Recent Operating Developments
The Company's future results of operations and the
other forward looking statements contained in this
Quarterly Report involve a number of risks and
uncertainties. Specifically, but without limitation,
no assurances can be given that any current or future
development or exploration plans and operations will
be successful or that, if successful, production from
the wells and the associated revenues over the
production life of the properties will equal or
exceed the costs associated with properties and their
development.
-15-
<PAGE>
Righthand Creek Field
The Righthand Creek Field, which represents
approximately 70% of the aggregate reserve value of
the Company, was acquired by the Company in January
1997 for $15.3 million.
Offshore commenced the workover and additional
development work at Righthand Creek in March 1997. A
workover drilling rig was placed on a previously
abandoned well in the field and was able to
recomplete the well in the Wilcox "B" formation.
Recompletion procedures were also performed on the
Wilcox "A" formation to test its production capacity.
The well has produced from the Wilcox "A" and "B"
formations since early July and in August had an
average production rate of approximately 30 BOPD. The
total workover and completion costs incurred for this
well were approximately $333,000 through July 31,
1997. The Company is currently completing this well
in the Wilcox B-1 formation.
On March 26, 1997, a drilling rig commenced an 11,300
foot Wilcox formation development well in Righthand
Creek. The well was completed in mid-June 1997. Oil
production was stabilized in mid-August and current
average production approximates 110 BOPD. Through
July 31, 1997, total drilling and completion costs
incurred for this well were approximately $946,000.
In mid-June 1997, the Company re-entered an abandoned
well in Righthand Creek. Attempts to achieve natural
production flow from the Wilcox "B" and "B-1"
formations were unsuccessful. Management intends to
place a pumping unit on the well to establish
production. If production cannot be established by
this method, then the well may be used as a water
injection well to facilitate additional development
of the Righthand Creek Field.
In late August 1997, two existing Righthand Creek
wells were perforated in the Wilcox "B-1" formation.
Production from both wells has increased from an
average of 80 BOPD to approximately 220 BOPD.
As a result of the testing operations on existing
wells, recompletion of shut-in wells and drilling of
new wells in the Righthand Creek Field, the Company
has concluded that the primary source of energy in
the Righthand Creek Wilcox "B" reservoir is fluid
expansion and not a natural water drive. Accordingly,
the Company now believes that the reservoir will
require pressure maintenance operations to achieve
its maximum productive potential, which in turn will
require additional capital investment by the Company.
The effect of reclassifying the Righthand Creek
Wilcox "B" reservoir as a depletion drive reservoir
may increase overall recoverable reserves, but will
likely result in the reclassification of a
significant portion of previously recognized reserves
from "Proved Producing" to "Proved Behind Pipe,"
"Proved Undeveloped" or "Probable and Possible" until
pressure maintenance can be successfully
demonstrated.
-16-
<PAGE>
The Company has retained an independent petroleum
engineering firm to assist in developing a
comprehensive development plan for the Righthand
Creek Field reservoir. Those engineering consultants
have recommended that pressures in the reservoir be
maintained by water injection. A properly designed
water injection program will require that additional
wells be drilled, and some currently producing wells
may be converted to water injection wells. Proper
development of the reserves in Righthand Creek will
be dependent upon the availability of sufficient
additional working capital to implement the pressure
maintenance program. Management currently estimates
the total cost of the required pressure maintenance
operation would range from approximately $2 million
to approximately $4 million.
The full implementation of a pressure maintenance
program in Righthand Creek may require that several
existing production units, with different mineral
owners, be combined or reconfigured. The existing
units have been established by orders of a Louisiana
state commission, and any changes in the unit
configurations will be subject to the approval of
that commission. The regulatory approval process may
require that the Company obtain consents from mineral
owners in the existing units. Although the Company
has recently begun the process of seeking such
consents as an initial step in obtaining regulatory
approval of the changes in the unit configurations,
there can be no assurances that the required number
of consents will be obtained or that the commission
will ultimately approve the changes in unit
configurations.
The Company also plans to complete additional
existing wells where downhole tests indicate good
Wilcox "B-1" formation in order to increase the daily
production. The Wilcox "B-1" formation was not
recognized in any reserve classification at the time
the property was acquired, and thus any additional
reserves derived from the Wilcox "B-1" formation will
enhance the Company's reserve position.
Other Areas
On April 1, 1997, production from Block 76 was
suspended to repair mechanical problems with the
downhole equipment. The total workover cost was
approximately $2.8 million. Offshore's portion of the
workover expense was approximately $112,000. As of
April 30, 1997 the level of production net to
Offshore's interest has been restored to average
approximately 500 mcf per day as compared to
approximately 700 mcf per day prior to the suspension
of production.
The Company has participated in the successful
completion of two wells at Eugene Island 324. The
wells were completed in July 1997; however, the
operator of the wells is currently repairing the
existing production facility to accommodate the
expected production from these wells. It is
anticipated that the wells will be fully producing by
October 1997. The Company has approximately 8.9%
working interest and 6% net revenue interest in these
wells.
-17-
<PAGE>
The Company has also participated in the drilling of
an exploratory well in the Red Bug Field in Wilkinson
County, Mississippi. The Company has a working
interest of 10.9375% and a net revenue interest of
7.875%. The well was completed at approximately
11,600 feet on September 8, 1997 and is currently
being tested. It is anticipated that this well will
primarily produce gas.
Capital Resources and Liquidity
Bank Debt
Effective January 16, 1997, the Company and Drilling
executed the First Amendment to the loan agreement
with a senior lender which provided for the increase
of the senior credit facility ("Senior Credit
Facility") from $10 million to $50 million and the
increase of the credit available under the Senior
Credit Facility (the "Borrowing Base") from
approximately $5 million to approximately $17 million
on January 16, 1997. The First Amendment also
provided for extending the maturity date of the
Senior Credit Facility to February 1, 2000. The
Borrowing Base is the credit line available under the
Senior Credit Facility, and is periodically
redetermined by the senior lender. The amount of the
Borrowing Base is determined by the senior lender in
its sole discretion based upon an analysis of reserve
and production data with respect to the oil and gas
properties of the Company for the purpose of
calculating the present value of future net revenues
from such mineral interests as of the specified date.
The principal factor in determining the Borrowing
Base is the present value of projected future net
revenues from the Company's proved producing reserves
as of the determination date. The present value of
projected future net revenues from the Company's
proved behind pipe and proved undeveloped reserves
are also factors in determining the Borrowing Base,
but are afforded significantly less value than proved
producing reserves.
The Borrowing Base is subject to monthly reductions,
currently in the amount of $333,000, which began on
April 1, 1997. The amount of the monthly reduction of
the Borrowing Base can be adjusted by the senior
lender upon redetermination of the Borrowing Base.
The next scheduled redetermination of the Borrowing
Base is on February 1, 1998. The Company may, at its
sole expense, request a redetermination prior to
February 1, 1998. The Senior Credit Facility likewise
permits the senior lender the option to effectuate a
redetermination of the Borrowing Base prior to
February 1, 1998. If the redetermination of the
Borrowing Base results in the outstanding principal
balance of the Company's debt exceeding the amount of
the Borrowing Base, the senior lender is to notify
the Company of such deficiency. Within thirty days of
receiving such notice, the Company must elect to
either (1) prepay an amount which will reduce the
principal balance of the debt to the amount of the
Borrowing Base, or (2) mortgage such additional
collateral as is acceptable to the senior lender. The
assets presented as additional collateral must have
sufficient present values on a discounted basis to
increase the Borrowing Base, in the opinion of the
senior lender, to an amount equal to or greater than
the outstanding principal balance of the debt. The
Company also has
-18-
<PAGE>
the option of prepaying and providing additional
collateral in any combination. The failure of the
Company to make sufficient prepayment and/or to
mortgage sufficient additional collateral is a
default under the Senior Credit Facility.
Substantially all of the Company's assets, including
all its interests (direct or indirect) in existing
oil and gas properties and miscellaneous assets serve
as collateral for the Senior Credit Facility. The
Senior Credit Facility also provides that properties
acquired in the future shall be pledged by the
Company to secure 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
those capital distributions to the outside minority
interest limited partners in GulfMex, maintenance of
positive working capital, and no change in the
ownership control or the President of the Company.
During the three months ended July 31, 1997, the
Company was in violation of a Senior Credit Facility
covenant which requires the Company to maintain
positive working capital, defined as current assets
less current liabilities excluding current maturities
of long-term debt. During this time, the Company
incurred significant costs associated with drilling
and recompletion activities in the Righthand Creek
Field, and an offshore property, and an exploration
activity in Mississippi. On June 30, 1997, the
Company borrowed $500,000 against its available
Borrowing Base to pay part of the costs incurred from
these drilling activities. On August 15, 1997, the
Company received a waiver of such non-compliance from
the senior lender and borrowed an additional $600,000
which was used to reduce its outstanding accounts
payable. As of August 31, 1997, the Company is in
compliance with the financial covenants contained in
the Senior Credit Facility.
The First Amendment to the Senior Credit Facility
permits the payment of dividends on the various
classes of preferred stock acquired by Koch
Exploration Company ("Koch") unless an event of
default under the Senior Credit Facility has occurred
and is continuing. The stock purchase agreement with
Koch provides for certain restrictions on the
Company's total indebtedness. The Company can
increase indebtedness through the Senior Credit
Facility; however, with respect to any other
additional debt, if the incurrence of such other
additional debt results in the Company's total
indebtedness exceeding 65% of the present value of
the Company's proved reserves discounted at 12%, the
Company cannot incur any additional other debt.
The Company pays interest on the outstanding balance
owed on the senior secured indebtedness. The Company
has the option to have the interest rate on all or
any portion of that outstanding balance determined
under either a prime rate formula or an Eurodollar
rate formula. Interest expense paid pursuant to the
Senior Credit Facility during the six months ended
July 31, 1997 and 1996, was approximately $542,000
and $148,000, respectively. The average interest rate
for the six months ended July 31, 1997 and 1996 was
8.16% and 9.23%, respectively.
-19-
<PAGE>
Redeemable Preferred Stock
On January 16, 1997, the Company and Koch Exploration
Company concluded a $10 million private placement
("Koch Private Placement"). Koch acquired 500,000
shares of Series A Preferred Stock for $5 million and
500,000 shares of Series B Preferred Stock for $5
million.
The following is a brief summary of various rights
and terms of the Preferred Stock.
Preferred Stock
---------------------------------------
Series A Series B Series C
-------- ------- --------
Number of shares issued 500,000 500,000 -0-
Face value per share $10 $10 $10
Cumulative dividends 15% of face 0.35 shares of 14% of face
value (per Series C value (per
annum) (quarterly) annum)
Dividends payable Feb. 1, May 1, Feb. 1, May 1, Feb. 1, May 1,
Aug. 1, Nov. 1 Aug. 1, Nov. 1 Aug. 1, Nov. 1
First dividend payment May 1, 1997 May 1, 1997 Aug. 1, 1997
The Company paid Koch a cash dividend of $220,377 on
May 1, 1997 for the dividends accrued from January
16, 1997 through April 30, 1997 on the Series A
Preferred Stock. Koch also received 17,500 shares of
Series C Preferred Stock as the stock dividend
accrued on the Series B Preferred Stock from February
1, 1997 through April 30, 1997. No cash dividend was
due on Series C Preferred Stock.
As a result of the significant costs incurred with
the drilling and recompletion activities conducted by
the Company during the six months ended July 31,
1997, the Company did not make the quarterly dividend
payments of $187,500 and $6,125 due on the Series A
Preferred Stock and the Series C Preferred Stock on
August 1, 1997. The Company has not issued the 17,500
shares of Series C Preferred Stock due on August 1,
1997 on the Series B Preferred Stock. The Company has
incurred dividends expense of $400,358 as of July 31,
1997 of which $200,265 is accrued as payable. The
Company's ability to pay the accrued dividends due on
August 1, 1997 and dividends which become due in the
future is dependent on increasing the cash flow from
operations.
The Koch Agreement provides that if the Company is in
arrears in whole or in part with regard to quarterly
dividend payments, and such nonpayment remains in
effect for three consecutive quarters, or, if a
significant event occurs, Koch will have the right at
any annual or special meeting of the stockholders to
nominate and elect such number of individuals as
shall after the election represent a majority of the
-20-
<PAGE>
number of directors constituting the Company's Board.
A significant event shall mean and be deemed to exist
if (i) the Company files a voluntary petition, or
there is filed against the Company an involuntary
petition, seeking relief under any applicable
bankruptcy or insolvency law, (ii) a receiver is
appointed for any of the Company's properties or
assets, (iii) the Company makes or consents to the
making of a general assignment for the benefit of
creditors or (iv) the Company becomes insolvent or
generally fails to pay, or admits in writing its
inability or unwillingness to pay, its debts as they
become due. At such time that there is a cure or
waiver received in writing from the holders of a
majority of the Series B Preferred Stock, the
additional board members elected by the holders shall
be removed from the Company's Board.
The Company's ability to meet its current financial
commitments, including those imposed by the Senior
Credit Facility and the terms of the Preferred Stock,
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
Company's development program. While the Company has
ongoing exploration and development efforts that, if
successful, will enhance its reserves and cash flow,
successful development of the Righthand Creek Field
by implementation of a comprehensive pressure
maintenance operation will require significant
additional working capital. Although the Company is
investigating sources of financing such as additional
or alternative bank financing, production or
mezzanine financing for the development of Righthand
Creek and other development projects, the Company
presently has no commitment for additional financing
and there can be no assurance that the Company will
be successful in obtaining additional financing. If
the Company is unable to obtain additional financing
as needed, it would consider, among other
alternatives, sale of certain of its leasehold
interests, 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.
Oil and gas exploration and production operations
involve substantial 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 the oil and gas properties and their
development.
Statements in this Quarterly Report including those
contained in the foregoing discussion and other items
herein, concerning the Company which are (a)
statements of plans and objectives for future
operations, (b) statements of future economic
performance, or (c) statements of assumptions or
estimates underlying or supporting the foregoing are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The
ultimate accuracy of forward-looking statements is
subject to a wide range of business risks and changes
in circumstances, and actual results and outcomes
often differ from expectations. Any number of
important
-21-
<PAGE>
factors could cause actual results to differ
materially from those in the forward- looking
statements herein, including the following: the
timing and extent of changes in crude oil and natural
gas prices; actions of the Company's purchasers,
competitors, lenders and other third parties over
whom the Company has little or no control; changes in
the cost or availability of pipelines and other means
of transporting products; state and federal
environmental, economic, safety and other policies
and regulations, any changes therein, and any legal
or regulatory delays or other factors beyond the
Company's control; weather conditions affecting the
Company's operations or the areas in which the
Company's products are marketed; future well
performance; the extent of the Company's success in
acquiring oil and gas properties and in discovering,
developing and producing reserves; political
developments in foreign countries; and the conditions
of the capital markets and equity markets during the
periods covered by the forward-looking statements.
The Company undertakes no obligation to publicly
release the result of any revisions to any such
forward-looking statements that may be made to
reflect the events or circumstances after the date
hereof or to reflect the occurrence of unanticipated
events.
PART II - OTHER INFORMATION
Item1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Series A Preferred Stock
The cash dividend in the amount of $187,500 due on August 1,
1997 on Series A Preferred Stock has not been paid.
Series B Preferred Stock
The dividend of 17,500 shares of Series C Preferred Stock due
on August 1, 1997 on the Series B Preferred Stock has not been
issued.
Series C Preferred Stock
The cash dividend in the amount of $6,125 due on August 1,
1997 on Series C Preferred Stock has not been paid.
-22-
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on July 1, 1997.
The slate of directors recommended by the management of the
Company were: Robert A. Buschman, Guy Bob Buschman, John G.
Hurd, H. M. Shearin, Jr., Hobby A. Abshier, Ralph F. Cox, Dale
G. Schlinsog and R. Allan Allford.
1. Approval of the selection of the slate of
Directors to serve for a term of one year or
to the date of the next annual meeting.
Shareholders present or entitled to
vote for the approval of the slate
of Directors as presented by
management, voted 4,966,376 shares
in favor of the slate of Directors.
The shareholders voted as follows:
For Against Abstained Not Voted
Robert A. Buschman 4,966,376 1,400 0 793,211
Guy Bob Buschman 4,966,376 1,400 0 793,211
John G. Hurd 4,966,376 1,400 0 793,211
H. M. Shearin, Jr. 4,966,376 1,400 0 793,211
Hobby A. Abshier 4,966,376 1,400 0 793,211
Ralph F. Cox 4,966,376 1,400 0 793,211
Dale G. Schlinsog 4,966,376 1,400 0 793,211
R. Allan Allford 4,966,376 1,400 0 793,211
2. Approval of the selection of KPMG Peat
Marwick as the Company's auditors for the
fiscal year commencing February 1, 1997.
Shareholders present or entitled to vote for
the resolution voted 4,966,596 shares in
favor of the resolution which constituted
more than a majority of the total number of
shares entitled to vote on this matter. The
shareholders voted as follows:
For: 4,966,596 Against: 100 Abstained: 1,080 Not Voted: 793,211
Item 5. OTHER INFORMATION
None.
Item 6. 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-QSB. The Company
will furnish a copy of any exhibit to a requesting shareholder
upon payment of a fee of $.25 per page.
-23-
<PAGE>
10(p) Confirmation of Costless Collar Put/Call Option
subject to Master Commodity Swap Agreement between
Koch Oil Company and Rio Grande, Inc., dated August
15, 1997. (E-4).
(b) Reports on Form 8-K
None.
-24-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RIO GRANDE, INC.
Date: September 19, 1997 By: /s/ Guy R. Buschman
------------------------------------
Guy R. Buschman, President
Date: September 19, 1997 By: /s/ Gary Scheele
------------------------------------
Gary Scheele, Secretary and Treasurer
(principal financial officer)
-25-
<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 (incorporated by reference
to Exhibit 3(a) to Form 8-K dated December 29, 1986 [File No. 1-8287]).
3(b) Bylaws of the Company (incorporated by reference to Exhibit 3(b) to
Form 8-K dated December 29, 1986 [File No. 1-8287]).
3(c) Certificate of Amendment of Certificate of Incorporation of the Company
(E-3).
4(a) Specimen stock certificate (incorporated by reference to Exhibit 4(a)
to Form 8-K dated December 29, 1986 [File No. 1-8287]).
4(b) Specimen Stock Purchase Warrant (incorporated by reference to Exhibit
4(b) to form 8-K dated December 29, 1986 [File No. 1- 8287]).
4(c) Note Purchase Agreement, dated September 27, 1995, by and among the
Company, Rio Grande Drilling Company, and the various purchasers of
11.50% Subordinated Notes due September 30, 2000 (incorporated herein
by reference from October 31, 1995 Form 10-QSB).
4(d) Form of Common Stock Purchase Warrant issued in connection with the
Offering described in this report (incorporated herein by reference
from October 31, 1995 Form 10-QSB).
4(e) Amendments to Note Purchase Agreement, by and among the Company,
Drilling and the Holders (incorporated herein by reference from March
26, 1996 Form 8-K).
4(f) Amendments to Notes, by and among the Company and the Holders
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(g) Consents to Proposed Transactions by the Holders to the Company
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(h) Amendment to Warrant Agreement among the Company and the Holders
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(i) Certificate of Designation, Preferences and Rights of Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock
of Rio Grande, Inc. dated January 15, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
4(j) Preferred Stock Purchase Agreement between Koch Exploration Company and
Rio Grande, Inc. dated January 16, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
4(k) Registration Rights Agreement between Rio Grande, Inc. and Koch
Exploration Company dated January 16, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
E-1
<PAGE>
4(l) Stockholders Agreement between Robert A. Buschman, Guy Bob Buschman,
Rio Grande, Inc., and Koch Exploration Company dated January 16, 1997
(incorporated herein by reference from January 31, 1997 Form 8-K).
10(a) Asset Purchase Agreement dated June 26, 1992 by and between SHV Oil and
Gas Company and Rio Grande Drilling Company (incorporated herein by
reference from July 31, 1992 Form 10-Q).
10(b) Agreement of Limited Partnership dated June 25, 1992 for Rio Grande
Offshore, Ltd. between Rio Grande Drilling Company, Robert A. Buschman,
H. Wayne Hightower and H. W. Hightower, Jr. (incorporated herein by
reference from July 31, 1992 Form 10-Q).
10(c) Loan Agreement by and between International Bank of Commerce and Rio
Grande Drilling Company dated June 26, 1992 (incorporated herein by
reference from July 31, 1992 Form 10-Q).
10(d) Purchase and Sale Agreement dated May 24, 1995, between Newfield
Exploration Company and Rio Grande Offshore, Ltd. for the sale of Ewing
Bank Blocks 947/903 and Ship Shoal Block 356 at a sales price of
$1,200,000 (incorporated by reference from July 31, 1995 Form 10-QSB).
10(e) Consulting Agreement dated August 10, 1995, between Hobby A. Abshier
and Rio Grande, Inc. (incorporated by reference from July 31, 1995 Form
10-QSB).
10(f) Closing Agreement between Fortune Petroleum Corporation, Pendragon
Resources, L.L.C. and Rio Grande Offshore, Ltd. dated March 6, 1996 for
the acquisition of South Timbalier Block 76 (incorporated by reference
from March 26, 1996 Form 8-K).
10(g) Loan Agreement between Comerica Bank-Texas, Rio Grande, Inc. and Rio
Grande Drilling Company dated March 8, 1996 for a senior credit
facility of $10,000,000 (incorporated herein by reference from March
26, 1996 Form 8-K).
10(h) Purchase and Sale Agreement between Belle Oil, Inc., Belle Exploration,
Inc., Louisiana Well Service Co., Alton J. Ogden, Jr., Alton J. Ogden,
Sr., Jeff L. Burkhalter and Rio Grande Offshore, Ltd. (incorporated
herein by reference from April 29, 1996 Form 8-K).
10(i) Engagement letter between Reid Investment Corporation and Rio Grande,
Inc. dated August 28, 1996, as exclusive agent to sell equity in Rio
Grande, Inc. (incorporated herein by reference from October 31, 1996
Form 10-QSB).
10(j) Purchase and Sale Agreement between Brechtel Energy Corporation, et al
and Rio Grande Offshore, Ltd. dated November 20, 1996 for the
acquisition of oil and gas properties located in the Righthand Creek
Field, Allen Parish, Louisiana (incorporated herein by reference from
October 31, 1996 Form 10-QSB).
10(k) First Amendment to Loan Agreement between Rio Grande, Inc., Rio Grande
Drilling Company and Comerica Bank - Texas dated January 15, 1997
(incorporated herein by reference from January 31, 1997 Form 8-K).
E-2
<PAGE>
10(l) Employment Agreement between Rio Grande, Inc., Rio Grande Drilling
Company and Guy Bob Buschman dated January 16, 1997 (incorporated
herein by reference from January 31, 1997 Form 8-K).
10(m) Employment Agreement between Rio Grande, Inc., Rio Grande Drilling
Company and Gary Scheele dated January 16, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
10(n) Master Commodity Swap Agreement between Rio Grande, Inc. and Koch Oil
Company dated January 16, 1997 (incorporated herein by reference from
January 31, 1997 Form 8-K).
10(o) Participation Agreement between Mortimer Exploration Company and Rio
Grande Offshore, Ltd. for the Texas/Louisiana Yegua Project dated March
10, 1997 with attached amended letter agreement.
10(p) Confirmation of Costless Collar Put/Call Option subject to Master
Commodity Swap Agreement between Koch Oil Company and Rio Grande, Inc.,
dated August 15, 1997 (E-4).
22 The following list sets forth the name of each subsidiary or affiliate
of the Company, with the State of incorporation as noted which are
wholly-owned by the Company (except as noted):
Rio Grande Drilling Company, Texas corporation Rio Grande
Desert Oil Company, Nevada corporation Rio Grande Offshore,
Ltd., a Texas limited partnership Rio Grande GulfMex, Ltd., a
Texas limited partnership (80% interest)
27 Financial Data Schedule (E-5).
99(a) Private Offering Memorandum of the Company dated August 27, 1995
(incorporated herein by reference from October 31, 1995 Form 10-QSB).
E-3
<PAGE>
Confirmation
Put 36335/Call 36341
TO: Rio Grande, Inc.
Attn: Guy Bob Buschman FAX: (210) 308-8111
FROM: Koch Oil Company
600 Travis, Ste 1300
Houston, TX 77002
Attn: Doug Wittenberg
Dear Sirs:
Koch Oil Company is pleased to confirm the following commodity price
swap between Koch Oil Company (Koch) and Rio Grande, Inc. on the Trade Date
referred to below. This letter constitutes a "Confirmation" as referred to in
the Master Swap Agreement specified below.
1. This Confirmation supplements, forms a part of, and is subject to, the
Master Commodity Swap Agreement (the "Master Agreement") that was executed
between Koch and Rio Grande, Inc. on 1/16/97. All provisions contained or
incorporated by reference in the Master Agreement shall govern this Confirmation
except as expressly modified below.
2. The terms of the particular Swap Transaction to which this Confirmation
relates are as follows:
a. Transaction Type: Costless Collar PUT/CALL Option
b. Put Option Seller/Call
Option Buyer: Koch Oil Company
c. Call Option Seller/Put
Option Buyer: Rio Grande, Inc.
d. Trade Date: August 15, 1997
e. Expiration Date: January 31, 1999
f. Applicable Commodity: Koch's Louisiana Light Sweet
Crude Oil Posting
g. Determination Quantity: 400 bbl/day (146,000 total)
h. Put Strike Price: $18.20/bbl USD
i. Call Strike Price: $19.97/bbl USD
j. Determination Period: February 1, 1998 through January 31, 1999
k. Floating Price: The Floating Price shall be calculated as the
arithmetic average of Koch's Louisiana Light
Sweet Crude Oil Posting for each of the
calendar months February 1998 through January
1999 plus $1.50/bbl.
l. Settlement Date: Last day of each calendar month February 1998
through January 1999
m. Payment Date: Five business days after Settlement Date
n. Settlement: At the Settlement Date, if the Floating Price
is less than the Put Strike Price, then Koch
will pay Rio Grande the difference times the
Determination Quantity on the Payment Date. If
the Floating Price is greater than the
corresponding Call Strike Price, then Rio
Grande will pay Koch the difference times the
Determination Quantity on the Payment Date.
o. Payment: First National Bank of Chicago
Chicago, Illinois Comerica Bank TX
ABA#071000013 Dallas, TX
SWIFT FNBC US 44 ABA#111000753
Koch Industries, Inc. Acct.#7611020657
A/C 51-39058 Rio Grande Offshore Ltd.
Ref. KOC Invoice
Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing the copy of this Confirmation enclosed for that purpose
and returning it to us.
We are pleased to have completed this transaction with you.
Best regards.
KOCH OIL COMPANY
By:
Doug Wittenberg
Director - Producer Services
Accepted and Confirmed:
Rio Grande, Inc.
By:
Guy Bob Buschman
Title: President & Chief Executive Officer
E-4
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from this
July 31, 1997 Form 10-QSB.)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1997
<CASH> 309867
<SECURITIES> 0
<RECEIVABLES> 986521
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1429404
<PP&E> 28511908
<DEPRECIATION> (5362309)
<TOTAL-ASSETS> 26100862
<CURRENT-LIABILITIES> 5911409
<BONDS> 9861499
10012593
0
<COMMON> 58477
<OTHER-SE> (1001030)
<TOTAL-LIABILITY-AND-EQUITY> 26100862
<SALES> 3738565
<TOTAL-REVENUES> 3738565
<CGS> 3140040
<TOTAL-COSTS> 3944633
<OTHER-EXPENSES> 804593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 546250
<INCOME-PRETAX> (710585)
<INCOME-TAX> 59018
<INCOME-CONTINUING> (769603)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (769603)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
