UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[root] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended October 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 November 30, 1997 there were 6,073,320 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)
October 31, 1997
Assets ----------------
Current assets:
Cash and cash equivalents $ 204,723
Trade receivables 944,508
Prepaid expenses 70,809
---------
Total current assets 1,220,040
---------
Property and equipment, at cost:
Oil and gas properties, successful efforts method 28,678,518
Transportation equipment 183,011
Other depreciable assets 411,055
---------
29,272,584
Less accumulated depreciation, depletion and amortization (5,676,267)
---------
Net property and equipment 23,596,317
---------
Other assets:
Platform abandonment fund 878,696
Other assets, net 543,139
---------
1,421,835
---------
Total Assets $ 26,238,192
=========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable 1,421,799
Accrued expenses 299,940
Current installments of long-term debt 4,029,563
---------
Total current liabilities 5,751,302
---------
Other accrued expenses 1,337,117
Long-term debt, excluding current installments 10,232,527
Minority interest in limited partnership 204,827
Redeemable preferred stock, $0.01 par value; $10
redemption value. Authorized 1,700,000 shares; issued
and outstanding 1,017,500 shares 10,026,093
Common stock of $0.01 par value. Authorized
10,000,000 shares; issued and outstanding
6,073,320 shares 60,733
Additional paid-in capital 1,128,245
Deficit (2,502,652)
---------
Contingent liabilities
Total Liabilities and Stockholders' Equity $ 26,238,192
=========
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 Nine Months
Ended Ended
October 31, October 31,
---------- ------------
1997 1996 1997 1996
Revenues: ---- ---- ---- ----
Oil and gas sales $ 1,685,636 1,339,774 5,424,201 3,732,930
--------- --------- --------- ---------
Costs and expenses:
Lease operating and
other production expense 936,317 682,546 2,708,941 1,830,094
Dry hole costs and lease
abandonments 0 0 63 189,903
Depletion of oil and gas
producing properties 490,417 270,012 1,718,873 721,160
Depreciation and other
amortization 55,473 46,230 173,371 135,914
Provisions for abandonment
expense 10,500 (30,000) 31,500 60,000
General and administrative 344,400 279,678 1,148,993 934,900
--------- --------- --------- ---------
Total costs and expenses 1,837,107 1,248,466 5,781,741 3,871,971
--------- --------- --------- ---------
Gain (loss) from operations (151,471) 91,308 (357,540) (139,041)
--------- --------- --------- --------
Other income (expense):
Interest expense (299,554) (221,844) (845,804) (488,624)
Interest income 20,343 27,778 71,312 51,306
Gain on sale of assets 273,614 226,542 285,389 361,128
Other, net 781 1,751 10,715 5,273
Minority interest in earnings of
limited partnership (15,300) (20,078) (46,244) (64,944)
-------- -------- -------- ---------
Total other income (expense) (20,116) 14,149 (524,632) (135,861)
-------- ------- -------- -------
Gain (loss) before income taxes (171,587) 105,457 (882,172) (274,902)
Income taxes 24,256 1,757 83,274 5,647
------- ------ -------- -------
Net income (loss) (195,843) 103,700 (965,446) (280,549)
Dividends on preferred stock 220,393 0 620,751 0
------- ------- ------- --------
Net income (loss) applicable to
common stock $ (416,236) 103,700(1,586,197) (280,549)
-------- ------- ---------- -------
Net income (loss) per common share $ (0.07) 0.02 (0.27) (0.05)
======= ======= ========= ========
Weighted average common shares
outstanding 5,973,735 5,552,760 5,817,044 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)
Nine Months
Ended
October 31,
-------------------
1997 1996
---- ----
Cash flows from operating activities:
Loss from continuing operations $ (965,446) (280,549)
Adjustments to reconcile loss from continuing
operations to net cash provided by
operating activities:
Depreciation and other amortization 173,371 135,914
Depletion of oil and gas producing properties 1,718,873 721,160
Provision for abandonment expense 31,500 60,000
Gain on sale of assets (285,389) (361,127)
Minority interest in earnings of limited
partnership 46,244 64,944
Decrease (increase) in trade receivables 864,154 (211,690)
Decrease (increase) in prepaid expenses (33,990) 1,864
Increase (decrease) in accounts payable and
accrued expenses 519,640 (11,346)
Increase (decrease) in other accrued expenses (152,246) (114,967)
---------- ---------
Net cash provided by (used in) continuing
operating activities 1,916,711 4,203
--------- --------
Cash flows from investing activities:
Purchase of oil and gas producing properties (3,993,598) (4,757,253)
Purchase of other property and equipment (75,595) (49,359)
Deletions from (additions to) platform abandonment
fund 123,267 33,275
Deletions from (additions to) other assets (22,863) (197,927)
Proceeds from sale of property and equipment 397,984 699,246
--------- --------
Net cash provided by (used in) investing activities (3,570,805) (4,272,018)
--------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 1,152,619 5,385,962
Repayment of long-term debt (251,838) (1,728,935)
Cash dividends on preferred stock (220,377) 0
Proceeds from issuance of common stock 104,112 0
Contributions from limited partners 95,570 0
Distributions to limited partners (66,600) (132,081)
--------- ----------
Net cash provided by (used in) financing activities 813,486 3,524,946
-------- ----------
Net increase (decrease) in cash and cash equivalents (840,608) (742,869)
Cash and cash equivalents at beginning of period 1,045,331 1,244,268
--------- ----------
Cash and cash equivalents at end of period $204,723 501,399
========= =========
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 nine months ended October 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 by the year
end reserve report.
Earnings Per Share
Earnings per share computations are based on the weighted average
number of shares and dilutive common stock equivalents outstanding
during the respective periods. Fully diluted earnings per share is the
same as earnings per common and common equivalent share.
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 the
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Company's 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 amount 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 a specified date. The principal factor in determining
the Borrowing Base is the present value of projected future net
revenues from the Company's proved producing reserves as of the
determination date. The present value of projected future net revenues
from the Company's proved behind pipe and proved undeveloped reserves
are also factors in determining the Borrowing Base, but are afforded
significantly less value than proved producing reserves.
The Borrowing Base established in January 1997 is subject to monthly
reductions, currently in the amount of $333,000, which commenced on
April 1, 1997. The amount of the monthly reduction of the Borrowing
Base can be adjusted by the senior lender upon any subsequent
determinations of the Borrowing Base. The next scheduled determination
date of the Borrowing Base is February 1, 1998. The Company may, at its
sole expense, request a determination of the Borrowing Base prior to
February 1, 1998. The Senior Credit Facility likewise permits the
senior lender the option to effectuate an earlier determination date of
the Borrowing Base. If the subsequent determination 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 can
notify the Company of such deficiency. Within thirty days of receiving
notice from the senior lender of a deficiency in the Borrowing Base,
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, solely in the opinion of the senior lender, to an
amount equal to or greater than the outstanding indebtedness under the
Senior Credit Facility. 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. In
the event of a default under the Senior Credit Facility, the senior
lender has various remedies available to it, including foreclosure of
its liens on the properties serving as collateral for the loan.
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 any properties
or material assets acquired in the future shall be pledged by the
Company to secure the Senior Credit Facility. The Senior Credit
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<PAGE>
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.
As of October 31, 1997, the Company was not in compliance with the
positive working capital financial covenants contained in the Senior
Credit Facility, but received a retrospective waiver of non-compliance
from the senior lender. The Company continues to incur significant
costs associated with drilling and recompletion activities in Righthand
Creek which have not been offset by increased production and related
revenues. The Company anticipates that it may not be in compliance with
the working capital financial covenants subsequent to October 31, 1997
and therefore be unable to make any further borrowing requests. There
can be no assurances that the senior lender will waive compliance of
that financial covenant for financial statements subsequent to October
31, 1997.
During the three months ended October 31, 1997, the Company sold its
working interest ownership in certain oil and gas properties located in
Jack and Young Counties, Texas for $327,205. The Company reduced its
indebtedness under the Senior Credit Facility by $219,657, the
Company's Borrowing Base was reduced $84,083 as a result of these
sales. In November 1997, the Company sold its working interest
ownership in oil and gas properties in McClain County, Oklahoma and
Upton County, Texas for $180,000 and $593,840, respectively. The
Company reduced its indebtedness under the Senior Credit Facility by
$690,705 with a portion of the proceeds of such sales, and the
Company's Borrowing Base was reduced by $457,915 as a result of these
sales.
The Company anticipates completing the sale of all oil and gas
properties located in Tom Green County, Texas prior to December 31,
1997. The senior lender has approved the sale of those properties
contingent on 50% of the net proceeds being applied to the outstanding
indebtedness under the Senior Credit Facility. Since these oil and gas
properties were not assigned any significant value in calculating the
Borrowing Base, the Borrowing Base will not be reduced by the sale. The
Company anticipates it will receive $612,256 for its net ownership in
these oil and gas properties of which $306,128 will be applied to
outstanding indebtedness under the Senior Credit Facility.
The Company, in addition, is currently negotiating the sale of Eugene
Island Lease Blocks 198, 199 and 202 which are held by GulfMex. The
Company anticipates that this sale may be completed by December 31,
1997. Pursuant to such sale, GulfMex would assign all its rights and
interest in those Offshore leases for a total sales price of $35,000
and the release of $265,500 held in escrow for the abandonment
liability of the platforms and wells located on those leases. GulfMex
has agreed with the buyer that the proceeds from the sale of the above
described leases will be applied to the outstanding accounts payable of
GulfMex with the buyer which were incurred by GulfMex for its
proportionate share of the drilling and recompletion of certain wells
at Eugene Island 324 and the senior lender has consented to this
application of proceeds.
Although the senior lender has reserved the right to examine future
sales of oil and gas properties individually, the Company anticipates
that the principal balance of the senior indebtedness could be reduced
by the proceeds of any future sales of oil and gas properties by an
amount equivalent to 100% of the present value of the oil and gas
properties calculated using a discount rate of 9% per annum as
determined by the senior lender ("PV-9") plus 50% of the net proceeds
received in excess of the PV-9. The Company anticipates that the
Borrowing Base will be reduced by 75% of the senior lender's PV-9 for
any oil and gas properties sold.
The Company made an additional principal payment of $14,000 on November
3, 1997. As of December 1, 1997, the Company's Borrowing Base is
$13,511,002 and the outstanding indebtedness under the Senior Credit
Facility is $13,485,639. The Company has agreed that it will make no
further
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<PAGE>
requests for advances under the Senior Credit Facility until after the
Borrowing Base determination date of February 1, 1998.
The Company pays interest on the outstanding indebtedness of the Senior
Credit Facility under either a prime rate formula or a Eurodollar rate
formula. Interest expense paid pursuant to the Senior Credit Facility
during the nine months ended October 31, 1997 and 1996, was
approximately $846,000 and $489,000, respectively. The average interest
rate for the nine months ended October 31, 1997 and 1996 was 8.19% and
9.28%, respectively.
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.
(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
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
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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
dividends of $187,500 each due on August 1, 1997 and November 1, 1997
have not been paid. (See "Series B Preferred Stock-Voting Rights; Board
of Directors").
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 or other
creditors, 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 as the dividend due on the Series B Preferred
Stock on May 1, 1997 . The quarterly stock dividends of 17,500 shares
of Series C Preferred Stock each due on the Series B Preferred Stock on
August 1, 1997 and November 1, 1997 have not been issued.(See "Series B
Preferred Stock-Voting Rights; Board of Directors").
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 other
creditors, 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.
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 as stock dividends for the Series B
Preferred Stock due on August 1, 1997 and November 1, 1997. The
quarterly cash dividend payments of $6,125 and $12,250 due,
respectively, on August 1, 1997 and November 1, 1997 on the Series C
Preferred Stock have not been 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
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of the assets of the Company, after and subject to the payment to the
Senior Credit Facility and other creditors and 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.
Series B Preferred Stock-Voting Rights; Board of Directors. Holders of
all the issued and outstanding 500,000 shares of Series B Preferred
Stock collectively will 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 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.
The holders of Series B Preferred Stock shall have the right to
nominate and elect to the Companys 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. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and also "Capital
Resources and Liquidity").
The Company is currently in arrears on two consecutive dividend
payments on each of the Series A, Series B and Series C Preferred
Stock. The next consecutive quarterly dividend payment date will be
February 1, 1998. If the Company does not declare and pay at least one
quarterly dividend on each of the Series A, Series B and Series C
Preferred Stock on or prior to that date, Koch may invoke its remedies
under the Certificate to exercise voting rights equivalent to 51% of
the common stock and/or to convene a special meeting of the
stockholders at which Koch would have the right to elect a majority of
the number of directors constituting the Company's Board.
-11-
<PAGE>
(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 nine months ended October 31, 1997, the
Company incurred a net loss from operations before
dividends on preferred stock of $965,000 compared to
a net loss of $280,000 for the nine months ended
October 31, 1996. This significant change in the
Company's financial condition is due primarily to
the increased interest expense incurred on the
additional indebtedness required to acquire the oil
and gas properties at Righthand Creek and the
related depletion on those producing properties.
Dividends of $620,751 have been accrued for the
benefit of preferred stockholders during the nine
months ended October 31, 1997 of which $187,500 was
paid May 1, 1997. The quarterly dividends payable
August 1, 1997 and November 1, 1997 to Koch on the
Series A , Series B and Series C Preferred Stock
have not been paid.
For the three months ended October 31, 1997, the
Company incurred a net loss before dividends on
preferred stock of $196,000 versus $588,000 for the
three months ended July 31, 1997. This three-month
improvement is due mainly to the recognition of
approximately $235,000 gain on sales of oil and gas
properties in Jack County and Young County, Texas in
September 1997. For the nine months ended October
31, 1997, these oil and gas properties provided
approximately $133,000 of oil and gas revenues,
representing 2.4% of total production revenues.
Lease operating expenses and depletion for these
properties were approximately $159,000 which
resulted in a loss from operations for these
respective properties of $26,000.
2. Material Changes in Results of Operations
Revenues and Lease Operating Expenses
Oil and gas sales increased from $3,733,000 for the
nine months ended October 31, 1996 to $5,424,000 for
the nine months ended October 31, 1997, a 45%
increase. This increase is due primarily to the
acquisition of Righthand Creek in January 1997,
which generated $2,409,000 oil and gas sales for the
nine months ended October 31, 1997. Oil and gas
sales from existing properties have decreased
approximately $738,000 from October 31, 1996 to
October 31, 1997 as outlined below:
-12-
<PAGE>
Nine Months Ended October 31,
-----------------------------
Oil and gas sales from existing
properties 1997 1996 Difference
---- ---- ----------
Properties sold $ 0 180,000 (180,000)
Offshore properties recompleted
or shut-in 0 205,000 (205,000)
Remaining properties 1,772,100 2,124,800 (352,700)
--------- --------- ---------
Oil and gas sales from existing
properties $ 1,772,100 2,509,800 (737,700)
--------- --------- --------
Lease operating expenses increased from $1,830,000
for the nine months ended October 31, 1996 to
$2,709,000 for the nine months ended October 31,
1997, a 48% increase. The increase in lease
operating expenses is primarily due to the
acquisition of Righthand Creek which resulted in
$1,101,000 of lease operating expenses for the nine
months ended October 31, 1997. Included in lease
operating expenses for Righthand Creek properties is
approximately $67,000 for lease rentals and $223,000
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 revenues for the Belle properties have
increased significantly from 66% in 1996 to 95% in
1997. This increase is due to a 49% decrease in
revenues coupled with an 8% increase in operating
costs, including $79,000 in workover expenses.
The following table summarizes the operating
activity for oil and gas properties for the nine
months ended October 31, 1997 and 1996. The existing
properties are those oil and gas properties which
were acquired by the Company prior to February 1,
1996.
-13-
<PAGE>
Acquisition Nine Months
Date Ended October 31,
----------- ----------------
1997 1996
---- ----
Oil and gas sales:
------------------
Existing properties -- $1,772,104 2,509,799
Wheeler County properties(1) March 1996 211,509 197,857
Block 76(1) March 1996 304,202 307,830
Belle properties(1) April 1996 727,500 717,444
Righthand Creek properties(2) January 1997 2,408,886 0
--------- ---------
Total oil and gas sales $5,424,201 3,732,930
========= ==========
Lease operating expenses:
-------------------------
Existing properties -- $832,079 1,275,694
Wheeler County properties March 1996 60,919 56,016
Block 76 March 1996 26,509 28,155
Belle properties April 1996 688,805 470,229
Righthand Creek properties January 1997 1,100,629 0
--------- ---------
Total lease operating expenses $2,708,941 1,830,094
========= ==========
Depletion of oil and gas producing properties:
----------------------------------------------
Existing properties -- $278,256 551,067
Wheeler County properties March 1996 12,601 25,575
Block 76 March 1996 215,513 65,799
Belle properties April 1996 217,329 78,719
Righthand Creek properties January 1997 995,174 0
------- --------
Total depletion of oil and gas
producing properties $1,718,873 721,160
========= ========
Operating profit (loss) %:
--------------------------
Existing properties -- 37% 27%
Wheeler County properties March 1996 65% 59%
Block 76 March 1996 20% 69%
Belle properties (3) April 1996 (25)% 23%
Righthand Creek properties January 1997 13% 0%
----- ----
Total operating profit (loss) % 18% 32%
===== ====
-14-
<PAGE>
Acquisition Nine Months
Date Ended October 31,
----------- ----------------
1997 1996
---- ----
Oil production volume (bbl):
----------------------------
Existing properties -- 29,181 53,223
Wheeler County properties March 1996 73 171
Block 76 March 1996 5,080 4,757
Belle properties April 1996 38,366 34,192
Righthand Creek properties January 1997 103,544 0
------- -------
Total oil production volume (bbl) 176,244 92,343
======= =======
Gas production volume (mcf):
----------------------------
Existing properties -- 530,720 621,112
Wheeler County properties March 1996 103,245 93,212
Block 76 March 1996 71,980 83,890
Belle properties April 1996 40 137
Righthand Creek properties January 1997 116,039 0
------- -------
Total gas production volume (mcf) 822,024 798,351
======= ========
Average oil price per bbl $19.82 $20.50
======= ========
Average gas price per mcf $2.33 $2.28
======= =======
Average price per bbl oil equivalent (BOE) $17.32 $16.56
======= =======
Lease operating expense per BOE $8.65 $8.12
======= ======
- -----------------
(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 nine months ended October 31, 1996, the
Company incurred $130,000 dry hole expenses relative
to the recompletion of an existing well in Wheeler
County. For the nine months ended October 31, 1997,
no dry hole costs or lease abandonment expenses were
incurred.
Depletion of Oil and Gas Producing Properties
Depletion expense increased from $721,000 for the
nine months ended October 31, 1996 to $1,719,000 for
the nine months ended October 31, 1997. The increase
in depletion expense is primarily due to the
amortization as depletion of the capitalized
-15-
<PAGE>
acquisition costs for Righthand Creek and the
increase in the depletion rates for Block 76 and
Belle properties.
General and Administrative
General and administrative expenses have increased
from $935,000 to $1,149,000 for the nine months
ended October 31, 1996 and 1997, respectively. This
increase is primarily the result of hiring three
additional employees during the quarter ended April
30, 1997, cost of living and merit salary increases
provided to the staff and clerical employees in
January 1997, and the approximately $60,000 annual
increase to the base salaries of the President and
Chief Financial Officer as provided by their
employment agreements.
Interest Expense
Interest expense increased from $489,000 in 1996 to
$846,000 in 1997. The increase is due to the
additional debt outstanding during the nine months
ended October 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 by either a prime rate
formula or an Eurodollar rate formula. The average
interest rate related to the Senior Credit Facility
for the nine months ended October 31, 1997 was 8.19%
as compared to 9.28% for the nine months ended
October 31, 1996.
For any unused portion of the Borrowing Base, a
commitment fee of 3/8ths of one percent per annum is
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 $14,180,343 at
October 31, 1997 and $13,485,639 at December 1,
1997.
Gain on Sale of Assets
Effective September 1, 1997, the Company sold its
leasehold interest in oil and gas properties located
in Jack County and Young County, Texas for $190,000
and $137,200, respectively. Approximately $235,000
gain on sale of these assets was recognized as of
October 31, 1997.
Effective November 1, 1997, the Company sold its
leasehold interest in oil and gas properties in
McClain County, Oklahoma for $180,000 and recognized
a gain of approximately $122,000. The Company sold
its leasehold interest in non-operated oil and gas
properties in Upton County, Texas effective November
1, 1997 for $594,000 with a gain of $323,000. These
transactions occurred subsequent to the third
quarter and are not included in results for the
quarter.
-16-
<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
("Oil Swap Agreement") with Koch Oil Company. That
Oil Swap Agreement was made pursuant to an existing
Master Commodity Swap Agreement between the Company
and Koch, at no current cost to the Company, and is
termed a "Costless Put/Call Collar Option," covering
the period between February 1, 1998 and January 31,
1999. The Oil Swap Agreement is based upon 400
barrels oil per day and establishes settlement dates
on the last day of each calendar month during the
contract period. It sets a floating price equal to
Koch Oil Company's monthly average LLS posting plus
$1.50, and strike prices of $18.20 for put options
and $19.97 for call options. On any settlement date,
if the floating price is less than the put option
strike price, then Koch must pay the Company the
price difference, multiplied by the determination
quantity for the month. On any settlement date, if
the floating price exceeds the call option strike
price, the Company must pay Koch the difference,
multiplied by the determination quantity for the
month.
The Company also entered into a commitment with its
contract marketing agent to deliver an average of
600 MMBtu per day for February, March and April
1998. The Company in turn will receive an average
net price of $2.45 per MMBtu before taxes.
Except as described above, the Company is not
obligated to provide a fixed or determinable
quantity of oil and gas in the future under any
existing contracts, agreements, hedge or swap
arrangements.
Recent Operating Developments
The Company's future results of operations and the
other forward looking statements contained in this
Quarterly Report involve a number of risks and
uncertainties. Specifically, but without limitation,
no assurances can be given that any current or
future development or exploration plans and
operations will be successful or that, if
successful, production from the wells and the
associated revenues over the production
-17-
<PAGE>
life of the properties will equal or exceed the
costs associated with properties and their
development.
Righthand Creek Field
Righthand Creek, 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 averaged
production of approximately 30 BOPD through August
1997. The total workover and completion costs
incurred for this well were approximately $333,000
through August 31, 1997. The Company recompleted
this well in the Wilcox "B-1" formation in October
1997 with additional recompletion costs totaling
$241,000. The wells current production is
approximately 26 BOPD.
On March 26, 1997, a drilling rig commenced drilling
a 11,300 foot Wilcox formation development well in
Righthand Creek. The well was completed in June
1997. Oil production was stabilized in August 1997.
The average production has been approximately 130
BOPD. Through October 31, 1997, total drilling and
completion costs incurred for this well were
approximately $971,000.
In June 1997, the Company re-entered a second
abandoned well in Righthand Creek. Attempts to
achieve natural production flow from the Wilcox "B"
and "B-1" formations were unsuccessful. Total
capital expenditures incurred for this recompletion
was approximately $215,000 as of October 31, 1997.
Management may use this well as a water injection
well to facilitate the additional development of
Righthand Creek.
In late August 1997, two existing Righthand Creek
wells were perforated in the Wilcox "B-1" formation.
Production from these wells has increased from an
average of 80 BOPD to approximately 160 BOPD. The
total recompletion costs incurred to perforate and
recomplete these wells in the Wilcox "B-1" formation
was approximately $49,500.
As a result of the testing performed on existing
wells, recompletion of shut-in wells and drilling of
new wells in Righthand Creek, the Company has
concluded that the primary source of energy in the
Righthand Creek Wilcox "B" reservoir is fluid
expansion and not natural water drive. Accordingly,
the Company believes that the reservoir will require
pressure maintenance operations to achieve its
maximum productive potential, which in turn will
require significant additional capital investment by
the Company. The effect of reclassifying the
Righthand Creek Wilcox "B" reservoir as a depletion
drive reservoir has increased the overall
recoverable reserves, but resulted in the
reclassification of a significant portion of
previously
-18-
<PAGE>
recognized reserves from "Proved Producing" to
"Proved Behind Pipe," "Proved Undeveloped" and
"Probable and Possible." Such shift in reserve
classifications will remain until pressure
maintenance can be successfully demonstrated.
The Company has retained an independent petroleum
engineering firm to assist in developing a
comprehensive development plan for the Righthand
Creek reservoir. These 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 for water injection purposes and
that some currently producing wells be converted to
water injection wells as well. 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 estimates the total
cost of the required pressure maintenance operation
will exceed $2 million and could range to
approximately $4 million.
The full implementation of a pressure maintenance
program in Righthand Creek may also require that
several existing production units, with different
mineral owners, be combined or reconfigured. The
existing units have been established by orders of
the Louisiana state minerals commission (the
"Commission"), and any changes in the unit
configurations will be subject to approval by the
Commission. The regulatory approval process required
the Company to obtain consents from at least 75% of
the mineral owners in the existing units to the
reservoirwide unitization agreement. The Company has
obtained the necessary consents to go forward with
the unitization approval process. The Company has
completed a pre-notification hearing and is
currently scheduled with the Commission on January
6, 1998 for final approval of the reservoirwide
unitization of the three single well units. There
can be no assurances that the Commission will
ultimately approve the Company's plan.
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 $117,000. As
of April 30, 1997 the level of production net to
Offshore's interest has been restored to average
approximately 280 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. Production from
these wells
-19-
<PAGE>
have averaged approximately 36 BOPD and 15 Mcf net
to the Company's interest.
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% in this well. The well was
completed at approximately 11,600 feet in September
1997. It is anticipated that this well will be on
production during the first quarter of 1998 and will
produce primarily gas.
Capital Resources and Liquidity
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
estimating the present value of future net revenues
from such mineral interests as of a specified date.
The principal factor in determining the Borrowing
Base is the present value of projected future net
revenues from the Company's proved producing
reserves as of the determination date. The present
value of projected future net revenues from the
Company's proved behind pipe and proved undeveloped
reserves are also factors in determining the
Borrowing Base, but are afforded significantly less
value than proved producing reserves.
The Borrowing Base established in January 1997 is
subject to monthly reductions, currently in the
amount of $333,000, which commenced on April 1,
1997. The amount of the monthly reduction of the
Borrowing Base can be adjusted by the senior lender
upon any subsequent determinations of the Borrowing
Base. The next scheduled determination date of the
Borrowing Base is February 1, 1998. The Company may,
at its sole expense, request a determination of the
Borrowing Base prior to February 1, 1998. The Senior
Credit Facility likewise permits the senior lender
the option to effectuate an earlier determination
date of the Borrowing Base. If the subsequent
determination 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 can notify the Company of such
deficiency. Within thirty days of receiving notice
from the senior lender of a deficiency in the
Borrowing Base, 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, solely in the opinion
of the senior lender, to an amount
-20-
<PAGE>
equal to or greater than the outstanding
indebtedness under the Senior Credit Facility. 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,
serve as collateral for the Senior Credit Facility.
The Senior Credit Facility also provides that any
properties or material assets 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.
As of October 31, 1997, the Company was not in
compliance with the positive working capital
financial covenants contained in the Senior Credit
Facility, but received a waiver of non-compliance
from the senior lender. The Company continues to
incur significant costs associated with drilling and
recompletion activities in Righthand Creek which
have not been offset by increased production and
related revenues. The Company anticipates that it
may not be in compliance with the working capital
financiaL covenants subsequent to October 31, 1997.
There can be no assurances that the senior lender
will waive non-compliance of that financial covenant
for financial statements subsequent to October 31,
1997.
During the three months ended October 31, 1997, the
Company sold its working interest ownership in
certain oil and gas properties located in Jack and
Young Counties, Texas for $327,205 and applied the
proceeds to reduce its indebtedness under the Senior
Credit Facility by $219,657. The Company's Borrowing
Base was reduced $84,083 as a result of these sales.
In November 1997, the Company sold its working
interest ownership in oil and gas properties in
McClain County, Oklahoma and Upton County, Texas for
$180,000 and $593,840, respectively. The Company
reduced its indebtedness under the Senior Credit
Facility by $690,705 and the Company's Borrowing
Base was reduced by $457,915 as a result of these
sales.
<PAGE>
The Company anticipates completing the sale of all
oil and gas properties located in Tom Green County,
Texas prior to December 31, 1997. The senior lender
has approved the sale of those properties contingent
on 50% of the net proceeds being applied to the
outstanding indebtedness of the Senior Credit
Facility. Since these oil and gas properties were
not assigned any significant value in calculating
the Borrowing Base, the Borrowing Base will not be
reduced by the sale. The Company anticipates it will
receive $612,256 for its net ownership in these oil
and gas properties of which $306,128 will be applied
to outstanding indebtedness of the Senior Credit
Facility.
The Company, in addition, is currently negotiating
the sale of Eugene Island Lease Blocks 198, 199 and
202 which are held by GulfMex. The Company
anticipates that this sale may be completed by
December 31, 1997. Pursuant to such sale, GulfMex
would assign all its rights and interest in those
Offshore leases for a total sales price of $35,000
and the release of $265,500 held in escrow for the
abandonment liability of the platforms and wells
located on those leases. GulfMex has agreed with the
buyer that the proceeds from the sale of the above
described leases will be applied to the outstanding
accounts payable of GulfMex with the buyer which
were incurred by GulfMex for its proportionate share
of the drilling and recompletion of certain wells at
Eugene Island 324 and the senior lender has
consented to this application of proceeds.
-21-
<PAGE>
Although the senior lender has reserved the right to
examine future sales of oil and gas properties
individually, the Company anticipates that the
principal balance of the senior indebtedness could
be reduced by the proceeds of any future sales of
oil and gas properties by an amount equivalent to
100% of the senior lender's present values for the
oil and gas properties calculated using a discount
rate of 9% per annum as determined by the senior
lender ("PV-9") plus 50% of the net proceeds
received in excess of the PV-9. The Company
anticipates that the Borrowing Base will be reduced
by 75% of the senior lender's PV-9 for any oil and
gas properties sold.
The Company made an additional principal payment of
$14,000 on November 3, 1997. As of December 1, 1997,
the Company's Borrowing Base is $13,511,002 and the
outstanding indebtedness under the Senior Credit
Facility is $13,485,639. The Company has agreed that
it will make no further requests under the Senior
Credit Facility until after the Borrowing Base
determination date of February 1, 1998.
The Company pays interest on the outstanding
indebtedness of the Senior Credit Facility under
either a prime rate formula or an Eurodollar rate
formula. Interest expense paid pursuant to the
Senior Credit Facility during the nine months ended
October 31, 1997 and 1996, was approximately
$846,000 and $489,000, respectively. The average
interest rate for the nine months ended October 31,
1997 and 1996 was 8.19% and 9.28%, respectively.
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.
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.
-22-
<PAGE>
The following is a brief summary of the various
rights and terms of the Preferred Stock.
Preferred Stock
--------------------------------------------
Series A Series B Series C
-------- -------- --------
Number of shares issued 500,000 500,000 -0-
Face value per share $10 $10 $10
Cumulative dividends 15% of face 0.35 shares of 14% of face
value (per Series C value (per
annum) (quarterly) annum)
Dividends payable Feb. 1, May 1, Feb. 1, May 1, Feb. 1, May 1,
Aug. 1, Nov. 1 Aug. 1, Nov. 1 Aug. 1, Nov. 1
First dividend payment May 1, 1997 May 1, 1997 Aug. 1, 1997
The Company 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.
As a result of the significant costs incurred with
the drilling and recompletion activities conducted
by the Company during the nine months ended October
31, 1997, the Company has not made the two quarterly
cash dividend payments of $187,500 each due on the
Series A Preferred Stock and the $6,125 and $12,125
quarterly cash dividend payments due on the Series C
Preferred Stock on August 1, 1997 and November 1,
1997, respectively. The Company also has not issued
the stock dividends of 17,500 shares of Series C
Preferred Stock each due on August 1, 1997 and
November 1, 1997 accrued on the Series B Preferred
Stock. The Company has accrued a dividend expense of
$608,501 as of October 31, 1997 of which $394,908 is
accrued as payable. The Company's ability to pay the
accrued dividends due February 1, 1998 and those
dividends which become due in the future is
dependent on increasing the cash flow from
operations.
-23-
<PAGE>
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.
The Company is currently in arrears on two
consecutive dividend payments on each of the Series
A, Series B and Series C Preferred Stock. The next
consecutive quarterly dividend payment date will be
February 1, 1998. If the Company does not declare
and pay at least one quarterly dividend on each of
the Series A, Series B and Series C Preferred Stock
on or prior to that date, Koch may invoke its
remedies under the Certificate to exercise voting
rights equivalent to 51% of the common stock and/or
to convene a special meeting of the stockholders at
which Koch would have the right to elect a majority
of the number of directors constituting the
Company's Board.
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 Righthand Creek by implementation of
a comprehensive pressure
-24-
<PAGE>
maintenance operation will require significant
additional working capital. Although the Company is
investigating various sources of financing such as
additional or alternative bank financing, production
or mezzanine financing for the development of
Righthand Creek and any 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 any
additional financing.
The Company continues offering for sale of certain
non-strategic leasehold interests in an effort to
reduce the indebtedness of the Senior Credit
Facility and fund development costs. If the Company
is unable to obtain additional financing as needed,
it would consider, among other alternatives, the
curtailment of significant development and workover
activities until internally generated funds become
available, or other strategic alternatives in an
effort to meet its financial requirements.
Principally, as a result of the reclassification of
reserves in the Righthand Creek and the resultant
anticipated reduction in the Company's proved
producing reserves, management anticipates that the
next scheduled Borrowing Base determination date
will likely result in reduction of the Borrowing
Base to an amount less than the amount then expected
to be outstanding on the Senior Credit Facility. The
amount of any shortfall will not finally be
determined until reserve reports based on the then
most current reserve and production data are
completed. If the determination of Borrowing Base
results in a shortfall and the senior lender gives
notice under the terms of the Senior Credit
Facility, the Company is required to provide
additional collateral or pay an amount sufficient to
eliminate the shortfall within thirty days. If the
shortfall is not eliminated, the senior lender may
declare a default under the Senior Credit Facility
and exercise its remedies, which could include
foreclosure on the assets securing the Senior Credit
Facility.
The Company has no significant additional properties
or assets to pledge to the senior lender, and the
Company's ability to pay the senior lender an amount
sufficient to eliminate the shortfall would depend
on the amount of the deficit, the ability of the
Company to generate additional cash from operations
and sales of non-strategic leasehold interests, and
access to additional sources of financing through
new or amended debt or equity financing or other
alternative financing such as production and/or
mezzazine financing for development of the Company's
oil and gas properties. As discussed above, the
Company is pursuing the sale of non-strategic
leasehold interests to reduce the principal amount
outstanding on the Senior Credit Facility and
provide necessary cash for operations designed to
enhance production on its remaining properties. The
Company is pursuing alternatives in an effort to
secure additional funding, which efforts include
continuing discussions with its existing senior
lender and with potential alternate sources of debt
financing. The Company is also evaluating other
sources of funding in an effort to address the
Company's liquidity requirements. No assurance can
be given that the Company will be successful in its
efforts to obtain additional financing sufficient to
address the likely requirements of the senior
-25-
<PAGE>
lender, the Company's anticipated operating expense
requirements in connection with continuing
development of Righthand Creek and the Company's
other funding requirements, including the accrued
but unpaid dividends on the Preferred Stock.
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 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
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
-26-
<PAGE>
Item 3. DEFAULTS UPON SENIOR SECURITIES
Series A Preferred Stock
The cash dividends of $187,500 each due on August 1, 1997 and
November 1, 1997 on Series A Preferred Stock have not been
paid.
Series B Preferred Stock
The stock dividends of 17,500 shares of Series C Preferred
Stock each due on August 1, 1997 and November 1, 1997 on the
Series B Preferred Stock have not been issued.
Series C Preferred Stock
The cash dividends in the amount of $6,125 and $12,250 due on
August 1, 1997 and November 1, 1997, respectively, on Series C
Preferred Stock have not been paid.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Index to
Exhibits on page E-1 are filed as part of this Form
10-QSB. The Company will furnish a copy of any exhibit
to a requesting shareholder upon payment of a fee of
$.25 per page.
10(q) - Letter Agreement between Comerica Bank - Texas
and Rio Grande, Inc. and Rio Grande Drilling Company
dated December 27, 1997 (E-4).
(b) Reports on Form 8-K None.
-27-
<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: December 22, 1997 By: /s/ Guy R. Buschman
---------------------------------------
Guy R. Buschman, President
Date: December 22, 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
(incorporated herein by reference from January 31, 1997 Form 10-KSB).
4(a) Specimen stock certificate (incorporated by reference to Exhibit 4(a) to
Form 8-K dated December 29, 1986 [File No. 1-8287]).
4(b) Specimen Stock Purchase Warrant (incorporated by reference to Exhibit
4(b) to form 8-K dated December 29, 1986 [File No. 1- 8287]).
4(c) Note Purchase Agreement, dated September 27, 1995, by and among the
Company, Rio Grande Drilling Company, and the various purchasers of
11.50% Subordinated Notes due September 30, 2000 (incorporated herein by
reference from October 31, 1995 Form 10-QSB).
4(d) Form of Common Stock Purchase Warrant issued in connection with the
Offering described in this report (incorporated herein by reference from
October 31, 1995 Form 10-QSB).
4(e) Amendments to Note Purchase Agreement, by and among the Company,
Drilling and the Holders (incorporated herein by reference from March
26, 1996 Form 8-K).
4(f) Amendments to Notes, by and among the Company and the Holders
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(g) Consents to Proposed Transactions by the Holders to the Company
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(h) Amendment to Warrant Agreement among the Company and the Holders
(incorporated herein by reference from March 26, 1996 Form 8-K).
4(i) Certificate of Designation, Preferences and Rights of Series A Preferred
Stock, Series B Preferred Stock, and Series C Preferred Stock of Rio
Grande, Inc. dated January 15, 1997 (incorporated herein by reference
from January 31, 1997 Form 8-K).
4(j) Preferred Stock Purchase Agreement between Koch Exploration Company and
Rio Grande, Inc. dated January 16, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
4(k) Registration Rights Agreement between Rio Grande, Inc. and Koch
Exploration Company dated January 16, 1997 (incorporated herein by
reference from January 31, 1997 Form 8-K).
E-1
<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 (incorporated herein by
reference from Form 10-KSB from January 31, 1997).
10(p) Confirmation of Costless Collar Put/Call Option subject to Master
Commodity Swap Agreement between Koch Oil Company and Rio Grande, Inc.,
dated August 15, 1997 (incorporated herein by reference from July 31,
1997 Form 10-QSB).
10(q) Letter Agreement between Comerica Bank - Texas and Rio Grande, Inc. and
Rio Grande Drilling Company dated December 22, 1997 (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-8).
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>
December 22, 1997
VIA FACSIMILE - 210/308-8111
Mr. Guy Bob Buschman
President
Rio Grande, Inc.
Rio Grande Drilling
Union Square, Suite 201
San Antonio, Texas 78216
Re: Application of Proceeds Agreement Letter
Dear Guy Bob:
We refer to the Loan Agreement among Rio Grande, Inc., Rio Grande
Drilling Company and Comerica Bank - Texas dated as of March 8, 1996, as amended
by the First Amendment to Loan Agreement dated as of January 15, 1997
(collectively, the "Loan Agreement"). The defined terms in this letter have the
same meanings as are set forth in the Loan Agreement except that "you" and
"yours" means the Borrowers, and "we", "ours" and "us" mean the Bank.
This will confirm our agreements with respect to the application of the
proceeds from your recent sales of oil and gas properties located in McClain
County, Oklahoma, and in Tom Green, Jack, Upton and Young Counties, Texas:
1. McClain and Upton Counties. With respect to the sales of
your properties located in McClain County, Oklahoma, and in Upton
County, Texas:
(a) You have paid us $680,705 which represents 100%
of our PW9% value for these properties plus 50% of the net
sales proceeds you received for these properties in excess of
that value. We have applied this to the outstanding Principal
Debt.
(b) The Borrowing Base has been reduced by $457,915
which is 75% of our PW9% value for these properties. The
reduction of the Borrowing Base by only $457,915, instead of
the full $680,705, has the effect of creating $222,790 of
availability under the Borrowing Base.
2. Jack and Young Counties. You previously paid us $219,657
from the net proceeds of your sales of properties located in Jack and
Young Counties, Texas. This number is 100% of our PW9% value for these
properties plus 50% of the net sales
162309.5/SP3/1823/SAL/122297
<PAGE>
Mr. Guy Bob Buschman
December 22, 1997
Page 2
proceeds you received for these properties in excess of that value. We
applied this sum to the payment of the outstanding Principal Debt.
Also, we had originally reduced the Borrowing Base by the entire
$219,657. However, we have now agreed to reduce the Borrowing Base by
only $84,083 (75% of our PW9% value of $112,111 for these properties)
which has the effect of creating $135,574 of availability under the
Borrowing Base.
3. Tom Green County, Texas. When you sell the KWB property
located in Tom Green County, Texas, you will pay the Bank as a
principal payment the amount which is 50% of the net proceeds you
receive, and the Borrowing Base will remain unchanged. We will apply
this amount to the then outstanding Principal Debt, which will have the
effect of creating additional availability under the Borrowing Base in
the amount of your payment.
4. Effect of Increasing Availability Under Borrowing Base. As
the result of the applications of proceeds described in paragraphs 1
and 2 above, and effective as of the date hereof, the Borrowing Base is
$13,844,002, and your availability thereunder is $358,364. As you know,
the Loan Agreement provides that the Borrowing Base presently reduces
at the rate of $333,000 each month. Thus, the practical effects of
creating the availability under the Borrowing Base described in
paragraphs 1 and 2 above are to eliminate the requirement that you pay
us $333,000 on December 1, 1997, and to give you a credit of $25,364
toward the $333,000 payment due January 1, 1998. Similarly, the
practical effect of creating the availability under the Borrowing Base
as described in paragraph 3 above will be to give you a credit toward
the $333,000 payment next due under the Loan Agreement.
5. Agreement Not to Draw. In consideration of our creating
availability under the Borrowing Base with the resulting dollar for
dollar credit against your payment obligations otherwise due under the
Loan Agreement all as described above, you agree not to make any
further requests for borrowings under the Loan Agreement until after
the Borrowing Base has been next redetermined. The next regularly
scheduled Borrowing Base determination date is February 1, 1998.
Advances after the redetermination of the Borrowing Base will be made
only in compliance with the terms and provisions of the Loan Agreement.
6. Waiver of Non-Compliance With Working Capital Covenant.
Your financial statements for the month ending October 31, 1997,
reflect that your working capital is negative and therefore is not in
compliance with the covenant contained in Section 7.8 of the Loan
Agreement. We are waiving your working capital covenant
162309.5/SP3/1823/SAL/122297
<PAGE>
Mr. Guy Bob Buschman
December 22, 1997
Page 3
non-compliance which is reflected on your financial statements for the
month of October 1997 and which may have been reflected on financial
statements for months prior to October 1997. This waiver is limited to
working capital covenant non-compliance reflected on your financial
statements of October 1997 and earlier only, and does not apply to any
working capital covenant non-compliance which may be reflected on your
subsequent financial statements. We will address subsequent working
capital covenant non-compliance on a "financial statement by financial
statement" basis.
7. Consent to Sale of Interest in Eugene Island 198-199 and
202 and Application of Proceeds Therefrom. You have advised that one of
your affiliates, Rio Grande GulfMex, Ltd., will sell to Newfield
Exploration Company its interest in properties known as Eugene Island
198-199 and 202 for $300,500. You have advised that this $300,500 will
be paid directly to outstanding accounts payable for the ownership
interest of Rio Grande GulfMex, Ltd. in a property known as Eugene
Island 324 resulting from cost overruns for the drilling of the A-6 and
A-7 wells on Eugene Island 324 and platform repairs. Please be advised
that we consent to the foregoing, and we confirm to you that this
transaction will have no impact on the Borrowing Base.
8. Limitations on Agreements, Etc. We will look at other
proposed sales of oil and gas properties constituting our collateral on
a transaction by transaction basis. The fact that we have used the
application of proceeds methodology described above for the application
of proceeds for the property sales described above, does not obligate
us to follow this application procedure methodology for future asset
sales or otherwise constitute any type of "course of dealing" which is
binding on us. The fact that we have been willing to release our
collateral in certain circumstances to date does not obligate us to do
so in the future or constitute any type of "course of dealing" which is
binding on us. We reserve all rights granted to us in the Loan
Agreement and the related Loan Documents.
9. Release of Claims. In consideration of the foregoing, you
hereby release and forever discharge us from any and all Claims (as
hereinafter defined), whether known or unknown and whether arising now
or which may arise in the future, from any event or set of
circumstances that took place or transpired prior to your execution of
this letter. "Claims" as used in the preceding sentence means all
claims, demands, obligations, liabilities, breaches of contract, acts,
omissions, misfeasance, malfeasance, cause or causes of action,
controversies, damages and losses of every type, kind, nature or
character which could have been, might or may be claimed to exist.
162309.5/SP3/1823/SAL/122297
<PAGE>
Mr. Guy Bob Buschman
December 22, 1997
Page 4
The agreements set forth herein are limited precisely as written and
shall not be deemed (a) to be a waiver of or a consent to the modification of or
deviation from any other term or condition of the Loan Agreement or the Loan
Documents, or (b) to prejudice any right which we may now have or may have in
the future under or in connection with the Loan Agreement and the Loan
Documents.
Please indicate your agreement and acceptance of the foregoing by
signing below, and then returning the extra copy of this letter to me. Thank
you.
Very truly yours,
COMERICA BANK - TEXAS
V. Mark Fuqua
Senior Vice President
Energy Lending
AGREED AND ACCEPTED as of December 22, 1997
RIO GRANDE, INC.
By___________________________________
Gary Scheele, Vice President
RIO GRANDE DRILLING COMPANY
By___________________________________
Gary Scheele, Vice President
162309.5/SP3/1823/SAL/122297
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from this
October 31, 1997 Form 10-QSB)
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 204723
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<RECEIVABLES> 944508
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1220040
<PP&E> 29272584
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<TOTAL-ASSETS> 26238192
<CURRENT-LIABILITIES> 5751302
<BONDS> 10232527
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<COMMON> 60733
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<TOTAL-LIABILITY-AND-EQUITY> 26238192
<SALES> 5424201
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