SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report
June 9, 1998
Rio Grande, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-8287 74-1973357
(Commission File Number) (I.R.S. Employer Identification Number)
10101 Reunion Place, Suite 210
San Antonio, Texas 78216-4156
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(210) 308-8000
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Item 5.
(1) Unaudited Financial Statements
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
January 31, 1998
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 340,133
Trade receivables 836,843
Prepaid expenses 16,854
------------
Total current assets 1,193,830
Property and equipment, at cost:
Oil and gas properties, successful efforts method 26,760,906
Transportation equipment 183,011
Other depreciable assets 411,055
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27,354,972
Less accumulated depreciation, depletion and amortization (14,205,218)
Net property and equipment 13,149,754
Other assets:
Platform abandonment fund 363,618
Other assets, net 500,118
863,736
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Total Assets $ 15,207,320
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Liabilities and Stockholders' Equity Current liabilities:
Accounts payable 1,012,444
Accrued expenses 846,859
Current installments of long-term debt 4,031,412
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Total current liabilities 5,890,715
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Other accrued expenses 491,982
Long-term debt, excluding current installments 9,220,459
Minority interest in limited partnership 144,981
Redeemable preferred stock, $0.01 par value; $10
redemption value. Authorized 1,700,000 shares; issued
and outstanding 1,017,500 shares 10,047,459
Common stock of $0.01 par value. Authorized
10,000,000 shares; issued and outstanding
6,073,320 shares 61,774
Additional paid-in capital 1,148,026
Deficit (11,798,077)
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Total Stockholder's Equity (540,817)
Total Liabilities and Stockholders' Equity $ 15,207,320
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Item 5.(continued)
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year
Ended
January 31,
1998 1997
(unaudited) (audited)
Revenues:
Oil and gas sales $ 7,144,241 5,337,593
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Costs and expenses:
Lease operating and other production expense 3,449,429 2,394,318
Dry hole costs and lease abandonments 294,265 821,982
Depletion of oil and gas producing properties 11,236,517 1,637,634
Depreciation and other amortization 229,872 303,414
Provisions for abandonment expense 0 140,800
General and administrative 1,614,783 1,297,010
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Total costs and expenses 16,824,866 6,597,158
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Gain (loss) from operations (9,680,625) (1,259,565)
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Other income (expense):
Interest expense (1,139,232) (695,580)
Interest income 84,769 78,415
Gain on sale of assets 708,257 315,884
Other, net 18,058 0
Minority interest in earnings of limited
partnership (12,798) (94,034)
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Total other income (expense) (340,946) (395,315)
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Loss before income taxes (10,021,571) (1,654,880)
Income taxes 4,353 260
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Net income (loss) (10,025,923) (1,655,140)
Dividends on preferred stock 855,699 32,887
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Net income (loss) applicable to common stock $ (10,881,622) (1,688,017)
============ ===========
Net loss per common share $ ( 1.85) (0.30)
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Weighted average common shares outstanding 5,890,767 5,552,760
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Item 5.(continued)
RIO GRANDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended January 31,
1998 1997
---- ----
(unaudited) (audited)
Cash flows from operating activities:
Loss from continuing operations
Adjustments to reconcile loss from
continuing operations to net cash
provided by operating activities: $(10,025,923) (1,655,140)
Depreciation and other amortization 229,873 305,414
Depletion of oil and gas producing properties 11,236,517 1,637,634
Provision for abandonment expense - 140,800
Gain on sale of assets (708,257) (315,884)
Minority interest in earnings of limited
partnership 12,798 94,034
Decrease (increase) in trade receivables 971,820 (1,171,371)
Decrease (increase) in prepaid expenses 19,965 (23,264)
Increase (decrease) in accounts payable
and accrued expenses 36,464 498,686
Increase (decrease) in other accrued expenses (558,724) (129,452)
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Net cash provided by (used in) continuing
operating activities 1,214,533 (618,543)
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Cash flows from investing activities:
Purchase of oil and gas producing properties (4,408,131) (19,259,658)
Additions to other property and equipment (75,595) (49,859)
Net reductions in platform abandonment fund 638,345 33,607
Additions to (deletion from) other assets (22,863) (12,870)
Proceeds from sale of property and equipment 2,150,824 861,731
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Net cash provided by (used in) investing
activities (1,717,420) (18,427,049)
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Cash flows from financing activities:
Additions to other assets - (696,359)
Proceeds from long-term debt 1,152,619 19,436,045
Repayment of long-term debt (1,262,057) (9,758,950)
Proceeds from issuance of common stock 124,934 -
Proceeds from issuance of redeemable
preferred stock - 10,000,000
Preferred stock dividends (220,377) -
Contributions from limited partners 95,570 -
Distributions to limited partners (93,000) (134,081)
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Net cash provided by financing activities (202,311) 18,846,655
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Net increase (decrease) in cash and
cash equivalents (705,198) (198,937)
Cash and cash equivalents at beginning of period 1,045,331 1,244,268
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Cash and cash equivalents at end of period $340,133 1,045,331
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Item 5.(continued)
(2) Long-term Debt
The Company is currently in default under the terms of its senior credit
facility (the "Senior Credit Facility") with Comerica Bank-Texas (the "Bank"),
the Company's senior lender. Pursuant to a letter agreement executed March 4,
1998 with the Bank, the Company was required to provide the Bank by April 3,
1998 with additional collateral to increase the Company's borrowing base
("Borrowing Base") with the Bank, or reduce the outstanding balance of the
Company's indebtedness to an amount equal to or less than the available
Borrowing Base of the Company as redetermined by the Bank effective February 1,
1998. As previously reported, the Company received a Borrowing Base
Determination Notice from the Bank advising the Company that the Company's
Borrowing Base had been redetermined to be $6,500,000 effective February 1,
1998. The balance of the Company's current outstanding indebtedness with the
Bank is approximately $13,178,000, which exceeds the Borrowing Base by
approximately $6,678,000 (the "Deficiency").
The Borrowing Base is the amount of borrowing available under the Senior Credit
Facility. The amount of the Borrowing Base is determined by the Bank, in its
sole discretion, based upon an analysis of reserve and production data with
respect to the oil and gas properties of the Company for the purpose of
calculating the present value of future net revenues from such mineral interests
as of a specified date. The principal factor in determining the Borrowing Base
is the present value of projected future net revenues from the Company's proved
producing reserves as of the determination date. The present value of projected
future net revenues from the Company's proved behind pipe and proved undeveloped
reserves are also factors in determining the Borrowing Base, but are afforded
significantly less value than proved producing reserves.
Righthand Creek, which represents a significant percentage of the aggregate
reserve value and Borrowing Base of the Company, was acquired by the Company in
January 1997 for $15.3 million. The Company commenced workover and additional
development work at Righthand Creek in March 1997. A workover drilling rig was
placed on a previously abandoned well in the field and was able to recomplete
the well in the Wilcox "B" formation. Recompletion procedures were also
performed on the Wilcox "A" formation to test its production capacity. When the
production from the Wilcox "A" and "B" dropped to an uneconomic level in October
1997, the Company recompleted this well in the Wilcox "B-1" formation. The
well's current production is approximately 16 BOPD.
The Company also drilled a 11,300 foot Wilcox "B-1" formation development well
in March 1997. This well was completed in June 1997 and oil production was
stabilized in August 1997. The average production has been approximately 120
BOPD. In June 1997, the Company re-entered a second abandoned well in Righthand
Creek. Attempts to achieve natural production flow from the Wilcox "B" and "B-1"
formations were unsuccessful. This well was not plugged as it may be used as a
water injection well. In August 1997, two existing Righthand Creek wells were
perforated in the Wilcox "B-1" formation. Production from these wells increased
from an average of 80 BOPD to approximately 160 BOPD. In January 1998, a casing
separation in one of the field's most productive wells, the Powell, resulted in
an additional decrease in production of approximately 140 BOPD. Although the
Company attempted to repair the damage, recompletion efforts were unsuccessful.
The Company is currently evaluating the most prudent means to recomplete or
replace the Powell. As of May 31, 1998, the Company has expended approximately
$2.33 million for recompletion and drilling of the wells described above.
As a result of the testing performed on existing wells, recompletion of shut-in
wells and drilling of new wells in Righthand Creek, the Company has concluded
that the primary source of energy in the Righthand Creek Wilcox "B" and "B-1"
reservoirs is fluid expansion and not natural water drive. Accordingly, the
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Item 5.(continued)
Company believes that the reservoir will require pressure maintenance operations
to achieve its maximum productive potential, which in turn will require
significant additional capital investment. The effect of reclassifying the
Righthand Creek Wilcox "B" reservoir as a depletion drive reservoir has
increased the overall recoverable reserves, but resulted in the reclassification
of a significant portion of previously recognized reserves from "Proved
Producing" to "Proved Behind Pipe," "Proved Undeveloped" and "Probable and
Possible."
The Deficiency in the Borrowing Base occurred primarily as a result of the
reclassification of reserves in the Righthand Creek field, as described above.
In addition, the significant decline in oil prices from approximately $20 per
bbl average to the current average price of approximately $12 per bbl has
significantly and adversely affected the cash flows and the market value of
Righthand Creek. The Company has been in regular contact with the Bank and has
kept the Bank apprised of its efforts to address the Deficiency. Although the
Bank has not accelerated the indebtedness under the terms of the Senior Credit
Facility, the Bank's willingness to defer its remedies may be premised upon the
Company's continued efforts to address the Deficiency.
The Company has no significant additional properties or assets to pledge to the
Bank, and the Company's ability to pay the Bank an amount sufficient to
eliminate the Deficiency will depend on the ability of the Company to generate
sufficient cash from sales of non-strategic leasehold interests, and/or to
access additional sources of financing through new or amended debt or equity
financing or other alternative financing, which may include production and/or
mezzanine financing for the development of Righthand Creek. The value of the
Company's oil and gas properties has been adversely affected by the decline in
oil and gas prices and the reclassification of the reserves in Righthand Creek,
and no assurance can be given that the value of the Company's oil and gas
properties is greater than the amount of the Company's outstanding indebtedness.
If the Company is unable to satisfy the requirements of the Bank or refinance
the remaining indebtedness, the Bank may exercise it remedies under the Senior
Credit Facility, which include, but are not limited to, foreclosure of its
security interest in the collateral and offset of the Company's cash.
(3) Sale of Leasehold Interests
The Company is currently pursuing the orderly sale of its leasehold interests to
comply with the Bank's request to repay the Senior Credit Facility. The sale may
include all oil and gas properties except Righthand Creek. The Company has
retained Energy Spectrum Advisors, Inc. ("ESA") to assist the Company in
marketing the oil and gas properties to be sold. ESA has prepared a sales
brochure which details the terms and conditions of the proposed sale and has
provided a list of prospective buyers for the Company's leasehold interests.
Additionally, ESA will advise the Company during any due diligence and purchase
and sale agreement negotiations with prospective buyers. The Company is
currently meeting with prospective buyers and anticipates that final bids for
the leasehold interests should be received on or about June 12, 1998.
The Company is obligated to pay ESA a sales fee equal to the greater of $100,000
or $50,000 plus one percent (1%) of the total sales consideration received from
its sale of the leasehold interests for which ESA assists in selling. In
addition, ESA shall receive a maximum of $15,000 as reimbursement for expenses
incurred pursuant to their assistance in selling the properties, which includes
the expense of printing the sales brochure.
The Company is uncertain regarding the proceeds that may be realized from the
sale of the leasehold
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Item 5.(continued)
interests offered for sale. As previously noted, the significant decline in oil
prices could adversely affect the sales value of the properties thereby limiting
the Company's ability to reduce the Bank's indebtedness by an amount sufficient
to enable the Company the ability to secure alternative financing and be able to
retain Righthand Creek and/or obtain the additional necessary capital to
properly develop the field.
(4) Redeemable Preferred Stock
On January 16, 1997, the Company and Koch Exploration Company ("Koch") concluded
a $10 million private placement ("Koch Private Placement"). Koch acquired
500,000 shares of Series A Preferred Stock for $5 million and 500,000 shares of
Series B Preferred Stock for $5 million. In addition to the rights set forth
below, the Preferred Stock carries a liquidation preference equal to its
aggregate face value ($10,000,000) plus accrued but unpaid dividends.
The following is a brief summary of the various rights and terms of the
Preferred Stock.
Preferred Stock
---------------
Series A Series B Series C
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Number of shares issued 500,000 500,000 -0-
Face value per share $10 $10 $10
Cumulative dividends 15% of face 0.35 shares of 14% of face
value (per Series C value (per
annum) (quarterly) annum)
Dividends payable Feb.1, May 1, Feb.1, May 1, Feb.1,May 1,
Aug.1, Nov.1 Aug.1, Nov.1 Aug.1, Nov.1
First dividend payment May 1, 1997 May 1, 1997 Aug. 1, 1997
The Company has paid Koch a cash dividend of $220,377 on May 1, 1997 for the
dividends accrued from January 16, 1997 through April 30, 1997 on the Series A
Preferred Stock. Koch also received 17,500 shares of Series C Preferred Stock as
the stock dividend accrued on the Series B Preferred Stock from February 1, 1997
through April 30, 1997.
As a result of the significant costs incurred with the drilling and recompletion
activities and the significant decline in oil prices, the Company has not made
any additional quarterly cash dividend payments due on the Series A Preferred
Stock and the Series C Preferred Stock since May 1, 1997. The Company also has
not issued the stock dividends of 17,500 shares of Series C Preferred Stock each
due quarterly on the Series B Preferred Stock since May 1, 1997. The Company has
accrued dividends payable of $668,200 as of January 31, 1998.
If at any time the Company is in arrears in whole or in part with regard to
quarterly dividends and such nonpayment remains in effect for three consecutive
quarters or, if a significant event (as defined in the Certificate of
Designation) occurs, the holders have the right at any annual or special meeting
of the stockholders to nominate and elect such number of individuals as shall
after the election represent a majority of the number of directors constituting
the Company's Board. The holders also have the right after a default in the
payment of dividends or the occurrence of a significant event to cast such
number of votes at any annual or special stockholders meeting as is equivalent
to fifty-one percent(51%) of the aggregate voting shares. A
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Item 5.(continued)
significant event shall mean and be deemed to exist if (i) the Company files a
voluntary petition, or there is filed against the Company an involuntary
petition, seeking relief under any applicable bankruptcy or insolvency law, (ii)
a receiver is appointed for any of the Company's properties or assets, (iii) the
Company makes or consents to the making of a general assignment for the benefit
of creditors or (iv) the Company becomes insolvent or generally fails to pay, or
admits in writing its inability or unwillingness to pay, its debts as they
become due. At such time that there is a cure or waiver received in writing from
the holders of a majority of the Series B Preferred Stock, the additional board
members elected by the holders shall be removed from the Company's Board.
The Company is currently in arrears on four consecutive dividend payments on
each of the Series A, Series B and Series C Preferred Stock. Koch has not
invoked its rights under the Certificate, which include but are not limited to,
the right to convene a special meeting of the stockholders at which Koch would
have the right to elect a majority of the number of directors constituting the
Company's Board. Koch currently has two representatives serving on the Company's
Board.
(5) Depletion of Oil and Gas Producing Properties
The Company amortizes as depletion expense the capitalized acquisition costs and
the capitalized cost of exploratory wells that find proved reserves or the
development costs that increase proved reserves by the unit-of-production
method. The unit-of-production method assigns a pro rata portion of the
capitalized cost to each unit of reserves. The amortization of the capitalized
costs of proved producing reserves may be computed either on a
property-by-property basis or with reference to some reasonable aggregation of
properties in the same field area.
The Company revises the unit-of- production rate annually based on the estimates
of remaining proved reserves prepared by independent petroleum reserve
engineers. Reserve estimates for producing oil and gas properties are inherently
imprecise and may, therefore, change dramatically from year to year.
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This new pronouncement was
adopted effective February 1, 1996.
Depletion expense increased from $1.6 million for the fiscal year ended January
31, 1997 to $11.2 million for the fiscal year ended January 31, 1998. Included
as depletion expense for each year are the additional depletion adjustments to
record the impairment of the Company's oil and gas properties based on the
independent engineers reserve valuations at the end of the year. The impairment
loss for the year ended January 31, 1997 was approximately $261,000 as compared
to $4.52 million for the year ended January 31, 1998.
Righthand Creek's shift in reserve classification accounted for the primary
increase in depletion and impairment expense for the year ended January 31,1998.
For the year ended January 31,1997, Righthand Creek was estimated to have proved
net reserves of 3.96 million BOE which was reduced to 964,000 BOE for the year
ended January 31, 1998. As a result of this significant reduction in proved
reserves, the unit-of-production rate for depletion was increased which resulted
in depletion of $4.34 million for production during the year. An additional
impairment adjustment of $3.27 million was required to adjust the book value of
Righthand Creek to the year-end reserve valuation. The total depletion and
impairment adjustment for Righthand Creek for the year ended January 31, 1998
was $7.61 million.
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Item 5.(continued)
An adjustment was also necessary for the oil properties which were acquired from
Belle Exploration, Inc. located primarily in Mississippi. These properties were
estimated to have approximately 375,000 BOE net reserves to the Company as of
January 31, 1997 as compared to approximately 271,000 BOE net reserves for the
year ended January 31, 1998. The Company produced approximately 52,000 net BOE
during the year, therefore, the reserve estimate for those properties was
adjusted by approximately 52,000 BOE resulting in an impairment adjustment of
approximately $770,000.
Based upon the evaluation of the net carrying values of the Company's other oil
and gas properties relative to future net cash flows, approximately $400,000
additional charge to depletion expense was recorded for the fiscal year ended
January 31, 1998 due primarily to the impairment loss for an offshore property
recompleted during the year.
(6) Capital Resources and Liquidity
The Company has continued its search for additional equity and/or debt
financing. However, the Company has not been successful in its efforts to
identify additional sources of funding. The Company has explored refinancing of
its indebtedness as well as transactions that would result in additional equity
with concomitant dilution of the interests of current stockholders. The holder
of the Company's preferred stock, Koch, initially indicated a willingness to
consider providing credit support or additional funding in some form for the
Company. However, Koch has indicated to the Company that it is at this point
unwilling to provide any additional financing or credit support. Currently, the
Company has no additional financing transactions under active consideration and
has not identified any alternative funding.
The Company is undertaking efforts to sell oil and gas properties in an effort
to reduce its Bank indebtedness. No assurance can be provided that the amount
realized from such sales will be adequate to reduce the Bank indebtedness in an
amount sufficient to forestall the Bank from pursuing its remedies against the
Company, nor can any assurance be given that bids received for the properties
will provide attractive sales opportunities for the Company. Similarly, no
assurances can be given that the Company will be able to identify any
alternative financing sources which, in combination with the sale of the oil and
gas properties being offered for sale, would permit the development of Righthand
Creek or continuation of the business of the Company as a going concern.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RIO GRANDE, INC.
Date: June 9, 1998 By: /s/ Guy R. Buschman
--------------------------
Guy R. Buschman, President
Date: June 9, 1998 By: /s/ Gary Scheele
---------------------------
Gary Scheele,Secretary and
Treasurer
(principal financial officer)
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