<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
================================================================================
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 2-70145
SOUTH TEXAS DRILLING & EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2088619
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9310 Broadway, Bldg. I San Antonio, Texas 78217
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 210-828-7689
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.10 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant (computed by reference to the average of bid and ask closing
sales prices on June 19, 1996): $1,645,496
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of June 19, 1996.
Class: Common Stock Shares Outstanding: 5,654,333
Par Value: $0.10
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
South Texas Drilling & Exploration, Inc. and its subsidiaries (the
"Company") are engaged in the business of providing land contract drilling
services for the oil and gas industry; oil and gas exploration and development
activity for its own account; and operation of oil and gas wells for its own
account and those of outside investors. The revenues; earnings (loss) from
operations; identifiable assets; depreciation, depletion and amortization; and
capital expenditures are reported for each of its business segments for the
fiscal years ended March 31, 1996, 1995 and 1994 in note 5 ("Business Segments
and Supplementary Earnings Information") of the Notes to Consolidated Financial
Statements, which note is incorporated herein by reference.
CONTRACT DRILLING
The Company currently owns four land drilling rigs with approximate depth
capabilities ranging from 6,000 feet to 11,500 feet. Of these four rigs, three
were operated during all of fiscal 1996, while the fourth was placed in service
in May, 1995. The Company also operated a fifth rig through the end of the
third quarter of fiscal 1996. The rig was owned by a partnership in which one
of the Company's wholly-owned subsidiaries was the general partner. The
operations of the partnership are included in the Company's consolidated
financial statements. In December, 1995, the partnership was terminated and
the Company's subsidiary sold its one-half interest in the drilling rig. The
Company's rigs are presently operating in south Texas and along the Gulf Coast
of Texas. All four of the rigs are currently in operation.
Drilling Equipment
A land drilling rig consists of engines, drawworks, mast, pumps to
circulate the drilling mud, blowout preventors, drillstring and related
equipment. The size and type of rig used depends upon well depth and site
conditions, among other factors. A description of the type and capability of
the land drilling rigs operated by the Company is set forth in the following
table:
<TABLE>
<CAPTION>
Approximate Aggregate
Rig Depth Utilization
Number Type Capability During 1996
------ ---- ---------- -----------
<S> <C> <C> <C>
4 Skytop - Brewster
N-46 11,500 59%
6 Skytop - Brewster
DHI-4610 10,000 66%
11 Skytop - Brewster
N-46 11,500 82%
14 Skytop - Brewster
N-46 11,500 62%
</TABLE>
Minor repair work on the drilling rigs is performed on-site by the
Company's employees, but major repair work and overhaul of drilling equipment
on a contractual basis are performed by unaffiliated oil field service
companies. In the event of major breakdowns or mechanical problems, the
Company's rigs could be subject to significant idle time and a resulting loss
of revenue if such repair services were not immediately available. The Company
engages in periodic maintenance and improvement of its drilling equipment and
believes that its drilling rigs and other related equipment are in good
operating condition. The Company has experienced no substantial down time as
the result of repair or overhaul of its equipment.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Principal materials, supplies and equipment necessary for drilling
operations are fuels to operate drilling equipment, drilling mud, tubular
steel, cement, drill bits, and other miscellaneous items. Certain of these
items were in short supply from time to time during prior periods of high
drilling demand. At the present time, the Company is not experiencing any
significant shortages of materials, supplies and equipment used in drilling,
and does not foresee any shortages materially affecting its operations.
Contracts
All contracts under which the Company is presently conducting its land
drilling operations provide for rate charges determined on a daywork, footage
or turnkey basis, with rates dependent on the anticipated complexity of
drilling the well, on-site drilling conditions, the type of equipment to be
used, the Company's estimate of the risks involved, the duration of the work to
be performed and competitors' rates among other considerations. Daywork
contracts provide for a fixed charge per day for drilling the well, and the
customer generally bears the major portion of the related costs and risks of
drilling.
With certain limitations, contracts entered into on a footage basis provide
for an agreed price per foot drilled regardless of the time required or the
problems involved in drilling the well. Related costs of drilling (i.e., rig
mobilization, labor, fuel usage and other costs) are included in the footage
charge. As compared to daywork contracts, footage contracts involve a higher
degree of risk to the Company.
Contracts entered into on a turnkey basis usually require the Company to
deliver to the operator a completed hole drilled to a specified depth. In
addition to all costs incurred when drilling on a footage basis, the Company is
usually also responsible for drilling fluids, water and other costs. As this
type of contract places a greater degree of risk on the Company than daywork or
footage contracts, the anticipated gross margin on this type of contract is
usually greater than on daywork or footage contracts.
Drilling contracts are obtained either through competitive bidding or
through direct negotiation. Contracts are usually entered into by the Company
covering the drilling of one well and obligate the Company to advance certain
costs and to assume certain expenses in connection with drilling operations.
During the year ended March 31, 1996 the Company drilled 48 wells with 54% of
contract drilling revenues attributable to daywork contracts, 20% to footage
contracts, and 26% to turnkey contracts.
Uncertainty relating to oil and gas prices and the domestic gas surplus has
led to significant reductions in drilling activity by oil and gas producing
companies. Furthermore, the phased-in reduction of the highest marginal income
tax rates applicable to individual investors has reduced commitments of capital
to oil and gas drilling funds. Additionally, increased costs due to government
regulation have resulted in the movement of much of the drilling activities to
locations overseas. The aggregate impact of these diverse economic factors has
resulted in significant reductions of oil company commitments to domestic oil
and gas exploration and consequent slackening of overall demand for drilling
rigs.
During the year ended March 31, 1996, the largest customer of the Company's
drilling rigs was Columbia Gas Development Corp. This customer accounted for
approximately 17% of contract drilling revenues of the Company during that
period. No other single customer accounted for more than 10% of the Company's
contract drilling revenues for 1996.
The Company actively markets its rigs and completed contracts for 27
customers in 1996, compared to 19 customers in 1995 and 24 customers in 1994.
The loss of any of the Company's land drilling customers could have a
material adverse effect on the Company's business, particularly with respect to
the time required to find other users of the rig concerned. See "Competitive,
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Business and Operational Risks in Contract Drilling" in Part I. During the
last quarter of fiscal 1991, drilling activity in south Texas began to decline,
although, there was marked increase in activity during the third quarter of
fiscal 1993 and the second and third quarters of fiscal 1994. During the first
three quarters of fiscal 1995, drilling activity was stable but it decreased
significantly in the last quarter of the fiscal year primarily due to a fall in
natural gas prices. In fiscal 1996 drilling activity returned to stability.
Since the 1991 decline, the Company has seen an increase in the number of
requests from current and potential customers for bids on footage and turnkey
terms.
Competitive, Business and Operational Risks in Contract Drilling
The Company encounters substantial competition in its contract drilling
operations from other drilling contractors. The usual method of competition in
the contract drilling industry is on the basis of price, customer relations,
rig availability and suitability, service, performance and condition of
equipment used. Competition for contract drilling is primarily on a regional
basis, and many of the Company's competitors in south Texas have financial
resources, and technical staffs and facilities substantially greater than those
of the Company. With the decline in drilling activity which began in the last
quarter of fiscal 1991, competition, especially as to price, has intensified.
Land contract drilling in oil and gas operations is subject to a number of
operational risks and hazards including blowouts, cratering, fires and
explosions. Any one of these happenings could cause serious damage to
equipment, personnel, property and/or the financial condition of the Company.
In addition, there is a risk that damage to the environment could result from
some of the Company's operations, particularly through oil spillage or
extensive, uncontrolled fires. While the Company believes that it is
adequately insured against normal and foreseeable risks in its operations in
accordance with industry standards, such insurance may not be adequate to
protect the Company against liability from all consequences of well disasters,
extensive fire damage, or damage to the environment. In the event that such
insurance was not adequate, the occurrence of a significant event could have a
material adverse effect on the Company's financial position and results of
operations. Under current conditions, the Company anticipates that its present
insurance coverage will be maintained, but no assurance can be given that
insurance coverage will continue to be available at rates considered reasonable
or that certain types of coverage will be available at any cost.
OIL AND GAS OPERATIONS AND PROPERTIES
The Company's oil and gas operations consist of the ownership of certain
oil and gas properties and the exploration, development and production of oil
and gas. In June, 1992, the Company acquired operating interests in 17
producing wells. During fiscal 1994 and fiscal 1995 the Company drilled three
additional wells. No wells were added in fiscal 1996.
Productive Wells and Acreage
At March 31, 1996, the Company had operating interests in 20 producing
wells in Texas. Additionally, at March 31, 1996, the Company had additional
minor investments in working interests and overriding royalty interests in
productive wells and developed acreage in Texas. However, the Company believes
the value and the amount of reserves in these properties are not significant in
relation to the value and the reserves in the operating interests. Therefore,
the working interests and overriding royalty interests have been omitted from
this report. The following table presents information on the wells in which
the Company has an operating interest:
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Productive Wells (1) (2)
--------------------------------- Developed
Oil Gas Acreage(2)(3)
---------------- ------------- ---------------
Location by County Gross Net Gross Net Gross Net
- ------------------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Texas
- -----
Bastrop 14 6.41 1 .62 1,198 522
Lee 5 3.16 - - 369 229
-- ---- - --- ----- ---
19 9.57 1 .62 1,567 751
== ==== = === ===== ===
</TABLE>
(1) A "productive well" is a well either producing or capable of producing oil
or gas. The Company owns no interests in wells with multiple completions.
(2) A "gross" well or acre is a well or acre in which a working interest is
owned. "Net" wells or acres reflect the sum of fractional working
interests owned in gross wells or acreage.
(3) "Developed acreage" is acreage spaced or assigned to productive wells.
Oil and gas properties in general are subject to customary royalty
interests contracted for in connection with the acquisition of title, liens
incident to operating agreements, liens for current taxes and other burdens and
minor encumbrances, easements, and restrictions. The Company believes that the
existence of such burdens will not materially detract from the general value of
its working interests.
Exploration and Development
The Company's oil and gas exploration and development activities consist of
the geological evaluation of prospective oil and gas properties, the
acquisition of working interests in oil and gas leases, and the production and
sale of oil and gas from such properties. The Company participates as an
operator and a non-operator with other individuals, partnerships and
corporations in its oil and gas operations, as is customary in the industry.
In June, 1992, the Company acquired operating interests in 17 producing wells.
During fiscal 1994 and fiscal 1995 the Company drilled three additional wells.
Net oil and gas reserves attributable to the interest of the Company,
quantities of oil and gas available to be produced by the Company and the
estimated future net revenue and present worth of future net revenue,
discounted at 10% per annum, have been estimated as set forth in Note 9, "Oil
and Gas Producing Activities", in the "Notes to Consolidated Financial
Statements" of this Report. This note is incorporated herein by reference.
The Company does not believe that there have been any major discoveries or
other favorable or adverse events since the date of the preparation of reserve
estimates which would cause a significant change in the estimated proved
reserves of future net revenue as set forth in "Oil and Gas Producing
Activities" of the "Notes to Consolidated Financial Statements" of this Report.
Estimates of oil and gas reserves are projections based on engineering
information and data. There are uncertainties inherent in the interpretation
of all such data, and there can be no assurance that the reserves will be
ultimately realized.
Except for filing reserve data with the Securities and Exchange Commission
in various reports which are required to be filed under its rules, the Company
is not required to and does not file any reports of reserves with any federal
or state authority or agency.
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<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
In prior years, the Company participated with small interests as a working
interest owner in various development wells. The Company will participate in
development and exploratory wells in the future on a more focused basis and
with larger working interest participation. Strategically, such investments
will be low to medium risk ventures and/or participation in producing
properties. During the periods covered by this Report, the Company had no
investment in exploratory wells. The following table sets forth certain
information with respect to the Company's investment in development wells
during the years indicated:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------------------
1996 1995 1994
-------------- -------------- ----------------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Development Wells:
Oil - - 1 .68 2 1.90
Gas - - - - - -
Dry hole - - 1 .04 1 .05
----- ----- ---- ----- ----- -----
TOTAL - - 2 .72 3 1.95
===== ===== ==== ===== ===== =====
</TABLE>
Production Information
The Company is involved in oil and gas exploration, development and
production. Oil and gas production accounted for approximately 5.1% of the
Company's total revenues in the fiscal year ended March 31, 1996 compared with
7.4 % in the fiscal year ended March 31, 1995.
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Oil Production (in Bbls) (1) 12,260 15,700 16,458
Gas production (in Mcf) (1) 89,802 73,488 66,805
Revenues from production (1) $ 380,110 405,409 410,674
Production (lifting) costs (2) $ 169,008 166,594 178,501
Net Revenues $ 211,102 238,815 232,173
Average sales price:
Oil (per Bbl) $ 17.70 17.00 16.14
Gas (per Mcf) $ 1.84 1.91 2.19
Average production cost per unit
(in barrel equivalents) (3) $ 6.21 5.96 6.47
</TABLE>
(1) Oil and gas production is shown net of royalties attributable to the
interests of others and is based upon production reports furnished to
the Company by the operators.
(2) "Production (lifting) costs" are costs directly related to the
extraction of oil or gas including production taxes, but do not include
depreciation, or amortization of exploration and development costs.
(3) Average production costs per unit were determined on the basis of six
Mcf of gas being equivalent to one barrel of oil.
Marketing and Customers
Oil and gas produced by the Company are marketed under contracts in
accordance with usual industry practice. Oil is sold under short-term
agreements for delivery at or near the well site at posted field prices which
may fluctuate depending on market conditions and the quality and classification
of the oil produced.
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<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
The extent of demand for oil and gas and prices for oil and gas in
general depend on domestic production and consumption, the amount of foreign
oil imported and, in the case of gas, the proximity and capacity of natural gas
pipelines. There can be no assurance that favorable market conditions will
exist in the future, nor can it be determined what effect, if any, future
regulation of the oil and gas industry will have upon the Company's marketing,
operations or production.
GOVERNMENTAL REGULATION
Governmental regulations promulgated by various state and federal
authorities directly influence the Company's operations insofar as they
regulate operations of the Company's rigs, impact prices and therefore supplies
of and demands for oil and gas, and influence various costs associated with
petroleum exploration and production.
Regulation of Production
The production of oil and gas is subject to extensive federal and state
laws, rules, orders and regulations governing a wide variety of matters.
Numerous departments and agencies, both federal and state, are authorized by
statute to issue and have issued rules and regulations binding on the oil and
gas industry and its individual members, some of which carry substantial
penalties for the failure to comply.
State statutes and regulations require permits for drilling operations,
drilling bonds and reports concerning operations. Most states in which the
Company operates or might operate also have statutes and regulations governing
conservation matters, including the unitization or pooling of oil and gas
properties, establishing of maximum rates of production from oil and gas wells
and the spacing of such wells. Many states also restrict production to the
market demand for oil and gas. Such statutes and regulations may limit the
rate at which oil and gas could otherwise be produced from the Company's
properties. As a result of domestic crude oil shortages, there has been no
limit on allowable daily production on the basis of market demand since
mid-1972, although at some locations production continues to be regulated for
conservation purposes. In addition to the direct costs borne in complying with
such regulations, operations and revenues may be impacted to the extent that
certain regulations limit oil and gas production to below economic levels.
Although the particular regulations applicable in each state in which
operations may be conducted vary, such regulations are generally designed to
ensure that oil and gas operations are carried out in a safe and efficient
manner and to ensure that similarly situated operators are provided with
reasonable opportunities to produce their respective fair shares of available
oil and gas reserves. However, since these regulations generally apply to all
oil and gas producers, management of the Company believes that these
regulations should not put the Company at a material disadvantage to other oil
and gas producers.
Regulation of Sales and Transportation of Natural Gas
Certain sales, transportation and resales of natural gas by the Company
are subject to both federal and state laws and regulations, including the
Natural Gas Act ("NGA") and the Natural Gas Policy Act of 1978 (the "NGPA") and
regulations promulgated by the Federal Energy Regulatory Commission (the
"FERC") under the NGA, the NGPA and other statutes. The provisions of the NGA
and the NGPA, as well as the regulations thereunder, are complex and may affect
all who produce, resell, transport, purchase or consume natural gas.
The FERC's transportation regulations primarily affect the operations of
the Company by virtue of the need to deliver the Company's gas production to
markets served by interstate or intrastate pipelines governed by these
regulations. In most instances, interstate pipelines represent the only
available method of accomplishing such transportation.
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<PAGE> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Federal and state authorities have issued numerous orders during the
last several years governing the sale and transportation of natural gas and, no
doubt, will continue to issue other orders and actions which may significantly
affect the operations of the Company.
Price Controls on Liquid Hydrocarbons
Sales of crude oil, condensate, and natural gas liquids by the Company
can at present be made at uncontrolled market prices. While there are
currently no federal price controls on crude oil, condensate or natural gas
liquids, there can be no assurance that Congress will not reenact controls at a
future time.
Future Legislation
Currently there are many legislative proposals pertaining to regulation
of the oil and gas industry, which may directly or indirectly affect the
Company's activities. No prediction can be made as to what additional energy
legislation may be proposed, if any, or which bills may be enacted or when any
such bills, if enacted, would become effective.
Regulation of the Environment
The exploration, development, production and processing of oil and gas,
including the disposal of produced water, are subject to various federal and
state laws and regulations designed to protect the environment. Compliance
with these regulations is part of the Company's day-to-day operating
procedures. Infrequently, accidental discharge of such materials as oil,
natural gas, drilling fluids or contaminated water can and does occur. Such
accidents can require material expenditures to correct.
Various state and governmental agencies are considering, and some have
adopted, other laws and regulations regarding environmental control which could
adversely affect the business of the Company. Compliance with such measures,
together with any penalties resulting from noncompliance therewith, may
increase the cost of oil and gas development, production and processing
operations or may affect the ability of the Company to complete existing or
future activities in a timely manner.
Compliance with Regulations
The Company believes that it complies with all material legislation and
regulations affecting its operations in the drilling and operation of oil and
gas wells, and in controlling the discharge of wastes. Compliance has not, to
date, materially affected the capital expenditures, earnings or competitive
position of the Company, although these measures add to the costs of operating
drilling equipment in some instances, and in others they may operate to reduce
drilling activity. The Company does not expect to incur material capital
expenditures in the next fiscal year in order to comply with current
environmental control regulations. Further legislation or regulation may
reasonably be anticipated, but the effects thereof on operations cannot be
predicted.
The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the Environmental Protection Agency "community
right-to-know" regulations under Title III of the Federal Superfund Amendment
and Reauthorization Act and comparable state statutes require the Company to
organize and report certain information about the hazardous materials used in
its operations to employees, state and local government authorities, and local
citizens.
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<PAGE> 9
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Taxation
Although the Company's business is subject to many provisions of the
Internal Revenue Code, as amended, the depletion allowance and intangible
drilling costs have particular significance to the exploration, development and
production of oil and gas. Certain state taxes influence operations as well.
Competitive and Operational Risks
in Oil and Gas Exploration and Production
The Company encounters substantial competition in its exploration and
development operations from other oil and gas companies. The usual method of
competition in the exploration, development and production segment is on the
basis of lease acquisition, the cost of such acquisition, geologic information
and its cost, availability of rigs at reasonable cost, successful drilling,
completion and production, availability of pipelines if gas, and successful
negotiation of oil and gas sales contracts. Many of the Company's competitors
have resources, technical staff and facilities substantially greater than those
of the Company.
Exploration and development of oil and gas reserves involves certain
operational risks and hazards. Among these are blowouts, cratering, fires and
explosions, and environmental damage, any one of which could potentially result
in loss of prospect value and liability to the Company.
PRINCIPAL CUSTOMERS
During the fiscal year ended March 31, 1996, Columbia Gas Development
Corp. contributed 17% of the Company's total drilling revenues. This was the
only customer to contribute 10% or more of the Company's total drilling
revenues. See "Contract Drilling - Contracts" in this Item I.
EMPLOYEES
The Company's personnel are leased under an agreement with a personnel
leasing company.
At May 25, 1996, the Company had 94 full-time leased personnel, of whom
78 were paid on an hourly basis and were engaged in operating the Company's
drilling rigs or in other operations. Of the total personnel, nine were
administrative personnel and seven were supervisory. None of the personnel are
represented by any union or collective bargaining group, and there is no
history of strikes, slow downs, or other material labor disputes. Management
believes that the Company's relations with the leased personnel are
satisfactory.
ITEM 2. PROPERTIES
For purposes of property description, see "Contract Drilling - Drilling
Equipment" and "Oil and Gas Operations and Properties" contained in this Part
I. The Company's principal executive office in San Antonio, Texas is
maintained in office space which the Company purchased in September, 1995. The
Company also owns a six-acre tract in Kenedy, Texas utilized as an operating
yard.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several personal injury lawsuits of a type
which the Company considers routine for the contract drilling industry. These
lawsuits arose out of injuries to personnel under lease from third party
employee leasing companies. These lawsuits are being defended either by the
Company's general liability insurance carrier under what the Company considers
to be adequate coverage, or pursuant to an Indemnity
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<PAGE> 10
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Agreement between the Company and the employee leasing company which employed
the Plaintiff. The Company believes that the employee leasing company has
adequate insurance coverage to cover those claims.
Among the lawsuits currently pending against the Company is National
Energy Group, Inc. v. South Texas Drilling Company, cause No. 96-98, 357
Judicial District Court, Willacy County, Texas. This case arose out of a
dispute with a drilling customer over a billing for work performed under a
daywork drilling contract. In the course of drilling the well, some of the
Company's equipment was lost in the hole. Under the terms of the contract, the
customer was billed for the drilling operations and replacement cost of the
lost equipment. The customer has declined to pay the billed amount of $279,000
alleging negligence and seeking damages in excess of $100,000. This lawsuit is
being defended by the Company's general liability insurance carrier with a
rights of reservation letter. Discovery in this case is in the early stages and
depositions have not been completed. However, the Company believes it has
meritorious defenses and is vigorously defending this litigation. The Company
has filed a counter-suit seeking payment in full of the original invoice.
Management believes the ultimate disposition of these matters will have
no material adverse effect on the consolidated financial statements of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of the Company's security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The initial public offering of the Company's Common Stock occurred on
February 4, 1981, and from that date until August 18, 1981, the Common Stock
was traded in the over-the-counter market. From August 19, 1981 until
February 10, 1986, the Company's Common Stock was listed on the American Stock
Exchange (AMEX) (Symbol: SDR). On February 10, 1986, trading of the Company's
stock was discontinued on the AMEX as the Company no longer met the net worth
requirement for listing on the AMEX. At the present time, the Company's Common
Stock (Symbol: STXD) is not traded on a stock exchange. However, the Company's
Common Stock is traded in the "pink sheets". Shareholders interested in
trading the Company's Common Stock should contact their stockbroker or the
Company for further information. The following table sets forth for the period
indicated quotations from a marketmaker for the Company's common stock.
<TABLE>
<CAPTION>
OVER-THE-COUNTER
-------------------------
Bid Ask
------ ------
<S> <C> <C>
1996
----
First Quarter $.1800 .5000
Second Quarter .3100 .5600
Third Quarter .2500 .5000
Fourth Quarter .2500 .5000
1995
----
First Quarter $.4375 .5625
Second Quarter .3750 .7500
Third Quarter .2500 .5000
Fourth Quarter .2500 .5000
</TABLE>
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<PAGE> 11
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
The above over-the-counter quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
As of June 19, 1996, there were approximately 1,000 registered
stockholders of Common Stock of the Company.
The Board of Directors has followed a policy of reinvesting the earnings
of the Company in its business and of not distributing any part thereof as
dividends to shareholders. The Board of Directors has no present intention to
initiate the payment of cash dividends, and future dividends of the Company
will depend upon the earnings, capital requirements and financial condition of
the Company and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
March 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Revenues $ 7,500 5,494 7,050 6,109 3,983
Earnings (loss) before income taxes and
extraordinary item 3 (244) 723 486 (841)
Net earnings (loss) 3 (244) 723 486 (841)
Earnings (loss) per share before extraordinary
item - (0.05) .14 .07 (.18)
Net earnings (loss) per share - (0.05) .14 .10 (.18)
Long-term debt, excluding current installments 554 88 91 96 97
Shareholders' equity 1,477 1,541 1,744 1,013 498
Total assets 4,286 3,473 4,093 2,781 1,794
Capital expenditures 1,162 835 961 953 584
</TABLE>
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Liquidity
The reduced level of drilling activity in the oil and gas industry
during the period of 1982-1989 had a detrimental effect on the Company's
operations. Beginning in March, 1987, the Company experienced increased rig
utilization which continued until December, 1990. Beginning with the last
quarter of fiscal 1991, drilling activity in the Company's market area began to
decline and this lower level of activity continued through fiscal 1993 with a
brief surge of activity in November and December, 1992 and also during the
second and third quarters of fiscal 1994. During the first three quarters of
fiscal 1995, drilling activity was stable but it decreased significantly in the
last quarter of the fiscal year primarily due to a fall in natural gas prices.
In fiscal 1996, drilling activity returned to a more stable level. During
fiscal 1995, the utilization rate for the Company's rigs was 64 percent.
During that year, the Company operated four rigs. In fiscal 1996, the
utilization rate remained at 64 percent. However, in
-11-
<PAGE> 12
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
fiscal 1996, the Company operated or had available to operate five rigs. The
actual number of drilling days increased to 1,076 in fiscal 1996 from 842 in
fiscal 1995. Drilling rates charged to customers on drilling contracts in
fiscal 1996 showed some increase over those charged in fiscal 1995. This
increase in drilling rates reflects the increased demand for drilling rigs
during the period. At March 31, 1996, the Company's current ratio was .51
compared to .59 at March 31, 1995. Working capital at March 31, 1996 was
($1,104,828) compared to ($658,399) at March 31, 1995. This decrease was due,
in part, to the effects of an uncollected trade receivable; increased current
portion of long-term debt incurred to acquire drilling equipment, transportation
equipment and land and building; and increased trade payables incurred to
acquire, improve and maintain drilling equipment.
During fiscal 1996, the Company utilized its line of credit with its
bank on several occasions. At March 31, 1996, the Company owed $200,000 on its
$200,000 line of credit. This was necessary to offset the effect on the
Company's cash position of increased accounts receivables from drilling
operations. Additional borrowings during the year included $300,000 for the
purchase of a drilling rig; $120,000 for additional drilling equipment;
$106,641 for the drilling of a well in which the Company has a 67.5% working
interest; $245,250 for the purchase of the Company's headquarters building in
San Antonio; and $31,575 for the purchase of transportation equipment.
In May, 1996, the Company closed on a debt restructuring which included
a term loan of $1,250,000 and a revolving line of credit of $500,000, which has
allowed the Company to pay off all its bank debt with the exception of the loan
secured by the headquarters building in San Antonio and a minimal balance on
the loan secured by the oil and gas properties. The new debt also allowed the
Company to pay off the seller financing on the rig purchased in May, 1995.
Proceeds from the new debt were also used to reduce trade accounts payable and
to provide funds for future drilling equipment purchases. The term loan is
secured by drilling equipment, transportation equipment and the yard facility
in Kenedy, Texas. The loan carries an interest rate of prime (8.25% at March
31, 1996) plus 3% and is payable in monthly payments of $14,881 plus interest.
Payments are based on a seven-year amortization and the loan is due in June,
1998. The revolving loan is secured by the Company's trade accounts receivable
and carries an interest rate of prime plus 2.75%.
During fiscal 1996, the Company negotiated with its Bank to have the
Bank's demand clause removed from all of the Company's debt with the Bank.
Because of the change the Company is able to classify as long-term the
long-term portion of the bank debt. This results in a higher current ratio and
a lower working capital deficit than would have been reported had the demand
clause not been removed.
The ratio of trade accounts receivable to total revenue increased to
7.1% at the end of fiscal 1996 from 3.6% at the end of fiscal 1995. This
increase was the result of the increased drilling activity in the fourth
quarter of the fiscal year. Due to the Company's incurring of additional debt
to purchase equipment and the minimal earnings incurred by the Company during
fiscal 1996, the ratio of the Company's shareholders' equity in relation to
outstanding debt (vendor and bank notes payable) decreased. At March 31, 1995,
the ratio of shareholders' equity to notes payable was 1 to .46. At March 31,
1996, the ratio had declined to 1 to .83. Shareholders' equity was also
affected by a pending lawsuit in which the Company is the plaintiff in a cross
action filed in a Declaratory Judgment case filed by one of its Company's
insurers contesting payment of a personal injury judgment entered against the
Company. Due to the uncertainty of the outcome of the case, the Company has
established a provision of $200,000 relating to the Company's obligation under
a judgment in a personal injury lawsuit in which the Company was the defendant
and represented by the insurer of its former employee leasing company. If the
insurer should prevail in its Declaratory Judgment action the Company is
required to pay $200,000 over a three year period to the personal injury
plaintiff. Since the insurer has refused to pay on the $200,000 judgment, the
Company has made payments of $45,000 to the personal injury plaintiff. The
Company has also recorded a liability for the remaining $155,000 of which
$60,000 is classified as current portion of long-term debt and $95,000 as
long-term debt.
-12-
<PAGE> 13
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
The Company's liquidity was also affected by an uncollected account
receivable of $279,000 from drilling operations. In this case, the Company
drilled a well under a daywork contract. In the course of drilling the well,
some of the Company's equipment was lost in the hole. Under the terms of the
contract, the customer was billed for the drilling operations and the
replacement cost of the lost equipment. The customer filed a lawsuit alleging
negligence, denying responsibility for the $279,000 billed by the Company, and
seeking additional damages in excess of $100,000. Management, which believes
the customer's claim to be without merit, has filed a counter-suit seeking
payment in full of the original invoice in the amount of $279,000.
Changes in Financial Condition
During fiscal 1996, the Company had a net increase in property and
equipment of $844,000 before accumulated depreciation, depletion and
amortization. Of this increase, $530,000 was attributable to the purchase of
drilling equipment, $7,000 to purchase or acquisition of oil and gas
properties, and $307,000 to the purchase of transportation and office
equipment, land and buildings and improvements. The net increase in drilling
equipment included the addition of Rig 11 which was placed in service in May,
1995 and the disposal of Rig 10 in December, 1995. Rig 11 was purchased for
$345,000 of which $45,000 was paid in cash and $300,000 was financed through
owner financing. In December, 1995, a partnership in which a wholly-owned
subsidiary of the Company was the general partner distributed Rig 10 back to
the partners of the partnership. The Company's subsidiary then sold its
one-half interest in the rig to the other partner for 319,767 shares of the
Company's stock. The main component in the increase in transportation and
office equipment, land and buildings and improvements was the purchase of the
building which the Company occupies as its headquarters in San Antonio, Texas.
The building was purchased for $273,000 of which $137,000 was financed by a
bank and $114,000 was financed by the Small Business Administration.
At March 31, 1996, current debt and notes payable were $667,000. Of
this amount, $277,000 was owed on oil and gas properties, $200,000 on the line
of credit, $98,000 on drilling equipment, $7,000 on the yard facility, $13,000
on land and buildings and improvements, $12,000 on transportation equipment and
$60,000 as the current amount of the loss related to the personal injury claim
discussed above in the "Liquidity" section of this ITEM 7. Trade accounts
payable at March 31, 1996 were $1,256,000 compared to $764,000 at March 31,
1995. At March 31, 1996, long-term debt was $554,000. Of this amount,
$232,000 was owed on land and buildings and equipment; $126,000 on drilling
equipment; $95,000 long-term portion of the $200,000 contingent obligation on
the possible lawsuit judgment related to the personal injury claim; $73,000 to
an employee for unpaid salary and $28,000 on transportation equipment.
Results of Operations
Rig utilization rates for the years ended March 31, 1996, 1995 and 1994
were 64%, 64% and 57%, respectively. In fiscal 1996, the Company completed
1,076 drilling days while in fiscal 1995, the Company completed 842 drilling
days. This was a 28% increase compared to fiscal 1995 in the number of
drilling days. This increase reflects the increased demand during the period
for drilling rigs and the increased efforts of the Company's staff to obtain
contracts for the rigs.
During fiscal 1996, the Company's drilling margin increased when
compared to fiscal 1995 and it decreased when compared to fiscal 1994. In
fiscal 1996, the drilling margin was $912,230, while in fiscal 1995 and fiscal
1994 it was $539,801 and $1,149,247, respectively. The increase in fiscal 1996
over fiscal 1995 was principally the result of the 28% increase in the number
of drilling days during fiscal 1996. The drilling margin in 1996 was less than
1994 because of increased repairs, maintenance and operating costs.
The Company markets its rigs to a number of customers. In fiscal 1996,
the Company drilled for 27 different customers. In fiscal 1995, the Company
drilled for 19 different customers. Of the 27 customers in fiscal
-13-
<PAGE> 14
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
1996, 22 were customers the Company had not drilled for in fiscal 1995. These
22 customers accounted for over 68% of the Company's drilling revenue in fiscal
1996. In fiscal 1994, two customers accounted for 23% of total drilling
revenue. In fiscal 1995, two customers accounted for 36% of total drilling
revenue. In fiscal 1996, three customers accounted for 34% of total drilling
revenue. Of these three customers, only one was included in the top two
customers of fiscal 1995. The loss of any of these customers could have a
material adverse effect on the Company's business for the time required to find
other users of the rig concerned.
Oil and gas revenue for fiscal 1996 decreased by $25,299 from fiscal
1995. The decrease was primarily due to a 22% decrease in oil production and a
4% decrease in the average price per MCF of gas. These decreases were offset
to an extent by a 22% increase in gas production and a 4% increase in the
average price per barrel of oil. In fiscal 1996, the Company's average
production cost per unit in barrel equivalents increased 4% from fiscal 1995.
This compares with a 8% decrease in the average production cost for 1995
compared to 1994.
Depreciation, depletion and amortization expense in fiscal 1996
increased to $576,894 from $475,708 in fiscal 1995. Depreciation expense
increased to $384,400 in fiscal 1996 from $277,986 in fiscal 1995. This
increase was the result of equipment purchased in late fiscal 1995 and fiscal
1996. Depletion expense decreased to $192,494 in fiscal 1996 compared to
$197,722 in fiscal 1995. Production decreased to 27,227 barrel equivalents in
fiscal 1996 from 27,948 barrel equivalents in fiscal 1995. In fiscal 1996, the
Company was not subject to the ceiling test limitation as it applies to oil and
gas properties. Under such a test, the depleted carrying value of the
Company's oil and gas properties is compared to the net present worth of
estimated future oil and gas revenues, discounted at 10%. If the depleted
carrying value exceeds the discounted net present worth of estimated future oil
and gas revenues, the carrying value must be written down. Conversely, if the
discounted net present value exceeds the carrying value of the properties, no
adjustment is made to the carrying value, even if there had been a write-off in
prior years.
General and administrative expenses increased from $450,609 in fiscal
1995 to $520,402 in fiscal 1996. The primary reasons for the increase were an
increase in payroll costs associated with additional personnel and costs
incurred related to the annual meeting in August, 1995.
Earnings (loss) from operations increased to $15,608 in fiscal 1996 from
($222,900) in fiscal 1995. Of the $15,608, ($65,506) was contributed by
drilling operations and $81,114 by oil and gas operations. When compared with
oil and gas operations, drilling operations generate significantly more
revenue, but they are far more costly, requiring large expenditures for
equipment, personnel and maintenance and repairs. Oil and gas operations, on
the other hand, normally do not require significant expenditures once the
original purchase or investment is accomplished. Oil and gas operations
require limited personnel involvement to produce the oil and gas, whereas
drilling operations require continuous involvement of significant numbers of
personnel to complete a contract.
The exploration, development, production and processing of oil and gas,
including the disposal of produced water, are subject to various federal and
state laws and regulations designed to protect the environment. Compliance
with these regulations is part of the Company's day-to-day operating
procedures. The Company is not aware of any potential clean-up obligations
which would have a material effect on its financial condition or results of
operations.
In March, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
This Statement 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 Statement requires that long-lived
assets and certain identifiable intangibles to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell. This Statement
is not expected to impact the Company's oil and gas properties as they are
accounted for under the full
-14-
<PAGE> 15
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
cost accounting method. The Company has not yet performed an analysis of the
impact of implementation of this Statement on its drilling rigs and equipment.
The Company is required to adopt this Statement in fiscal year 1997.
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which requires adoption of the disclosure provisions
no later than fiscal years beginning after December 15, 1995. This Statement
establishes financial accounting and reporting for stock-based employee
compensation plans, including stock purchase plans, stock option plans,
restricted stock and stock appreciation rights. The Statement requires a fair
value based method of accounting for employee stock options or similar
instruments and encourages a similar method for all employee stock compensation
plans. This method measures compensation cost at the grant date based on the
value of an award and recognizes it over the service period, usually the
vesting period. However, the Statement also allows an entity to continue
measuring compensation cost for such plans using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", provided pro forma disclosures are
made. The Company has not yet determined the effect the new standard will have
on net income and earnings per share should it elect to make such a change.
-15-
<PAGE> 16
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors
South Texas Drilling & Exploration, Inc.:
We have audited the consolidated balance sheets of South Texas Drilling
& Exploration, Inc. and subsidiaries as of March 31, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1996. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule (Schedule II) for each of the
years in the three-year period ended March 31, 1996. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of South Texas
Drilling & Exploration, Inc. and subsidiaries as of March 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended March 31, 1996, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
San Antonio, Texas
June 19, 1996
-16-
<PAGE> 17
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
------
March 31,
----------------------------
1996 1995
---------- ----------
<TABLE>
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 325,568 221,816
Receivables:
Trade, net of allowance for
doubtful accounts of $140,000
in 1996 and $0 in 1995 530,393 195,131
Contract drilling in progress 234,527 437,563
Employees and officers 10,926 13,857
Prepaid expenses 48,016 60,006
----------- ----------
Total current assets 1,149,430 928,373
----------- ----------
Property and equipment, at cost (note 2):
Drilling rigs and equipment 8,287,756 7,757,780
Oil and gas properties,
based on full cost accounting
method (note 9) 1,749,467 1,741,982
Transportation, office, land and other 1,072,847 766,278
----------- -----------
11,110,070 10,266,040
Less accumulated depreciation,
depletion and amortization 8,001,254 7,751,704
----------- -----------
Net property and equipment 3,108,816 2,514,336
Notes receivable-employees,
at 5% and 7%, due in 1995
and 1998, respectively 27,404 30,549
----------- -----------
$ 4,285,650 3,473,258
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
-17-
<PAGE> 18
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
Liabilities and Shareholders' Equity
- ------------------------------------
<TABLE>
<CAPTION>
March 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current liabilities:
Current installments of long-term
debt (note 2) $ 467,416 291,311
Line of credit with bank (note 2) 200,000 200,000
Notes payable, interest at 10% to 11-1/2% - 133,530
Accounts payable 1,255,505 763,591
Accrued expenses:
Payroll and payroll taxes 166,580 127,156
Other 164,757 71,184
---------- ----------
Total current liabilities 2,254,258 1,586,772
Note payable to employee, interest at 7%
(note 2) 73,416 73,416
Long-term debt, less current installments
and note payable to employee (note 2) 480,500 14,207
Minority interest in partnership (note 10) - 258,024
---------- ----------
Total liabilities 2,808,174 1,932,419
---------- ----------
Shareholders' equity (note 4):
Preferred stock, Series A,
noncumulative dividend at 8%
of liquidation preference value,
$1.00 par value. Authorized
1,000,000 shares; issued and
outstanding 235,000 shares.
Liquidation preference value
of $4.26 per share ($1,000,000);
redeemable at the Company's option
at $1.00 per share 235,000 235,000
Common stock, $.10 par value.
Authorized 15,000,000 shares;
issued and outstanding 5,601,000
shares at March 31, 1996 and
5,408,000 shares at March 31, 1995 560,100 540,800
Additional paid-in capital 15,899,227 15,854,757
Accumulated deficit (15,086,946) (15,089,718)
----------- -----------
1,607,381 1,540,839
Less treasury stock, 319,767 shares, at cost (129,905) -
----------- -----------
Total shareholders' equity 1,477,476 1,540,839
----------- ----------
$ 4,285,650 3,473,258
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-18-
<PAGE> 19
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Revenues:
Contract drilling $ 6,989,972 4,935,510 6,476,450
Oil and gas 380,110 405,409 410,674
Administrative overhead and other 129,572 153,175 163,046
----------- --------- ---------
Total operating revenues 7,499,654 5,494,094 7,050,170
----------- --------- ---------
Costs and expenses:
Contract drilling 6,077,742 4,395,709 5,327,203
Oil and gas 169,008 166,594 178,501
Depreciation, depletion and
amortization 576,894 475,708 344,488
General and administrative 520,402 450,609 412,854
Doubtful accounts 140,000 228,374 62,949
----------- --------- ---------
Total operating costs and expense 7,484,046 5,716,994 6,325,995
----------- --------- ---------
Earnings (loss) from operations 15,608 (222,900) 724,175
----------- --------- ---------
Other income (expense):
Interest expense (108,121) (65,465) (55,190)
Interest income 5,443 6,409 10,697
Gain on sale of assets 273,251 48,774 43,206
Provision for litigation settlement (200,000) - -
Minority interest in operation
of partnership 16,591 (11,224) -
----------- --------- ---------
Total other income (expense) (12,836) (21,506) (1,287)
----------- --------- ---------
Earnings (loss) before income
taxes 2,772 (244,406) 722,888
Income taxes - - -
----------- --------- ----------
Net earnings (loss) $ 2,772 (244,406) 722,888
=========== ========= ==========
Net earnings (loss) per common
and common equivalent share $ - ( 0.05) 0.14
=========== ========= ==========
Weighted average common and
common equivalent shares
outstanding 5,401,578 5,336,167 5,078,000
=========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE> 20
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Amount
-------------------------- -------------------------
Common Preferred Common Preferred
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at March 31, 1993 5,058,000 235,000 $ 505,800 235,000
Issuance of common stock for fees
to directors 30,000 - 3,000 -
Net earnings - - - -
---------- --------- ---------- ---------
Balance at March 31, 1994 5,088,000 235,000 508,800 235,000
Issuance of common stock for bonus
to employees 50,000 - 5,000 -
Issuance of common stock for fees
to directors 25,000 - 2,500 -
Issuance of common stock for
exercise of warrants 245,000 - 24,500 -
Net loss - - - -
---------- --------- ---------- ---------
Balance at March 31, 1995 5,408,000 235,000 540,800 235,000
Issuance of common stock for bonus
to employee 50,000 - 5,000 -
Issuance of common stock
for fees to directors 8,000 - 800 -
Issuance of common stock
for exercise of warrant 35,000 - 3,500 -
Issuance of common stock for
exercise of option 100,000 - 10,000 -
Acquisition of 319,767 shares
of common stock in
exchange for equipment - - - -
Net earnings - - - -
---------- --------- ---------- ---------
Balance at March 31, 1996 5,601,000 235,000 $ 560,100 235,000
========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-in Accumulated Treasury Shareholders'
Capital Deficit Stock Equity
------------ --------------- --------- ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993 15,840,287 (15,568,200) - 1,012,887
Issuance of common stock for fees
to directors 5,700 - - 8,700
Net earnings - 722,888 - 722,888
------------ --------------- --------- ------------
Balance at March 31, 1994 15,845,987 (14,845,312) - 1,744,475
Issuance of common stock for bonus
to employees 6,500 - 11,500
Issuance of common stock for fees
to directors 2,270 - 4,770
Issuance of common stock for
exercise of warrants - - 24,500
Net loss - (244,406) - (244,406)
------------ --------------- --------- ------------
Balance at March 31, 1995 15,854,757 (15,089,718) - 1,540,839
Issuance of common stock for bonus
to employee 6,500 - 11,500
Issuance of common stock
for fees to directors 1,040 - 1,840
Issuance of common stock
for exercise of warrant 6,300 - 9,800
Issuance of common stock for
exercise of option 30,630 - 40,630
Acquisition of 319,767 shares
of common stock in
exchange for equipment - - (129,905) (129,905)
Net earnings - 2,772 - 2,772
------------ --------------- --------- ------------
Balance at March 31, 1996 15,899,227 (15,086,946) (129,905) 1,477,476
============ =============== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE> 21
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 2,772 (244,406) 722,888
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 576,894 475,708 344,488
Provision for doubtful accounts 140,000 228,374 62,949
Stock issued to directors and employees 13,340 16,270 8,700
Gain on sale of assets (273,251) (48,774) (43,206)
Minority interest in operations of partnership (16,591) 11,224 -
Changes in current assets and liabilities:
Receivables (266,150) 225,620 (772,752)
Prepaid expenses 11,990 (25,950) 11,409
Accounts payable 491,914 (425,644) 489,482
Accrued expenses 132,997 28,767 24,400
---------- ---------- ----------
Net cash provided by operating activities $ 813,915 241,189 848,358
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
-21-
<PAGE> 22
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable $ 1,580,707 630,165 442,037
Proceeds from exercise of warrants 9,800 24,500 -
Proceeds from exercise of options 37,500 - -
Payments of debt (2,078,094) (987,597) (657,379)
----------- ---------- ----------
Net cash used in financing activities (450,087) (332,932) (215,342)
Cash flows from investing activities:
Purchase of property and equipment (410,757) (754,963) (678,758)
Contribution from limited partner - 275,000 -
Proceeds from sale of property and equipment 150,681 5,350 75,462
----------- ---------- ----------
Net cash used in investing activities (260,076) (474,613) (603,296)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 103,752 (566,356) 29,720
Beginning cash and cash equivalents 221,816 788,172 758,452
----------- ---------- ----------
Ending cash and cash equivalents $ 325,568 221,816 788,172
=========== ========== ==========
Supplementary disclosure:
Interest paid $ 101,289 71,078 49,268
Debt incurred for litigation settlement 200,000 - -
Notes payable issued for equipment and
oil and gas properties 809,266 79,730 282,687
Treasury stock received for drilling equipment 129,905 - -
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE> 23
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
Business and Principles of Consolidation
The Company provides land contract drilling services for the oil
and gas industry, primarily in southern Texas, and engages in oil and
gas exploration and development activity for its own account. The
consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its limited partnership interest
through December, 1995. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets and income and expenses for the periods.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
changes in the near term relate to the determination of depreciation,
depletion and amortization expense.
Reclassifications
Certain reclassifications of prior period amounts have been made
to conform with the current period presentation.
Income Taxes
The Company files a consolidated Federal income tax return with
its subsidiaries using a December 31 year- end.
Pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", the Company follows the asset and
liability method of accounting for income taxes under which deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings (Loss) Per Common Share
Earnings (loss) per common and common equivalent share are based
upon the weighted average number of outstanding shares during each
period. Dilutive common equivalent shares consist of stock warrants
and the weighted average is computed using the treasury stock method.
Earnings (loss) per share computed on a fully diluted basis is not
presented as it is not significantly different from earnings (loss)
per share computed on a primary basis.
(Continued)
-23-
<PAGE> 24
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Contract Drilling in Progress
Contract drilling revenues are earned on footage, daywork and
turnkey contracts and such revenues and related costs are included in
the determination of earnings as work progresses. Contract drilling
in progress consists of revenues earned on contracts which have not
yet been billed.
Property and Equipment
Oil and gas producing activities are accounted for using the full
cost method. Under the full cost method, all costs incurred in the
acquisition, exploration and development of all oil and gas
properties, including surrendered and abandoned leaseholds, delay
lease rentals and dry hole costs, are capitalized. All costs related
to production, general corporate overhead and other similar activities
are expensed in the period incurred.
Depletion of oil and gas properties is provided by the unit of
production method based on the Company's interest in the aggregated,
estimated recoverable reserves of all properties. Depletion includes
a ceiling limitation adjustment required under the full cost method of
accounting. The ceiling limitation adjustment is applicable when the
carrying value of oil and gas properties exceeds the discounted net
present worth of estimated future cash flows on those properties.
Depreciation of drilling, transportation and other equipment is
provided using the straight-line method over estimated useful lives
ranging from three to ten years.
Maintenance and repairs are charged to operations; renewals and
betterments are charged to appropriate property and equipment
accounts.
Cash Equivalents
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
(2) Notes Payable and Long-term Debt
As of March 31, 1996 and 1995, the Company had established a line
of credit with a bank enabling the Company to borrow up to $200,000 at
the bank's prime rate (9.25% at March 31, 1996 and 10.0% at March 31,
1995) all of which was outstanding as of March 31, 1996 and 1995. The
line of credit would have been due October 21, 1996, however, it was
paid in full through a debt restructuring accomplished in May, 1996
and more fully described in footnote No. 8, "Subsequent Events." The
Company had no other credit facilities at March 31, 1996 except for
the long-term debt described below:
<TABLE>
<CAPTION>
March 31,
----------------------
1996 1995
---------- ------
<S> <C> <C>
Note payable to employee for unpaid compensation,
at 7.0%, due in 1998. $ 73,416 73,416
</TABLE>
(Continued)
-24-
<PAGE> 25
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
March 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Note payable, secured by a vehicle, due in monthly payments of
$380 including interest at 10.9%, due in January, 2000. 14,191 17,023
Note payable, secured by a vehicle, due
in monthly payments of $426 including
interest at 12.35%, due in June, 1999. 13,855 -
Note payable, secured by a vehicle, due
in monthly payments of $498 including
interest at 9.7%, due in June, 1998. 11,635 -
Note payable, secured by a vehicle, due in
monthly payments of $413 including interest
at 8.5%, due in October, 1995. - 2,811
Note payable to seller, secured by a
drilling rig, due in monthly payments of
$9,540 including interest at 9.0%, due
in May, 1998. (note b) 224,591 -
Note payable to bank, secured by land and
improvements, due in monthly payments of
$1,900 including interest at the bank's prime rate
(9.25% at March 31, 1996) plus 0.5%, due in
September, 2005. (note c) 131,756 -
Note payable to Small Business Administration,
secured by second lien on land and improvements,
due in monthly payments of $921 including interest
at 6.713% due in November, 2015. (note c) 112,765 -
Note payable to bank, secured by land and improvements due in
monthly payments of $1,800 including interest at the bank's
prime rate (9.25% at March 31, 1996), due September, 1996.
(note a) 8,392 28,020
Note payable to bank, secured by oil and gas properties, due in
monthly installments of $17,510 including interest at the bank's
prime rate (9.25% at March 31, 1996) plus 1%, due January, 1997.
(note a)
275,731 257,664
</TABLE>
(Continued)
-25-
<PAGE> 26
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
March 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Litigation settlement due in
quarterly payments of $15,000 without
interest, due in August, 1998. 155,000 -
---------- ----------
1,021,332 378,934
Less current portion 467,416 291,311
---------- ----------
$ 553,916 87,623
========= =========
</TABLE>
Long-term debt maturing each year subsequent to March 31, 1996 is
as follows: 1997 - $467,416; 1998 - $268,001; 1999 - $78,296; 2000 -
$21,627; 2001 and thereafter- $185,992.
At March 31, 1996, the Company was in compliance with various
negative and affirmative covenants on its note payable to bank,
secured by oil and gas properties. Such covenants included the
maintenance of at least $25,000 in depository accounts at the bank and
a net worth of at least $400,000 at all times.
Note a: On April 14, 1995, the Company executed a Master Real
Estate Lien Note in the amount of $800,000 with a bank. This note
provides the Company with a $400,000 "Guidance Line of Credit
Facility" to be used for drilling, completion and equipping expenses
of wells to be drilled. This note has an interest rate of one percent
over the Bank's prime rate, 9.25% at March 31, 1996, and is due
January 1, 1997. In addition to the Guidance Line of Credit Facility,
the Master Note covers the other notes executed by the Company in
favor of the Bank, the line of credit, the loan secured by the yard
facility in Kenedy and the loan secured by oil and gas properties
purchased in 1992 and drilled in 1993. Subsequent to the execution of
the Master Real Estate Lien Note, the bank has funded $107,000 to the
Company.
Note b: In May, 1995, the Company purchased an additional land
drilling rig for $345,000. $300,000 of the purchase price was financed
by the seller through a note payable in monthly payments of $9,540
including interest at 9.0%. This note has a three year term.
Note c: In September, 1995, the Company executed a note payable,
in the amount of $245,250, to a bank for the purchase of the office
building which the Company occupies as its headquarters in San
Antonio, Texas. The note has a term of ten years and is payable in
monthly payments of $1,900 including interest at 0.5% over the Bank's
prime rate, 9.25% at March 31, 1996. In November, 1995 the Company
closed on financing with the Small Business Administration which
became a second lien on the headquarters building. The loan is in the
amount of $114,000 and was used to pay down the amount borrowed from
the bank for the purchase. This debt has a 20 year term and is
payable in monthly payments of $921 including interest at 6.713%.
Subsequent to the end of fiscal 1996, the Company restructured a
majority of its bank and long-term debt. See footnote 8, "Subsequent
Events".
(3) Income Taxes
Due to the utilization of net operating loss carryforwards, the
Company had no Federal income tax liability at March 31, 1996 or 1995.
(Continued)
-26-
<PAGE> 27
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At March 31, 1996, for Federal income tax purposes the Company
had a net operating loss carryforward of approximately $15,820,000 and
investment tax credit carryforwards of approximately $671,000
available to offset future taxable income and taxes.
Unless utilized, net operating loss and investment tax credit
carryforwards will expire as follows:
<TABLE>
<CAPTION>
Net Investment
Operating Tax
Year Loss Credits
---- ------------ ----------
<S> <C> <C>
1996 - 546,000
1997 - 110,000
1998 11,717,000 9,000
1999 1,025,000 5,000
2000 2,225,000 1,000
2001 452,000 -
2006 401,000 -
------------ ----------
$ 15,820,000 671,000
============ ==========
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at March 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
March 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Property and equipment, principally due to differences in
depreciation $ - 82,000
Allowance for bad debts 48,000 -
Investment tax credit carryforwards 671,000 789,000
Net operating loss carryforwards 5,381,000 5,494,000
---------- ----------
Total gross deferred tax assets 6,100,000 6,365,000
Less valuation allowance (5,871,000) (6,158,000)
---------- ----------
Total deferred tax assets 229,000 207,000
---------- ----------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 45,000 -
Oil and gas properties, principally due to intangible
drilling costs and differences in depletion
184,000 207,000
---------- ----------
Total gross deferred tax liabilities 229,000 207,000
---------- ----------
Net deferred tax asset $ - -
========== ==========
</TABLE>
A valuation allowance has been established to decrease total
gross deferred tax assets to the amount of the total gross tax
liabilities due to the uncertainties involved in the ultimate
realization of the deferred
(Continued)
-27-
<PAGE> 28
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
tax assets. The valuation allowance for deferred tax assets at March
31, 1995 was $6,158,000. The net change in total valuation allowance
for the year ended March 31, 1996 was a decrease of $287,000 due to the
change in the corresponding gross deferred tax assets and liabilities.
(4) Stock Options and Warrants
In December, 1988, the Board of Directors issued certain
directors, officers and employees warrants to purchase 435,000 shares
of the Company's common stock at $.15 per share, of which three
warrants for a total of 55,000 shares have been exercised as of March
31, 1996 and two warrants for 245,000 shares have been canceled.
These warrants are exercisable upon issuance and expire December 8,
1998. As of March 31, 1996, 135,000 shares of Common stock were
reserved for future issuance in connection with warrants issued to
employees, directors, officers and former employees.
In August, 1992, the Board of Directors issued certain directors,
officers and employees warrants to purchase 235,000 shares of the
Company's stock at $.10 per share, all of which have been exercised as
of March 31, 1996.
On May 1, 1995, the Board of Directors issued an option to Mr.
Locke, President and Chief Executive Officer, to purchase 1,200,000
shares of the Company's common stock at $.375 per share. This option
expires on May 1, 2005. At March 31, 1996, 100,000 shares have been
purchased under this option.
On June 15, 1995, the Board of Directors issued certain
directors, officers and employees options to purchase 128,500 shares
of the Company's common stock at $.375 per share, none of which has
been exercised as of March 31, 1996.
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which requires adoption of the disclosure
provisions no later than fiscal years beginning after December 15,
1995. This Statement establishes financial accounting and reporting
for stock-based employee compensation plans, including stock purchase
plans, stock option plans, restricted stock and stock appreciation
rights. The Statement requires a fair value based method of
accounting for employee stock options or similar instruments and
encourages a similar method for all employee stock compensation plans.
This method measures compensation cost at the grant date based on the
value of an award and recognizes it over the service period, usually
the vesting period. However, the Statement also allows an entity to
continue measuring compensation cost for such plans using the
intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", provided pro forma disclosures are made. The Company has
not yet determined the effect the new standard will have on net income
and earnings per share should it elect to make such a change.
(Continued)
-28-
<PAGE> 29
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Business Segments and Supplementary Earnings Information
The Company is engaged in contract drilling of oil and gas wells
and in oil and gas exploration, development and production.
Information concerning business segments and supplementary earnings
information is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Contract drilling $ 7,024,144 4,998,555 6,558,667
Oil and gas 475,510 495,539 492,024
Elimination of intersegment revenue - - (521)
----------- ---------- ----------
$ 7,499,654 5,494,094 7,050,170
=========== ========== ==========
Earnings (loss) from operations:
Contract drilling $ (65,506) (313,847) 553,696
Oil and gas 81,114 90,947 171,000
Elimination of intersegment revenue - - (521)
----------- ---------- ----------
$ 15,608 (222,900) 724,175
=========== ========== ==========
Identifiable assets at end of period:
Contract drilling $ 3,501,058 2,419,778 3,065,005
Oil and gas 784,592 1,053,480 1,028,443
----------- ---------- ----------
$ 4,285,650 3,473,258 4,093,448
=========== ========== ==========
Depreciation, depletion and amortization:
Contract drilling $ 384,400 277,986 209,300
Oil and gas 192,494 197,722 135,188
----------- ---------- ----------
$ 576,894 475,708 344,488
=========== ========== ==========
Capital expenditures:
Contract drilling $ 1,154,698 609,842 516,738
Oil and gas 7,485 224,851 444,707
----------- ---------- ----------
$ 1,162,183 834,693 961,445
=========== ========== ==========
Maintenance and repairs $ 502,844 414,812 640,622
=========== ========== ==========
</TABLE>
Total revenues for the year ended March 31, 1996 included revenues
of $1,809,804 from two customers as follows: $1,204,983; $604,821.
Total revenues for the year ended March 31, 1995 included revenues
of $1,784,218 from two customers as follows: $1,121,651; $662,567.
Total revenues for the year ended March 31, 1994 included revenues
of $1,459,951 from two customers as follows: $765,159; $694,792.
(Continued)
-29-
<PAGE> 30
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The intersegment revenue that is eliminated in the above tables
represents the reduction in drilling revenue due to full cost accounting
for oil and gas properties. Under such method, drilling revenue from
wells where the Company owns a working interest can only be recognized
to the extent it exceeds the total cost of the well, including the cost
to acquire the interest. There were no such participations in fiscal
1996 or fiscal 1995. Therefore, there were no eliminations in those
years.
(6) Related Party Transactions
A director owns an interest in several oil and gas properties in
which the Company owns an interest. Two directors own interests in the
well which the Company drilled in February, 1995 and continues to
operate.
(7) Commitments and Contingencies
Rental expense for the years ended March 31, 1996, 1995, and 1994
was $2,421, $15,825, and $13,275, respectively.
The Company is a defendant in several personal injury lawsuits of a
type which the Company considers routine for the contract drilling
industry. These lawsuits arose out of injuries to personnel under lease
from third party employee leasing companies. These lawsuits are being
defended either by the Company's general liability insurance carrier
under what the Company considers to be adequate coverage, or pursuant to
an Indemnity Agreement between the Company and the employee leasing
company which employed the Plaintiff. The Company believes that the
employee leasing company has adequate insurance coverage to cover those
claims.
Among the lawsuits currently pending against the Company is
National Energy Group, Inc. v. South Texas Drilling Company, cause No.
96-98, 357 Judicial District Court, Willacy County, Texas. This case
arose out of a dispute with a drilling customer over a billing for work
performed under a daywork drilling contract. In the course of drilling
the well, some of the Company's equipment was lost in the hole. Under
the terms of the contract, the customer was billed for the drilling
operations and replacement cost of the lost equipment. The customer has
declined to pay the billed amount of $279,000 alleging negligence and
seeking damages in excess of $100,000. This lawsuit is being defended
by the Company's general liability insurance carrier with a rights of
reservation letter. Discovery in this case is in the early stages and
depositions have not been completed. Therefore, it is impractical to
render an opinion about whether the likelihood of an unfavorable outcome
is either "probable" or "remote". However, the Company believes it has
meritorious defenses and is vigorously defending this litigation. The
Company has filed a counter-suit seeking payment in full of the original
invoice.
Management believes the ultimate disposition of these matters will
have no material adverse effect on the consolidated financial statements
of the Company.
(8) Subsequent Events
In May, 1996, the Company closed on a debt restructuring which
included a term loan of $1,250,000 and a revolving line of credit of
$500,000, which has allowed the Company to pay off all its bank debt
with the exception of the loan secured by the headquarters building in
San Antonio and a minimal balance on the loan secured by the oil and gas
properties. The new debt also allowed the Company to pay off the seller
(Continued)
-30-
<PAGE> 31
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
financing on the rig purchased in May, 1995. Proceeds from the new debt
were also used to reduce trade accounts payable and to provide funds for
future drilling equipment purchases. The term loan is secured by
drilling equipment, transportation equipment and the yard facility in
Kenedy, Texas. The loan carries an interest rate of prime (8.25% at
March 31, 1996) plus 3% and is payable in monthly payments of $14,881
plus interest. Payments are based on a seven-year amortization and the
loan is due in June, 1998. The revolving loan is secured by the
Company's trade accounts receivable and carries an interest rate of prime
plus 2.75%.
(9) Oil and Gas Producing Activities (Unaudited)
The Company's oil and gas properties and operations are presented
in the consolidated financial statements on the full cost method of
accounting. All of the Company' exploration and production is conducted
in the United States.
The aggregate amount of capitalized costs relating to oil and gas
producing activities at the dates indicated are as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Proved properties $ 1,749,467 1,741,982 1,580,142
Unproved properties - - -
------------ ---------- ----------
1,749,467 1,741,982 1,580,142
Accumulated depletion (1,012,830) (820,337) (622,615)
------------ ---------- ----------
$ 736,637 921,645 957,527
============ ========== ==========
Depletion rate per unit of production (net
equivalent barrel, exclusive of ceiling
limitation adjustment) $ 7.07 7.07 4.90
============ ========== ==========
</TABLE>
During the periods indicated in the preceding table, no internal
costs were capitalized. Internal costs incurred during these periods
were in the nature of general corporate overhead. All costs related to
production, general corporate overhead and other similar activities are
expensed in the period incurred. Costs of site restoration and
dismantlement and abandonment have historically been equal to or less
than revenue earned from salvage of the well equipment. Such costs, net
of the salvage revenue, are added to or subtracted from the full cost of
oil and gas properties. These costs have been minimal in the years
being reported.
(Continued)
-31-
<PAGE> 32
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth information with respect to
quantities of net proved oil and gas reserves, as estimated by an
in-house petroleum engineer, and changes in proved reserves. Estimates
of reserves and production performance are subjective and may change
materially as actual production information becomes available.
<TABLE>
<CAPTION>
Oil and
Condensate Gas
(Bbls) (Mcf)
---------- ----------
<S> <C> <C>
Estimated quantity, March 31, 1993 310,250 1,267,800
Revisions in previous estimates (458) (48,564)
Extensions, discoveries and other additions 67,626 143,499
Production (16,458) (66,805)
---------- ----------
Estimated quantity, March 31, 1994 377,418 1,362,735
Revisions in previous estimates 2,200 94,938
Extensions, discoveries and other additions 21,520 209,750
Production (15,700) (73,488)
---------- ----------
Estimated quantity, March 31, 1995 368,980 1,527,130
Revisions in previous estimates (13,490) (180,078)
Production (12,260) (89,802)
---------- ----------
Estimated quantity, March 31, 1996 343,230 1,257,250
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- --------------------
(Bbl) (Mcf) (Bbl) (Mcf) (Bbl) (Mcf)
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved developed
reserves:
Balance at
beginning of year 69,890 362,300 90,599 383,651 97,080 469,120
====== ======= ====== ======= ====== =======
Balance at end of year 60,420 302,960 69,890 362,300 90,599 383,651
====== ======= ====== ======= ====== =======
</TABLE>
(Continued)
-32-
<PAGE> 33
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Costs incurred for property acquisition, exploration and
development activities are summarized below:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Property acquisition costs $ - 23,863 80,962
Exploration costs - - -
Development costs 7,485 200,988 363,745
------------ ---------- ----------
$ 7,485 224,851 444,707
============ ========== ==========
</TABLE>
Results of operations for producing activities for the periods
indicated were as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Revenues $ 380,110 405,409 410,674
Production costs (169,008) (166,594) (178,501)
Depletion (192,494) (197,722) (135,188)
------------ ---------- ----------
Results of operations from producing activities
(excluding corporate overhead and interest costs) $ 18,608 41,093 96,985
============ ========== ==========
</TABLE>
The following is a standardized measure of the discounted net
future cash flows and changes applicable to proved oil and gas
reserves required by FASB 69. The future cash flows are based on
estimated oil and gas reserves utilizing prices and costs in effect as
of year end discounted at 10% per year and assuming continuation of
existing economic conditions.
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for
this table is a reserve study, as prepared by an in-house petroleum
engineer, which contains estimates of quantities and rates of
production of reserves. Revisions of previous year estimates can have
a significant impact on these results. Also, exploration costs in one
year may lead to significant discoveries in later years and may
significantly change previous estimates of proved reserves and their
valuation. Therefore, the standardized measure of discounted future
net cash flow is not necessarily a "best estimate" of the fair value
of the Company's proved oil and gas properties.
(Continued)
-33-
<PAGE> 34
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Estimated future cash flows $ 10,314,000 9,475,000 8,028,000
Estimated future production costs (3,013,000) (2,956,000) (2,866,000)
Estimated future development costs (1,547,000) (1,827,000) (1,567,000)
------------ ---------- ----------
Estimated future net cash flows
before income taxes 5,754,000 4,692,000 3,595,000
Estimated future income taxes (1,684,000) (1,324,000) (960,000)
Ten percent discount for estimated timing of
future cash flows (1,372,000) (1,105,000) (855,000)
------------ ---------- ----------
Standardized measure of discounted estimated
future net cash flows $ 2,698,000 2,263,000 1,780,000
============ ========== ==========
Changes in standardized measure of discounted
estimated future net cash flows:
Sales of oil and gas produced, net of
production costs (223,000) (239,000) (232,000)
Extensions, discoveries and other
additions, less related costs - 257,000 320,000
Changes in estimated future
development costs 179,000 (103,000) 130,000
Revisions of previous quantity estimates (369,000) 124,000 (48,000)
Net changes in prices 1,010,000 567,000 (1,075,000)
Accretion of discount 302,000 230,000 294,000
Income taxes (223,000) (235,000) 480,000
Other (241,000) (118,000) (30,000)
------------ ---------- ----------
Net increase (decrease) $ 435,000 483,000 (161,000)
============ ========== ==========
</TABLE>
(10) Minority Interest in Partnership
In August, 1994, the Company, through one of its wholly-owned
subsidiaries, became the managing and general partner of a partnership
whose purpose was to operate a drilling rig contributed to the
partnership by the two partners. The partnership operated the rig
through December 20, 1995 at which
-34-
<PAGE> 35
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
time the rig was distributed back to the partners and the partnership
was terminated. The Company's subsidiary then sold its remaining
one-half interest in the rig to the other partner. Since the Company
is no longer involved in the operations of the rig, the Company was
able, in fiscal 1996, to recognize the gain on the sale of the rig
which was deferred in fiscal 1995 when the first one-half interest in
the rig was sold. In exchange for the rig, the Company received
$250,000 in cash and 319,767 shares of the Company's common stock. The
gain attributable to the disposition of the rig was $183,000.
(11) Liquidity
In order to improve its financial position, management plans to
increase utilization of its drilling rigs, reduce indebtedness and
increase its base of oil and gas producing properties. Management
anticipates an improved working capital position in 1997 and believes
that by emphasizing the above plans, in conjunction with its
continuing commitment to closely monitor operational costs, the
Company will improve both its results of operations and its financial
position. The debt restructuring discussed in Note 8, "Subsequent
Events." will allow the Company to improve its current position. The
new debt allowed the Company to reduce its current debt obligations
and to reduce accounts payable. This will improve the Company's
current ratio and reduce its working capital deficit. The removal of
its demand clause by the Bank from its debt will also improve the
Company's current ratio and reduce its working capital deficit.
(12) Fair Value of Financial Instruments
Cash, trade receivables and payables and short-term debt:
The Company holds cash, trade receivables and payables and
short-term debt. The carrying amount of these instruments
approximates fair value due to the short maturity of the instruments.
Long-term debt:
The carrying amount of the Company's long-term debt approximates
fair value due to the recentness of the issuance of the debt.
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<PAGE> 36
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ROBERT R. MARMOR, 70, Chairman of the Board since April, 1980. Mr. Marmor
was Chief Executive Officer of the Company from April, 1980 until February,
1992 and President from June, 1984 until November, 1991, at which time he
voluntarily resigned from these positions and recommended his replacement.
From December, 1979 until April, 1980, Mr. Marmor was President of the
Company. From September, 1979 until December, 1979, Mr. Marmor was engaged in
founding the Company. From October, 1978 until September, 1979 he was
associated as a petroleum engineering consultant with Max K. Watson &
Associates, Inc. of Austin, Texas, petroleum and natural gas consultants. From
1977 to October, 1978 he was engaged in various personal investment ventures.
Mr. Marmor was employed from 1971 to 1977 in Adelaide, Australia by Delhi
International Oil Corporation, Dallas, Texas, and served as project development
manager and later as operations manager responsible for the exploration,
drilling and production divisions.
WILLIAM D. HIBBETTS, 47, CPA, a Director since June, 1984. Mr. Hibbetts
is Chief Accounting Officer of Southwest Venture Management Company. He was
Treasurer/Controller of Gary Pools, Inc. from May, 1986 to July, 1988. He
served as an officer of the Company from January 1, 1982 until May 1, 1986.
Mr. Hibbetts served in various positions as an accountant with KPMG Peat
Marwick from June, 1971 to December, 1981. Mr. Hibbetts served as manager in
that accounting firm's audit group from July, 1978 to December, 1981.
CHARLES B. TICHENOR, 69, a Director since May, 1988. Mr. Tichenor is
Corporation Chief Executive-in- Residence/Professor at The Indiana University
of Pennsylvania since January 1, 1995. Mr. Tichenor was Vice- Chancellor at
Elizabeth City State University from May, 1992 to December 31, 1994. He was a
professor at the College of Business of Mississippi State University where he
occupied the position of Distinguished Corporation Chief Executive Officer-in-
Residence from 1987 to 1992. Mr. Tichenor is the retired Chairman of Champale,
Inc., a Fortune 1000 Company, where he served as president and chairman of the
board from 1975 to 1983. He is a member of the Board of Trustees of Rider
College, Lawrenceville, NJ and he currently or formerly served on the Boards of
Doughty Foods, Inc., NYP Container Corp., MCM Investments Co. and Johnston
Printing Co.
ALVIS L. DOWELL, 60, a Director since February, 1991. Mr. Dowell was
President and Chief Executive Officer from November 7, 1992 to May 1, 1995. He
was Chief Operating Officer from February, 1991 and Vice President from May 2,
1991. From 1988 until 1991, Mr. Dowell was employed by Maersk Oil and Gas,
Copenhagen, Denmark as Assistant Manager, Drilling Department. From 1972 to
1988, Mr. Dowell was with Aramco, Saudi Arabian Operations as Drilling Safety
Engineer and later as Superintendent Offshore Drilling and then Drilling
Manager. He served as Director/Safety and Loss Prevention, Safety Engineering
and Regional Engineering Manager with Holiday Inns, Inc., Texas Employers
Insurance and Northwestern National Insurance Company.
WM. STACY LOCKE, 40, a Director since May 1, 1995. Mr. Locke is President
and Chief Executive Officer since May 1, 1995. He was Vice President-
Investment Banking with Arneson, Kercheville, Ehrenberg & Associates, Inc. from
January 1, 1993 to April 30, 1995. From 1988-1992, Mr. Locke was Vice
President-Investment Banking with Chemical Banking Corporation, Texas Commerce
Bank. He was Senior Geologist with
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<PAGE> 37
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Huffco Petroleum Corporation from 1982-1986. From 1979 to 1982 Mr. Locke worked
for Tesoro Petroleum Corporation and Valero Energy as a Geologist.
MARY L. KILGORE, 57, Vice President of Administration since December, 1993
and Corporate Secretary of the Company since May, 1986, has been employed in
various positions by the Company and its predecessor from August, 1978.
CHRIS F. PARMA, 46, CPA, Vice President and Chief Financial Officer since
December, 1995. He has been employed as Controller of the Company since
October, 1990. He served in various accounting positions from Staff Accountant
to Controller from 1972 to 1990 with J. H. Uptmore & Associates, Inc., Real
Estate Developer. He served as Vice President of Uptmore from 1985 to 1990.
MARTIN KALER, 34, Vice President of Engineering since December, 1995. He
has been employed as an Engineer of the Company since June, 1993. From 1987
until 1991, Mr. Kaler was with Dowell Schlumberger as Engineer and later as
District Engineer.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company and its subsidiaries for services performed during the fiscal year
ended March 31, 1996, to the chief executive officer of the Company. No other
officer was paid total compensation of $100,000 or more. See Item 13 for a
summary of compensation due to Mr. Locke, the chief executive officer of the
Company, under his employment agreement with the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Other All
Name and Annual Restricted Warrants/ LTIP Other
Principal Compen- Stock Options/ Payouts Compen-
Position Year Salary $ Bonus $ sation $ Award $ SARS # $ $
--------- ---- -------- ------- -------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wm. Stacy Locke CEO 1996 33,000 - 479(1) 18,333(2) - - 3,130(3)
Al L. Dowell CEO 1996 56,250 - 2,244(4) 11,960(5) - - -
1995 76,716(6) - 1,075(1) 5,770(7) - - -
1994 67,500 - 1,475(8) - - - -
</TABLE>
(1) Includes value of personal use of company-provided vehicle.
(2) Includes 48,889 shares accrued per employment agreement.
(3) Includes value realized on exercise of 100,000 shares of Stock Option Plan
granted May, 1995. See "Option/SAR Grants in Last Fiscal Year".
(4) Includes value of personal use of company-provided vehicle and Directors'
fee paid by the Company.
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<PAGE> 38
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(5) Includes 50,000 shares issued as a bonus. Value is calculated based on
the average of the bid and ask prices at issue date discounted due to
2-year restriction on sale or transfer of stock.
(6) Includes $2,885 voluntarily deferred at election of Executive.
(7) Includes 20,000 shares issued as bonus and 6,000 shares issued as a
directors' fee. Value is calculated based on bid price at issue date
discounted due to 2-year restriction on sale or transfer of stock.
(8) Includes value of personal use of company-provided vehicle and legal fees
paid by the Company.
From December, 1988, through June, 1995, Directors received 1,000 shares
of the Company's common stock for each directors' meeting attended. Since
June, 1995, Directors who are not officers or employees of the Company receive
$1,000 each quarter for their service on the Board and $250 for each meeting
attended. Directors who are not officers or employees of the Company and
reside outside of the surrounding area in which a board meeting is held are
entitled to reimbursement for travel expenses incurred by them in attending
directors' meetings.
The following table summarizes as to the chief executive officer of the
Company, the number and terms of stock options granted during the year ended
March 31, 1996:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of % of Total Potential
Securities Options/ Realized Value at Assumed
Underlying SARs Granted Annual Rates of Stock Price
Options/ to Employees Excercise or Appreciation for Option Term
SARs Granted in Fiscal Base Price Expiration ----------------------------
Name (#) Year ($/sh) Date 5% ($) 10%($)
---- ------------ ------------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Wm. Stacy Locke 1,200,000 90 0.375 06/15/2005 273,228 701,616
</TABLE>
The following table shows as to the chief executive officer of the Company
the net value realized (market value less exercise price) with respect to stock
options exercisable/unexercisable during the last year:
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Value Excercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Wm. Stacy Locke 100,000 3,130 0/1,100,000 0/0
</TABLE>
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<PAGE> 39
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes as to each of the executive officers of the
Company, the number and terms of stock warrants granted during the year ended
March 31, 1996:
Stock Warrants Granted in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
% of Total
Warrants
Stock Granted to
Warrant Employees in Exercise Expiration
Name Grants Fiscal Year Price Date
---- ------- ------------ --------- ----------
<S> <C> <C> <C> <C>
No stock warrants were granted in the current fiscal year.
</TABLE>
The following table shows as to each of the executive officers of the
Company the net value of securities or cash realized (market value less
exercise price) with respect to stock warrants exercisable/unexercisable during
the last year:
Aggregated Stock Warrant Exercises in Last Fiscal Year
and Fiscal Year End Stock Warrant Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Stock Warrants Stock Warrants
Shares at FY-End at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C>
In the current fiscal year, there were no stock warrant exercises by
executive officers nor were there any stock warrant values at year end.
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 19, 1996,
with respect to each person who is known by the Company to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock and the Series
A Preferred Stock, each director of the Company, and all officers and directors
of the Company as a group. Except as otherwise indicated, each person has sole
investment and voting power with respect to the shares shown.
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<PAGE> 40
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nature of Percentage
Title of Name and Address of Beneficial Ownership
Class Beneficial Owner Ownership of Class(7)
------- --------------------- --------- -----------
<S> <C> <C> <C>
Preferred Series A Alfred G. Holcomb 117,500 50.0%
300 Convent, Suite 1775
San Antonio, Texas 78205
Preferred Series A Rodney Lewis 117,500 50.0%
P.O. Box 118
Encinal, TX 78019
Common Rowan Companies, Inc. 750,000(1) 10.9%
1900 Post Oak Tower
5051 Westheimer
Houston, TX 77056
Common Robert R. Marmor 572,393(1)(2) 8.4%
9310 Broadway, Bldg. I
San Antonio, TX 78217
Common William D. Hibbetts 146,612(3) 2.1%
13007 Blanche Coker
San Antonio, TX 78216
Common Charles B. Tichenor 57,500(4) 0.8%
1402 N. Negley Ave.
Pittsburgh, PA 15206
Common Alvis L. Dowell 208,000 3.0%
9310 Broadway, Bldg. I
San Antonio, Texas 78217
Common Wm. Stacy Locke 1,278,333(5) 18.6%
9310 Broadway, Bldg. I
San Antonio, Texas 78217
All officers and directors as a group 2,401,679(6) 34.9%
(8 persons)
</TABLE>
(1) The Rowan Companies, Inc. have granted an option, which initially expired
on August 15, 1993, but has been extended to August 15, 1996, to Mr.
Marmor to purchase its holdings of Common Stock in the Company.
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<PAGE> 41
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(2) Does not include 30,420 shares owned by Mr. Marmor's children. Mr. Marmor
disclaims beneficial ownership and has no voting rights or dispositive
power in these 30,420 shares. Includes options issued to Mr. Marmor by
the Board of Directors to purchase 50,000 shares.
(3) Includes options issued to Mr. Hibbetts by the Board of Directors to
purchase 10,000 shares .
(4) Includes options issued to Mr. Tichenor by the Board of Directors to
purchase 10,000 shares.
(5) Includes options issued to Mr. Locke to purchase an additional 1,100,000
shares. (See Item 13.)
(6) Includes options to purchase 82,500 shares issued to the officers and
directors by the Board of Directors. Also includes an option to purchase
an additional 1,100,000 shares by Mr. Locke (see item 13).
(7) Percentage of class outstanding is calculated assuming all officers and
directors exercise all outstanding options and warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's president and chief executive officer, Mr. Wm.
Stacy Locke, commenced employment by the Company on May 1, 1995, under
a two year employment agreement calling for a base salary of $100,000
for the first year of the two year term and $150,000 for year two.
$20,000 of Mr. Locke's first year's salary will be payable in Common
Stock valued at the average market value of such shares during March,
1996. Likewise, $55,000 of the $150,000 salary payable to Mr. Locke
during the second year of his employment with the Company is payable
in Common Stock valued at its average market value during March, 1997.
Furthermore, if the Company should experience a loss for the last two
consecutive quarters of the term of Mr. Locke's employment agreement
the $55,000 payable in Common Stock for the second year of Mr. Locke's
employment shall be reduced to $30,000. The Company may terminate Mr.
Locke's employment agreement without cause at any time after May 1,
1996 and prior to the end of its two year term, upon payment to him of
$75,000 in cash and the issuance to him of a five-year warrant to
purchase 120,000 shares of Common Stock at $0.375 per share.
The terms of Mr. Locke's agreement require the Company to issue
ISO's to Mr. Locke for 1,200,000 shares of Common Stock with an
exercise price of $.375 per share. While Mr. Locke remains employed
by the Company and after the earlier to occur of (i) May 1, 1998 or
(ii) the acquisition by Mr. Locke of at least 10% of the Company's
outstanding Common Stock, on a fully diluted basis, and assuming the
exercise of all exercisable stock options held by Mr. Locke, on each
May 1 Mr. Locke may accelerate his ability to exercise all or any part
of the options to purchase 240,000 shares of Common Stock which would
otherwise become exercisable on the next following May 1 under his ISO
up to the amount necessary for him to achieve or maintain the 10%
ownership of Common Stock determined as described above. After all of
Mr. Locke's ISO's become exercisable, the Company has agreed to issue
additional ISO's (or non- qualified options if ISO's cannot be made
available) covering up to 240,000 shares on each May 1 at an exercise
price equal to the then market value of Common Stock in order to
provide Mr. Locke with an opportunity to acquire and maintain
ownership of 10% of the Company's Common Stock on the basis described
above. In the event the Company shall receive gross cash proceeds of
$10 million or more in connection with an underwritten public offering
of Common Stock, Mr. Locke's rights to additional options shall cease.
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<PAGE> 42
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements and Schedules and Exhibits
1. The following consolidated financial statements of South Texas
Drilling & Exploration, Inc. and its subsidiaries are included in
Part II, Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets at March 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
March 31, 1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Supplementary Income Statement Information is included in
Part IV, Item 14, "Financial Statements and Supplementary
data" of this Report.
Schedule II - Valuation and Qualifying Accounts
(All other schedules are omitted as inapplicable, not
required, or already covered in the financial statements and
notes thereto).
3. The following exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
- (3) Articles of Incorporation and Bylaws of the Company (previously filed as an Exhibit to the
company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(a) Stock Purchase and Options Agreement dated December 28, 1981 between the Company and Rowan
Companies, Inc. ("Rowan") (previously filed as an Exhibit to the Company's 1981 Annual
Report on Form 10-K, File No. 2-70145).
- (10)(b) Amended and Restated Agreement of Sale dated December 28, 1981 between the Company and Rowan
relating to acquisition of the Tender Rigs (previously filed as an Exhibit to the Company's
1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(c) Note Purchase and Warrant Agreement between the Company and Connecticut General Life
Insurance Company and Teachers Insurance and Annuity Association
</TABLE>
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<PAGE> 43
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
relating to acquisition of the Tender Rigs (previously filed as an Exhibit to the Company's
1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(d) Amendment No. 2 to Warrant Agreement dated April 12, 1984 between the Company and
Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association
(previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No.
2-70145).
- (10)(e) Letter of Basic Terms dated April 12, 1984 between the Company and Connecticut General Life
Insurance Company and Teachers Insurance and Annuity Association regarding the
recapitalization or reorganization of South Texas Offshore Drilling Company (previously
filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(f) Agreement dated April 12, 1984 among the Company and Connecticut General Life Insurance
Company and Teachers Insurance and Annuity Association of America releasing certain
obligations of the Company (previously filed as an Exhibit to the Company's 1983 Annual
Report on Form 10-K, File No. 2-70145).
- (10)(g) Loan Agreement dated December 28, 1981 between the Company and Frost National Bank of San
Antonio (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K,
File No. 2-70145).
- (10)(h) Second Amendment dated April 13, 1984 to the Loan Agreement dated December 28, 1981 between
the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the
Company's 1983 Annual Report on Form 10-K, File No. 2- 70145).
- (10)(i) Modification of General Guaranty dated April 13, 1984 between the Company and Frost National
Bank of San Antonio modifying the Company's guarantee of the Promissory Note of South
Texas/1200, Ltd. (previously filed as an Exhibit to the Company's 1983 Annual Report on Form
10-K, File No. 2-70145).
- (10)(j) The Company's 1983 Non-qualified Stock Option Plan (previ-ously filed as an Exhibit to the
Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(k) Letter from Hoy M. Booker deferring enforcement of legal remedies (previously filed as an
Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2- 70145).
- (10)(l) Letter from R. L. Kirkwood deferring enforcement of legal remedies (previously filed as an
Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2- 70145).
- (10)(m) Modification of Representation and Warranty of Second Amendment dated April 13, 1984 to the
Loan Agreement dated December 28, 1981 between the company and Frost National Bank of San
Antonio (previously filed as an Exhibit to the Company's 1984 Annual Report on Form 10-K,
File No. 2-70145).
</TABLE>
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<PAGE> 44
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
- (10)(n) Agreement and Release dated January 3, 1986, between the Company and Hoy M. Booker and
Robert L. Kirkwood regarding the assignment of certain oil and gas properties in
satisfaction of certain promissory notes (previously filed as an Exhibit to the Company's
1985 Annual Report on Form 10-K, File No. 2-70145).
- (10)(o) Debt Cancellation Agreement dated March 24, 1986 between the company and Frost National Bank
of San Antonio (previously filed as an Exhibit to the Company's 1985 Annual Report on Form
10-K, File No. 2-70145).
- (10)(p) Amendment #1 To Debt Cancellation Agreement dated March 24, 1986 between the Company and
Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986
Annual Report on Form 10-K, File No. 2-70145).
- (10)(q) Amendment #2 To Debt Cancellation Agreement dated March 24, 1986 between the Company and
Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986
Annual Report on Form 10-K, File No. 2-70145).
- (10)(r) Modification and Extension of Term Note dated April 16, 1986 between the Company and Frost
National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual
Report on Form 10-K, File No. 2-70145).
- (10)(s) Bill of Sale of Oil and Gas Drilling Rigs dated April 16, 1986 between the Company and Frost
National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual
Report on Form 10-K, File No. 2-70145).
- (10)(t) Convertible subordinated note dated January 1, 1989 between the Company and Frost Bank
(previously filed as an Exhibit to the Company's 1989 Annual Report on Form 10-K, File No.
2-70145).
- (10)(u) Convertible subordinated note dated November 1, 1988 between the Company and Larry Temple
(previously filed as an Exhibit to the Company's 1989 Annual Report on Form 10-K, File No.
2-70145).
- (10)(v) Rig Lease and Refurbishing Agreement (Rig 11) dated September 21, 1990 between the Company
and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's 1991 Annual
Report on Form 10-K, File No. 2-70145).
- (10)(w) Rig Lease and Refurbishing Agreement (Rig 12) dated September 21, 1990 between the Company
and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's 1991 Annual
Report on Form 10-K, File No. 2-70145).
- (10)(x) Revised and restated rig Lease and Refurbishing Agreement regarding Rig 11 and Rig 12 dated
September 27, 1991 between the Company and LB Sales and Leasing, Inc. (previously filed as
an Exhibit to the Company's 1992 Annual Report on Form 10-K, File No. 2-70145).
</TABLE>
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<PAGE> 45
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
- (10)(y) Settlement Agreement dated November 13, 1991 between the Company and Frio Drilling Company
(previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File No.
2-70145).
- (10)(z) Settlement Agreement dated December 29, 1994 between the Company and L. B. Sales and
Leasing, Inc. ( previously filed as an Exhibit to the Company's 1995 Annual Report on Form
10-K, File No. 2-70145).
- (10)(aa) Executive Employment Agreement dated May 1, 1995 between the Company and Wm. Stacy Locke (
previously filed as an Exhibit to the Company's 1995 Annual Report on Form 10-K, File No. 2-
70145).
48 (10)(bb) Form of Loan and Security Agreement dated May 8, 1996 between the Company and Finova Capital
Corporation
70 (10)(cc) Form of Schedule to Loan and Security Agreement dated May 8, 1996 between the Company and
Finova Capital Corporation
- (22) Subsidiaries of the registrant (previously filed as an Exhibit to the Company's 1992 Annual
Report on Form 10-K, File No. 2-70145).
</TABLE>
(b) Reports of Form 8-K: No reports on Form 8-K were filed with the
Securities and Exchange Commission during the last quarter of the
period covered by this report.
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<PAGE> 46
SCHEDULE II
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged Deductions
beginning to costs and from Balance at
of year expenses accounts year end
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 1994:
Allowance for doubtful receivables $ 170,945 62,949 - 233,894
========== ======== =========== =========
Year ended March 31, 1995:
Allowance for doubtful receivables $ 233,894 228,374 462,268 -
========== ======== =========== =========
Year ended March 31, 1996:
Allowance for doubtful receivables $ - 140,000 - 140,000
========== ======== =========== =========
</TABLE>
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<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, South Teas Drilling & Exploration, Inc. has duly caused
this report to be signed on its behalf by the undersigned, this 28th day of
June, 1996 thereunto duly authorized.
By /s/ Robert R. Marmor
--------------------------------------------------
Robert R. Marmor, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert R. Marmor
----------------------------
Robert R. Marmor Chairman and Director June 28, 1996
/s/ Wm. Stacy Locke
----------------------------
Wm. Stacy Locke President and Chief June 28, 1996
Executive Officer and
Director
/s/ Al Dowell
----------------------------
Al Dowell Director June 28, 1996
/s/ William D. Hibbets
----------------------------
William D. Hibbetts Director June 28, 1996
/s/ Chris F. Parma
----------------------------
Chris F. Parma Vice President and June 28, 1996
Chief Financial Officer
</TABLE>
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<PAGE> 1
EXHIBIT 10.BB
[FINOVA LOGO]
LOAN AND SECURITY AGREEMENT
Borrower: SOUTH TEXAS DRILLING & EXPLORATION, INC.
Address: 9310 Broadway, Building I
San Antonio, Texas 78217
DATE: May 8, 1996
THIS LOAN AND SECURITY AGREEMENT ("Agreement") dated the date set forth above,
is entered into by and between the borrower named above (the "Borrower"), whose
address is set forth above and FINOVA CAPITAL CORPORATION ("FINOVA"), whose
address is 355 South Grand Avenue, Suite 2400, Los Angeles, California 90071.
1 LOANS.
1.1 Loan Facilities. Upon the terms and conditions set forth herein and
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, on the Closing Date, FINOVA shall provide Borrower
with the Term Loan, and on the Closing Date and upon subsequent requests by
Borrower, FINOVA shall make Receivable Loans to Borrower in an aggregate
outstanding principal amount at any time not to exceed the percentage or dollar
limitations set forth in Section 1.2 of the schedule hereto (the "Schedule"),
subject to deduction of reserves for accrued interest and such other reserves
as FINOVA deems proper from time to time, and less amounts FINOVA may be
obligated to pay in the future on behalf of Borrower. As of the Closing Date,
the maximum aggregate amount that FINOVA may fund to Borrower, assuming
Borrower requests such full amount and has sufficient borrowing availability
therefor; under the Receivable Loans facility and the Term Loan is set forth in
Section 1.1 of the Schedule under the caption "Initial Total Facility Amount."
The maximum aggregate amount of Loans available to Borrower from time to time
hereunder shall be reduced dollar for dollar from the Initial Total Facility
Amount upon amortization of the Term Loan. The Schedule is an integral part of
this Agreement and all references to "herein", "herewith" and words of similar
import shall for all purposes be deemed to include the Schedule.
1.2 Loans. The Receivable Loans and the Term Loan (collectively, the
"Loans") shall be comprised of the amounts shown in Section 1.2 of the
Schedule.
1.3 Overlines. If at any time or for any reason the outstanding amount of
Receivable Loans made pursuant hereto exceeds any of the dollar or percentage
limitations contained in the Schedule (any such excess, an "Overline"), then
Borrower shall, upon FINOVA's demand, immediately pay to FINOVA, in cash, the
full amount of such Overline. Without limiting Borrower's obligation to repay
to FINOVA on demand the amount of any Overline, Borrower agrees to pay FINOVA
interest on the outstanding principal amount of any Overline, on demand, at the
rate set forth on the Schedule.
1.4 Loan Account. All Loans made hereunder shall be added to and deemed
part of the Obligations when made. FINOVA may from time to time charge all
Obligations of Borrower to Borrower's loan account with FINOVA.
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2 CONDITIONS PRECEDENT.
2.1 Initial Loans. The obligation of FINOVA to make the initial Revolving
Loans hereunder and to fund the Term Loan is subject to the fulfillment, to the
satisfaction of FINOVA and its counsel, of each of the following conditions on
or prior to the date set forth on the Schedule:
(a) Loan Documents. FINOVA shall have received each of the following Loan
Documents: (i) the Term Loan Note, executed by Borrower; (ii) the Confirmation
and Support Agreement, executed by Wm. Stacy Locke in his personal capacity;
(iii) such security agreements, intellectual property assignments and financing
statements as FINOVA may require with respect to this Agreement, executed by
each of the parties thereto and, if applicable, duly acknowledged for recording
or filing in the appropriate governmental offices; and (iv) such other
documents, instruments and agreements in connection herewith as FINOVA shall
require, executed, certified and/or acknowledged by such parties as FINOVA
shall designate;
(b) Terminations by Existing Lender. Borrower's existing lenders, if any,
shall have executed and delivered such UCC termination statements as FINOVA may
require;
(c) Charter Documents. FINOVA shall have received copies of Borrower's
By-laws and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(d) Good Standing. FINOVA shall have received a certificate of corporate
status with respect to Borrower, dated within ten (10) days of the Closing
Date, by the Secretary of State of the state of incorporation of Borrower,
which certificate shall indicate that Borrower is in good standing in such
state;
(e) Foreign Qualification. FINOVA shall have received certificates of
corporate status with respect to Borrower, each dated within ten (10) days of
the Closing Date, issued by the Secretary of State of each state in which
Borrower's failure to be duly qualified or licensed would have a material
adverse effect on its financial condition or assets, indicating that Borrower
is in good standing;
(f) Authorizing Resolutions and Incumbency. FINOVA shall have received a
certificate from the Secretary of Borrower attesting to (i) the adoption of
resolutions of Borrower's Board of Directors authorizing the borrowing of money
from FINOVA and execution and delivery of this Agreement and the other Loan
Documents to which Borrower is a party, and authorizing specific officers of
Borrower to execute same, and (ii) the authenticity of original specimen
signatures of such officers;
(g) Property Insurance. FINOVA shall have received the insurance
certificates and certified copies of policies required by Section 4.4 hereof,
in form and substance satisfactory to FINOVA and its counsel;
(h) UCC Searches. FINOVA shall have received searches reflecting the
filing of its financing statements in such jurisdictions as it shall determine;
(i) Fees. Borrower shall have paid all fees payable by it on the Closing
Date pursuant to this Agreement;
(j) Opinion of Counsel. FINOVA shall have received an opinion of
Borrower's counsel covering such matters as FINOVA shall determine in its sole
discretion;
(k) Officer Certificate. FINOVA shall have received a certificate of the
President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
(l) Environmental Assessment. If required by FINOVA, Borrower shall have
caused a Phase I Environmental Assessment to be conducted on the property or
properties owned or occupied by Borrower, all at Borrower's own expense and the
results of such assessment(s) shall have been in form and substance
satisfactory to FINOVA in its sole discretion. Such assessment(s) shall have
included, in FINOVA's discretion, core samplings, and shall have been conducted
by an environmental engineer acceptable to FINOVA;
(m) Environmental Certificate. FINOVA shall have received an Environmental
Certificate from Borrower, in form and substance satisfactory to FINOVA in its
discretion, with respect to all locations of Collateral; and
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(n) Other Matters. All other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered,
executed or recorded and shall be in form and substance satisfactory to FINOVA
and its counsel.
2.2 Subsequent Advances. The obligation of FINOVA to make any advance
hereunder (including the initial Receivable Loan) shall be subject to the
further conditions precedent that, on and as of the date of such advance:
(a) the representations and warranties of Borrower set forth in this
Agreement shall be accurate, before and after giving effect to such advance or
issuance and to the application of any proceeds thereof;
(b) no Event of Default and no event which, with notice or passage of time
or both; would constitute an Event of Default has occurred and is continuing,
or would result from such advance or issuance or from the application of any
proceeds thereof;
(c) no material adverse change has occurred in Borrower's business,
operations, financial condition, or assets or in the prospect of repayment of
the Obligations; and
(d) FINOVA shall have received such other approvals, opinions or documents
as FINOVA shall reasonably request.
3 INTEREST RATE AND OTHER CHARGES.
3.1 Interest; Fees. Borrower shall pay FINOVA interest on the daily
outstanding balance of Borrower's Receivable Loans account at the per annum
rate set forth on the Schedule and interest on the principal balance of the
Term Loan at the per annum rate set forth in the Term Loan Note. Borrower
shall also pay FINOVA the fees set forth on the Schedule.
3.2 Default Interest Rate. Upon the occurrence and during the
continuation of an Event of Default, Borrower shall pay FINOVA interest on the
daily outstanding balance of Borrower's Receivable Loans account at a rate per
annum which is two (2) percentage points in excess of the rate which would
otherwise be applicable thereto pursuant to the Schedule and on the principal
balance of the Term Loan at the default rate set forth in Section 5.0 of the
Term Loan Note.
3.3 Examination Fees. Borrower agrees to pay to FINOVA an examination fee
in the amount set forth on the Schedule in connection with each audit or
examination of Borrower performed by FINOVA prior to or after the date hereof.
Without limiting the generality of the foregoing, Borrower shall pay to FINOVA
an initial examination fee in an amount equal to the amount set forth on the
Schedule. Such initial examination fee shall be deemed fully earned at the time
of payment and due and payable upon the closing of this transaction, and shall
be deducted from any good faith deposit paid by Borrower to FINOVA prior to the
date of this Agreement.
3.4 Excess Interest. The contracted for rate of interest of the loan
contemplated hereby, without limitation, shall consist of the following: (i)
the interest rate set forth on the Schedule, calculated and applied to the
principal balance of the Obligations in accordance with the provisions of this
Agreement; (ii) interest after an Event of Default, calculated and applied to
the amount of the Obligations in accordance with the provisions hereof; and
(iii) all Additional Sums (as herein defined), if any. Borrower agrees to pay
an effective contracted for rate of interest which is the sum of the
above-referenced elements. The examination fees, attorneys fees, expert witness
fees, letter of credit fees, collateral monitoring fees, closing fees, facility
fees, Termination Fees, Minimum Interest Charges, other charges, goods, things
in action or any other sums or things of value paid or payable by Borrower
(collectively, the "Additional Sums"), whether pursuant to this Agreement or
any other documents or instruments in any way pertaining to this lending
transaction, or otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to this lending
transaction, for the purpose of any applicable law that may limit the maximum
amount of interest to be charged with respect to this lending transaction,
shall be payable by Borrower as, and shall be deemed to be, additional interest
and for such purposes only, the agreed upon and "contracted for rate of
interest" of this lending transaction shall be deemed to be increased by the
rate of interest resulting from the inclusion of the Additional Sums.
It is the intent of the parties to comply with the usury laws of the State
of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed that
notwithstanding any provisions to the contrary in
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this Agreement, or in any of the documents securing payment hereof or otherwise
relating hereto, in no event shall this Agreement or such documents require the
payment or permit the collection of interest in excess of the maximum contract
rate permitted by the Applicable Usury Law (the "Maximum Interest Rate"). In
the event (a) any such excess of interest otherwise would be contracted for,
charged or received from Borrower or otherwise in connection with the loan
evidenced hereby, (b) the maturity of the Obligations is accelerated in whole
or in part, or (c) all or part of the Obligations shall be prepaid, so that
under any of such circumstances the amount of interest contracted for, shared
or received in connection with the loan evidenced hereby, would exceed the
Maximum Interest Rate, then in any such event (1) the provisions of this
paragraph shall govern and control, (2) neither Borrower nor any other person
or entity now or hereafter liable for the payment of the Obligations shall be
obligated to pay the amount of such interest to the extent that it is in excess
of the Maximum Interest Rate, (3) any such excess which may have been collected
shall be either applied as a credit against the then unpaid principal amount of
the Obligations or refunded to Borrower, at FINOVA's option, and (4) the
effective rate of interest shall be automatically reduced to the Maximum
Interest Rate. It is further agreed, without limiting the generality of the
foregoing, that to the extent permitted by the Applicable Usury Law; (x) all
calculations of interest which are made for the purpose of determining whether
such rate would exceed the Maximum Interest Rate shall be made by amortizing,
prorating, allocating and spreading during the period of the full stated term
of the loan evidenced hereby, all interest at any time contracted for, charged
or received from Borrower or otherwise in connection with such loan; and (y) in
the event that the effective rate of interest on the loan should at any time
exceed the Maximum Interest Rate, such excess interest that would otherwise
have been collected had there been no ceiling imposed by the Applicable Usury
Law shall be paid to FINOVA from time to time, if and when the effective
interest rate on the loan otherwise falls below the Maximum Interest Rate, to
the extent that interest paid to the date of calculation does not exceed the
Maximum Interest Rate, until the entire amount of interest which would
otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law has been paid in full. Borrower further agrees that should
the Maximum Interest Rate be increased at any time hereafter because of a
change in the Applicable Usury Law, then to the extent not prohibited by the
Applicable Usury Law, such increases shall apply to all indebtedness evidenced
hereby regardless of when incurred; but, again to the extent not prohibited by
the Applicable Usury Law, should the Maximum Interest Rate be decreased because
of a change in the Applicable Usury Law, such decreases shall not apply to the
indebtedness evidenced hereby regardless of when incurred.
4 COLLATERAL.
4.1 Security Interest in the Collateral. To secure the payment and
performance of the Obligations when due, Borrower hereby grants to FINOVA a
security interest in all of Borrower's now owned or hereafter acquired or
arising Inventory, Equipment, Receivables, and General Intangibles, including,
without limitation, all of Borrower's deposit accounts, money, any and all
property now or at any time hereafter in FINOVA's possession (including claims
and credit balances), and all proceeds (including proceeds of any insurance
policies, proceeds of proceeds and claims against third parties), all products
and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which FINOVA may be granted a
lien or security interest, is referred to herein, collectively, as the
"Collateral").
4.2 Perfection and Protection of Security Interest. Borrower shall, at its
expense, take all actions requested by FINOVA at any time to perfect, maintain,
protect and enforce FINOVA's security interest and other rights in the
Collateral and the priority thereof from time to time, including, without
limitation, (i) executing and filing financing or continuation statements and
amendments thereof in form and substance satisfactory to FINOVA, (ii) if
Borrower hereafter acquires and maintains Inventory, maintaining a perpetual
inventory and complete and accurate stock records, (iii) if Borrower hereafter
acquires and maintains Inventory, delivering to FINOVA warehouse receipts
covering any portion of the Collateral located in warehouses and for which
warehouse receipts are issued, and transferring Inventory to warehouses
designated by FINOVA, (iv) placing notations on Borrower's books of account to
disclose FINOVA's security interest therein, and (v) delivering to FINOVA all
letters of credit on which Borrower is named beneficiary. FINOVA may file,
without Borrower's signature, one or more financing statements disclosing
FINOVA's security
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interest under this Agreement. Borrower agrees that a carbon, photographic,
photostatic or other reproduction of this Agreement or of a financing statement
is sufficient as a financing statement. If any Collateral is at any time in the
possession or control of any warehouseman, bailee or any of Borrower's agents
or processors, Borrower shall notify such Person of FINOVA's security interest
in such Collateral and, upon FINOVA's request, instruct them to hold all such
Collateral for FINOVA's account subject to FINOVA's instructions. From time to
time, Borrower shall, upon FINOVA's request, execute and deliver confirmatory
written instruments pledging the Collateral to FINOVA, but Borrower's failure
to do so shall not affect or limit FINOVA's security interest or other rights
in and to the Collateral. Until the Obligations have been fully satisfied and
FINOVA's obligation to make further advances hereunder has terminated, FINOVA's
security interest in the Collateral shall continue in full force and effect.
4.3 Preservation of Collateral. FINOVA may, in its sole discretion, at any
time discharge any lien or encumbrance on the Collateral or bond the same, pay
any insurance, maintain guards, pay any service bureau, obtain any record or
take any other action to preserve the Collateral and charge the cost thereof to
Borrower's loan account as an Obligation.
4.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of
such insurance as is required by FINOVA, written by insurers, in amounts, and
with lender's loss payee and other endorsements, satisfactory to FINOVA. All
premiums with respect to such insurance shall be paid by Borrower as and when
due. Accurate and complete copies of the policies shall be delivered by
Borrower to FINOVA. If Borrower fails to comply with this Section, FINOVA may
(but shall not be required to) procure such insurance at Borrower's expense and
charge the cost thereof to Borrower's loan account as an Obligation.
5 EXAMINATION OF RECORDS; FINANCIAL REPORTING.
5.1 Examinations. FINOVA shall at all reasonable times have full access to
and the right to examine, audit, make abstracts and copies from and inspect
Borrower's records, files, books of account and all other documents,
instruments and agreements relating to the Collateral and the right to check,
test and appraise the Collateral. Borrower shall deliver to FINOVA any
instrument necessary for FINOVA to obtain records from any service bureau
maintaining records for Borrower. All instruments and certificates prepared by
Borrower showing the value of any of the Collateral shall be accompanied, upon
FINOVA's request, by copies of related purchase orders and invoices. FINOVA
may, at any time after the occurrence of an Event of Default, copy Borrower's
books and records (including removing such books and records from Borrower's
premises if necessary for copying) or require Borrower to deliver copies of its
books and records to FINOVA. FINOVA may, without expense to FINOVA, use such
of Borrower's personnel, supplies and premises as may be reasonably necessary
for maintaining or enforcing FINOVA's security interest.
5.2 Reporting Requirements. Borrower shall furnish FINOVA, upon request,
such information and statements as FINOVA shall request from time to time
regarding Borrower's business affairs, financial condition and the results of
its operations. Without limiting the generality of the foregoing, Borrower
shall provide FINOVA with: (i) copies of sales journals, cash receipt journals,
deposit slips and FINOVA's standard form collateral and loan report, daily;
(ii) upon FINOVA's request, copies of invoices, customer statements and credit
memoranda issued, remittance advices and reports; (iii) on or prior to the date
set forth on the Schedule, monthly agings and reconciliations of Receivables,
payables reports, and unaudited financial statements with respect to the prior
month prepared on a basis consistent with such statements prepared in prior
months and otherwise in accordance with generally accepted accounting
principles, consistently applied; (iv) within ten (10) days after the end of
each month, a report indicating the location of each of Borrower's drilling
rigs, in form and substance acceptable to FINOVA; (v) audited annual
consolidated and consolidating financial statements, prepared in accordance
with generally accepted accounting principles applied on a basis consistent
with the most recent Prepared Financials provided to FINOVA by Borrower,
including balance sheets, income and cash flow statements, accompanied by the
unqualified report thereon of independent certified public accountants
acceptable to FINOVA, as soon as available, and in any event, within ninety
(90) days after the end of each of Borrower's fiscal years; and (vi) such
certificates relating to the foregoing as FINOVA may request, including,
without limitation, a monthly certificate from the president and the chief
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financial officer of Borrower showing Borrower's compliance with each of the
financial covenants set forth in this Agreement, and stating whether any Event
of Default has occurred or event which, with giving of notice or the passage of
time, or both, would constitute an Event of Default, and if so, the steps being
taken to prevent or cure such Event of Default.
6 COLLATERAL REPORTING.
6.1 Invoices. Borrower shall not re-date any invoice from the original
date thereof or provide services on extended terms beyond those customary in
Borrower's industry, or otherwise extend or modify the term of any Receivable.
If Borrower becomes aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon, Borrower shall
promptly notify FINOVA in writing.
6.2 Instruments. In the event any Receivable is or becomes evidenced by a
promissory note, trade acceptance or any other instrument for the payment of
money, Borrower shall immediately deliver such instrument to FINOVA
appropriately endorsed to FINOVA and, regardless of the form of any
presentment, demand, notice of dishonor, protest or notice of protest with
respect thereto, Borrower shall remain liable thereon until such instrument is
paid in full. FINOVA shall not transfer any such instrument prior to the
occurrence of an Event of Default; provided, however, a transfer of any such
instrument shall not be deemed to have occurred hereunder solely as a result of
a sale of FINOVA or FINOVA's transfer of the Loans in an asset securitization
transaction.
7 PRINCIPAL PAYMENTS; PROCEEDS OF COLLATERAL.
7.1 Principal Payments. Except as otherwise provided in the Term Loan
Note, that portion of the Obligations consisting of principal payable on
account of Receivable Loans shall be payable by Borrower to FINOVA immediately
upon the earliest of (i) the receipt by FINOVA or Borrower of any proceeds of
any of the Collateral, to the extent of said proceeds, (ii) the occurrence of
an Event of Default in consequence of which FINOVA elects to accelerate the
maturity and payment of such loans, or (iii) any termination of this Agreement
pursuant to Section 16 hereof; provided, however, that any Overline shall be
payable on demand pursuant to the provisions of Section 1.3 hereof.
7.2 Collections. Until FINOVA notifies Borrower to the contrary, Borrower
may make collection of all Receivables for FINOVA and shall receive all
payments as trustee of FINOVA and immediately deliver all payments to FINOVA in
their original form as set forth below, duly endorsed in blank. FINOVA or its
designee may, at any time, notify account debtors that the Receivables have
been assigned to FINOVA and of FINOVA's security interest therein, and may
collect the Receivables directly and charge the collection costs and expenses
to Borrower's loan account. Borrower agrees that, in computing the charges
under this Agreement, all items of payment shall be deemed applied by FINOVA on
account of the Obligations two (2) Business Days after receipt by FINOVA of
good funds which have been finally credited to FINOVA's account, whether such
funds are received directly from Borrower or from the Blocked Account bank or
the Dominion Account bank, pursuant to Section 7.3 hereof, and this provision
shall apply regardless of the amount of the Obligations outstanding or whether
any Obligations are outstanding. FINOVA is not, however, required to credit
Borrower's account for the amount of any item of payment which is
unsatisfactory to FINOVA in its sole discretion and FINOVA may charge
Borrower's loan account for the amount of any item of payment which is returned
to FINOVA unpaid.
7.3 Establishment of a Lockbox Account or Dominion Account. All proceeds
of Collateral shall, at the direction of FINOVA, be deposited by Borrower into
a lockbox account, or such other "blocked account" as FINOVA may require (each,
a "Blocked Account") pursuant to an arrangement with such bank as may be
selected by Borrower and be acceptable to FINOVA. Borrower shall issue to any
such bank an irrevocable letter of instruction directing said bank to transfer
such funds so deposited to FINOVA, either to any account maintained by FINOVA
at said bank or by wire transfer to appropriate account(s) of FINOVA. All funds
deposited in a Blocked Account shall immediately become the sole property of
FINOVA and Borrower shall obtain the agreement by such bank to waive any offset
rights against the funds so deposited. FINOVA assumes no responsibility for any
Blocked Account arrangement, including without limitation, any claim of accord
and satisfaction or release with respect to deposits accepted by any bank
thereunder. Alternatively, FINOVA may establish depository accounts in the name
of FINOVA at a bank or banks
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for the deposit of such funds (each, a "Dominion Account") and Borrower shall
deposit all proceeds of Receivables and, to the extent permitted herein,
Equipment or cause same to be deposited, in kind, in such Dominion Accounts of
FINOVA in lieu of depositing same to Blocked Accounts.
7.4 Payments Without Deductions. Borrower shall pay principal, interest,
and all other amounts payable hereunder, or under any related agreement,
without any deduction whatsoever, including, but not limited to, any deduction
for any setoff or counterclaim.
7.5 Collection Days Upon Repayment. In the event Borrower repays the
Obligations in full at any time hereafter, such payment in full shall be
credited (conditioned upon final collection) to Borrower's loan account two (2)
Business Days after FINOVA's receipt thereof.
7.6 Monthly Accountings. FINOVA shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by FINOVA), unless Borrower
notifies FINOVA in writing to the contrary within sixty (60) days after each
account is rendered, describing the nature of any alleged errors or admissions.
8 POWER OF ATTORNEY.
Borrower appoints FINOVA and its designees as Borrower's attorney, with the
power to endorse Borrower's name on any checks, notes, acceptances, money
orders or other forms of payment or security that come into FINOVA's
possession; to sign Borrower's name on any invoice relating to any Receivable,
on drafts against customers, on assignments of Receivables, on notices of
assignment, financing statements and other public records, on verifications of
accounts and on notices to customers or account debtors; to send requests for
verification of Receivables to customers or account debtors; after the
occurrence of any Event of Default, to notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated by
FINOVA and to open and dispose of all mail addressed to Borrower; and to do all
other things FINOVA deems necessary or desirable to carry out the terms of this
Agreement. FINOVA is authorized to act as Borrower's attorney only to the
extent that such acts are in accordance with the terms of this Agreement and
necessary to enforce FINOVA's rights under this Agreement. Borrower hereby
ratifies and approves all acts of such attorney. Neither FINOVA nor any of its
designees shall be liable for any acts or omissions nor for any error of
judgment or mistake of fact or law while acting as Borrower's attorney. This
power, being coupled with an interest, is irrevocable until the Obligations
have been fully satisfied and FINOVA's obligation to provide loans hereunder
shall have terminated.
9 RECEIVABLES.
9.1 Eligibility. Borrower represents and warrants that each Receivable
covers and shall cover a bona fide sale or lease and delivery by it of goods or
the rendition by it of services in the ordinary course of its business, and
shall be for a liquidated amount and FINOVA's security interest shall not be
subject to any offset, deduction, counterclaim, rights of return or
cancellation, lien or other condition. If any representation or warranty herein
is breached as to any Receivable or any Receivable ceases to be an Eligible
Receivable for any reason other than payment thereof, then FINOVA may, in
addition to its other rights hereunder, designate any and all Receivables owing
by that account debtor as not Eligible Receivables; provided, that FINOVA shall
in any such event retain its security interest in all Receivables, whether or
not Eligible Receivables, until the Obligations have been fully satisfied and
FINOVA's obligation to provide loans hereunder has terminated.
9.2 Disputes. Borrower shall notify FINOVA promptly of all disputes or
claims and settle or adjust such disputes or claims at no expense to FINOVA,
but no discount, credit or allowance shall be granted to any account debtor and
no returns of merchandise shall be accepted by Borrower without FINOVA's
consent, except for discounts, credits and allowances made or given in the
ordinary course of Borrower's business. FINOVA may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with account debtors for amounts and upon terms which FINOVA considers
advisable in its reasonable credit judgment and, in all cases, FINOVA shall
credit Borrower's loan account with only the net amounts received by FINOVA in
payment of any Receivables.
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10 EQUIPMENT.
Borrower shall keep and maintain the Equipment in good operating condition and
repair and make all necessary replacements thereto to maintain and preserve the
value and operating efficiency thereof at all times consistent with Borrower's
past practice, ordinary wear and tear excepted. Borrower shall not permit any
item of Equipment to become a fixture (other than a trade fixture) to real
estate or an accession to other property.
11 OTHER LIENS; NO DISPOSITION OF COLLATERAL.
Borrower represents, warrants and covenants that (a) all Collateral is and
shall continue to be owned by it free and clear of all liens, claims and
encumbrances whatsoever (except for FINOVA's security interest, Permitted
Encumbrances, purchase-money security interests granted by Borrower in
connection with its purchase of new Equipment consistent with the Capital
Expenditures and Indebtedness covenants set forth in this Agreement, and such
other liens, claims and encumbrances as may be permitted by FINOVA in its sole
discretion from time to time in writing), and (b) Borrower shall not, without
FINOVA's prior written approval, sell, encumber or dispose of or permit the
sale, encumbrance or disposal of any Collateral or any interest of Borrower
therein, except for the sale of used Equipment in the ordinary course of
Borrower's business, provided that (i) all such sales during any year of the
term of this Agreement shall not involve Equipment having a fair market value
in excess of $100,000, (ii) Borrower shall remit to FINOVA the proceeds of all
such sales, and FINOVA shall apply such proceed to reduce Borrower's
outstanding Receivable Loans, and (iii) Borrower shall purchase replacement
Equipment acceptable to FINOVA for all such sold Equipment within sixty (60)
days after the sale of such Equipment. In the event FINOVA gives any such prior
written approval, the same may be conditioned on the sale price being equal to,
or greater than, an amount acceptable to FINOVA. The proceeds of any such sales
shall be remitted To FINOVA pursuant to this Agreement for application to the
Obligations.
12 GENERAL REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
12.1 Due Organization. It is a corporation duly organized, validly existing
and in good standing under the laws of the State set forth on the Schedule, is
qualified and authorized to do business and is in good standing in all states
in which such qualification and good standing are necessary in order for it to
conduct its business and own its property, and has all requisite power and
authority to conduct its business as presently conducted, to own its property
and to execute and deliver each of the Loan Documents to which it is a party
and perform all of its Obligations thereunder, and has not taken any steps to
wind-up, dissolve or otherwise liquidate its assets;
12.2 Other Names. Borrower has not, during the preceding five (5) years,
been known by or used any other corporate or fictitious name except as set
forth on the Schedule, nor has Borrower been the surviving corporation of a
merger or consolidation or acquired all or substantially all of the assets of
any person during such time;
12.3 Due Authorization. The execution, delivery and performance by Borrower
of the Loan Documents to which it is a party have been authorized by all
necessary corporate action and do not and shall not constitute a violation of
any applicable law or of Borrower's Articles or Certificate of Incorporation or
By-Laws or any other document, agreement or instrument to which Borrower is a
party or by which Borrower or its assets are bound;
12.4 Binding Obligation. Each of the Loan Documents to which Borrower is a
party is the legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms;
12.5 Intangible Property. Borrower possesses adequate assets, licenses,
patents, patent applications, copyrights, trademarks, trademark applications
and trade names for the present and planned future conduct of its business
without any known conflict with the rights of others, and each is valid and has
been duly registered or filed with the appropriate governmental authorities;
12.6 Capital. Borrower has capital sufficient to conduct its business, is
able to pay its debts as they mature and owns property having a fair salable
value greater than the amount required to pay all of its debts (including
contingent debts);
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12.7 Material Litigation. Except as set forth on Schedule 12.7 hereto,
Borrower has no pending or overtly threatened litigation, actions or
proceedings which would materially and adversely affect its business, assets,
operations, prospects or condition, financial or otherwise, or the Collateral
or any of FINOVA's interests therein;
12.8 Title, Security Interests of FINOVA. Borrower has good, indefeasible
and merchantable title to the Collateral and, upon the filing of UCC-1
Financing Statements and the recording of any mortgages or deeds of trust with
respect to real property, in each case in the appropriate offices, this
Agreement and such documents shall create valid and perfected first priority
liens in the Collateral, subject only to Permitted Encumbrances;
12.9 Restrictive Agreements: Labor Contracts. Borrower is not a party or
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to
any labor dispute. In addition, no labor contract is scheduled to expire during
the Initial Term of this Agreement, except as disclosed to FINOVA in writing
prior to the date hereof;
12.10 Laws. Borrower is not in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
12.11 Consents. Borrower has obtained or caused to be obtained or issued any
required consent of a governmental agency or other Person in connection with
the financing contemplated hereby;
12.12 Defaults. Borrower is not in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause
such a default;
12.13 Financial Condition. The Prepared Financials fairly present
Borrower's financial condition and results of operations and those of such
other Persons described therein as of the date thereof; there are no material
omissions from the Prepared Financials or other facts or circumstances not
reflected in the Prepared Financials; and there has been no material and
adverse change in such financial condition or operations since the date of the
initial Prepared Financials delivered to FINOVA hereunder;
12.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is in
violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a) or any of the published interpretations
thereunder, nor has Borrower or any ERISA Affiliate received any notice to such
effect. No notice of intent to terminate a Plan has been filed under Section
4041 of ERISA, nor has any Plan been terminated under ERISA. The PBGC has not
instituted proceedings to terminate, or appointed a trustee to administer, a
Plan. No lien upon the assets of Borrower has arisen with respect to a Plan. No
prohibited transaction or Reportable Event has occurred with respect to a Plan.
Neither Borrower nor any ERISA Affiliate has incurred any withdrawal liability
with respect to any Multiemployer Plan. Borrower and each ERISA Affiliate have
made all contributions required to be made by them to any Plan or Multiemployer
Plan when due. There is no accumulated funding deficiency in any Plan, whether
or not waived;
12.15 Taxes. Borrower has filed all tax returns and such other reports as
it is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
12.16 Locations. Borrower's chief executive office and the offices and
locations where it keeps the Collateral (except for rigs or related Equipment
in transit or at work) are at the locations set forth on the Schedule, except
to the extent that such locations may have been changed after notice to FINOVA
in accordance with Section 13.5 below;
12.17 Business Relationships. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no
present condition or state of facts or circumstances which would materially and
adversely affect Borrower or prevent Borrower from conducting
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such business after the consummation of the transactions contemplated by this
Agreement in substantially the same manner in which it has heretofore been
conducted; and
12.18 Reaffirmations. Each request for a loan made by Borrower pursuant to
this Agreement shall constitute (i) an automatic representation and warranty by
Borrower to FINOVA that there does not then exist any Event of Default and (ii)
a reaffirmation as of the date of said request of all of the representations
and warranties of Borrower contained in this Agreement and the other Loan
Documents.
13 AFFIRMATIVE COVENANTS.
Borrower covenants that, so long as any Obligation remains outstanding and this
Agreement is in effect, it shall:
13.1 Expenses. Promptly reimburse FINOVA for all costs, fees and expenses
incurred by FINOVA in connection with the negotiation, preparation, execution,
delivery, administration and enforcement of each of the Loan Documents,
including, but not limited to, the attorneys' and paralegals' fees of in-house
and outside counsel, expert witness fees, lien, title search and insurance
fees, appraisal fees, all charges and expenses incurred in connection with any
and all environmental reports and environmental remediation activities, and all
other costs, expenses, taxes and filing or recording fees payable in connection
with the transactions contemplated by this Agreement, including without
limitation all such costs, fees and expenses as FINOVA shall incur or for which
FINOVA shall become obligated in connection with (i) any inspection or
verification of the Collateral, (ii) any proceeding relating to the Loan
Documents or the Collateral, (iii) actions taken with respect to the Collateral
and FINOVA's security interest therein, including, without limitation, the
defense or prosecution of any action involving FINOVA and Borrower or any third
party, (iv) enforcement of any of FINOVA's rights and remedies with respect to
the Obligations or Collateral, and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other
proceeding involving any Loan Party or any Affiliate, whether or not suit is
filed. Borrower shall also pay all FINOVA charges in connection with bank wire
transfers, forwarding of loan proceeds, deposits of checks and other items of
payment, returned checks, establishment and maintenance of lockboxes and other
Blocked Accounts, and all other bank and administrative matters, in accordance
with FINOVA's schedule of bank and administrative fees and charges in effect
from time to time;
13.2 Taxes. File all tax returns and pay or make adequate provision for the
payment of all taxes, assessments and other charges on or prior to the date
when due;
13.3 Notice of Litigation. Promptly notify FINOVA in writing of any
litigation, suit or administrative proceeding which may materially and
adversely affect the Collateral or Borrower's business, assets, operations,
prospects or condition, financial or otherwise, whether or not the claim is
covered by insurance;
13.4 ERISA. Notify FINOVA in writing (i) Promptly upon the occurrence of
any event described in Paragraph 4043 of ERISA, other than a termination,
partial termination or merger of a Plan or a transfer of a Plan's assets and
(ii) prior to any termination, partial termination or merger of a Plan or a
transfer of a Plan's assets;
13.5 Change in Location. Notify FINOVA in writing forty-five (45) days
prior to any change in the location of Borrower's chief executive office or the
location of any Collateral other than rolling stock rigs and related Equipment,
for which Borrower shall notify FINOVA on a monthly basis, or Borrower's
opening or closing of any other place of business;
13.6 Corporate Existence. Maintain its corporate existence and its
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, patents, copyrights, trademarks and trade names for the
conduct of its business;
13.7 Labor Disputes. Promptly notify FINOVA in writing of any labor dispute
to which Borrower is or may become subject and the expiration of any labor
contract to which Borrower is a party or bound;
13.8 Violations of Law. Promptly notify FINOVA in writing of any violation
of any law, statute, regulation or ordinance of any governmental entity, or of
any agency thereof, applicable to Borrower which may materially and adversely
affect the Collateral or
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Borrower's business, assets, prospects, operations or condition, financial or
otherwise;
13.9 Defaults. Notify FINOVA in writing within five (5) business days of
Borrower's default under any note, indenture, loan agreement, mortgage, lease
or other agreement to which Borrower is a party or by which Borrower is bound,
if such default materially and adversely affects either the Collateral or
Borrower's ability to repay the Obligations or of any other default under any
Indebtedness of Borrower, if such default materially and adversely affects
either the Collateral or Borrower's ability to repay the Obligations;
13.10 Capital Expenditures. Promptly notify FINOVA in writing of the making
of any Capital Expenditure in excess of $50,000;
13.11 Books and Records. Keep adequate records and books of account with
respect to its business activities in which proper entries are made in
accordance with generally accepted accounting principles consistently applied,
reflecting all of its financial transactions;
13.12 Additional Documents. At FINOVA's request, promptly execute or cause
to be executed and delivered to FINOVA any and all documents, instruments or
agreements deemed necessary by FINOVA to facilitate the collection of the
Obligations or the Collateral or otherwise to give effect to or carry out the
terms or intent of this Agreement or any of the other Loan Documents. Without
limiting the generality of the foregoing, if any of the Receivables with a face
value in excess of $1,000.00 arises out of a contract with the United States of
America or any department, agency, subdivision or instrumentality thereof,
Borrower shall promptly notify FINOVA of such fact in writing and shall execute
any instruments and take any other action required or requested by FINOVA to
comply with the provisions of the Federal Assignment of Claims Act; and
13.13 Financial Covenants. Comply with the financial covenants set forth on
the Schedule.
14 NEGATIVE COVENANTS.
Without FINOVA's prior written consent, which consent FINOVA may withhold in
its sole discretion, so long as any Obligation remains outstanding and this
Agreement is in effect, Borrower shall not:
14.1 Mergers. Merge or consolidate with or acquire any other Person, or
make any other material change in its capital structure or in its business or
operations which might adversely affect the repayment of the Obligations;
14.2 Loans. Make advances, loans or extensions of credit to, or invest in,
any Person;
14.3 Dividends. Declare or pay cash dividends upon any of its stock or
distribute any of its property or redeem, retire, purchase or acquire directly
or indirectly any of its stock excepting amounts not to exceed $50,000 per
year;
14.4 Adverse Transactions. Enter into any transaction which materially and
adversely affects the Collateral or its ability to repay the Obligations in
full as and when due;
14.5 Indebtedness of Others. Become directly or contingently liable for the
Indebtedness of any Person, except by endorsement of instruments for deposit;
14.6 Repurchase. Make a sale to any customer on a bill-and-hold, guaranteed
sale, sale and return, sale on approval, consignment, or any other repurchase
or return basis;
14.7 Name. Use any corporate or fictitious name other than its corporate
name as set forth in its Articles or Certificate of Incorporation on the date
hereof or as set forth on the Schedule;
14.8 Prepayment. Prepay any Indebtedness other than trade payables and
other than the Obligations;
14.9 Capital Expenditure. Make or incur any Capital Expenditure if, after
giving effect thereto, the aggregate amount of all Capital Expenditures by
Borrower in any fiscal year would exceed the amount set forth on the Schedule;
14.10 Compensation. Pay total compensation, including salaries,
withdrawals, fees, bonuses, commissions, drawing accounts and other payments,
whether directly or indirectly, in money or otherwise, during any fiscal year
to all of Borrower's executives, officers and directors (or any relative
thereof) in an amount in excess of the amount set forth on the Schedule;
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14.11 Indebtedness. Create, incur, assume or permit to exist any
Indebtedness (including Indebtedness in connection with Capital Leases) in
excess of the amount set forth on the Schedule, other than (i) the Obligations,
(ii) trade payables and other contractual obligations to suppliers, employees
and customers incurred in the ordinary course of business, and (iii) other
Indebtedness existing on the date of this Agreement and reflected in the
Prepared Financials (except Indebtedness paid on the date of this Agreement
from proceeds of the initial advances hereunder);
14.12 Affiliate Transactions. Except as set forth below, sell, transfer,
distribute or pay any money or property to any Affiliate, or invest in (by
capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, Borrower may pay compensation permitted by
Section 14.10 to employees who are Affiliates and, if no Event of Default has
occurred, Borrower may engage in transactions with Affiliates in the normal
course of business, in amounts and upon terms which are fully disclosed to
FINOVA and which are no less favorable to Borrower than would be obtainable in
a comparable arm's length transaction with a Person who is not an Affiliate;
14.13 Nature of Business. Enter into any new business or make any material
change in any of Borrower's business objectives, purposes or operations;
14.14 FINOVA's Name. Use the name of FINOVA in connection with any of
Borrower's business or activities, except in connection with internal business
matters or as required in dealings with governmental agencies and financial
institutions or with trade creditors of Borrower, solely for credit reference
purposes; or
14.15 Margin Security. Own, purchase or acquire (or enter into any contract
to purchase or acquire) any "margin security" as defined by any regulation of
the Federal Reserve Board as now in effect or as the same may hereafter be in
effect.
15 ENVIRONMENTAL MATTERS.
15.1 Definitions. The following definitions apply to the provisions of this
Section 15:
(a) the term "Applicable Law" shall include, but shall not be limited to,
each federal statute named or referred to in this Section 15.1, each statute of
the State of Arizona, and all rules and regulations thereunder, and any other
local, state and/or federal laws, rules, regulations or ordinances, whether
currently in existence or hereafter enacted, which govern, to the extent
applicable to the Property or to Borrower, (i) the existence, cleanup and/or
remedy of contamination on real property; (ii) the protection of the
environment from soil, air or water pollution, or from spilled, deposited or
otherwise emplaced contamination; (iii) the emission or discharge of hazardous
substances into the environment; (iv) the control of hazardous wastes; or (v)
the use, generation, transport, treatment, removal or recovery of Hazardous
Substances;
(b) The term "Hazardous Substance" shall mean (i) any oil, flammable
substance, explosives, radioactive materials, hazardous wastes or substances,
toxic wastes or substances or any other wastes, materials or pollutants which
either pose a hazard to the Property or to persons on or about the Property or
cause the Property to be in violation of any Applicable Law; (ii) asbestos in
any form which is or could become friable, urea formaldehyde foam insulation,
transformers or other equipment which contain dielectric fluid containing
levels of polychlorinated biphenyls, or radon gas; (iii) any chemical, material
or substance defined as or included in the definition of "hazardous
substances," "waste," "hazardous wastes," "hazardous materials," "extremely
hazardous waste," "restricted hazardous waste," or "toxic substances" or words
of similar import under any Applicable Law, including, but not limited to, the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), 42 USC Sections 9601 et seq.; the Resource Conservation and
Recovery Act ("RCRA"), 42 USC Sections 6901 et seq.; the Hazardous Materials
Transportation Act, 49 USC Sections 1801 et seq.; the Federal Water Pollution
Control Act, 33 USC Sections 1251 et seq.; (iv) any other chemical, material or
substance, exposure to which is prohibited, limited or regulated by any
governmental authority which may or could pose a hazard to the health or safety
of the occupants of the Property or the owners and/or occupants of property
adjacent to or surrounding the Property, or any other person coming upon the
Property or adjacent property; and (v) any other chemical, materials or
substance which may or could pose a hazard to the environment; and
(c) the term "Property" shall mean all real property, wherever located, in
which Borrower or any
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Affiliate of Borrower has any right, title or interest, whether now existing or
hereafter arising, and including, without limitation, as owner, lessor or
lessee, but specifically excluding any oil and gas properties of Borrower.
15.2 Covenants and Representations.
(a) Borrower represents and warrants that there have not been during the
period of Borrower's possession of any interest in the Property and, to the
best of its knowledge after reasonable inquiry, there have not been at any
other times, any activities on the Property involving, directly or indirectly,
the use, generation, treatment, storage or disposal of any Hazardous Substances
except in compliance with Applicable Law (i) under, on or in the land included
in the Property, whether contained in soil, tanks, sumps, ponds, lagoons,
barrels, cans or other containments, structures or equipment, (ii) incorporated
in the buildings, structures or improvements included in the Property,
including any building material containing asbestos, or (iii) used in
connection with any operations on or in the Property.
(b) Without limiting the generality of the foregoing and to the extent not
included within the scope of this Section 15.2, Borrower represents and
warrants that it is in full compliance with Applicable Law and has received no
notice from any person or any governmental agency or other entity of any
violation by Borrower or its Affiliates of any Applicable Law.
(c) Borrower shall be solely responsible for and agrees to indemnify
FINOVA, protect and defend FINOVA with counsel reasonably acceptable to FINOVA,
and hold FINOVA harmless from and against any claims, actions, administrative
proceedings, judgments, damages, punitive damages, penalties, fines, costs,
liabilities (including sums paid in settlements of claims), interest or losses,
attorneys' fees (including any fees and expenses incurred in enforcing this
indemnity), consultant fees, expert fees, and other out-of-pocket costs or
expenses actually incurred by FINOVA (collectively, the "Environmental Costs"),
that may, at any time or from time to time, arise directly or indirectly from
or in connection with: (i) the presence, suspected presence, release or
suspected release of any Hazardous Substance whether into the air, soil,
surface water or groundwater of or at the Property, or any other violation of
Applicable Law, or
(ii) any breach of the foregoing representations and covenants; except to
the extent any of the foregoing result from the actions of FINOVA, its
employees, agents and representatives. All Environmental Costs incurred or
advanced by FINOVA shall be deemed to be made by FINOVA in good faith and shall
constitute Obligations hereunder.
16 TERM; TERMINATION.
16.1 Term. The initial term of this Agreement shall be as set forth on the
Schedule (the "Initial Term") and shall be automatically renewed for successive
periods of one (1) year (each, a "Renewal Term"), unless earlier terminated as
provided herein.
16.2 Prior Notice. Each party shall have the right to terminate this
Agreement at the end of the Initial Term or at the end of any Renewal Term by
giving the other party written notice not less than sixty (60) days prior to
the effective date of such termination, by registered or certified mail.
16.3 Payment in Full. Upon the effective date of termination, the
Obligations shall become immediately due and payable in full in cash.
16.4 Early Termination, Termination Fee. In addition to the procedure set
forth in Section 16.2, Borrower may terminate this Agreement at any time but
only upon sixty (60) days' prior written notice and prepayment of the
Obligations. Upon any such early termination by Borrower or any termination of
this Agreement by FINOVA upon the occurrence of an Event of Default, then, and
in any such event, Borrower shall pay to FINOVA upon the effective date of such
termination a fee with respect to the Receivable Loans (the "Termination Fee")
in an amount equal to the amount shown on the Schedule, and a prepayment fee
with respect to the Term Loan in an amount equal to the amount set forth in the
Term Loan Note.
17 DEFAULT.
17.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of the
Obligations at stated maturity, upon acceleration or otherwise;
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(b) Borrower or any other Loan Party falls or neglects to perform, keep,
or observe any Obligation including, but not limited to, any term, provision,
condition, covenant or agreement contained in any Loan Document to which
Borrower or such other Loan Party is a party; provided, however, an Event of
Default shall not be deemed to have occurred hereunder solely as a result of
Borrower's failure to comply with the financial reporting requirements set
forth in Section 5.2 hereof up to three times in any year during the term
hereof so long as Borrower rectifies each such failure of compliance within
five (5) days.
(c) Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations or the
value or priority of FINOVA's security interest in the Collateral is materially
impaired;
(e) Assets of Borrower having a value in excess of $100,000 are is seized,
attached, subjected to a writ or distress warrant, is levied upon or comes into
the possession of any judicial officer;
(f) Borrower shall generally not pay its debts as they become due or shall
enter into any agreement (whether written or oral), or offer to enter into any
agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation
of such creditors or their representatives in the supervision, management or
control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced by
Borrower, or any such proceeding is commenced against Borrower and remains
undischarged or unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of record with respect
to any of Borrower's assets having a value of $100,000 or more and not
removed-within 30 days;
(i) Any judgments are entered against Borrower for which Borrower's actual
liability, after giving effect to all insurance coverage, exceeds $100,000;
(j) Any default shall occur under any material agreement between Borrower
and any third party including, without limitation, any default which would
result in a right by such third party to accelerate the maturity of any
Indebtedness of Borrower to such third party;
(k) Any representation or warranty made or deemed to be made by Borrower,
any Affiliate or any other Loan Party in any Loan Document or any other
statement, document or report made or delivered to FINOVA in connection
therewith shall prove to have been misleading in any material respect;
(l) Any Prohibited Transaction or Reportable Event shall occur with
respect to a Plan which could have a material adverse effect on the financial
condition of Borrower; any lien upon the assets of Borrower in connection with
any Plan shall arise; Borrower or any of its ERISA Affiliates shall fail to make
fall payment when due of all amounts which Borrower or any of its ERISA
Affiliates may be required to pay to any Plan or any Multiemployer Plan as one
or more contributions thereto; Borrower or any of its ERISA Affiliates creates
or permits the creation of any accumulated funding deficiency, whether or not
waived; or
(m) Any transfer of more than twenty-five percent (25%) of the issued and
outstanding shares of common stock or other evidence of ownership of Borrower.
17.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may, at
its option and in its sole discretion and in addition to all of its other
rights under the Loan Documents, terminate this Agreement and declare all of
the Obligations to be immediately payable in full. Borrower agrees that FINOVA
shall also have all of its rights and remedies under applicable law, including,
without limitation, the default rights and remedies of a secured party under
the Code, and upon acceleration of the Obligations in response to the
occurrence of an Event of Default Borrower hereby consents to the appointment
of a receiver by FINOVA in any action initiated by FINOVA pursuant to this
Agreement and to the jurisdiction and venue set forth in Section 19.7 hereof,
and Borrower waives notice and posting of a bond in connection therewith.
Further, FINOVA may, at any time, take possession of the Collateral and keep it
on Borrower's premises, at no cost to FINOVA, or remove any part of it to such
other place(s) as FINOVA may desire, or Borrower shall, upon FINOVA's demand,
at Borrower's sole cost, assemble
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the Collateral and make it available to FINOVA at a place and in a condition
reasonably convenient to FINOVA. FINOVA may sell and deliver any Collateral at
public or private sales, at a location or locations reasonably acceptable to
FINOVA, for cash, upon credit or otherwise, at such prices and upon such terms
as FINOVA deems advisable, at FINOVA's discretion, and may, if FINOVA deems it
reasonable, postpone or adjourn any sale of the Collateral by an announcement
at the time and place of sale or of such postponed or adjourned sale without
giving a new notice of sale. Borrower agrees that FINOVA has no obligation to
preserve rights to the Collateral or marshall any Collateral for the benefit of
any Person. FINOVA is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, name, trade secrets, trade
names, trademarks and advertising matter, or any similar property, in
completing production, advertising or selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to FINOVA's
benefit. Any requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Borrower at its address set forth in the heading to
this Agreement at least five (5) days before sale or other disposition. The
proceeds of sale shall be applied, first, to all attorneys fees and other
expenses of sale, and second, to the Obligations in such order as FINOVA shall
elect, in its sole discretion. FINOVA shall return any excess to Borrower and
Borrower shall remain liable for any deficiency to the fullest extent permitted
by law.
17.3 Standards for Determining Commercial Reasonableness. FINOVA
acknowledges its obligation under the Code to act commercially reasonably in
all respects when disposing of Collateral. Borrower and FINOVA agree that the
following conduct by FINOVA with respect to any disposition of Collateral shall
conclusively be deemed commercially reasonable (but other conduct by FINOVA,
including, but not limited to, FINOVA's use in its sole discretion of other or
different times, places and manners of noticing and conducting any disposition
of Collateral shall not be deemed unreasonable): Any public or private
disposition as to which on no later than the fifth calendar day prior thereto
written notice thereof is mailed or personally delivered to Borrower and, with
respect to any public disposition, on no later than the fifth calendar day
prior thereto notice thereof describing in general non-specific terms, the
Collateral to be disposed of is published once in a newspaper of general
circulation in the county where the sale is to be conducted. The public
disposition shall be at any place designated by FINOVA, with or without the
Collateral being present, and which commences at any time between 8:00 a.m. and
5:00 p.m. (provided that no notice of any public or private disposition need be
given to the Borrower if the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market).
Without limiting the generality of the foregoing, Borrower expressly agrees
that, with respect to any disposition of accounts, instruments and general
intangibles, it shall be commercially reasonable for FINOVA to direct any
prospective purchaser thereof to ascertain directly from Borrower any and all
information concerning the same, including, but not limited to, the terms of
payment, aging and delinquency, if any, the financial condition of any obligor
or account debtor thereon or guarantor thereof, and any collateral therefor.
18 DEFINITIONS.
18.1 Defined Terms. As used in this Agreement, the following terms have the
definitions set forth below:
"Affiliate" means any Person controlling, controlled by or under common control
with Borrower. For purposes of this definition, "control" means the possession,
directly or indirectly, of the power to direct or cause direction of the
management and policies of any Person, whether through ownership of common or
preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer, director, employee or other agent of Borrower, any
shareholder or subsidiary of Borrower, and any other Person with whom or which
Borrower has common shareholders officers or directors.
"Business Day" means any day on which commercial banks in both Los Angeles,
California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities incurred for
the acquisition of any fixed asset or improvement, replacement, substitution or
addition thereto which has a useful life of more than one year and including,
without limitation, those arising in connection with Capital Leases.
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"Capital Lease" means any lease of property by Borrower that, in accordance
with generally accepted accounting principles, should be capitalized for
financial reporting purposes and reflected as a liability on the balance sheet
of Borrower.
"Closing Date" means the date on which the initial Receivable Loan and the Term
Loan is made by FINOVA pursuant to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the State
of Arizona from time to time.
"Collateral" has the meaning set forth in Section 4.1 above.
"Confirmation and Support Agreement" means the Confirmation and Support
Agreement, of even date herewith, executed by Wm. Stacy Locke, in his personal
capacity, in favor of FINOVA.
"Current Assets" at any date means the amount at which the current assets of
Borrower would be shown on a balance sheet of Borrower as at such date,
prepared in accordance with generally accepted accounting principles, provided
that amounts due from Affiliates and investments in Affiliates shall be
excluded therefrom.
"Current Liabilities" at any date means the amount at which the current
liabilities of Borrower would be shown on a balance sheet of Borrower as at
such date, prepared in accordance with generally accepted accounting
principles.
"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services, which
FINOVA, in its sole judgment, shall deem eligible based on such considerations
as FINOVA may from time to time deem appropriate. Without limiting the
foregoing, a Receivable shall not be deemed to be an Eligible Receivable if (i)
the account debtor has failed to pay the Receivable within a period of ninety
(90) days after invoice date, to the extent of any amount remaining unpaid
after such period; (ii) the account debtor has failed to pay more than 25% of
all outstanding Receivables owed by it to Borrower within ninety (90) days
after invoice date; (iii) the account debtor is an Affiliate of Borrower; (iv)
the goods relating thereto are placed on consignment, "bill and hold",
guaranteed sale or other terms pursuant to which payment by the account debtor
may be conditional; (v) the account debtor is not located in the United States,
unless the Receivable is supported by a letter of credit or other form of
guaranty or security, in each case in form and substance satisfactory to
FINOVA; (vi) the account debtor is the United States or any department, agency
or instrumentality thereof or any State, city or municipality of the United
States; (vii) Borrower is or may become liable to the account debtor for goods
sold or services rendered by the account debtor to Borrower; (viii) the account
debtor's total obligations to Borrower exceed 20% of all Eligible Receivables,
to the extent of such excess, unless such excess, up to a maximum amount of
$250,000 at any time, is approved by FINOVA; (ix) the account debtor disputes
liability or makes any claim with respect thereto (up to the amount of such
liability or claim), or is subject to any insolvency or bankruptcy proceeding,
or becomes insolvent, fails or goes out of a material portion of its business;
(x) the amount thereof consists of late charges or finance charges; (xi) the
amount thereof consists of a credit balance more than ninety (90) days past
due; (xii) the face amount thereof exceeds [$1,000], unless accompanied by
evidence of shipment of the goods or completion of the work relating thereto
satisfactory to FINOVA in its sole discretion; or (xiii) cash sales or sales on
a cash on delivery basis.
"Equipment" means all of Borrower's present and hereafter acquired rigs and
other machinery and equipment, molds, machine tools, motors, furniture,
furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes,
jigs, goods and other tangible personal property (other than Inventory) of
every kind and description used in Borrower's operations or owned by Borrower
and any interest in any of the foregoing, and all attachments, accessories, .
accessions, replacements, substitutions, additions or improvements to any of
the foregoing, wherever located.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not incorporated and
whether or not foreign) which is or may hereafter become a member of a group of
which Borrower is a member and which is treated as a single employer under
ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 17.1 of this
Agreement.
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"General Intangibles" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choices in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, rights to purchase or sell real or personal property, rights as a
licensor or licensee of any kind, royalties, telephone numbers, proprietary
information, purchase orders, and all insurance policies and claims (including
without limitation credit, liability, property and other insurance) tax refunds
and claims, computer programs, discs, tapes and tape files, claims under
guaranties, security interests or other security held by or granted to Borrower
to secure payment of any of the Receivables by an account debtor, all rights to
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Indebtedness" means all of Borrower's present and future obligations,
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by Borrower, even though Borrower has not assumed or become
liable therefor, (iii) obligations and liabilities created or arising under any
lease (including Capital Leases) or conditional sales contract or other title
retention agreement with respect to property used or acquired by Borrower, even
though the rights and remedies of the lessor, seller or lender are limited to
repossession, (iv) all unfunded pension fund obligations and liabilities and
(v)deferred taxes.
"Indebtedness for Borrowed Money" shall mean, without duplication, all
Indebtedness: (i) in respect of borrowed money; (ii) evidenced by a note,
debenture or other like written obligation to pay money (including without
limitation, all accrued interest on Borrower's obligations to FINOVA); (iii) for
the deferred purchase price of property (other than trade payables arising in
the ordinary course of business); or (iv) in respect of obligations under
conditional sales or other title retention agreements; and all guarantees of any
of the foregoing.
"Initial Term" has the meaning set forth on the Schedule.
"Initial Total Facility Amount" has the meaning set forth on the Schedule.
"Inventory" means all of Borrower's hereafter acquired goods, merchandise or
other personal property, wherever located, to be furnished under any contract of
service or held for sale or lease, all raw materials, work in process, finished
goods and materials and supplies of any kind, nature or description which might
hereafter be used or consumed in Borrower's business, and all documents of title
or other documents representing them.
"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
"Loan Documents" means, collectively, this Agreement, the Term Loan Note, and
any other agreement entered into in connection with this Agreement, together
with all alterations, amendments, changes, extensions, modifications,
refinancings, refundings, renewals, replacements, restatements, or supplements,
of or to any of the foregoing.
"Loan Party" means Borrower and Wm. Stacy Locke, an individual, in connection
with his execution and delivery of the Validity Agreement.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA Sections
3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of Borrower or
any ERISA Affiliate.
"Net Worth" at any date means the Borrower's net worth as determined in
accordance with generally accepted accounting principles, consistently applied.
"Obligations" means all present and future loans, advances, debts, liabilities,
obligations, covenants, duties and indebtedness at any time owing by Borrower to
FINOVA, whether evidenced by this Agreement, any note or other instrument or
document, whether arising from an extension of credit, opening of a letter of
credit, banker's acceptance, loan, guaranty, indemnification or
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<PAGE> 18
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by FINOVA in Borrower's debts owing
to others), absolute or contingent, due or to become due, including, without
limitation, all interest, charges, expenses, fees, attorney's fees, expert
witness fees, examination fees, letter of credit fees, collateral monitoring
fees, closing fees, facility fees, Termination Fees, Minimum Interest Charges
and any other sums chargeable to Borrower hereunder or under any other agreement
with FINOVA.
"Operating Cash Flow" shall mean, for any fiscal period, the net income or loss
of Borrower for such period, determined in accordance with generally accepted
accounting principles; plus the following items to the extent deducted in the
calculation of such net income or loss: (i) depreciation and amortization; (ii)
interest expense paid and accrued; (iii) provision for income and franchise
taxes; and (iv) other non-cash expenses; minus (a) capital expenditures actually
made during such period that are not financed; (b) income and franchise taxes
actually paid or required to be paid during such period; and (c) other non-cash
income.
"Overlines" has the meaning set forth in Section 1.3 hereof.
"PBGC" means the Pension Benefit Guarantee Corporation.
"Permitted Encumbrance" means each of the liens, mortgages and other security
interests set forth on the Schedule and incorporated herein by this reference.
"Person" means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, government, or any
agency or political division thereof, or any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for employees
of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrower as of the date set
forth in the Schedule, and as of each subsequent date on which audited balance
sheets are delivered to FINOVA from time to time hereunder, and the related
statements of operations, changes in stockholder's equity and changes in cash
flow for the periods ended on such dates.
"Prohibited Transaction" means any transaction described in Section 406 of
ERISA which is not exempt by reason of Section 408 of ERISA, and any
transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Section 4975(c)(2) of the IRC.
"Receivable Loans" has the meaning set forth on the Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired accounts
(whether or not earned by performance), proceeds of any letters of credit naming
Borrower as beneficiary, contract rights, chattel paper, instruments, documents
and all other forms of obligations at any time owing to Borrower, all guaranties
and other security therefor, whether secured or unsecured, all merchandise
returned to or repossessed by Borrower, and all rights of stoppage in transit
and all other rights or remedies of an unpaid vendor, lienor or secured party;
provided, however, any and all payment or other rights of Borrower under any
current or future oil and gas leases or which relate to the oil and gas
properties owned by Borrower shall not constitute Receivables or General
Intangibles for any purpose hereunder.
"Renewal Term" has the meaning set forth on the Schedule.
"Reportable Event" means a reportable event described in Section 4043 of ERISA
or the regulations thereunder, a withdrawal from a Plan described in Section
4063 of ERISA, or a cessation of operations described in Section 4068(f) of
ERISA.
"Subordinated Debt" means liabilities of Borrower the repayment of which is
subordinated, to the payment and performance of the Obligations, pursuant to a
subordination agreement on FINOVA's standard form.
"Term Loan" has the meaning set forth in the Schedule.
"Term Loan Note" has the meaning set forth in the Schedule.
"Total Debt Service" shall mean, for any fiscal period, principal and interest
payments made or required to be made by Borrower during such period on all
Indebtedness for Borrowed Money.
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"Total Debt Service Coverage" means the ratio of Operating Cash flow for the
twelve-month period then ended to Total Debt Service for the twelve-month period
then ended.
18.2 Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with generally accepted accounting principles, consistently applied. All other
terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the Code, to the extent such terms are defined therein.
19 MISCELLANEOUS.
19.1 Recourse to Security: Certain Waivers. All Obligations shall be
payable by Borrower as provided for herein and, in full, at the termination of
this Agreement; recourse to security shall not be required at any time.
Borrower waives presentment and protest of any instrument and notice thereof,
notice of default and, to the extent permitted by applicable law, all other
notices to which Borrower might otherwise be entitled.
19.2 No Waiver by FINOVA. Neither FINOVA's failure to exercise any right,
remedy or option under this Agreement, any supplement, the Loan Documents or
other agreement between FINOVA and Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. No waiver by FINOVA shall be
effective unless in writing and then only to the extent stated. No waiver by
FINOVA shall affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not exclusive.
19.3 Binding on Successor and Assigns. All terms, conditions, promises,
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and Borrower's respective representatives, successors and assigns.
19.4 Severability. If any provision of this Agreement shall be prohibited
or invalid under applicable law, it shall be ineffective only to such extent,
without invalidating the remainder of this Agreement.
19.5 Amendments; Assignments. This Agreement may not be modified, altered
or amended, except by an agreement in writing signed by Borrower and FINOVA.
Borrower may not sell, assign or transfer any interest in this Agreement or any
other Loan Document, or any portion thereof, including, without limitation, any
of Borrower's rights, title, interests, remedies, powers and duties hereunder
or thereunder. Borrower hereby consents to FINOVA's participation, sale,
assignment, transfer or other disposition, at any time or times hereafter, of
this Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, FINOVA's rights, title, interests,
remedies, powers and duties hereunder or thereunder. In connection therewith,
FINOVA may disclose all documents and information which FINOVA now or hereafter
may have relating to Borrower or Borrower's business. To the extent that FINOVA
assigns its rights and obligations hereunder to a third party, FINOVA shall
thereafter be released from such assigned obligations to Borrower and such
assignment shall effect a novation between Borrower and such third party.
19.6 Integration. This Agreement, together with the Schedule (which is a
part hereof) and the other Loan Documents, reflect the entire understanding of
the parties with respect to the transactions contemplated hereby.
19.7 Governing Law, Waivers. THIS AGREEMENT SHALL BE INTERPRETED IN
ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF
THE STATE OF ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH
STATE. BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED WITHIN THE COUNTY OF MARICOPA, THE STATE OF ARIZONA OR,
AT THE SOLE OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE
LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER
THE MATTER IN CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON
CONVENIENS AND VENUE. BORROWER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS
UPON IT, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER
SET FORTH IN SECTION 19.13 HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER
WAIVES ANY RIGHT IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT
ENTERED AGAINST IT.
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19.8 Survival. All of the representations and warranties of Borrower
contained in this Agreement shall survive the execution, delivery and
acceptance of this Agreement by the parties. No termination of this Agreement
or of any guaranty of the Obligations shall affect or impair the powers,
obligations, duties, rights, representations, warranties or liabilities of the
parties hereto and all shall survive any such termination.
19.9 Evidence of Obligations. Each Obligation may, in FINOVA's discretion,
be evidenced by notes or other instruments issued or made by Borrower to
FINOVA. If not so evidenced, such Obligation shall be evidenced solely by
entries upon FINOVA's books and records.
19.10 Collateral Security. The Obligations shall constitute one loan
secured by the Collateral. FINOVA may, in its sole discretion, (i) exchange,
enforce, waive or release any of the Collateral, (ii) apply Collateral and
direct the order or manner of sale thereof as it may determine, and (iii)
settle, compromise, collect or otherwise liquidate any Collateral in any manner
without affecting its right to take any other action with respect to any other
Collateral.
19.11 Application of Collateral. FINOVA shall have the continuing and
exclusive right to apply or reverse and re-apply any and all payments to any
portion of the Obligations in such order and manner as FINOVA shall determine
in its sole discretion. To the extent that Borrower makes a payment or FINOVA
receives any payment or proceeds of the Collateral for Borrower's benefit which
is subsequently invalidated, declared to be fraudulent or preferential, set
aside or required to be repaid to a trustee, debtor in possession, receiver or
any other party under any bankruptcy law, common law or equitable cause, then,
to such extent, the Obligations or part thereof intended to be satisfied shall
be revived and continue as if such payment or proceeds had not been received by
FINOVA.
19.12 Loan Requests. Each oral or written request for a loan by any Person
who purports to be any Employee, officer or authorized agent of Borrower shall
be made to FINOVA on or prior to 11:00 a.m., Chicago time, on the Business Day
on which the proceeds thereof are requested to be paid to Borrower and shall be
conclusively presumed to be made by a Person authorized by Borrower to do so
and the crediting of a loan to Borrower's operating account shall conclusively
establish Borrower's obligation to repay such loan. Unless and until Borrower
otherwise directs FINOVA in writing, all loans shall be wired to Borrower's
operating account set forth on the Schedule.
19.13 Notices. Any notice required hereunder shall be in writing and
addressed to the Borrower and FINOVA at their addresses set forth at the
beginning of this Agreement. Notices hereunder shall be deemed received on the
earlier of receipt, whether by mail, personal delivery, facsimile, or
otherwise, or upon deposit in the United States mail, postage prepaid.
19.14 Brokerage Fees. Borrower represents and warrants to FINOVA that, with
respect to the financing transaction herein contemplated, no Person other than
Capital Investment Group is entitled to any brokerage fee or other commission
and Borrower agrees to indemnify and hold FINOVA harmless against any and all
such claims.
19.15 Disclosure. No representation or warranty made by Borrower in this
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to Borrower
which Borrower has not disclosed to FINOVA in writing with respect to the
transactions contemplated by this Agreement which materially and adversely
affects the business, assets, operations, prospects or condition (financial or
otherwise), of Borrower.
19.16 Publicity. FINOVA is hereby authorized to issue appropriate press
releases and to cause a tombstone to be published announcing the consummation
of this transaction and the aggregate amount thereof.
19.17 Captions. The Section titles contained in this Agreement are without
substantive meaning and are not part of this Agreement.
19.18 Injunctive Relief. Borrower recognizes that, in the event Borrower
fails to perform, observe or discharge any of its Obligations under this
Agreement, any remedy at law may prove to be inadequate relief to FINOVA.
Therefore, FINOVA, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
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19.19 Counterparts. This Agreement may be executed in one or more
counterparts, each of which taken together shall constitute one and the same
instrument.
19.20 Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments or
exhibits hereto.
19.21 Time of Essence. Time is of the essence for the performance by
Borrower of the Obligations set forth in this Agreement.
19.22 Limitation of Actions. Borrower agrees that any claim or cause of
action by Borrower against FINOVA, or any of FINOVA's directors, officers,
employees, agents, accountants or attorneys, based upon, arising from, or
relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause or thing whatsoever, whether or not relating hereto
or thereto, occurred, done, omitted or suffered to be done by FINOVA, or by
FINOVA's directors, officers, employees, agents, accountants or attorneys,
whether sounding in contract or in tort or otherwise, shall be barred unless
asserted by Borrower by the commencement of an action or proceeding in a court
of competent jurisdiction by the filing of a complaint within one year after
the first act, occurrence or omission upon which such claim or cause of action,
or any part thereof, is based and service of a summons and complaint on an
officer of FINOVA or any other person authorized to accept service of process
on behalf of FINOVA, within 90 days thereafter. Borrower agrees that such
one-year period of time is a reasonable and sufficient time for Borrower to
investigate and act upon any such claim or cause of action. The one-year period
provided herein shall not be waived, tolled, or extended except by a specific
written agreement of FINOVA. This provision shall survive any termination of
this Loan Agreement or any other agreement.
19.23 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable
for any indirect, special, incidental or consequential damages in connection
with any breach of contract, tort or other wrong relating to this Agreement or
the Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like), whether such damages are foreseeable or
unforeseeable, even if FINOVA has been advised of the possibility of such
damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by the Borrower through the ordinary negligence of FINOVA,
or any FINOVA Affiliate. "FINOVA Affiliate" shall mean FINOVA's directors,
officers, employees, agents, attorneys or other person or entity affiliated
with or representing FINOVA.
19.24 Notice of Breach by FINOVA. Borrower agrees to give FINOVA written
notice of (i) any action or inaction by FINOVA or any attorney of FINOVA in
connection with any Loan Documents that may be actionable against FINOVA or any
attorney of FINOVA or (ii) any defense to the payment of the Obligations for
any reason, including, but not limited to, commission of a tort or violation of
any contractual duty or duty implied by law. Borrower agrees that unless such
notice is fully given as promptly as possible (and in any event within ninety
(90) days) after Borrower has knowledge, or with the exercise of reasonable
diligence should have had knowledge, of any such action, inaction or defense,
Borrower shall not assert, and Borrower shall be deemed to have waived, any
claim or defense arising therefrom.
19.25 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND BORROWER EACH HEREBY
WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN FINOVA AND BORROWER; OR (iii)
ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
FINOVA OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE.
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19.26 Receipt of Funds. In this document or any related document, whenever
there is a reference to the "receipt by FINOVA of funds", or any similar
language regarding receipt of funds by FINOVA, in order to be credited to the
applicable account on the date that good funds were received by FINOVA (either
directly or through a bank account or lock box arrangement, etc.), the funds
must reach FINOVA no later than 10:00 a.m. on that date (using the time zone of
the FINOVA office where the Borrower's loan is managed on the date the transfer
of funds is made). Any funds reaching FINOVA after 10:00 a.m. will be credited
to the appropriate account on the next immediately following Business Day.
BORROWER:
SOUTH TEXAS DRILLING & EXPLORATION, INC.
BY________________________________________
TITLE_____________________________________ WITNESSED BY:
__________________________________
FINOVA:
FINOVA CAPITAL CORPORATION
BY_______________________________________
TITLE____________________________________
[LOAN AND SECURITY AGREEMENT TO BE
EXECUTED BEFORE A NOTARY PUBLIC]
22
<PAGE> 1
EXHIBIT 10.cc
FINOVA
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: SOUTH TEXAS DRILLING & EXPLORATION,, INC.
ADDRESS: 9310 BROADWAY, BUILDING I
SAN ANTONIO, TEXAS 78217
DATE: MAY 8, 1996
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
INITIAL TOTAL FACILITY AMOUNT (SECTION 1.1):
$1,750,000
LOANS (SECTION 1.2):
A. REVOLVING LOANS: A revolving line of credit consisting of loans
against Borrower's Eligible Receivables ("Receivable Loans") in an aggregate
outstanding principal amount not to exceed the lesser of (a) or (b) below:
(a) $500,000, or
(b) 80% of the net amount of Eligible Receivables.
<PAGE> 2
B. TERM LOAN: A term loan against the value of Borrower's machinery
and equipment in the original principal amount of One Million Two Hundred Fifty
Thousand Dollars ($1,250,000) (the "Term Loan"), which shall be evidenced by
and payable in accordance with the terms of the Term Loan Note.
CONDITIONS PRECEDENT (SECTION 2.1):
The obligation of FINOVA to make the initial advance hereunder is
subject to the fulfillment, to the satisfaction of FINOVA and its counsel, of
each of the following conditions, in addition to the conditions set forth in
Sections 2.1 and 2.2 above: (a) Borrower shall have excess borrowing
availability under the Receivable Loans facility of not less than $150,000,
after giving effect to the initial advance hereunder and after giving effect to
payment in full of all of Borrower's (i) accounts payable outstanding for sixty
(60) days or more from their written due date or for more than ninety (90) days
from their invoice date, and (ii) all book overdrafts; and (b) there shall have
been no material adverse change in the business, operations, profits or
prospects of Borrower, or in the condition of the assets of Borrower, between
January 31, 1996 and the date hereof. Borrower shall cause the conditions
precedent set forth in Section 2.1 of this Agreement and set forth above in
this Schedule to be satisfied on or before the Closing Date.
INTEREST AND FEES (SECTION 3.1):
Interest. Borrower shall pay FINOVA interest on the daily outstanding
balance of Borrower's Receivable Loans account at a per annum rate of two and
three-quarters (2.75) percentage points in excess of the rate of interest
announced publicly by Citibank, N.A., from time to time as its "base rate" (or
any successor thereto), which may not be such institution's lowest rate (the
"Base Rate"). The interest rate chargeable hereunder in respect of the
Receivable Loans shall be increased or decreased, as the case may be, without
notice or demand of any kind, upon the announcement of any change in the Base
Rate. Each change in the Base Rate shall be effective hereunder on the first
day following the announcement of such change, provided, that a cumulative
change of less than one-fourth of one percent (0.25%) shall not be considered.
Interest charges and all other fees and charges herein shall be computed on the
basis of a year of 360 days and actual days elapsed and shall be payable to
FINOVA in arrears on the first day of each month. Borrower shall pay FINOVA
interest on the unpaid principal balance of the Term Loan as set forth in the
Term Loan Note.
Minimum Interest Charge. With respect to each calendar month or portion
thereof during the term of this Agreement (excluding the calendar month in
which this Agreement is executed), Borrower shall also pay FINOVA, on the first
day of the next month, as a minimum charge, the amount by which accrued
interest pursuant to the section above for such month or portion thereof is
less than $5,000 (the "Minimum Interest Charge"). Notwithstanding the
occurrence of any Event of Default hereunder or termination of this Agreement
by FINOVA as a result thereof, the Minimum Interest Charge shall be paid by
Borrower for the unexpired portion of the Initial Term or any Renewal Term of
this Agreement.
S-2
<PAGE> 3
Closing Fee. At the closing of this transaction, Borrower shall pay to
FINOVA a closing fee in an amount equal to one percent (1.0%) of the Initial
Total Facility Amount, which shall be deemed fully earned at the time of
payment.
Examination Fees. Borrower agrees to pay to FINOVA an examination fee in
the amount of Five Hundred Dollars ($500) per person per day in connection with
each audit or examination of Borrower performed by FINOVA prior to or after the
date hereof, provided that prior to the occurrence of an Event of Default
Borrower shall not be obligated to FINOVA for more than $8,000 plus
out-of-pocket costs in any year in connection with such audits or expenses.
Without limiting the generality of the foregoing, Borrower shall pay to FINOVA
an initial examination fee in an amount equal to $500 per person per day. Such
initial examination fee shall be deemed fully earned at the time of payment and
due and payable upon the closing of this transaction, and shall be deducted
from any good faith deposit paid by Borrower to FINOVA prior to the date of
this Agreement, or if such good faith deposit is insufficient to cover such
initial examination fee, Borrower shall pay such fee to FINOVA promptly
following Borrower's receipt of FINOVA's statement therefor.
REPORTING REQUIREMENTS (Section 5.2):
1. Borrower shall provide FINOVA with monthly agings aged by invoice date and
reconciliations of Receivables within ten (10) days after the end of each
month.
2. Borrower shall provide FINOVA with monthly accounts payable agings aged by
invoice date and outstanding or held check registers within ten (10) days after
the end of each month.
3. If Borrower hereafter acquires any Inventory, Borrower shall provide FINOVA
with monthly perpetual inventory reports for such Inventory valued on a
first-in, first-out basis at the lower of cost or market (in accordance with
generally accepted accounting principles) or such other inventory reports as
are reasonably requested by FINOVA, all within fifteen (15) days after the end
of each month.
4. Borrower shall provide FINOVA with monthly unaudited financial statements
within thirty (30) days after the end of each month.
5. Borrower shall provide FINOVA with annual operating budgets (including
income statements, balance sheets and cash flow statements, by month) for the
upcoming fiscal year of Borrower within thirty (30) days prior to the end of
each fiscal year of Borrower.
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<PAGE> 4
BORROWER INFORMATION:
Borrower's State of Incorporation (Section 12.1): Texas
Fictitious Names/Prior Corporate
Names (Section 12.2): South Texas Drilling Rig-
10, Ltd.
Borrower Locations (Section 12.16): (1) 9310 Broadway, Building I
San Antonio, Texas 78217
(2) 210 Industrial Boulevard
Kenedy, Texas 78119
Permitted Encumbrances (Section 18.1): See Exhibit 18.1 attached
hereto and incorporated
herein by this reference.
FINANCIAL COVENANTS (SECTION 13.14):
Borrower shall comply with all of the following covenants. Compliance
shall be determined as of the end of each month, except as otherwise
specifically provided below:
Net Worth. Borrower shall maintain Net Worth of not less than
One Million Five Hundred Thousand Dollars
($1,500,000);
Debt to Net Worth. Borrower shall maintain a ratio of Indebtedness to
Net Worth of not greater than 2.0 to 1.0; and
Total Debt Service
Coverage. Borrower shall maintain Total Debt Service Coverage
of not less than 0.80 to 1.0.
NEGATIVE COVENANTS (SECTION 14):
Capital Expenditures: Borrower shall not make or incur any Capital
Expenditure of any kind if, after giving effect
thereto, the aggregate amount of all such Capital
Expenditures by Borrower in any fiscal year
(beginning with the March 31, 1997 fiscal year)
would exceed Three Hundred Thousand Dollars
($300,000).
Compensation: Borrower shall not pay total compensation,
including salaries, withdrawals, fees, bonuses,
commissions, drawing accounts and other payments,
whether directly or indirectly, in money or
otherwise,
S-4
<PAGE> 5
during any fiscal year to all of Borrower's
executives, officers' and directors (or any
relative thereof) in an amount in excess of
$300,000, in the case of Borrower's 1997 fiscal
year or in excess of one hundred twenty percent
(120%) of the total compensation paid by Borrower
to such individuals during its immediately
preceding fiscal year, in the case of each
subsequent fiscal year of Borrower.
Indebtedness: Borrower shall not create, incur, assume or permit
to exist any Indebtedness (including Indebtedness
in connection with Capital Leases) in excess of
$300,000 other than (i) the Obligations, (ii) trade
payables and other contractual obligations to
suppliers and customers incurred in the ordinary
course of business and (iii) other Indebtedness
existing on the date of this Agreement and
reflected in the Prepared Financials (other than
Indebtedness paid on the date of this Agreement
from proceeds of the initial advances hereunder).
TERM (SECTION 16.1):
The initial term of this Agreement shall be twenty-five (25) months from
the date hereof (the "Initial Term") and shall be automatically renewed for
successive periods of one (1) year each (each, a "Renewal Term"), unless
earlier terminated as provided in Section 16 or 17 above or elsewhere in this
Agreement.
TERMINATION FEE (SECTION 16.4):
The Termination Fee provided in Section 16.4 shall be an amount equal to
the following percentage of the average daily outstanding balance of the
Receivable Loans for the 180-day period (or lesser period if applicable)
preceding the date of termination:
(i) three percent (3.0%), if such early termination occurs on or
prior to the first anniversary of this Agreement;
(ii) one percent (1.0%), if such early termination occurs after the
first anniversary of this Agreement.
ADDITIONAL DEFINITIONS (SECTION 18.1):
"Prepared Financials" means the balance sheets of Borrower as of January
31, 1996, and as of each subsequent date on which
audited balance sheets are delivered to FINOVA from
time to time hereunder, and the related statements
of operations, changes in stockholder's equity and
changes in cash flow for the periods ended on such
dates.
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<PAGE> 6
DISBURSEMENT (SECTION 19.12):
Unless and until Borrower otherwise directs FINOVA in writing, all loans
shall be wired to Borrower's general operating account number 0014265-11
maintained with International Bank of Commerce.
BORROWER: FINOVA:
SOUTH TEXAS DRILLING & FINOVA CAPITAL CORPORATION
EXPLORATION, INC.
By: By:
----------------------------------- -----------------------------------
Title: Title:
-------------------------------- --------------------------------
Witnessed By:
- --------------------------------------
[Schedule to be executed before a Notary Public]
S-6
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 325,568
<SECURITIES> 0
<RECEIVABLES> 915,846
<ALLOWANCES> 140,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,149,430
<PP&E> 11,110,070
<DEPRECIATION> 8,001,254
<TOTAL-ASSETS> 4,285,650
<CURRENT-LIABILITIES> 2,254,258
<BONDS> 0
<COMMON> 560,100
0
235,000
<OTHER-SE> 682,376
<TOTAL-LIABILITY-AND-EQUITY> 4,285,650
<SALES> 380,110
<TOTAL-REVENUES> 7,499,654
<CGS> 169,008
<TOTAL-COSTS> 7,344,046
<OTHER-EXPENSES> (12,836)
<LOSS-PROVISION> 140,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,772
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,772
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
