<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, 1997
[ ] 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. [X]
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 20, 1997): $5,086,791
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of June 20, 1997.
Class: Common Stock Shares Outstanding: 5,808,003
Par Value: $0.10
<PAGE> 2
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, 1997, 1996 and 1995 in note 5 ("Business Segments
and Supplementary Earnings Information") of the Notes to Consolidated Financial
Statements, which note is incorporated herein by reference.
This Form 10K contains certain "forward-looking" statements as such term is
defined in The Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect" and "intend" and words or phrases of similar
import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance,
technological change, changes in industry practices, one-time events and other
factors described herein and in other filings made by the Company with the
Securities and Exchange Commission. Based upon changing conditions, should any
one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected, or
intended. The Company does not intend to update these forward-looking
statements.
CONTRACT DRILLING
At the end of fiscal 1997, the Company owned four land drilling rigs with
approximate depth capabilities ranging from 7,000 feet to 11,500 feet. All
four rigs were operated during all of fiscal 1997. The Company's rigs are
presently operating in south Texas, along the Gulf Coast of Texas and in the
country of Belize, Central America. All four of the rigs are currently in
operation.
On June 18, 1997, the Company closed on the purchase of the drilling
operations of San Patricio Corporation, a drilling contractor based in Corpus
Christi, Texas. Equipment purchased in this transaction included two land
drilling rigs with depth capabilities ranging from 6,000' to 10,000' and a
leased land drilling rig with depth capability of 9,500'.
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 during fiscal 1997 is set forth
in the following table:
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Approximate Aggregate
Rig Depth Utilization
Number Type Capability During 1997
------ ---- ----------- -----------
<S> <C> <C> <C>
4 Skytop - Brewster
N-46 11,500 86%
6 Skytop - Brewster
DHI-4610 10,000 67%
11 Skytop - Brewster
N-46 11,500 85%
14 Skytop - Brewster
N-46 11,500 84%
</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.
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.
However, certain equipment items, such as used drill pipe, are becoming more
difficult to find, requiring the purchase of more expensive new equipment.
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
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
costs and to assume certain expenses in connection with drilling operations.
During the year ended March 31, 1997 the Company drilled 46 wells with 72% of
contract drilling revenues attributable to daywork contracts, 17% to footage
contracts, and 11% to turnkey contracts. 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.
In several previous years 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
previously 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 prior to fiscal 1997.
Fiscal 1997, however, saw a reversal of the downward trend of prior years.
Because of increased drilling activity and a decrease from prior years in the
number of drilling rigs available, the Company has experienced increased demand
for its rigs.
During the year ended March 31, 1997, the largest customer of the Company's
drilling rigs was Sanchez-O'Brien Oil and Gas Corp. This customer accounted
for approximately 14% 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 1997.
The Company actively markets its rigs and completed contracts for 32
customers in 1997 compared to 27 customers in 1996 and 19 customers in 1995.
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,
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 increased over that of
prior years. This increased activity continued through fiscal 1997.
As part of its efforts to diversify and expand, the Company undertook a
drilling contract in the country of Belize. The contract began in May, 1997,
and should be completed in July, 1997. Under the contract, the Company is
earning daywork rates greater than those being earned on contracts in south
Texas. There is a likelihood that contracts for additional drilling in
Central America will be executed. Management believes that this venture is an
excellent opportunity for the Company to expand its sphere of operations and
diversify its dependence on drilling in a limited geographical area.
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.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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 or fiscal 1997. In
fiscal 1997, the Company sold its interest in one well. At the present time,
the Company is in negotiations to purchase additional working interest in the
wells it operates and is participating in small working interests with certain
of its drilling customers.
Productive Wells and Acreage
At March 31, 1997, the Company had operating interests in 19 producing
wells in Texas. Additionally, at March 31, 1997, 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:
<TABLE>
<CAPTION>
Productive Wells (1) (2) Developed
Oil Gas Acreage (2) (3)
--------------- ------------- ---------------
Location by County Gross Net Gross Net Gross Net
------------------ ----- ----- ----- --- ----- ----
Texas
-----
<S> <C> <C> <C> <C> <C> <C>
Bastrop 14 6.41 - - 1,158 497
Lee 5 3.16 - - 369 229
-- ---- --- --- ----- ---
19 9.57 - - 1,527 726
== ==== === === ===== ===
</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.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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.
No wells were added in fiscal 1996. During fiscal 1997 the Company sold its
interest in one well. At the present time, the company is participating in two
exploratory wells currently being drilled.
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.
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,
--------------------------------------------------------
1997 1996 1995
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Development Wells:
Oil - - - - 1 .68
Gas - - - - - -
Dry hole - - - - 1 .04
--- --- --- --- --- ----
TOTAL - - - - 2 .72
=== === === === === ====
</TABLE>
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Production Information
The Company is involved in oil and gas exploration, development and
production. Oil and gas production accounted for approximately 4.7% of the
Company's total revenues in the fiscal year ended March 31, 1997 compared with
5.1% in the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Oil Production (in Bbls) (1) 10,007 12,260 15,700
Gas production (in Mcf) (1) 65,963 89,802 73,488
Revenues from production (1) $401,542 380,110 405,409
Production (lifting) costs (2) $177,318 169,008 166,594
Net Revenues $224,224 211,102 238,815
Average sales price:
Oil (per Bbl) $ 22.24 17.70 17.00
Gas (per Mcf) $ 2.73 1.84 1.91
Average production cost per unit
(in barrel equivalents) (3) $ 8.44 6.21 5.96
</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.
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.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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.
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
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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.
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.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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, 1997, Sanchez-O'Brien Oil and Gas
Corp. contributed 14% 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
Prior to the last quarter of fiscal 1997, the Company leased its
personnel from a personnel leasing company. In December, 1996, the leasing
contract was terminated and the Company became the employer of the personnel.
At May 24, 1997, the Company had 94 full-time employees, 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 employees, nine were administrative
employees and seven were supervisory. None of the employees 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 its employees 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 employed by 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 $460,000 plus attorney's
fees. This lawsuit is being defended by the Company's general liability
insurance carrier with a reservation of rights letter. 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. The case was originally scheduled to go to trial in
January, 1997. However, the plaintiff has been granted several postponements.
The case is currently scheduled to go to trial in August, 1997.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Another case is the Jose C. Rodriguez and Margarita Rodriguez vs.
Employer's Select Management Inc. and South Texas Drilling and Exploration,
Inc., Cause No. 93-CI05512, 15th District Court, Bexar County, Texas. Personal
injury by employee of Employer Select Management, Inc. ("STDE") was defended by
Company's automobile liability insurer under a reservation of rights letter.
This case was tried in June, 1995, under a partial settlement agreement and
release between the Plaintiffs and the Company under which the Company's
liability was limited by agreement to $200,000, payable in eleven (11)
quarterly payments of $15,000 each and a final quarterly payment totalling
$35,000, payments to commence within thirty (30) days of the entry of judgment.
Under the terms of the agreement, to the extent the amount of any judgment is
collected from the Company's automobile insurer the $200,000 payable by the
Company shall be reduced. Judgment was entered against the Company on June 29,
1995, in the amount of $366,394 plus pre-judgment interest, after a non-jury
trial. The Company's insurer took the position that the Plaintiff was an
employee of the Company at the time the injuries were sustained and that the
insurer is not liable for the amount of the judgment as the result of an
employee exclusion in its policy. The insurer brought a declaratory judgment
action against the Company and the Plaintiff in order to establish that the
damages found are not covered by the Company's policy with the insurer. This
declaratory judgment has been decided in favor of the Company. Consequently,
the Company has been reimbursed for all payments made on its $200,000
settlement amount and has no obligation for any additional payments.
While the outcome of these matters cannot be determined at year end
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
------------------------
1997 Bid Ask
---- ------ -----
<S> <C> <C>
First Quarter $.3125 .6250
Second Quarter .3750 .7500
Third Quarter .4375 .6250
Fourth Quarter .4375 .7500
</TABLE>
-11-
<PAGE> 12
<TABLE>
OVER-THE-COUNTER
------------------------
1996 Bid Ask
---- ------ -----
<S> <C> <C>
First Quarter $.1800 .5000
Second Quarter .3100 .5600
Third Quarter .2500 .5000
Fourth Quarter .2500 .5000
</TABLE>
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 20, 1997, 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. Additionally, the Company's debt
facility includes a provision preventing the Company from issuing dividends.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
March 31,
-------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues $8,503 7,500 5,494 7,050 6,109
Earnings before taxes, depreciation,
depletion and amortization 1,175 593 253 1,069 842
Earnings (loss) before income taxes and
extraordinary item 597 3 (244) 723 486
Net earnings (loss) 564 3 (244) 723 486
Earnings (loss) per share before
extraordinary item 0.09 -- (0.05) .14 .07
Net earnings (loss) per share 0.09 -- (0.05) .14 .10
Long-term debt, excluding current
installments 1,220 554 88 91 96
Shareholders' equity 2,054 1,477 1,541 1,744 1,013
Total assets 5,051 4,286 3,473 4,093 2,781
Capital expenditures 763 1,162 835 961 953
</TABLE>
In fiscal 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which eliminated the
treatment of tax benefits from the use of net operating loss carryforwards as
an extraordinary item in fiscal years after 1993.
-12-
<PAGE> 13
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Liquidity
During the past fifteen years, drilling activity in the oil and gas
industry has been volatile with periods of high activity and other periods of
low activity. In fiscal 1996, drilling activity began to increase. This
increased activity continued through fiscal 1997. During fiscal 1996, the
utilization rate for the Company's rigs was 64 percent while operating five
rigs. In fiscal 1997, the utilization rate increased to 80 percent while
operating four rigs. The actual number of drilling days increased to 1,175 in
fiscal 1997 from 1,076 in fiscal 1996. Drilling rates charged to customers on
drilling contracts in fiscal 1997 showed some increase over those charged in
fiscal 1996. This increase in drilling rates reflects the increased demand for
drilling rigs during the period. At March 31, 1997, the Company's current
ratio was 1.02 compared to .51 at March 31, 1996. Working capital at March 31,
1997 was $29,166 compared to ($1,104,828) at March 31, 1996. This increase was
due, in part, to the increased drilling activity and to the debt restructuring
discussed below in this section.
During fiscal 1997, the Company terminated its line of credit with its
bank. The line of credit was replaced with the revolving line of credit
described below. The revolving line of credit was used only occasionally to
meet cash requirements of the Company. Additional borrowings during the year
included $90,000 for additional drilling equipment and $10,375 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 (8.50% at March
31, 1997) 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%. Subsequent to year end, the
Company secured additional financing to purchase additional drilling equipment
and rig moving equipment. The additional amount of financing was $1,050,000.
In securing this financing, the Company also negotiated more favorable terms on
its existing debt secured by drilling equipment, transportation equipment and
the yard facility. Under the new terms, the term loan carries an interest rate
of prime plus 2.25% and revolving loan an interest rate of prime plus 2.25%.
The monthly payments on both notes are now $27,381 plus interest.
The ratio of trade accounts receivable to total revenue increased to
7.4% at the end of fiscal 1997 from 7.1% at the end of fiscal 1996. This
increase was the result of the increased drilling activity in the fourth
quarter of the fiscal year. The ratio of the Company's shareholders' equity in
relation to outstanding debt (vendor and bank notes payable) increased in
fiscal 1997. At March 31, 1996, the ratio of shareholders' equity to notes
payable was 1 to .83. At March 31, 1997, the ratio was 1 to .71. The increase
in shareholders' equity was primarily due to the Company's profitability.
The Company's liquidity was also affected by an uncollected account
receivable of $279,000 from drilling operations in fiscal 1996. 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
-13-
<PAGE> 14
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
damages of $460,000 plus attorney's fees. 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. In fiscal 1996, an
allowance for uncollectible accounts in the amount of $140,000 was established
for this account. A trial date has been scheduled in August, 1997.
In April, 1997, the Company issued a new Series A 8% Convertible
Preferred Stock. The issue consisted of 400,000 shares with a designated par
value of $2.00 per share. Dividends on the stock are cumulative. This
Preferred Stock is convertible into two shares of Common Stock for each share
of Preferred Stock and one share of Common Stock for each $.50 of due but
unpaid dividends on the Series A 8% Convertible Preferred Stock. The stock is
redeemable at the Company's option at or following the third anniversary of the
issuance of such stock provided, generally, that the price of the Company's
common stock equals or exceeds $2.50 per share. The proceeds from the stock
were used to reduce trade accounts payable, bank debt and to acquire drilling
equipment. Prior to the issuance of this new Series A preferred stock, the
Company redeemed its previously issued and outstanding Series A preferred stock
consisting of 235,000 shares of stock with a stated par value of $1.00 per
share. The outstanding shares were redeemed for a cash payment of $75,000.
Included in the results of operations for fiscal 1997 was the reversal
of the provision for litigation settlement in the amount of $200,000
established in fiscal 1996. The Plaintiff was unsuccessful in its efforts to
have the lower courts findings reversed by the Fifth Circuit Court of Appeals.
As a result of the Circuit Court's decision, the Company increased its net
income by $200,000, increased its accounts receivable by $90,000 and decreased
its notes payable by $110,000.
Changes in Financial Condition
During fiscal 1997, the Company had a net decrease in property and
equipment of $222,000 before accumulated depreciation, depletion and
amortization. This decrease was the result of a write off of $955,000 in fully
depreciated drilling equipment, a reduction of $32,000 resulting from the trade
in of transportation equipment, a reduction of $5,000 resulting from the
salvage of oil and gas equipment and the expenditure of $770,000 for major
repairs and the purchase of additional equipment. Of this amount, $716,000 was
attributable to the purchase of drilling equipment, $44,000 to the purchase of
transportation equipment, $5,000 to the purchase or acquisition of oil and gas
properties, $4,000 to the purchase of building improvements and $1,000 to the
purchase of furniture and fixtures.
At March 31, 1997, the current portion of long-term debt was $261,000.
Of this amount, $33,000 was owed on oil and gas properties, $179,000 on
drilling equipment, $13,000 on land and buildings and improvements, $17,000 on
transportation equipment and $19,000 on unpaid salary to an employee. Trade
accounts payable at March 31, 1997 were $1,147,000 compared to $1,256,000 at
March 31, 1996. At March 31, 1997, long-term debt was $1,220,000. Of this
amount, $218,000 was owed on land and buildings and equipment; $910,000 on
drilling equipment; $50,000 on oil and gas properties; $19,000 to an employee
for unpaid salary and $23,000 on transportation equipment.
Results of Operations
Rig utilization rates for the years ended March 31, 1997, 1996 and 1995
were 80%, 64% and 64%, respectively. In fiscal 1997, the Company completed
1,175 drilling days while in fiscal 1996, the Company completed 1,076 drilling
days. This was a 9% increase in number of drilling days compared to fiscal
1996 despite the Company operating four rigs during fiscal 1997 compared to
five rigs during fiscal 1996. 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.
-14-
<PAGE> 15
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
During fiscal 1997, the Company's drilling margin increased when
compared to both fiscal 1996 and fiscal 1995. In fiscal 1997, the drilling
margin was $1,366,798, while in fiscal 1996 and fiscal 1995 it was $912,230
and $539,801, respectively. When to compared to drilling revenue, the drilling
margin was 17%, 13% and 11% in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. The increase in fiscal 1997 over fiscal 1996 was principally
the result of the 9% increase in the number of drilling days during fiscal 1997
and increase in drilling rates charged on contracts.
The Company markets its rigs to a number of customers. In fiscal 1997,
the Company drilled for 32 different customers. In fiscal 1996, the Company
drilled for 27 different customers. Of the 32 customers in fiscal 1997, 25
were customers the Company had not drilled for in fiscal 1996. These 25
customers accounted for over 76% of the Company's drilling revenue in fiscal
1997. In fiscal 1995, two customers accounted for 36% of total drilling
revenue. In fiscal 1996, three customers accounted for 34% of total drilling
revenue. In fiscal 1997, three customers accounted for 24% of total drilling
revenue. Of these three customers, none was included in the top three
customers of fiscal 1996. The loss of any of these customers could have a
material adverse effect on the Company's business resulting from the time
required to find other users of the rig concerned.
Oil and gas revenue for fiscal 1997 increased by $21,432 from fiscal
1996. The increase was primarily due to a 26% increase in the average price
per barrel of oil and a 48% increase in the average price per MCF of gas
despite an 18% decrease in oil production and a 27% decrease in gas production.
In fiscal 1997, the Company's average production cost per unit in barrel
equivalents increased 36% from fiscal 1996. This compares with a 4% increase
in the average production cost for 1996 compared to 1995.
Depreciation, depletion and amortization expense in fiscal 1997
increased to $623,614 from $576,894 in fiscal 1996. Depreciation expense
increased to $475,135 in fiscal 1997 from $384,400 in fiscal 1996. This
increase was the result of equipment purchased in late fiscal 1996 and fiscal
1997. Depletion expense decreased to $148,479 in fiscal 1997 compared to
$192,494 in fiscal 1996. Production decreased to 21,001 barrel equivalents in
fiscal 1997 from 27,227 barrel equivalents in fiscal 1996. In fiscal 1997, 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 based on period end prices, 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 $520,402 in fiscal
1996 to $549,656 in fiscal 1997. The primary components of the change in
general administrative expenses were an increase in payroll costs and a
decrease in legal fees.
Earnings from operations increased to $551,333 in fiscal 1997 from
$15,608 in fiscal 1996. Of the $551,333, $376,439 was contributed by drilling
operations and $174,894 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. Drilling operations also generate more risk for
the Company, especially when the Company is drilling under footage and turnkey
contracts. 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
-15-
<PAGE> 16
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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.
As part of its efforts to diversify and expand, the Company undertook a
drilling contract in the country of Belize. The contract began in May, 1997,
and should be completed in July, 1997. Under the contract, the Company is
earning daywork rates greater than those being earned on contracts in south
Texas. There is a likelihood that contracts for additional drilling in Central
America will be executed. Management believes that this venture is an
excellent opportunity for the Company to expand its sphere of operations and
diversify its dependence on drilling in a limited geographical area.
Forward Looking Information
This Form 10K contains certain "forward-looking" statements as such term
is defined in The Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance,
technological change, changes in industry practices, one-time events and other
factors described herein and in other filings made by the Company with the
Securities and Exchange Commission. Based upon changing conditions, should any
one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected, or
intended. The Company does not intend to update these forward-looking
statements.
Accounting Matters
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"
which the Company adopted on April 1, 1996. 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. Adoption of this Statement did not
have a material impact on the Company's financial position, results of
operations or liquidity.
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. The Company
adopted this Statement on April 1, 1996. 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. Under the intrinsic
value method, the Company records no compensation expense for stock options
granted when the exercise price of options granted
-16-
<PAGE> 17
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
is equal to the fair market value of the Company's common stock on the date of
grant. The Company has chosen to continue to account for stock-based
compensation under the intrinsic value method.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share." The Statement, which is effective for financial statements issued
after December 15, 1997, simplifies the standards for computing earnings per
share (EPS) and makes the U.S. standard for computing earnings per share more
compatible with the EPS standards of other countries. The Company plans to
adopt this Statement in the third quarter of fiscal 1998. This Statement
requires restatement of all prior period EPS data presented. Thus basic net
earnings (loss) per share for fiscal 1997 will be restated to $0.10 and there
will be no restatement for fiscal 1996 as the adoption of the Statement did not
change the EPS previously presented.
-17-
<PAGE> 18
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, 1997 and 1996 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, 1997. 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, 1997. 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended March 31, 1997, 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 20, 1997
-18-
<PAGE> 19
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets March 31,
------ ---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 407,755 325,568
Receivables:
Trade, net of allowance for
doubtful accounts of $140,000 in
1997 and 1996 641,597 530,393
Contract drilling in progress 593,162 234,527
Employees and officers 1,080 10,926
Prepaid expenses 162,213 48,016
------------ ------------
Total current assets 1,805,807 1,149,430
------------ ------------
Property and equipment, at cost:
Drilling rigs and equipment 8,048,115 8,287,756
Oil and gas properties, based on full cost
accounting method 1,749,809 1,749,467
Transportation, office, land and other 1,090,011 1,072,847
------------ ------------
10,887,935 11,110,070
Less accumulated depreciation, depletion and
amortization 7,642,458 8,001,254
------------ ------------
Net property and equipment 3,245,477 3,108,816
Notes receivable-employees -- 27,404
------------ ------------
$ 5,051,284 4,285,650
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-19- (Continued)
<PAGE> 20
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity March 31,
------------------------------------ ----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Current installments of long-term
debt $ 261,394 467,416
Line of credit with bank -- 200,000
Accounts payable 1,146,982 1,255,505
Accrued expenses:
Payroll and payroll taxes 174,772 166,580
Other 193,493 164,757
------------ ------------
Total current liabilities 1,776,641 2,254,258
Note payable to employee, interest at 7% 17,198 73,416
Long-term debt, less current installments
and note payable to employee 1,202,905 480,500
------------ ------------
Total liabilities 2,996,744 2,808,174
------------ ------------
Shareholders' equity:
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 5,655,333 shares at
March 31, 1997 and 5,601,000 shares
at March 31, 1996 565,533 560,100
Additional paid-in capital 15,914,169 15,899,227
Accumulated deficit (14,523,257) (15,086,946)
------------ ------------
2,191,445 1,607,381
Less treasury stock, 339,767 shares at March 31,
1997 and 319,767 shares at March 31, 1996,
at cost (136,905) (129,905)
------------ ------------
Total shareholders' equity 2,054,540 1,477,476
------------ ------------
$ 5,051,284 4,285,650
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE> 21
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Contract drilling $ 7,968,191 6,989,972 4,935,510
Oil and gas 401,542 380,110 405,409
Administrative overhead and other 133,581 129,572 153,175
------------ ------------ ------------
Total operating revenues 8,503,314 7,499,654 5,494,094
------------ ------------ ------------
Costs and expenses:
Contract drilling 6,601,393 6,077,742 4,395,709
Oil and gas 177,318 169,008 166,594
Depreciation, depletion and amortization 623,614 576,894 475,708
General and administrative 549,656 520,402 450,609
Doubtful accounts -- 140,000 228,374
------------ ------------ ------------
Total operating costs and expenses 7,951,981 7,484,046 5,716,994
------------ ------------ ------------
Earnings (loss) from operations 551,333 15,608 (222,900)
------------ ------------ ------------
Other income (expense):
Interest expense (176,801) (108,121) (65,465)
Interest income 15,295 5,443 6,409
Gain on sale of assets 6,862 273,251 48,774
Provision for litigation settlement 200,000 (200,000) --
Minority interest in operation of partnership -- 16,591 (11,224)
------------ ------------ ------------
Total other income (expense) 45,356 (12,836) (21,506)
------------ ------------ ------------
Earnings (loss) before income taxes 596,689 2,772 (244,406)
Income taxes 33,000 -- --
------------ ------------ ------------
Net earnings (loss) $ 563,689 2,772 (244,406)
============ ============ ============
Net earnings (loss) per common and common
equivalent share $ .09 -- (0.05)
============ ============ ============
Weighted average common and common equivalent
shares outstanding 5,650,305 5,401,578 5,336,167
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE> 22
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Amount Additional Total
---------------------- --------------------- Paid-in Accumulated Treasury Shareholders
Common Preferred Common Preferred Capital Deficit Stock Equity
---------- --------- --------- --------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 5,088,000 235,000 $ 508,800 235,000 15,845,987 (14,845,312) -- 1,744,475
Issuance of common stock
for bonus to employees 50,000 -- 5,000 -- 6,500 -- -- 11,500
Issuance of common stock
for fees to directors 25,000 -- 2,500 -- 2,270 -- -- 4,770
Issuance of common stock
for exercise of warrants 245,000 -- 24,500 -- -- -- -- 24,500
Net loss -- -- -- -- -- (244,406) -- (244,406)
---------- --------- --------- --------- ----------- ----------- --------- ----------
Balance at March 31, 1995 5,408,000 235,000 540,800 235,000 15,854,757 (15,089,718) -- 1,540,839
Issuance of common stock
for bonus to employee 50,000 -- 5,000 -- 6,500 -- -- 11,500
Issuance of common stock
for fees to directors 8,000 -- 800 -- 1,040 -- -- 1,840
Issuance of common stock
for exercise of warrant 35,000 -- 3,500 -- 6,300 -- -- 9,800
Issuance of common stock
for exercise of option 100,000 -- 10,000 -- 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 5,601,000 235,000 560,100 235,000 15,899,227 (15,086,946) (129,905) 1,477,476
Acquisition of 20,000 shares -- -- -- -- -- -- (7,000) (7,000)
Issuance of common stock
as compensation 53,333 -- 5,333 -- 14,667 -- -- 20,000
Issuance of common stock
for exercise of option 1,000 -- 100 -- 275 -- -- 375
Net earnings -- -- -- -- -- 563,689 -- 563,689
---------- --------- --------- --------- ----------- ----------- --------- ----------
Balance as of March 31, 1997 5,655,333 235,000 $ 565,533 235,000 15,914,169 (14,523,257) (136,905) 2,054,540
========== ========= ========= ========= =========== =========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE> 23
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 563,689 2,772 (244,406)
Adjustments to reconcile net
earnings (loss) to net
cash provided by
operating activities:
Depreciation, depletion and
amortization 623,614 576,894 475,708
Provision for doubtful accounts -- 140,000 228,374
Provision for litigation (200,000) 200,000
Stock issued to directors and
employees -- 13,340 16,270
Gain on sale of assets (6,862) (273,251) (48,774)
Minority interest in operations of
partnership -- (16,591) 11,224
Changes in current assets and liabilities:
Receivables (342,589) (311,150) 225,620
Prepaid expenses (114,197) 11,990 (25,950)
Accounts payable (108,523) 491,914 (425,644)
Accrued expenses 36,928 132,997 28,767
--------- --------- ---------
Net cash provided by
operating activities $ 452,060 968,915 241,189
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-23- (Continued)
<PAGE> 24
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable $ 1,603,724 1,425,707 630,165
Purchase of treasury stock (7,000) -- --
Proceeds from exercise of warrants -- 9,800 24,500
Proceeds from exercise of options 375 37,500
Payments of debt (1,213,559) (2,078,094) (987,597)
----------- ----------- -----------
Net cash provided (used) in financing activities 383,540 (605,087) (332,932)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (762,946) (410,757) (754,963)
Contribution from limited partner -- -- 275,000
Proceeds from sale of property
and equipment 9,533 150,681 5,350
----------- ----------- -----------
Net cash provided (used) in investing activities (753,413) (260,076) (474,613)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 82,187 103,752 (566,356)
Beginning cash and cash equivalents 325,568 221,816 788,172
----------- ----------- -----------
Ending cash and cash equivalents $ 407,755 325,568 221,816
=========== =========== ===========
Supplementary disclosure:
Interest paid $ 187,441 101,289 71,078
Notes payable issued for equipment
and oil and gas properties 116,075 809,266 79,730
Treasury stock received for drilling equipment -- 129,905 --
Common stock issued for accrued compensation 20,000 -- --
Reimbursement receivable for prior litigation payment 90,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE> 25
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.
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128 "Earnings per Share," which establishes standards for
computing and presenting earnings per share. This Standard, effective
for financial statements issued for periods ending after December 15,
1997, replaces the
-25- (Continued)
<PAGE> 26
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
presentation of primary earnings per share with a presentation of
basic earnings per share. In addition, this standard requires dual
presentation of basic and diluted earnings per share on the face of
the statement of operations. This Statement requires restatement of
all prior period EPS data presented. Thus basic net earnings (loss)
per share for fiscal 1997 will be restated to $0.10 and there will be
no restatement for fiscal 1996 as the adoption of the Statement did
not change the EPS previously presented.
Stock-Based Compensation
On April 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." This SFAS allows a Company to adopt a
fair value based method of accounting for a stock-based employee
compensation plan or to continue to use the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." The Company has
chosen to continue to account for stock-based compensation under the
intrinsic value method. Under this method, the Company records no
compensation expense for stock options granted when the exercise price
of options granted is equal to the fair market value of the Company's
common stock on the date of grant. The pro forma effects of adoption
of SFAS No. 123 is disclosed in footnote 4 in the 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.
Prepaid Expenses
Prepaid expenses include loan fees which are amortized over the
life of the debt.
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 based
on prices at the end of the period.
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.
-26- (Continued)
<PAGE> 27
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company adopted the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," on April 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations or liquidity.
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. At March 31, 1997 and
1996, cash includes a restricted account in the amount of $102,629 and
$99,000, respectively.
(2) Notes Payable and Long-term Debt
Notes payable and long-term debt of the Company is described
below:
<TABLE>
<CAPTION>
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Note payable to employee for unpaid compensation,
at 7.0%, due in 1998, paid in 1997 $ -- 73,416
Note payable to employee for unpaid compensation,
due in monthly payments of $1,720 plus interest at
7.0%, due in January, 1999 37,836 --
Note payable, secured by a vehicle, due in monthly
payments of $380 including interest at 10.9%, due
in January, 2000 11,047 14,191
Note payable, secured by a vehicle, due in monthly
payments of $426 including interest at 12.35%,
due in June, 1999 9,676 13,855
Note payable, secured by a vehicle, due in monthly
payments of $498 including interest at 9.7%, due
in June, 1998 6,566 11,635
</TABLE>
-27- (Continued)
<PAGE> 28
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
March 31,
-----------------------
1997 1996
---------- ----------
<C> <C> <C>
Note payable, secured by a vehicle, due in monthly
payments of $393 including interest at 9.25%, due
in July, 2000 13,469 --
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 c) -- 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 (9.50% at March 31, 1997) plus
0.5%, due in September, 2005. (note b) 121,595 131,756
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 b) 109,885 112,765
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
Note payable to bank, secured by oil and gas properties,
due in monthly installments of $13,278 including interest
at the bank's prime rate (9.50% at March 31, 1997) plus
1%, due January, 1999. (note a) 85,113 275,731
Note payable, secured by drilling equipment, transportation
equipment, land and improvements, due in monthly payments
of $14,881 plus interest at prime (8.5% at March 31, 1997)
plus 3%, due June, 1998. (note c) 1,086,310 --
Litigation settlement due in quarterly payments of $15,000
without interest, due in August, 1998. (note d) -- 155,000
---------- ----------
1,481,497 1,021,332
Less current portion 261,394 467,416
---------- ----------
$1,220,103 553,916
========== ==========
</TABLE>
Long-term debt maturing each year subsequent to March 31, 1997 is as
follows: 1998 - $261,394; 1999 - $989,821; 2000 - $43,142; 2001 - $19,966;
2002 - $146,912 and thereafter - $20,262.
-28- (Continued)
<PAGE> 29
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At March 31, 1997, the Company was in compliance or has obtained
waivers with respect to various negative and affirmative covenants on
its note payable secured by drilling equipment, transportation
equipment and land and improvements. Such covenants included the
maintenance of a net worth of at least $1,500,000, a debt to net
worth ratio of less than 2.0 to 1.0, and a total debt service
coverage ratio of greater than 0.8 to 1.0, 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, 9.50% at March 31, 1997, and is due
January 1, 1999. 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, and the loan secured by oil and gas properties
purchased in 1992 and drilled in 1993.
Note b: 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, 9.50% at March 31, 1997. 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%.
Note c: On May 8, 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 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 (8.50% at March 31, 1997) 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 line of credit is secured by the Company's
trade accounts receivable and carries an interest rate of prime (8.5%
at March 31, 1997) plus 2.75%. The revolving line of credit had no
outstanding balance at March 31, 1997.
Note d: The debt was the result of a lawsuit in which the
Company was a defendant. The ruling of the District Court was
affirmed by the Fifth Circuit Court of Appeals. This relieved the
Company of any further obligation on the original debt and required
the plaintiff to reimburse the Company for payments previously made on
the debt. Thus, the $200,000 provision for litigation settlement made
in fiscal 1996 has been reversed and included in other income in
fiscal 1997.
-29- (Continued)
<PAGE> 30
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Income Taxes
Due to the utilization of net operating loss carryforwards, the
Company had no Federal income tax liability at March 31, 1997 or 1996.
The Company has accrued a $33,000 liability for state franchise taxes
for fiscal 1997.
At March 31, 1997, 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 $125,000
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>
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 -
------------ ----------
$ 15,820,000 125,000
============ ==========
</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, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts $ 48,000 48,000
Investment tax credit carryforwards 125,000 671,000
Net operating loss carryforwards 5,379,000 5,381,000
------------ ------------
Total gross deferred tax assets 5,552,000 6,100,000
Less valuation allowance (5,113,000) (5,871,000)
------------ ------------
Total deferred tax assets 439,000 229,000
------------ ------------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 275,000 45,000
Oil and gas properties, principally due to
intangible drilling costs and differences
in depletion 164,000 184,000
------------ ------------
Total gross deferred tax liabilities 439,000 229,000
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
-30- (Continued)
<PAGE> 31
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A valuation allowance has been established to decrease total
gross deferred tax assets to the amount of the total gross deferred
tax liabilities due to the uncertainties involved in the ultimate
realization of the deferred tax assets. The valuation allowance for
deferred tax assets at March 31, 1996 was $5,871,000. The net change
in total valuation allowance for the year ended March 31, 1997 was a
decrease of $758,000 due to the change in the corresponding gross
deferred tax assets and liabilities.
(4) Stock Options, Warrants and Stock Option Plan
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, 1997 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, 1997, 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, 1997.
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, 1997, 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, 1997.
Under the Company's stock option plan, stock options become
exercisable over a five year period and all options expire 10 years
after the date of grant. All of the Company's options shall be
granted at the fair market value of the Company's Common Stock on the
date of grant. Accordingly as discussed in Note 1, no compensation
expense relating to these options is recognized in the Company's
results of operations.
-31- (Continued)
<PAGE> 32
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information relating to stock options outstanding at March 31 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -----------------------
Exercise Exercise Exercise
Price per Price Per Price Per
Options Options Options Option Options Option
---------- ---------- ---------- ---------- ---------- ----------
Balance Outstanding
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 1,325,500 $ .375-.41 -- -- -- --
Granted 10,000 $ 0.470 1,428,500 $ .375-.41 -- --
Exercised (1,000) $ 0.375 (100,000) 0.375 -- --
Canceled (72,000) $ .375-.41 (3,000) 0.375 -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance Outstanding
End of year 1,262,500 $ .375-.47 1,325,500 $ .375-.41 -- --
========== ========== ========== ========== ========== ==========
Options Exercisable
End of year 296,500 20,000 --
========== ========== ==========
</TABLE>
At March 31, 1997, the weighted average price of options outstanding
was $0.38 per share and the weighted average price of excercisable options
was $0.38 per share.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123) "Accounting for
Stock-Based Compensation." Accordingly, no compensation has been
recognized for the stock option plan. If the Company had elected to
recognize compensation cost based on the fair value of the options granted
at grant date as prescribed by SFAS No. 123, net earnings and net earnings
per share would have been reduced to the pro forma amounts indicated in
the table below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net earnings-as reported $ 563,689 2,772
Net earnings per share pro-forma 485,869 (99,925)
Net earnings per share-as reported 0.09 0.00
Net earnings per share-pro forma 0.08 (0.02)
Weighted-average fair value of options,
granted during the year 0.23 0.18
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes options-pricing model. The model assumed
expected volatility of 46% and 46%, weighted average risk-free interest
rates of 6.7% and 6.3% for grants in 1997 and 1996, respectively, and an
expected life of five years. As the Company has not declared dividends
since it became a public entity, no dividend yield was used. Actual value
realized, if any, is dependent on the future performance of the Company's
common stock, and overall stock market conditions. There is no assurance
the value realized by an optionee will be at or near the value estimated
by the Black-Scholes model.
-32- (Continued)
<PAGE> 33
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,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Contract drilling $8,001,352 7,024,144 4,998,555
Oil and gas 501,962 475,510 495,539
---------- ---------- ----------
$8,503,314 7,499,654 5,494,094
========== ========== ==========
Earnings (loss) from operations:
Contract drilling $ 376,439 (65,506) (313,847)
Oil and gas 174,894 81,114 90,947
---------- ---------- ----------
$ 551,333 15,608 (222,900)
========== ========== ==========
Identifiable assets at end of period:
Contract drilling $4,375,971 3,501,058 2,419,778
Oil and gas 675,313 784,592 1,053,480
---------- ---------- ----------
$5,051,284 4,285,650 3,473,258
========== ========== ==========
Depreciation, depletion and amortization:
Contract drilling $ 475,135 384,400 277,986
Oil and gas 148,479 192,494 197,722
---------- ---------- ----------
$ 623,614 576,894 475,708
========== ========== ==========
Capital expenditures:
Contract drilling $ 765,450 1,154,698 609,842
Oil and gas 5,000 7,485 224,851
---------- ---------- ----------
$ 770,450 1,162,183 834,693
========== ========== ==========
Maintenance and repairs $ 566,194 502,844 414,812
========== ========== ==========
</TABLE>
In fiscal 1997, only one customer accounted for 10% or more of
contract drilling revenues. The revenue attributed to that customer was
$1,116,322.
In fiscal 1996, only one customer accounted for 10% or more of
contract drilling revenues. The revenue attributed to that customer was
$1,204,983.
In fiscal 1995, two customers each accounted for 10% or more of
contract drilling revenues. The revenue attributed to these customers
was $1,121,651 and $662,567.
-33- (Continued)
<PAGE> 34
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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
There was no rental expense for the year ended March 31, 1997.
Rental expense for the years ended March 31, 1996 and 1995 was $2,421
and $15,825, 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
filed a lawsuit alleging negligence, denying responsibility for the
$279,000 billed by the Company, and seeking additional damages of
$460,000 plus attorney's fees. 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. In fiscal 1996,
an allowance for uncollectible accounts in the amount of $140,000 was
established for this account. A trial date has been scheduled in
August, 1997
While the final outcome of these matters cannot be determined at
year end, 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 April, 1997, the Company issued a new Series A 8% Convertible
Preferred Stock. The issue consisted of 400,000 shares with a
designated par value of $2.00 per share. Dividends on the stock are
cumulative. This Preferred Stock is convertible into two shares of
Common Stock for each share of Preferred Stock and one share of Common
Stock for each $.50 of due but unpaid dividends on the Series A 8%
Convertible Preferred Stock. The stock is redeemable at the Company's
option at or following the third anniversary of the issuance of such
stock provided, generally, that the price of the Company's common stock
equals or exceeds $2.50 per share. The proceeds from the stock were
used to reduce trade accounts payable, bank debt and to acquire drilling
equipment. Prior to the issuance of this new Series A preferred stock,
the Company redeemed its previously issued and outstanding Series A
preferred stock consisting of 235,000 shares of stock with a stated par
value of $1.00 per share. The outstanding shares were redeemed for a
cash payment of $75,000.
-34- (Continued)
<PAGE> 35
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In May, 1997, the Company began work on a drilling contract in the
country of Belize. The contract should be completed in July, 1997.
Under the terms of the contract, the Company is earning daywork rates
greater than those currently being earned on contracts in south Texas.
The operator is also assuming some of the expenses normally the
responsibility of the contractor.
In June, 1997, the Company closed on the acquisition of the
drilling operations of San Patricio Corporation. Assets acquired by the
Company included two land drilling rigs, rig handling trucks and
trailers and miscellaneous drilling equipment. In addition, the Company
assumed a lease of a third land drilling rig. As a result of the
acquisition, the Company now operates seven land drilling rigs,
primarily in central and south Texas. The acquisition was accomplished
with $900,000 of third-party financing, $300,000 of seller financing,
$300,000 of the Company's Common Stock. The transaction will be
accounted for as a purchase.
In June, 1997 the Company closed on additional financing of
$1,050,000. This debt was used in part for the rig acquisition
described above and for the purchase of additional drilling equipment.
In securing this financing, the Company also negotiated more favorable
terms on its existing debt secured by drilling equipment, transportation
equipment and the yard facility. Under the new terms, both the term
loan and the revolving loan carry an interest rate of prime plus 2.25%.
The monthly payments on both notes are now $27,381 plus interest.
The following pro forma financial information for the year ended
March 31, 1997 gives effect to the above acquisition as though it was
effective at the beginning of the period. The pro forma information may
not be indicative of the results that would have occurred had the
acquisition been effective on the date indicated or of the results that
may be obtained in the future. The pro forma information should be read
in conjunction with the consolidated financial statements and notes
thereto of the Company.
<TABLE>
<CAPTION>
Pro Forma
Year ended March 31, 1997
-------------------------
(unaudited)
<S> <C>
Total Revenues $16,205,542
Net Income Applicable to Common Stock 439,530
Net Income per Common and Common Equivalent Share 0.07
Weighted Average Common and Common Equivalent
Shares Outstanding 6,050,305
</TABLE>
(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 with a small working interest in Belize, Central
America.
The aggregate amount of capitalized costs relating to oil and gas
producing activities at the dates indicated are as follows:
-35- (Continued)
<PAGE> 36
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proved properties $ 1,749,809 1,749,467 1,741,982
Unproved properties -- -- --
----------- ----------- -----------
1,749,809 1,749,467 1,741,982
Accumulated depletion (1,161,309) (1,012,830) (820,337)
----------- ----------- -----------
$ 588,500 736,637 921,645
=========== =========== ===========
Depletion rate per unit of
production (net equivalent
barrel, exclusive of ceiling
limitation adjustment) 7.07 7.07 7.07
=========== =========== ===========
</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.
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, 1994 360,960 1,295,930
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
Revisions in previous estimates (260,253) (778,747)
Production (10,007) (65,963)
---------- ----------
Estimated quantity, March 31, 1997 72,970 412,540
========== ==========
</TABLE>
-36- (Continued)
<PAGE> 37
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
(Bbl) (Mcf) (Bbl) (Mcf) (Bbl) (Mcf)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Proved developed
reserves:
Balance at
beginning of
year 60,420 302,960 69,890 362,300 90,599 383,651
======== ======== ======== ======== ======== ========
Balance at end
of year 72,970 412,540 60,420 302,960 69,890 362,300
======== ======== ======== ======== ======== ========
</TABLE>
Costs incurred for property acquisition, exploration
and development activities are summarized below:
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Property acquisition costs $ -- -- 23,863
Development costs 5,000 7,485 200,988
-------- -------- --------
$ 5,000 7,485 224,851
======== ======== ========
</TABLE>
Results of operations for producing activities
for the periods indicated were as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 401,542 380,110 405,409
Production costs (177,318) (169,008) (166,594)
Depletion (148,479) (192,494) (197,722)
--------- --------- ---------
Results of operations from
producing activities (excluding corporate
overhead and interest costs) $ 75,745 18,608 41,093
========= ========= =========
</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
-37- (Continued)
<PAGE> 38
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Estimated future cash flows $ 2,356,000 10,314,000 9,475,000
Estimated future production costs
(1,364,000) (3,013,000) (2,956,000)
Estimated future development costs
-- (1,547,000) (1,827,000)
------------ ------------ ------------
Estimated future net cash
flows before income taxes 992,000 5,754,000 4,692,000
Estimated future income taxes (66,000) (1,684,000) (1,324,000)
Ten percent discount for
estimated timing of future cash flows
(214,000) (1,372,000) (1,105,000)
------------ ------------ ------------
Standardized measure of
discounted estimated future
net cash flows $ 712,000 2,698,000 2,263,000
============ ============ ============
Changes in standardized
measure of discounted
estimated future net cash
flows:
Sales of oil and gas
produced, net of
production costs $ (238,000) (223,000) (239,000)
Extensions, discoveries and
other additions, less
related costs -- -- 257,000
Changes in estimated future development
costs 1,041,000 179,000 (103,000)
Revisions of previous quantity estimates (1,743,000) (369,000) 124,000
Net changes in prices (1,996,000) 1,010,000 567,000
Accretion of discount 367,000 302,000 230,000
Income taxes 1,022,000 (223,000) (235,000)
Other (439,000) (241,000) (118,000)
------------ ------------ ------------
Net increase (decrease) $ (1,986,000) 435,000 483,000
============ ============ ============
</TABLE>
-38- (Continued)
<PAGE> 39
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) 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 recent issuance of the debt and the variable
interest rate.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ROBERT R. MARMOR, 71, 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, 48, 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 LLP 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, 70, 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.
-39- (Continued)
<PAGE> 40
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ALVIS L. DOWELL, 61, 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, 41, 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 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, 58, 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, 47, 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.
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, 1997, 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 Re- All
Name Annual stricted Warrants/ LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award SARs outs sation
Position Year $ $ $ $ # $ $
--------- ---- ------- -------- ---------- -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wm. Stacy Locke
CEO 1997 71,750 -- 479(1) 52,083(2) -- --
1996 33,000 -- 479(1) 18,333(3) -- -- 3,130(4)
Al L. Dowell
CEO 1996 56,250 -- 2,244(5) 11,960(6) -- -- --
1995 76,716(7) -- 1,075(1) 5,770(8) -- -- --
</TABLE>
-40-
<PAGE> 41
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(1) Includes value of personal use of company-provided vehicle.
(2) Includes 84,734 shares accrued per employment agreement.
(3) Includes 48,889 shares accrued per employment agreement.
(4) Includes value realized on exercise of 100,000 shares of Stock Option Plan
granted May, 1995. See "Option/SAR Grants in Last Fiscal Year".
(5) Includes value of personal use of company-provided vehicle and Directors'
fee paid by the Company.
(6) 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.
(7) Includes $2,885 voluntarily deferred at election of Executive.
(8) 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.
From December, 1988, through June, 1995, Directors received 1,000 shares
of the Company's common stock for each directors' meeting attended. From July,
1995 through June 1996, Directors who were not officers or employees of the
Company received $1,000 each quarter for their service on the Board and $250
for each meeting attended. From July 1996 through March 1997 those Directors
received $500 each quarter for their service on the Board and $250 for each
meeting attended. Beginning in April 1997 the Directors will once again
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 for their service on the Board and $250 for each meeting
attended.
The following table summarizes as to the chief executive officer of the
Company, the number and terms of stock options granted during the year ended
March 31, 1997:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total Potential
Number of Options/ Realized Value at Assumed
Securities SARs Annual Rates of Stock
Underlying Granted to Price Appreciation for
Options/ Employees Excercise or Option Term
SARs in Fiscal Base Price Expiration -------------------------
Name Granted (#) Year ($/sh) Date 5% ($) 10%($)
---- ----------- ---------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
No stock options were granted in the current fiscal year.
-41-
<PAGE> 42
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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 - - 240,000/860,000 15,600/55,900
</TABLE>
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, 1997:
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>
</TABLE>
No stock warrants were granted in the current fiscal year.
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>
</TABLE>
In the current fiscal year, there were no stock warrant exercises by
executive officers nor were there any stock warrant values at year end.
-42-
<PAGE> 43
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 19, 1997,
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.
<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 T.L.L. Temple Foundation 400,000 100.0%
109 Temple Blvd., Suite 300
Lufkin, Texas 75901-7321
Common Rowan Companies, Inc. 750,000(1) 11.3%
1900 Post Oak Tower
5051 Westheimer
Houston, TX 77056
Common Robert R. Marmor 572,393(1)(2) 8.6%
9310 Broadway, Bldg. I
San Antonio, TX 78217
Common William D. Hibbetts 151,612(3) 2.3%
13007 Blanche Coker
San Antonio, TX 78216
Common Charles B. Tichenor 102,500(4) 1.5%
1402 N. Negley Ave.
Pittsburgh, PA 15206
Common Alvis L. Dowell 208,000 3.1%
9310 Broadway, Bldg. I
San Antonio, Texas 78217
Common Wm. Stacy Locke 1,447,770(5) 21.8%
9310 Broadway, Bldg. I
San Antonio, Texas 78217
All officers and directors as a group 2,656,116(6) 39.9%
(7 persons)
</TABLE>
-43-
<PAGE> 44
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(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.
(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 15,000 shares .
(4) Includes options issued to Mr. Tichenor by the Board of Directors to
purchase 15,000 shares.
(5) Includes options issued to Mr. Locke to purchase an additional 1,100,000
shares. (See Item 13.)
(6) Includes options to purchase 147,500 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 was paid 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 was paid in Common
Stock valued at its average market value during March, 1997.
The terms of Mr. Locke's agreement required 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.
-44-
<PAGE> 45
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, 1997 and 1996.
Consolidated Statements of Operations for the years ended
March 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
March 31, 1997, 1996 and 1995.
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:
Page
- ----
- (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).
-45-
<PAGE> 46
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
- (10)(c) Note Purchase and Warrant Agreement between the Company
and Connecticut General Life Insurance Company and
Teachers Insurance and Annuity Association 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
(previously 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).
-46-
<PAGE> 47
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
- (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).
- (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).
-47-
<PAGE> 48
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
- (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).
- (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).
- (10)(bb) Form of Loan and Security Agreement dated May 8, 1996
between the Company and Finova Capital Corporation
(previously filed as an Exhibit to the Company's 1996
Annual Report on Form 10-K, File No. 2-70145).
- (10)(cc) Form of Schedule to Loan and Security Agreement dated May
8, 1996 between the Company and Finova Capital Corporation
(previously filed as an Exhibit to the Company's 1996
Annual Report on Form 10-K, File No. 2-70145).
- (10)(dd) Asset Purchase Agreement May 23, 1997 between the Company
and San Patricio Corporation .
- (10)(ee) Non-Statutory Stock Option Agreement dated June 18, 1997
between the Company and San Patricio Corporation.
- (10)(ff) Second Amended Certificate of Designation, Reducing The
Number Of Shares Formerly Designated Series A, Series B
and Series C Preferred Stock to Zero and Designating The
Voting Powers, Preferences and Rights of A New Series A 8%
Convertible Preferred Stock dated April 15, 1997 between
the Company and T.L.L. Temple Foundation.
- (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).
- (27) Financial Data Schedule
(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.
-48-
<PAGE> 49
SCHEDULE II
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance Charged
at to costs Deductions Balance
beginning and from at
of year expenses accounts year end
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
Year ended March 31, 1997:
Allowance for doubtful
receivables $ 140,000 -- -- 140,000
============ ============ ============ ============
</TABLE>
-49-
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, South Texas Drilling & Exploration, Inc. has duly caused
this report to be signed on its behalf by the undersigned, this 24th day of
June, 1997 thereunto duly authorized.
By
-------------------------------------
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 Chairman and Director June 24, 1997
- -----------------------------------
/s/ Wm. Stacy Locke President and Chief June 24, 1997
- ----------------------------------- Executive Officer and
Director
/s/ Al Dowell Director June 24, 1997
- -----------------------------------
/s/ William D. Hibbetts Director June 24, 1997
- -----------------------------------
/s/ Chris F. Parma Vice President and June 24, 1997
- ----------------------------------- Chief Financial Officer
</TABLE>
-50-
<PAGE> 51
INDEX TO EXHIBITS
- (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 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
(previously 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).
-51-
<PAGE> 52
- (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).
- (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).
-52-
<PAGE> 53
- (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).
- (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).
- (10)(bb) Form of Loan and Security Agreement dated May 8, 1996
between the Company and Finova Capital Corporation
(previously filed as an Exhibit to the Company's 1996
Annual Report on Form 10-K, File No. 2-70145).
- (10)(cc) Form of Schedule to Loan and Security Agreement dated May
8, 1996 between the Company and Finova Capital Corporation
(previously filed as an Exhibit to the Company's 1996
Annual Report on Form 10-K, File No. 2-70145).
- (10)(dd) Asset Purchase Agreement May 23, 1997 between the Company
and San Patricio Corporation.
- (10)(ee) Non-Statutory Stock Option Agreement dated June 18, 1997
between the Company and San Patricio Corporation.
- (10)(ff) Second Amended Certificate of Designation, Reducing The
Number Of Shares Formerly Designated Series A, Series B
and Series C Preferred Stock to Zero and Designating The
Voting Powers, Preferences and Rights of A New Series A 8%
Convertible Preferred Stock dated April 15, 1997 between
the Company and T.L.L. Temple Foundation.
- (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).
- (27) Financial Data Schedule
-53-
<PAGE> 1
EXHIBIT 10(dd)
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement"), is made this 23rd day
of May, 1997, by and among San Patricio Corporation, a Texas corporation
(hereinafter called "Seller"), Richard Phillips, an individual (hereinafter
called "Phillips"), and South Texas Drilling & Exploration, Inc., a Texas
corporation (hereinafter called "Purchaser").
WITNESSETH:
WHEREAS, Seller is engaged in the land contract drilling business (the
"Drilling Business"); and
WHEREAS, Phillips is the sole shareholder of Seller; and
WHEREAS, Purchaser is desirous of purchasing from the Seller certain
of the assets of Seller used in Seller's Drilling Business.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Purchase and Sale of Assets. On and subject to the terms and
conditions of this Agreement, Seller shall sell, transfer and assign to
Purchaser and Purchaser shall purchase and acquire from Seller on the Closing
Date (as hereinafter defined), all of Seller's right, title, interest and
benefit in and to the assets, properties, and rights used and useful in
connection with the operation of Seller's Drilling Business which are described
below (the "Assets"), free and clear and expressly excluding all debts,
liabilities, obligations, taxes, liens and encumbrances of any kind, character
or description:
(a) All of the Seller's drilling rigs and related
equipment (the "Drilling Equipment") and Inventory and supplies of
Seller (the "Inventory") which are set forth on Schedule 1(a);
(b) The drilling rig lease agreement for Rig #10,
described on Schedule l(b) (the "Rig Lease");
(c) Seller's personal property related to the Drilling
Business, and all support, maintenance, warranty, and similar
agreements relating to such personal property (the "Personal
Property") described on Schedule 1(c);
(d) All contracts, agreements and commitments of Seller
under which Seller has agreed or hereafter agrees to perform land
contract drilling for any third party which are set forth on Schedule
1(d) (the "Contracts and Commitments"). In the event of any material
adverse change with respect to any Contract or Commitment which occurs
any time before Closing,
<PAGE> 2
Purchaser shall have the right to reject any such Contract or
Commitment in which event such Contract or Commitment shall remain the
property and responsibility of Seller. Any Contract rejected by
Purchaser under this paragraph shall be expressly rejected by
Purchaser by written instrument at Closing;
(e) All contracts, agreements and commitments of Seller
relating to the Drilling Business other than those listed on Schedule
1(d) above, which includes the Seller's vehicle leases and mobile
telephone equipment leases including, but not limited to, those set
forth on Schedule 1 (e) (the "Ancillary Agreements"); provided,
however, that Purchaser may, in its sole and absolute discretion,
reject any Ancillary Agreement (other than the mobile telephone
equipment leases and vehicles leases) which is not acceptable to
Purchaser, and each such rejected Ancillary Agreement shall remain the
property and responsibility of Seller. Any Ancillary Agreement
accepted by Purchaser shall be expressly assumed by Purchaser by
written instrument at Closing;
(f) All intellectual property, including, without
limitation, all customer lists, supplier lists, manuals, governmental
approvals, licenses, permits, documents, drawings, know-how,
processing information, patents, intellectual property (other than
trademarks and tradenames) and trade secrets of Seller (the
"Intellectual Property"), including those set forth on Schedule 1(f);
(g) All permits, approvals, authorizations, licenses,
qualifications, and the like issued by any government or governmental
unit, agency, board, body, or instrumentality, whether federal, state,
or local, and all applications therefor (the "Permits and
Authorizations"), including, specifically and without limitation, the
permits, approvals, and qualifications described or referred to on
Schedule 1 (g);
(h) All customer lists, drilling reports, maintenance
records and supplier lists;
(i) All personal property acquired after the date of this
Agreement but prior to Closing by Seller relating to the Drilling
Business, all of which shall be included in the appropriate Schedules
at the time of acquisition and at Closing, and appropriately
designated as Rig 10 Assets, Rig 9 Assets or Rig 5 Assets, as the case
may be; and
(j) All personal property described on Schedule 1 (j)
(the "Salvage Assets"), which consists of damaged or salvaged property
which is no longer used in the Drilling Business.
2
<PAGE> 3
All of the foregoing assets, properties and rights to be transferred
are collectively referred to herein as the "Assets." The term "Assets" does not
include, and Seller is not selling to Purchaser, any cash or cash equivalents,
accounts receivable, trademarks or tradenames of Seller, or any oil and gas
properties of Seller.
2. Assumption of Liabilities. Except for the obligations and
liabilities arising after the Closing, the Second Delivery Date, or the
termination of the Lease Agreement (as herein defined), as the case may be,
under the Rig Lease and the Contracts and Commitments and Ancillary Agreements
which are not rejected by Purchaser (the "Assumed Liabilities"), Purchaser does
not and shall not assume or be responsible for any obligation or liability of
Seller.
3. Consideration.
(a) Based on the representations, warranties and
agreements contained herein, Purchaser shall purchase, and Seller
agrees to sell, assign, transfer and vest in Purchaser, the Assets for
a total consideration consisting of (i) Nine Hundred Thousand Dollars
to be paid in cash (the "Cash Consideration"); (ii) a Note in the form
attached as Exhibit "A," which note shall be in the principal amount
of $300,000, amortized over five years with interest accruing from the
Closing Date (as hereafter defined) at the rate of 10% per annum, and
payable in 60 equal monthly payments commencing on the first day of
the month following the Closing Date; (iii) the issuance of 400,000
shares of the Purchaser's Common Stock (the "Common Stock
Consideration"), such Common Stock Consideration to be delivered at
Closing; and (iv) the issuance of an option to purchase 150,000 shares
of the Purchaser's Common Stock at a price of $1.50 per share pursuant
to the terms of the Stock Option Agreement attached hereto as Exhibit
"C" (the "Stock Option Agreement").
(b) In addition to the Purchase Price, and as additional
consideration for the Assets, at the Closing Purchaser and Seller
shall execute and deliver written Assignment and Assumption Agreements
in the form attached hereto as Exhibit "D" under the terms of which
Purchaser shall assume all obligations of Seller arising after
Closing, the Second Delivery Date or the termination of the Lease
Agreement (as herein defined), as the case may be, under the Rig Lease
and the Contracts and Commitments and the Ancillary Agreements which
are not rejected by Purchaser (the "Assumed Liabilities").
(c) Consideration paid by Purchaser for the Assets
($1,500,000) shall be allocated to the Assets on the basis of the
relative values set forth in the appraisal dated March 24,
3
<PAGE> 4
1997, conducted by M.E.L. Valuations, Inc. The parties agree that such
allocation shall be reported on Internal Revenue Service Form 8594.
4. Closing. In the event that Purchaser and Seller satisfy those
conditions set forth in this Agreement, or the conditions unsatisfied are
waived in writing, the consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at 10:00 A.M., local time on the
first business day following the completion or the termination for any reason
of the drilling contract between the Seller and KCS Energy (the "KCS
Contract"). The Closing shall take place at the offices of Matthews &
Branscomb, P.C., 1900 Frost Bank Plaza, Corpus Christi, Texas, or such other
time and place as the parties mutually agree. The time and date of the Closing
shall be referred to herein as the "Closing Date." If, at the time of Closing,
the Assets designated as Rig 9 Assets on Schedule 1(a) are being operated by
Seller incident to performing a drilling contract (the "Rig 9 Contract"),
Seller shall be permitted to lease the Rig 9 Assets to complete such drilling
contract pursuant to the terms of the Lease Agreement attached as Exhibit "H"
to this Agreement (the "Lease Agreement"). Such drilling contract shall be
appropriately referenced on Exhibit B to the Lease Agreement and such Rig 9
Contract shall not be assumed by Purchaser, notwithstanding anything herein to
the contrary. In addition, if at the time of Closing, Rig 10 is being operated
by Seller incident to performing a drilling contract (the "Rig 10 Contract"),
the Assignment and Assumption of the Rig Lease and the delivery of Rig 10 shall
occur at such time that Rig 10 is released from the Rig 10 Contract, and such
Rig 10 Contract shall not be assumed by the Purchaser.
(a) Seller's Obligations at Closing. At the Closing,
Seller shall deliver to Purchaser the following:
(i) To the Purchaser, executed bills of sale,
assignments, certificates of title for motor vehicles, and
such other instruments satisfactory in form and substance to
Purchaser pursuant to which Seller shall convey the Assets to
Purchaser;
(ii) To the Purchaser, certificates as to the existence
and good standing of Seller (as of the date not earlier than
ten days prior to the Closing) in the State of Texas;
(iii) To the Purchaser, resolutions evidencing the
authorization of the execution, delivery and performance of
this Agreement by Seller and the consummation of the
transactions contemplated hereby, certified by the Secretary
of Seller;
4
<PAGE> 5
(iv) To the Purchaser, a certificate dated as of the
Closing Date and signed by the President and Secretary of
Seller that evidences the execution and delivery of this
Agreement by Seller and verifies the accuracy of Seller's
representations and warranties contained in this Agreement,
both as of the date of this Agreement and as of Closing;
(v) To the Purchaser, opinion of Seller's counsel in the
form of Exhibit "E";
(vi) To the Purchaser, a certificate of No Tax Due issued
by the Comptroller of the State of Texas indicating that no
sales tax, motor vehicle tax, employment tax, or other tax is
due and owing to the State of Texas;
(vii) To the Purchaser, a certified search of the UCC
records of the Secretary of State of the State of Texas and
the applicable counties where Seller resides, showing that the
Assets are free and clear of any liens or encumbrances, or
executed UCC-3 termination statements releasing any security
interest are reflected in such search;
(viii) To the Purchaser, such additional certificates,
proceedings, instruments and other documents as Purchaser may
reasonably request to evidence compliance by Seller with this
Agreement and applicable legal requirements and the
performance and satisfaction by Seller and Phillips to this
transaction at or prior to the time of all agreements then to
be performed and all conditions then to be satisfied by Seller
and Phillips;
(ix) To the Purchaser, the Assignment and Assumption
Agreement in the form attached as Exhibit "D" executed by
Seller and Purchaser under which the Seller assigns all of its
rights under the Contracts and Commitments (other than the Rig
9 Contract and the Rig 10 Contract) and the Ancillary
Agreements which are not rejected by Purchaser and which are
not designated on Schedules 1(d) and 1(e) as Rig 10 Assets;
(x) To the Purchaser, the Subscription Agreement in the
form attached hereto as Exhibit "G";
(xi) To the Purchaser, the Assignment and Assumption
Agreement in the form attached as Exhibit "D" executed by
Seller and Purchaser but made effective as of the Second
Delivery Date and under which the Seller assigns all of its
rights under the Rig 10 Lease, and the Contracts and
Commitments and the Ancillary Agreements which are not
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rejected by Purchaser and which are designated on Schedules
1(d) and 1(e) as Rig 10 Assets;
(xii) To the Purchaser, the Lease Agreement for Rig 9
attached hereto as Exhibit H executed by the Purchaser and the
Seller;
(xiii) To the Purchaser, the consent in a form acceptable to
Purchaser, under which Breaux Bridge Equipment Company (the
"Lessor") authorizes the Seller to assign the Rig Lease to the
Purchaser and which requires the Lessor to certify at the time
of the Second Delivery Date the condition of Rig 10 at such
time; and
(xiv) To the Purchaser, to the extent that any Ancillary
Agreement or any Contract or Commitment is not freely
assignable by the Seller, the Seller shall provide written
consents by the parties to such agreements, authorizing the
assignment by the Seller to the Purchaser.
(b) Purchaser's Obligations at Closing. At the Closing,
Purchaser shall deliver to Seller, the following:
(i) To the Seller, $900,000 by certified check in current
Corpus Christi, Texas funds, or wire transfer;
(ii) To the Seller, a certificate representing 400,000
shares of the Purchaser's Common Stock, which certificate
shall bear an appropriate legend restricting the sale or
transfer of such stock other than in accordance with the
registration requirements of the Securities Act of 1933 or any
exemption therefrom;
(iii) To the Seller, the fully executed Assignment and
Assumption Agreement in the form attached as Exhibit "D" under
which the Seller assigns all of its rights under the Contracts
and Commitments (other than the Rig 9 Contract and the Rig 10
Contract) and the Ancillary Agreements which are not rejected
by Purchaser, which are not designated on Schedules 1(d) and 1
(e) as Rig 10 Assets;
(iv) To the Seller, the fully executed Note;
(v) To the Seller, the fully executed Security Agreement
in the form attached hereto as Exhibit "B" along with executed
UCC-1 financing statements, under which Seller is granted a
security interest in the Drilling Rigs designated as Rig #5
and Rig #9; which security interest is expressly subordinated
to the Purchaser's presently existing secured lenders or their
assigns.
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(vi) To the Seller, the fully executed Stock Option
Agreement under which Seller shall have the right to acquire
150,000 shares of the Purchaser's Common Stock for a purchase
price of $1.50 per share, which shares, if issued, shall be
subject to the same transfer restrictions and legends as
described in (ii) above;
(vii) To the Seller, the fully executed Assignment and
Assumption Agreement in the form attached as Exhibit "D" made
effective as of the Second Delivery Date and under which the
Seller assigns all of its rights under the Rig Lease, and the
Contracts and Commitments (other than the Rig 10 Contract) and
the Ancillary Agreements which are not rejected by Purchaser,
which are designated on Schedules 1(d) and 1(e) as Rig 10
Assets;
(viii) To the Seller, the fully executed Voting Agreement in
the form attached as Exhibit "F"; and
(ix) To the Seller, the Lease Agreement for Rig 9 attached
hereto as Exhibit "H" executed by the Purchaser and the
Seller.
5. Delivery of Assets. At the Closing, Seller shall deliver and
transfer title to the Assets to Purchaser free, clear and discharged of and
from any and all liens, charges, equities, security interests, encumbrances,
claims and demands of every kind and character whatsoever known or unknown.
Delivery of the Assets shall be deemed to occur at the time of Closing, and
with respect to the Drilling Equipment which are a part of the Assets, delivery
shall take place at the on-site location of such Drilling Equipment, and with
respect to all other Assets, delivery shall take place at the Seller's yard
located in San Patricio, Texas. All delivery and shipment costs from location
or Seller's yard shall be the responsibility of Purchaser.
The Purchaser and Seller agree that delivery of the Assets designated
as "Rig 10 Assets," none of which are owned by the Seller, but which are leased
from Breaux Bridge Equipment Company under the Rig Lease, will be made to the
Purchaser at such time that Rig 10 is released from the Rig 10 Contract (the
"Second Delivery Date"), but only to the extent that Rig 10 is being used at
the time of Closing. If Rig 10 is not being operated at the time of Closing,
delivery of Rig 10 shall occur at Closing in accordance with the first
paragraph of this Section 5 and the Assignment and Assumption Agreement
relating to the Rig Lease and the Rig 10 Assets shall be effective as
of the Closing Date.
(a) Seller's Obligations at Second Delivery Date. At the
Second Delivery Date, Seller shall provide the following:
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Seller shall deliver the Rig 10 Assets, free, clear and discharged of
and from any and all liens, charges, equities, security interests,
encumbrances, claims and demands of every kind and character
whatsoever known or unknown, other than the Rig Lease. Delivery of the
Rig 10 Assets to Purchaser shall be deemed to occur at the time of the
Second Delivery Date, and with respect to the Drilling Equipment which
are a part of the Rig 10 Assets, delivery shall take place at the
on-site location of such Drilling Equipment, and with respect to all
other Assets included in the Rig 10 Assets, delivery shall take place
at the Seller's yard located in San Patricio, Texas. All delivery and
shipment costs from location or Seller's yard shall be the
responsibility of Purchaser. Risk of loss of the Rig 10 Assets shall
pass to Purchaser at the Second Delivery Date. At the Second Delivery
Date, the Seller and Phillips shall certify that, to the best of their
knowledge, Rig 10 is in good operating condition and in the condition
required by the Rig Lease. In addition, at the Second Delivery Date,
the Seller shall provide a certificate in a form acceptable to the
Purchaser and signed by the Lessor, which states that (i) the Rig
Lease is in full force and effect and no notice of termination has
been given by either party, and (ii) at the time of the Second
Delivery Date, Rig 10 is in good operating condition and in
the condition required by the Rig Lease.
(b) Risk of Loss. It is expressly agreed that the title to all of
the Assets shall pass to the Purchaser at Closing, unless Rig 10 is operating
at the time of Closing, in which case title to the Rig Lease and the Assignment
and Assumption of the Rig Lease will occur at the Second Delivery Date.
However, risk of loss of the Assets shall pass at the time of delivery. After
Closing, Seller agrees to maintain all insurance on the Rig 10 Assets and the
Rig 9 Assets, as currently maintained, until such time that the Rig 10 Assets
and the Rig 9 Assets are delivered to the Purchaser. All such policies shall
name the Purchaser as a named insured, in accordance with its interests. In
addition, Purchaser shall be named as an insured on all general liability
policies of the Seller. In the event of any loss or damage to any of the Assets
before delivery, the Seller shall replace or repair such damaged, destroyed or
lost Assets, so that on the Closing Date, the Second Delivery Date and upon the
termination of the Lease Agreement, as the case may be, all of the Assets are
in good operating condition and comprise all of the assets necessary for the
operation of the Drilling Business as currently operated by Seller.
(c) Salvage Assets. The parties acknowledge that the Salvage
Assets have little or no value and that the cost of
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<PAGE> 9
moving the Salvage Assets is greater than the value of the Salvage
Assets. Notwithstanding anything contained herein to the contrary, the
Salvage Assets shall remain in the possession and custody of the
Seller, and the Seller shall have the right to sell the Salvage Assets
at such prices as it deems appropriate. Prior to any sale, Purchaser
shall provide Seller with a Bill of Sale, transferring any such assets
"AS IS AND WITHOUT ANY WARRANTY". The consideration paid by the Seller
to the Purchaser for such assets in total, shall equal Ten Dollars.
6. Covenants, Representations and Warranties of Seller and
Phillips. Seller and Phillips covenant, represent and warrant to Purchaser as
follows and acknowledge that Purchaser is relying upon such representations and
warranties in entering into this Agreement:
(a) Due Incorporation. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Texas and has the corporate power to carry on its business as
now being conducted. Seller is not qualified as a foreign corporation
in any jurisdiction.
(b) Corporate Authority. The execution, delivery and
performance of this Agreement, and the obligations undertaken by
Seller herein, have been duly authorized and approved by the Board of
Directors of Seller and by the Shareholders of Seller. Phillips is the
sole shareholder of Seller, and no other person has the right to vote
or acquire his shares of stock in Seller.
(c) No Violation of Agreements, Etc. This Agreement
constitutes a valid and binding obligation of Seller enforceable
against Seller in accordance with its terms, and this Agreement and
all transactions contemplated hereby will not result in the violation
of any terms of the Articles of Incorporation or By-Laws of Seller or
any law or agreement to which Seller is a party or by which it is
bound.
(d) Title to Assets. Seller presently owns all of the
Assets, free and clear of all liens, charges, equities, pledges,
mortgages, leases, options, assessments, security interests,
restrictions and other encumbrances of any kind whatsoever ("Liens"),
other than those disclosed in Schedule 6 (d) (the "Existing Liens"),
and Seller has, and on the Closing Date will have, full right, power,
title and authority to sell, transfer and convey the Assets to
Purchaser, free and clear of all Liens, including the Existing Liens.
(e) No Litigation. Except as described on Schedule
6(e) there presently exists no litigation, proceeding, action, claim,
arbitration, or investigations at law, in
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equity or otherwise, pending or threatened against Seller or Phillips, and
neither Seller or Phillips has any knowledge of any facts or circumstances that
would indicate that any such claim exists. Neither Seller or Phillips is
subject to any notice, writ, injunction, order, or decree of any court, agency,
or other governmental authority. Neither Seller or Phillips has been served
with process or otherwise received formal notice with respect to, nor, to
Seller's or Phillip's knowledge, has Seller or Phillips been threatened with,
any litigation or judicial, administrative, arbitration or other proceeding.
(f) Brokers. If Seller or Phillips has retained any broker in
connection with the transactions contemplated by this Agreement, Seller and
Phillips shall be solely responsible for the payment of any compensation due
such broker by Seller or Phillips.
(g) Contracts/Assignments. The list of contracts and agreements
identified on Schedules 1(b), 1(d) and 1(e) is a complete and accurate list of
all contracts and agreements between Seller and any other person or related to
the Drilling Business, which are being assumed by Purchaser, unless otherwise
rejected in accordance with this Agreement. Each of the Rig Lease, Contracts
and Commitments and Ancillary Agreements described or referred to in Schedules
1(b), 1(d) and 1(e) are valid and binding obligations of Seller and the party
or parties thereto. None of the parties to any of such contracts or agreements
has terminated, cancelled, or substantially modified any of such contracts or
agreements and neither Seller nor any other party is in default thereunder.
Each of the Rig Lease, Contracts and Commitments and Ancillary Agreements may
be freely assigned by Seller to Purchaser without the requirement of any
consent or approval, except as set forth in Schedule 6(g).
(h) Personal Property. Seller owns all of the Assets free and
clear of any liens or encumbrances, other than those Existing Liens set forth
in Schedule 6(d) which will be released prior to or contemporaneous with the
Closing. The Assets described in Schedules 1(a) -- 1(j) are a full and complete
list of all tangible and intangible personal property used in connection with
the Drilling Business, and such property constitutes all of the assets
necessary for the conduct of the Drilling Business as presently conducted.
Seller has delivered or will deliver at Closing all support, maintenance,
warranty, and similar agreements related to such property. To the best of
Seller's and Phillip's knowledge, each of such assets is in good operating
condition and at the time the Assets are delivered to Purchaser, each of the
Assets (including Rig 10 and the assets relating thereto) will be in good
operating condition. In order to ensure that the Assets
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<PAGE> 11
are in good operating condition, immediately prior to Closing, the Second
Delivery Date and the termination of the Lease Agreement, the Seller and
Purchaser shall conduct a joint inspection of the Assets, and the Seller and
Phillips will certify that, to the best of their knowledge, the Assets are in
good operating condition. In addition, at all times prior to Closing, the
Second Delivery Date and the termination of the Lease Agreement, the Seller
shall provide Purchaser with accurate daily drilling reports which shall
specify any loss or damage to any of the Assets. The Seller shall take any
action necessary to place the Assets in operating condition prior to the
delivery dates specified herein. It is understood and agreed that ALL ASSETS
BEING PURCHASED FROM SELLER HEREUNDER ARE BEING PURCHASED AND SOLD "AS IS" WITH
NO WARRANTY, EXPRESSED OR IMPLIED.
(i) Employee Benefits. Seller has no and has never had any
employee benefit plans (as defined in Section (3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), maintained by or contributed
to by Seller in connection with the Drilling Business (all such plans are
referred to as the "Plans"), or any all employee stock option or stock
purchase, bonus, incentive compensation, severance pay and fringe benefit
arrangements. During the five-year period ending at the Closing, Seller has not
made or been required to make any contributions to any "multiemployer plan" (as
defined in Section 3(37) of ERISA).
(j) Permits and Approvals. Seller has no permits, approvals,
authorizations, licenses, consents, certifications, qualifications or
clearances held, used, or required in the conduct of the Drilling Business, and
none are required to be held by Seller.
(k) Compliance with Laws. Seller is in full compliance with all
statutes, ordinances, codes, restrictions, regulations, and other governmental
requirements. At all times prior to Closing, the conduct of Seller has been in
full compliance with all statutes, ordinances, codes, restrictions,
regulations, and other governmental requirements, including all Environmental
Laws, as hereafter defined.
(l) Tax Returns. All tax returns required to be filed by Seller
have been or will be properly and timely filed on or before the Closing Date.
All taxes, including but not limited to payroll and ad valorem taxes, have been
or will be paid when required by law. The Assets are not in any manner
encumbered by any liens arising out of unpaid taxes which are due and payable
nor shall any such lien arise on account of any taxes due for any period prior
to the Closing.
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(m) True and Correct Copies. Seller has delivered or made
available to Purchaser true, correct, and complete copies of all contracts,
agreements and documents referred to in this Agreement or related to the
Drilling Business, together with all modifications thereof and amendments
thereto, and all customer lists, supplier lists, maintenance records and daily
drilling reports with respect to the Drilling Business.
(n) Insurance. Schedule 6(n) contains a list of the policies and
contracts (including insurer, named insured, type of coverage, limits of
insurance, required deductibles or copayments, annual premiums and expiration
date) for fire, casualty, liability and other forms of insurance maintained by,
or for the benefit of Seller. All such policies are in full force and effect
and are adequate for the Drilling Business. Seller has not received any notice
of cancellation or non-renewal or of significant premium increases with respect
to any policy. All premiums due prior to the date hereof for the period prior
to the date hereof with respect to such policies have been timely paid, and all
premiums due before the Closing Date for periods between the date hereof and
the Closing Date will be timely paid. In addition, all premiums due before the
Second Delivery Date and the termination of the Lease Agreement with respect to
the Rig 9 Assets and the Rig 10 Assets for the periods between the date hereof,
the Second Delivery Date and the termination of the Lease Agreement, as the
case may be, will be timely paid so that all of the Assets are fully insured
for all periods prior to delivery.
(o) Financial Statements. Seller represents that all financial
statements provided to Purchaser are true and correct in all material respects,
and have been prepared in accordance with generally accepted accounting
principles, consistently applied. The financial statements which have been or
shall be provided to Purchaser are listed on Schedule 6(o).
(p) Disclosure. No statement in any document or certificate
furnished or to be furnished by Seller or Phillips to, Purchaser pursuant
hereto, or in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of a material fact, or fail to contain any
material facts necessary in order to make the statements therein not
misleading. Seller and Phillips have fully disclosed in writing all material
facts pertaining to the Assets and the Drilling Business.
(q) Private Placement Memorandum. Seller and Phillips acknowledge
the receipt of the Confidential Private Placement Memorandum (the "Memorandum")
delivered by the Purchaser prior to the execution of this Agreement, which
Memorandum
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describes, among other matters, the Purchaser, its capitalization, a
description of the Common Stock Consideration, the transferability of
the Common Stock Consideration and the Common Stock issuable upon the
exercise of the Stock Option Agreement. The Memorandum also contains
the Purchaser's latest annual report on Form 10-K, as well as its
quarterly reports filed on Form 10-Q for the Purchaser's fiscal
quarters ending March 31, 1996, June 30, 1996, September 30, 1996 and
December 31, 1996. Seller, through Phillips, has had the opportunity
to ask questions and obtain additional information from the officers
and directors of Purchaser regarding the financial condition,
business and properties of Purchaser.
7. Representations and Warranties of Purchaser. Purchaser
represents and warrants to Seller as follows:
(a) Corporate Existence. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of
Texas and has the corporate power to carry on its business as now
being conducted.
(b) Corporate Authority. The execution, delivery and
performance of this Agreement, and the obligations undertaken by the
Purchaser herein, have been duly authorized by all necessary corporate
action by and on behalf of the Purchaser.
(c) No Violation of Agreements. This Agreement
constitutes a valid and binding obligation of Purchaser enforceable
against Purchaser in accordance with its terms, and this Agreement and
all transactions contemplated hereby will not result in the violation
of any terms of the Articles of Incorporation or By-Laws of Purchaser
or any law or agreement to which Purchaser is a party or by which it
is bound.
(d) Brokers. If Purchaser has retained any broker in
connection with the transactions contemplated by this Agreement,
Purchaser shall be solely responsible for the payment of any
compensation due such broker by Purchaser.
(e) Disclosure. No statement in any document or
certificate furnished or to be furnished by Purchaser to Seller
pursuant hereto, or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a material
fact, or fail to contain any material facts necessary in order to make
the statements therein not misleading. Purchaser has fully disclosed
in writing all material facts pertaining to the Purchaser.
8. Actions before Closing.
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(a) Access. Between the date hereof and the later to occur of the
Second Delivery Date or the termination of the Lease Agreement, Seller shall
afford Purchaser and its counsel and other representatives full access during
normal business hours to Seller's contracts, properties and facilities, and
Seller shall instruct its officers, employees, accountants and agents to fully
cooperate with Purchaser and its counsel, accountants, lenders and other
representatives in its investigation and to furnish such additional information
as Purchaser and its counsel and other representatives may from time to time
reasonably request. Seller specifically covenants that Seller will permit
Purchaser to conduct such tests and investigations of the Assets as Purchaser
may request. In addition, Purchaser shall be permitted to make abstracts from,
or take copies of, such documentation relating to the Assets as may be
reasonably required by Purchaser.
(b) Interim Conduct of the Drilling Business. Seller hereby
covenants to Purchaser that, from the date hereof to the later to occur of the
Second Delivery Date or the termination of the Lease Agreement, Seller will
conduct the Drilling Business only in the ordinary course and usual course,
consistent with past practices, subject to Purchaser's approval of certain
transactions pursuant to 8(c) below. Without limiting the generality of the
foregoing, Seller hereby covenants to Purchaser that, insofar as the Drilling
Business is concerned, Seller will use its best efforts to:
(i) preserve the Drilling Business and Seller's relationships with
suppliers, customers, employees, creditors, and others having business
dealings with the Drilling Business;
(ii) maintain in full force and effect its existing policies of
insurance listed on Schedule 6(n);
(iii) maintain the Assets in good operating condition and repair;
(iv) continue performance in the ordinary course of its obligations
under the Rig Lease, the Contracts and Commitments and Ancillary
Agreements;
(v) permit employees or other representatives of Purchaser to
consult with Seller's employees who are employed in the Drilling
Business in the performance of their jobs for a period of not more
than two weeks prior to the Closing Date, provided that any such
discussions will be performed in a manner that will not disrupt the
operation of the Drilling Business; and
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(vi) pay all taxes and liabilities and perform all obligations of
Seller when due.
(c) Purchaser's Approval of Certain Transactions. Seller hereby
covenants to Purchaser that from the date hereof to the later to occur of the
Second Delivery Date or the termination of the Lease Agreement, Seller shall
not do any of the following acts without the prior written consent of
Purchaser:
(i) sell, transfer, encumber or assign any of the Assets (except
to Purchaser in accordance with this Agreement);
(ii) enter into any transaction, contract or commitment outside of
the ordinary course of the drilling portion of Seller's business; or
(iii) enter into any agreement whereby Seller is obligated to drill
any well on or after two days prior to the Closing Date or to perform
any service or other obligation after the day set forth herein as the
Closing Date. If any required consent shall not be given by Purchaser,
Purchaser shall pay the labor costs incurred by Seller with respect
thereto.
(d) Consent to Assignment. Seller hereby covenants to Purchaser
that, at least 10 days prior to the Closing, Purchaser will use its best efforts
to obtain the consents and approvals which are necessary to assign the Rig
Lease, as well as the Contracts and Commitments and Ancillary Agreements. Any
and all such approvals and consents shall be in writing, signed by the person
entitled to consent or approve, and shall be delivered to Purchaser at Closing.
(e) Schedule Updates. Seller and Purchaser shall update by
amendment or supplement each of the Schedules referred to herein and any other
disclosure in writing from either party required by this Agreement to be
disclosed by Seller or Purchaser promptly upon any change in the information
set forth in such Schedules or other disclosures, and each party hereby
represents and warrants to the other that such Schedules and such written
disclosures, as so amended or supplemented by them, shall be true and correct
as of the dates thereof; provided however, that the inclusion of any
information in any such amendment or supplement, not included in the original
Schedule or other disclosure at or prior to the date of this Agreement, shall
not limit or impair any right that either party might otherwise have respecting
the representations and warranties of Purchaser contained in this Agreement.
(f) Updated Financial Statements. Within ten (10) days of Closing,
Seller shall provide Purchaser with updated financial statements, current
within sixty days, and such financial statements shall be reflected on Schedule
6(__).
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(g) Reports. On a daily basis, Seller shall provide
Purchaser, via telefax, with the daily drilling reports pertaining to
the operation of the Drilling Equipment, as well as all proposals
seeking the Seller to bid on any project and at least two business
days before any bids are submitted, any bids proposed to be submitted
by Seller. In addition, as situations occur, Seller shall promptly
notify Purchaser in writing with respect to any material or adverse
change in the Assets or the Drilling Business.
9. Conditions Precedent to Closing by Purchaser. Except as
expressly waived in writing by the Purchaser, the obligation of Purchaser to
purchase the Assets is subject to, among other things, the following
conditions:
(a) Approvals. All corporate and other proceedings or
actions to be taken by Seller in connection with the transactions
contemplated by this Agreement and all documents incidental thereto
shall be satisfactory in form and substance to Purchaser and
Purchaser's counsel.
(b) Title. Transfer of title on the Closing Date, by
Seller to Purchaser, of the Assets, free and clear of all Liens,
including the Existing Liens, and delivery of the Rig 5 Assets on the
Closing Date, delivery of the Rig 10 Assets on the Second Delivery
Date and delivery of the Rig 9 Assets upon the termination of the
Lease Agreement, free and clear of all Liens, including the Existing
Liens. Notwithstanding any other provision of this Agreement, Seller's
obligation to deliver the Rig 10 Assets is conditioned upon receiving
the consent to such transfer from the Lessor under the Rig 10 lease.
(c) Covenants. The fulfillment and/or performance of all
agreements, conditions and covenants of Seller contained herein on or
prior to the Closing Date or such earlier specified date for
fulfillment and/or performance.
(d) Representations. The representations and warranties
of Seller and Phillips shall be true, accurate, and complete in all
material respects as of the date hereof and as of Closing.
(e) Documents. Delivery on the Closing Date, by Seller to
Purchaser, of all such instruments of transfer, bills of sale,
endorsements, assignments, and other instruments of transfer and
conveyance, in form and substance satisfactory to Purchaser, as are
necessary to vest in Purchaser good and indefeasible title to the
Assets free and clear of all Liens, including Existing Liens.
(f) Permits. Purchaser shall have received from the
appropriate entities such permits and licenses as are necessary for
the conduct of the Drilling Business after the Closing, or Purchaser
shall have determined, to Purchaser's sole satisfaction, that
Purchaser is not required to obtain
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such permits and licenses by reason of an available exemption.
Purchaser covenants and agrees to utilize due diligence and good faith
in obtaining such permits and licenses.
(g) Tax Certificate. Purchaser shall have received, in
accordance with Section 111.020(c) of the Texas Tax Code, a
certificate stating that no taxes are due by Seller.
(h) No Adverse Change. No material, adverse change in the
Assets or the Drilling Business (including, but not limited to, any
material, adverse change or circumstance pertaining to any Contract
or Commitment) which would have a material adverse effect on the
Purchaser, shall have occurred after the date of this Agreement and
prior to the Closing, and Seller shall have operated Seller's business
in the ordinary course. In the event that any of the Assets are
damaged or destroyed, before the Closing Date, Purchaser may at its
option, terminate this Agreement or Close the transactions
contemplated by this Agreement in which event Purchaser shall receive
all of the insurance proceeds resulting from such damage or
destruction.
(i) Litigation. There shall not have been issued and in
effect any injunction or similar legal order prohibiting or
restraining consummation of any of the actions herein contemplated and
no legal action or governmental investigation which might reasonably
be expected to result in any such injunction or order shall be pending
or threatened;
(j) Deliveries Required by Seller. Seller shall have
delivered to Purchaser all of the items enumerated in Section 4(a).
(k) Financing. Purchaser shall have obtained financing,
on such terms as are provided in the commitment received by Purchaser
from FINOVA, to enable Purchaser to complete the transactions
contemplated by this Agreement and to provide adequate working capital
for Purchaser's anticipated working capital needs after Closing.
10. Conditions Precedent to Closing by Seller. The obligation of
Seller to sell the Assets is subject to, among other things, the following
conditions:
(a) Covenants. The fulfillment and/or performance of all
conditions and covenants of Purchaser contained herein on or prior to
the Closing Date or such earlier specified date for fulfillment and/or
performance.
(b) Representations. The representations and warranties
of Purchaser shall be true, accurate, and complete in all material
respects as of the date hereof and as of Closing.
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(c) Documents. Delivery on the Closing Date, by Purchaser to
Seller of all instruments and documents required by this Agreement, in form and
substance reasonably satisfactory to Seller, as are necessary to fulfill
Purchaser's obligations under this Agreement.
(d) Deliveries Required by Purchaser. Purchaser shall have
delivered to Seller all items enumerated in Section 4(b)
11. Additional Covenants.
(a) Proration of Taxes and Other Items. All personal property
taxes shall be prorated to the Closing Date.
(b) Transfer and Liability. Seller has the sole responsibility
for any employment rights or benefits which any of its employees may have.
Purchaser has no obligation whatsoever to employ any such employees or to pay
any benefits which any employee has or claims to have by virtue of an
employment relationship with Seller. Purchaser shall have the right to
interview all of the employees of Seller. If Purchaser elects to hire an
employee of Seller, Seller agrees to cooperate and not to interfere with such
employee becoming an employee of Purchaser. However, Purchaser shall not
employ any employee of Seller while they are assigned to Rig 10 or Rig 9, until
the termination of the Lease Agreement or the Second Delivery Date, as the case
may be. Seller shall be solely responsible for any salary, wages, bonuses,
commissions, accrued vacation time, sick leave time, profit sharing or pension
benefits and any other compensation or benefits as well as any actions or
causes of action, including, but not limited to, unemployment compensation
claims and workers compensation claims which may be asserted by and determined
by a court or appropriate agency ruling to be due to any of its employees which
are not hired by Purchaser or by any of its employees which are hired by
Purchaser if the claims of such hired employee relates to or arises from
employment with Seller or termination of employment by Seller. The above
notwithstanding, Purchaser agrees to offer employment to Seller's drilling
superintendent and its contract manager at annual salaries of $50,000 and
$47,500, respectively. All such employees shall be at-will employees. Phillips
agrees to work as a consultant to the Purchaser on an as-needed basis, at a
rate of $300.00 for each day of requested services. All reasonable expenses
related to Phillips' serving as a consultant to Purchaser will be paid by
Purchaser, provided that Purchaser approves such expenses before incurred.
(c) Trading in Stock. Until the Closing, neither Seller nor
Phillips will trade in any of the stock of the Purchaser and acknowledge that
any such trading may be a violation of
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<PAGE> 19
law and subject Seller and Phillips to substantial liabilities. In order to
protect against such unlawful trading in the Purchaser's stock, until the
Closing, Seller and Phillips agree to keep the existence of this Agreement and
the terms thereof confidential and only to disclose the existence of this
Agreement and its terms, on an as needed basis.
(d) Board Representation. At his option, and provided that the
transactions contemplated by this Agreement are consummated, Phillips will be
appointed to serve on the Board of Directors of the Purchaser until the next
annual meeting of the shareholders of Purchaser. He shall be nominated to serve
annually thereafter so long as the Note shall not have been discharged in full.
Robert R. Marmor, William D. Hibbets, Wm. Stacy Locke and Alvis L. Dowell shall
each agree to vote all shares of the Purchaser owned or controlled by them in
favor of Richard Phillips serving as a director in each election, in accordance
with the Voting Agreement attached hereto as Exhibit "F, " which will be
delivered to the Seller at Closing.
(e) Survival of Covenants. The warranties, covenants, promises,
undertakings, and obligations of each of the parties hereto, whether set forth
in this Agreement, or in any document, exhibit or schedule delivered in
connection with this Agreement shall survive the Closing and, in the event of
the dissolution and liquidation of Seller or Purchaser, survive such
dissolution and liquidation and continue, notwithstanding such dissolution and
liquidation, to be performable by, and actionable and enforceable against, any
person, or persons, to whom, or to which, any of the assets of and property of
Seller or Purchaser, shall have been distributed as a result of such
dissolution and liquidation.
(f) Further Consents and Conveyances. After the Closing, Seller
shall, without further cost or expense to Purchaser, execute and deliver to
Purchaser, such additional instruments of conveyance, and take such other and
further actions to more completely sell, transfer, and assign to Purchaser, the
Assets. In addition, to the extent that any consent or approval was not
obtained prior to Closing and Purchaser nevertheless elected to proceed with
Closing, Seller shall continue to use its best efforts to obtain from such
person or persons any such consents or approvals.
(g) Right of Set-off. It is expressly agreed that for a period of
thirty (30) days following the later to occur of the Second Delivery Date or
termination of the Rig 9 lease agreement. Purchaser shall have the right to
reduce the amount owing under the Note by the amounts, if any, owed by Seller
under the Lease Agreement or this Agreement as a result of the breach of any
agreement, covenant, representation or warranty under this Agreement or the
Lease Agreement, or
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<PAGE> 20
arising under Purchaser's right to indemnification as provided in Section 12
below.
(h) Books and Records. Incident to any public offering of the
Stock of Purchaser or as necessary to satisfy Purchaser's obligations under the
Securities Exchange Act of 1934, as amended, within the twenty four month
period following the Closing, and to the extent necessary, Purchaser shall have
the right to conduct an audit of Seller's Drilling Business operations, in
which event Seller and Phillips will fully cooperate with Purchaser and allow
access to such books and records as is necessary to conduct such audit. As
such, the books and records of Seller relating to the Drilling Business shall
be maintained by Seller for a period of two years from the date of Closing.
(i) Rig Lease. Phillips agrees to provide any assistance
requested by Purchaser necessary to maintain the Rig Lease and agrees that at no
time shall he attempt to influence the owner of Rig 10 to terminate the Rig
Lease or assist any third party to contact, or negotiate with the owner of Rig
10.
12. Indemnification.
(a) Each party, whether the Seller and Phillips, or the Purchaser
("Indemnifying Party") shall defend, indemnify and hold harmless the other
party, its directors, officers, employees and shareholders, and its successors
and assigns (the "Indemnified Parties") from and against any and all costs,
losses, claims, liabilities, fines, expenses, penalties, and damages (including
interest, legal and accounting fees, court costs and fees and costs on appeal,
costs of arbitration and disbursements of counsel) ("Damages") suffered by an
Indemnified Party as a proximate result of:
(i) Any breach, violation, falsification, failure to
satisfy, or other default in any respect of any warranty, covenant or
representation provided herein by the indemnifying Party.
(ii) Any liability arising out of the ownership, use or
operation by the Indemnifying Party of the Assets or Drilling
Business, including, without limitation, the violation of any
Environmental Law, rule or regulation, and including any liability
arising out of or attributable to acts or omissions with respect to
the Rig Lease, the Contracts and Commitments and the Ancillary
Agreements.
(iii) The presence, management, production, refinement,
manufacture, processing, distribution, use,
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<PAGE> 21
treatment, sale, storage, disposal, transportation or
handling, or the emission, discharge, release, or threatened
release of any Hazardous Substances; any death, personal
injury or property damage (real or personal) arising out of or
related to such Hazardous Substances; any, action, suit,
proceeding or investigation brought or threatened, settlement
reached or governmental order relating to such Hazardous
Substances; and any violation of any Environmental Law by the
Indemnifying Party or its officers, directors, agents,
employees or representatives.
(b) The following terms used in this Section 12 have the
meanings set forth below:
"Environmental Laws" shall mean all federal, state, county,
municipal and local, foreign and other statutes, laws, regulations and
ordinances which relate to or deal with protection of human health or
the environment, all as may be from time to time amended.
"Hazardous Substance(s)" shall mean (i) any flammable
substances, explosives, radioactive materials, hazardous substances,
hazardous wastes, toxic substances, pollutants, contaminants or any
related materials or substances identified in or regulated by any of
the Environmental Laws, and (ii) asbestos, polychlorinated bipheyls,
urea formaldehyde, nuclear fuel or material, chemical waste,
explosives, known carcinogens, petroleum products and by-products
(including any fraction thereof) and radon.
(c) Subject to the rights of either party to arbitrate
any dispute as hereinafter provided for, each party shall have the
absolute right, for a period of thirty (30) days following the later
to occur of the Second Delivery Date or termination of the Rig 9 lease
agreement, to exercise its right of set-off of any indemnity owed
the other party under this Section 12 against any obligation owing
from the Indemnifying Party.
13. Mediation. In the event a dispute or disagreement may arise
between the parties out of or in connection with this Agreement, the parties
agree to submit, pursuant to Section 154.025 of the Texas Civil Practice and
Remedies Code, such dispute or disagreement to mediation within thirty (30)
days of written notice from one party to the other demanding such mediation. In
the event of any default under this Agreement, or the agreements entered into
incident to the Closing, the breaching party shall be liable for the attorney's
fees and expenses of the non-breaching party.
14.1 Incidental Registration.
(a) Right to Include Registrable Common Stock. The
Purchaser understands that the Seller intends to transfer all or
21
<PAGE> 22
part of the Common Stock Consideration to Arthur Seeligson, Jr. and/or Richard
Phillips (the "Transferee"), and the Purchaser agrees to facilitate such
transfer to the Transferee provided that the Transferee signs a subscription
agreement in the form acceptable to the Purchaser and acknowledges receipt and
review of the Private Placement Memorandum prepared by the Purchaser and
delivered to the Seller. If the Purchaser at any time within two years of the
Closing Date, files a registration statement covering any of its securities
under the Securities Act (other than by a registration on Form S-8, S-4 or any
successor similar forms or any other form not available for registering the
Registrable Common Stock for sale to the public), whether for sale for its own
account or for the account of any Person exercising demand registration rights,
it will each such time, at least 30 days prior to filing the registration
statement, give written notice to the Seller and the Transferee ("Holders")
(the Common Stock Consideration and the Common Stock issuable upon the exercise
of the rights under the Option Agreement are referred to herein as the
"Registrable Common Stock") at the last address provided to the Purchaser of
its intention to do so. Upon the written request of any such Holder made within
15 days after the receipt of any such notice (which request shall specify the
Registrable Common Stock intended to be disposed of by such Holder and the
intended method of disposition thereof), the Purchaser will use reasonable
efforts to effect the registration under the Securities Act of all Registrable
Common Stock which the Purchaser has been so requested to register by the
Holders of such Registrable Common Stock, to the extent requisite to permit the
disposition of the Registrable Common Stock so to be registered, provided that
if, at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration statement filed
in connection with such registration, the Purchaser shall determine for any
reason not to register or to delay registration of such securities, the
Purchaser may, at its election, give written notice of such determination to
each Holder of Registrable Common Stock and, thereupon, (i) in the case of a
determination not to register, shall be relieved of its obligation to register
any Registrable Common Stock in connection with such registration (but not from
its obligation to pay expenses in accordance with Section 14.1 (d)), and (ii)
in the case of a determination to delay registering, shall be permitted to
delay registering any Registrable Common Stock being registered pursuant to
this Section 14.1(a), for the same period as the delay in registering such
other securities.
(b) Priority in Incidental Registrations. If (i) a
registration pursuant to this Section 14.1 involves an underwritten offering of
the securities so being registered, whether or not for sale for the account of
the Purchaser or by any Person exercising demand registration rights, to be
distributed (on a firm commitment basis) by or through one or more underwriters
of recognized standing, whether or not the Registrable Common Stock so
requested to be registered for sale for the account of Holders of Registrable
22
<PAGE> 23
Common Stock is also to be included in such underwritten offering, and (ii) the
managing underwriter of such underwritten offering shall inform the Purchaser
and the Holders of the Registrable Common Stock requesting such registration by
letter of its belief that the number of securities requested to be included in
such registration would materially adversely affect the marketability or
offering price of any securities proposed to be offered by the Purchaser or any
Person exercising demand registration rights, exceeds the number which can be
sold in (or during the time of) such offering, then the Purchaser may include
in such offering all securities proposed by the Purchaser to be sold for its
own account or by any Person exercising demand registration rights and may
decrease the number of shares of Registrable Common Stock and other securities
of the Purchaser requested to be included in such registration pursuant to
contractual "piggyback" rights similar to those granted hereby pro rata on the
basis of the number of shares of Registrable Common Stock and other securities
of the Purchaser requested to be included in such registration to the extent
necessary to reduce the number of securities to be included in the registration
to the level recommended by the managing underwriter.
(c) Incidental Underwritten Offerings. If the Purchaser
at any time proposes to register any of its securities under the Securities Act
as contemplated by Section 14.1 and such securities are to be distributed by or
through one or more underwriters, the Purchaser will, if requested by any
Holder of Registrable Common Stock as provided in Section 14.1 and subject to
the provisions of Section 14.1(b), arrange for such underwriters to include all
the Registrable Common Stock to be offered and sold by such Holder owning the
securities to be distributed by such underwriters. Further, the Purchaser, at
its option, may require that such securities be distributed through such
underwriters.
(d) Expenses. Except as otherwise provided in this
Section 14.1(d), all expenses incurred in connection with each registration
pursuant to Section 14.2 (excluding in each case underwriter's discounts and
commissions applicable to Registrable Common Stock), including, without
limitation, in each case, all registration, filing and National Association of
Securities Dealer fees; all fees and expenses of complying with state
securities or blue sky laws; all word processing, duplicating and printing
expenses, messenger, delivery and shipping expenses; fees and disbursements of
the accountants and counsel for the Purchaser including the expenses (of any
special audits, "cold comfort" letters or opinions required by or incident to
such registrations; and the reasonable fees and disbursements of one firm of
counsel retained by the Holders of such Registrable Common Stock, any fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities, but excluding underwriting discounts and commissions, if any, shall
be borne by the Purchaser. In all cases, each Holder of Registrable Common
Stock shall pay the
23
<PAGE> 24
underwriter's discounts and commissions applicable to the securities sold by
such Holder.
14.2 Registration Procedures. If and whenever the Purchaser is
required to use reasonable efforts to effect the registration of any
Registrable Common Stock under the Securities Act as provided in this Section,
the Purchaser will, subject to the limitations provided herein, as
expeditiously as possible:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and thereafter use
reasonable efforts to cause such registration statement to become
effective, provided that the Purchaser may discontinue any
registration of its securities at any time prior to the effective date
of the registration statement relating thereto;
(ii) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the
Securities Act of 1933, as amended, with respect to the disposition of
all securities covered by such registration statement until such time
as all of such securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set
forth in such registration statement; provided, however, that if the
Purchaser is requested or required to maintain such registration
effective for more than 90 days, all out-of-pocket expenses of the
Purchaser in maintaining such effectiveness after such 90 day period
shall be borne by such of the holders of securities who have requested
the maintaining of such effectiveness in order to continue with the
distribution, in such proportions as they may agree upon;
(iii) furnish to each seller of Registrable Common Stock
covered by such registration statement such number of confirmed copies
of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number
of copies of the prospectus contained in such registration statement
(including each preliminary prospectus and any summary prospectus) and
any other prospectus filed under Rule 424 under the Securities Act,
and such other documents, as such seller may reasonably request;
(iv) use its best effort to register or qualify all
Registrable Common Stock and other securities covered by such
registration statement under such other securities or blue sky laws of
such jurisdictions as each seller thereof shall reasonably request, to
keep such registration or qualification in effect for so long as such
registration statement remains
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<PAGE> 25
in effect (provided, however, that if the Purchaser is requested or
required to maintain such registration effective for more than 90
days, all out-of-pocket expenses of the Purchaser in maintaining such
effectiveness after such 90 day period shall be borne by such of the
holders of securities who have requested the maintaining of such
effectiveness in order to continue with the distribution, in such
proportions as they may agree upon, and take any other action which
may be reasonably necessary or advisable to enable Such Seller to
consummate the disposition in such jurisdictions of the securities
owned by such seller, except that the Purchaser shall not for any such
purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the
requirements of this subdivision (iv) be obligated to be so qualified
or to consent to general service of process in any such jurisdiction;
(v) use its best efforts to cause all Registrable Common
Stock covered by such registration statement to be registered with or
approved by such other United States Federal or state governmental
agencies or authorities as may be necessary to enable the seller or
sellers thereof to consummate the disposition of such Registrable
Common Stock;
(vi) furnish to each seller of Registrable Common Stock a
copy, or, upon request, a signed counterpart, addressed to such seller
(and the underwriters, if any) of
(x) an opinion of counsel for the Purchaser,
dated the effective date of such registration statement (and,
if such registration includes an underwritten public offering,
dated the date of the closing under the underwriting
agreement), and
(y) a "comfort" letter, dated the effective date
of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of
the closing under the underwriting agreement), signed by the
independent public accountants who have audited the
Purchaser's financial statements included in such registration
statement, covering substantially the same matters with
respect to such registration statement (and the prospectus
included therein) and, in the case of the accountants' letter,
with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions
of issuer's counsel and in accountants' letters delivered to
the underwriters in underwritten public offerings of
securities and, in the case of the accountants letter, such
other financial matters, and, in the case of the legal opinion
such other
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<PAGE> 26
legal matters, as such seller or such Holder (or the
underwriters, if any) may reasonably request;
(vii) notify each seller of Registrable Common
Stock covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any
event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light
of the circumstances under which they were made;
(viii) otherwise use reasonable efforts to comply
with all applicable rules and regulations of the Commission, and make
available to its security Holders, as soon as reasonably practicable,
an earnings statement covering the period of at least twelve months
beginning with the first full calendar month after the effective date
of such registration statement which earnings statement shall satisfy
the provisions of Section 11(a) of the Securities Act, and will
furnish to each such seller, upon request of such seller, at least
five days prior to the filing thereof a copy of any amendment or
supplement to such registration statement or prospectus and shall not
file any thereof to which any such seller shall have delivered to the
company an opinion of counsel that such amendment or supplement does
not comply in all material respects with the requirements of the
Securities Act or of the rules or regulations thereunder;
(ix) provide and cause to be maintained a transfer
agent for all Registrable Common Stock covered by such registration
statement from and after a date not later than the effective date of
such registration statement; and
(x) use its best efforts to list all Registrable
Common Stock covered by such registration statement on any securities
exchange on which any of the Common Stock of the Purchaser is then
listed; and
It shall be a condition precedent to the obligations of the Purchaser to take
any action with respect to registering a Holder's
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<PAGE> 27
Registrable Common Stock pursuant to this Section 14.2 that such seller of
Registrable Common Stock as to which any registration is being effected furnish
the Purchaser in writing such information regarding such seller, the
Registrable Common Stock and other securities of the Purchaser held by such
seller, and the distribution of such securities as the Purchaser may from time
to time reasonably request in writing. If a Holder refuses to provide the
Purchaser with any of such information on the grounds that it is not necessary
to include such information in the registration statement, the Purchaser may
exclude such Holder's Registrable Common Stock from the registration statement
if the Purchaser provides such Holder with an opinion of counsel to the effect
that such information must be included in the registration statement and such
Holder thereafter continues to withhold such information. The deletion of such
Holder's Registrable Common Stock from a registration statement shall not
affect the registration of the other Registrable Common Stock to be included in
such registration statement.
Each Holder of Registrable Common Stock agrees by acquisition of such
Registrable Common Stock that upon receipt of any notice from the Purchaser of
the happenings of any event of the kind described in subdivision (vii) of this
Section 14.2, such Holder will forthwith discontinue such Holder's disposition
of Registrable Common Stock pursuant to the registration statements relating to
such Registrable Common Stock until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (vii) of this
Section 14.2 and, if so directed by the Purchaser, will deliver to the
Purchaser (at the Purchaser's expense) all copies, other than permanent file
copies then in such Holder's possession, of the prospectus relating to such
Registrable common Stock current at the time of receipt of such notice.
15. Miscellaneous.
(a) Entire Agreement and Amendment. This Agreement and
the attached exhibits, schedules and other documents delivered
hereunder contain the entire agreement between the parties with
respect to the matters described herein and are a completely
integrated and exclusive statement as to the terms thereof and
supersede all previous agreements. This Agreement may not be altered
or modified except by a writing signed by the parties hereto.
(b) Notices. Any notice, demand or other writing of any
kind whatsoever which may or shall be given pursuant to this Agreement
shall be deemed given if personally delivered or on the third
succeeding business day after being mailed by registered or certified
mail, postage prepaid and return receipt requested, addressed as
follows (or at such address as shall be specified by notice given
hereunder):
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<PAGE> 28
If to Seller: Mr. Richard Phillips
5701 Agnes Street
Corpus Christi, Texas 78408
If to Phillips: Mr. Richard Phillips
5701 Agnes Street
Corpus Christi, Texas 78408
with copy to: Don Feferman; 1830 Frost Bank Plaza;
Corpus Christi, TX 78470-0600
If to Purchaser: Mr. Wm. Stacy Locke
9310 Broadway, Building 1
San Antonio, Texas 78217
with copy to: Daniel M. Elder
Matthews & Branscomb, P.C.
106 S. St. Mary's St. Suite 700
San Antonio, Texas 78205
(c) Headings. The Background section and all Section and paragraph
headings contained herein are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
(d) Assignment. No party shall assign, transfer, pledge,
hypothecate or encumber this Agreement, or any interest herein or hereunder,
without the prior written consent of the other party.
(e) Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
(f) Parties in Interest. This Agreement shall inure to the benefit
of and be binding upon the parties named herein and their respective heirs,
beneficiaries, legal representatives, successors and assigns, provided that any
assignment of this Agreement or the rights hereunder by any party hereto except
as permitted hereunder without the written consent of the other shall be void.
(g) Waiver. The failure of any party at any time to require
performance by any other party of any provision of this Agreement shall not be
deemed a continuing waiver of that provision or a waiver of any other provision
of this Agreement and shall in no way affect the full right to require such
performance from the other party at any time thereafter.
(h) Payment of Expenses. Except as specifically described
herein, each of the parties shall pay all of the costs which each incurs
incident to the preparation, execution
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<PAGE> 29
and delivery of this Agreement and the performance of the obligations
hereunder, including, without limitation, the fees and disbursements
of counsel, accountants and consultants, whether or not the
transactions contemplated by this Agreement shall be consummated.
(i) Invalidity. The invalidity of any provision of this
Agreement shall not affect the validity of the remainder of any such
provision or the remaining provisions of this Agreement.
(j) Severability. This Agreement and the transactions
contemplated herein constitute one sale and shall not be divisible in
any manner. A breach of any portion of this Agreement shall be
deemed a breach of the whole Agreement.
(k) Governing Law and Choice of Forum. Texas law shall
govern the construction and enforceability of this Agreement. Any and
all actions concerning any dispute arising hereunder shall be filed
and maintained only in a court sitting in Texas.
(l) Further Assurances. Seller, Phillips and Purchaser
each agree that they shall execute and deliver any and all additional
writings, instruments and other documents contemplated hereby or
referred to herein and shall take such further action as shall be
reasonably required in order to effectuate the terms and conditions
of this Agreement.
(m) Specific Performance. Seller and Phillips
acknowledge that a wrongful refusal by Seller to consummate the
transactions contemplated by this Agreement will cause harm to
Purchaser for which there may be no adequate remedy at law and for
which the ascertainment of damages will be difficult. Therefore, in
addition to and without having to prove the inadequacy of other
remedies at law, Purchaser shall be entitled to specific performance
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
Seller:
SAN PATRICIO CORPORATION,
a Texas corporation
By: /s/ RICHARD PHILLIPS
-------------------------
Its: President
---------------------
RICHARD PHILLIPS
/s/ RICHARD PHILLIPS
----------------------------
Purchaser:
SOUTH TEXAS DRILLING &
EXPLORATION, INC.,
a Texas corporation
By: /s/ WM. STACY LOCKE
-------------------------
Its: President
---------------------
29
<PAGE> 1
EXHIBIT 10(ee)
NON-STATUTORY STOCK OPTION AGREEMENT
This OPTION AGREEMENT (this "Agreement") is made as of the 18th day of
June, 1997, by and between SOUTH TEXAS DRILLING & EXPLORATION, INC., a Texas
corporation, with its principal place of business in San Antonio, Bexar County,
Texas (hereinafter called the "Company"), and SAN PATRICIO CORPORATION, a
Texas corporation, with its principal place of business in Corpus Christi,
Nueces County, Texas (hereinafter called "SP").
WHEREAS, incident to the transactions contemplated by the Asset
Purchase Agreement dated May _, 1997, by and between the Company, SP and
Richard Phillips ("Phillips"), the Company desires to afford SP an opportunity
to purchase shares of the $0.10 par value common stock of the Company
(hereinafter called the "Stock").
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereto agree as follows:
1. Corporate Authority. This Agreement is made pursuant to and in
accordance with the terms and provisions of a resolution adopted by the Board
of Directors of the Company on April 25, 1997.
2. Grant of Option. The Company hereby irrevocably grants to SP
the right and option to purchase all or any part of an aggregate of 150,000
shares of the Stock on the terms and conditions hereinafter set forth
(hereinafter referred to individually as an "Option" and collectively as the
"Options").
<PAGE> 2
3. Purchase Price. The purchase price of the shares of the Stock
covered by the Options shall be $1.50 per share (subject to adjustment as
provided in Section 11).
4. Time Option is Exercisable. SP shall have the right to
purchase all or a portion of the Stock subject to the Option at such times, and
from time to time, until June 15, 2002, at which time the Options shall
terminate. There is no obligation on SP to purchase any of the Stock subject to
the Options.
5. Exercise of Options. SP may exercise an Option by giving
written notice to the Company specifying the number of full shares to be
purchased and accompanied by payment of the full price thereof. No exercise of
an Option shall be complete and no Stock shall be delivered to SP prior to the
time that the full purchase price for such Stock has been paid. The purchase
price shall be paid in cash.
6. Transferability of Options. The Options may only be assigned,
transferred, pledged or hypothecated to Phillips. Otherwise, the Options may
not be assigned, transferred, pledged or hypothecated in any manner and shall
not be subject to any form of execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition of
the Options contrary to the provisions of this Agreement, or the levy of any
execution, attachment or similar process upon the Options, shall be null and
void and of no effect. However, Phillips may assign the Options upon his death.
7. Stockholder Rights. SP, (or Phillips, if the Options are so
transferred) shall not have any of the rights of a stockholder merely because
of its/his ownership of the Options granted by this Agreement.
2
<PAGE> 3
8. Requirements of Law. If any law or regulation of the
Securities and Exchange Commission (the "SEC") or any other federal or state
commission or agency having jurisdiction requires the Company or SP to take any
action with respect to the Stock acquired by the exercise of the Options, then
the Company shall take such required actions within a reasonable period of time
and the date upon which the Company shall deliver the Stock shall be postponed
until full compliance has been made with all such legal or regulatory
requirements. Further, at or before the time of the delivery of the Stock, SP
shall, if requested by the Company, deliver to the Company its written
statement that it intends to hold the Stock so acquired by him on exercise of
any Option for investment and not with a view to resale or other distribution
thereof to the public. Further, in the event the Company shall determine that,
in compliance with the Securities Act of 1933, as amended (the "Act"), or any
other applicable federal or state statute or regulation, it is necessary to
register any of the shares of Stock with respect to which an exercise of any
Option has been made, or to qualify any such shares for exemption from any of
such requirements, the Company shall take such action at its own expense and
within a reasonable period of time, but not until such action has been
completed shall the Option shares be delivered to SP.
9. Restrictions on Sale or Other Transfer of Stock. SP (or
Phillips) may not sell, assign or otherwise transfer any shares of Stock
purchased pursuant to the exercise of any Option granted hereunder in any
manner that violates the Act, or the Rules and Regulations of the SEC issued
thereunder, or any other federal or state laws, rules, and regulations
applicable to the sale or transfer of securities.
3
<PAGE> 4
10. Capital Adjustments Affecting Stock. In the event of a capital
adjustment resulting from a stock dividend, stock split, reorganization,
merger, consolidation, or a combination or exchange of shares, the number of
shares of Stock under Option shall be adjusted consistent with such capital
adjustment. The price of any share under Option shall be adjusted so that there
will be no change in the aggregate purchase price payable under exercise of any
such Option. The granting of an Option pursuant to this Agreement shall not
affect in any way the right or power of the Company to make adjustments,
reorganizations, reclassifications or changes of its capital or business
structure or to merge, consolidate, dissolve, liquidate, or sell or transfer
all or any part of its business or assets.
11. Dissolution, Liquidation and Reorganization. In the event of
the dissolution or liquidation of the Company, any Option granted under this
Agreement shall terminate as of a date to be fixed by the Board, provided that
not less than thirty (30) days' written notice of the date so fixed shall be
given to SP, and SP shall have the right during such period to exercise all or
any part of his Options without regard to the limitations of Section 4.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by an authorized officer, and SP has hereunto set its hand, all as of
the day and year first above written.
SOUTH TEXAS DRILLING & EXPLORATION, INC.
By: /s/ Wm. Stacy Locke
-----------------------------------
Name: Wm. Stacy Locke
---------------------------------
Title: President/CEO
--------------------------------
4
<PAGE> 5
SAN PATRICIO CORPORATION
By: /s/ Richard Phillips
-----------------------------------
Name: Richard Phillips
----------------------------------
Title: President
5
<PAGE> 1
FILED
in the Office of the
Secretary of State
of Texas
APR 16 1997
Corporations Section
EXHIBIT 10(ff)
SECOND AMENDED CERTIFICATE OF DESIGNATION,
REDUCING THE NUMBER OF SHARES FORMERLY DESIGNATED
SERIES A, SERIES B AND SERIES C PREFERRED STOCK
TO ZERO AND DESIGNATING THE VOTING POWERS, PREFERENCES
AND RIGHTS OF A NEW SERIES A 8% CONVERTIBLE PREFERRED STOCK OF
SOUTH TEXAS DRILLING & EXPLORATION, INC.
A Texas Corporation
South Texas Drilling & Exploration, Inc., a Texas corporation (the
"Corporation"), pursuant to Article 2.13 of the Business Corporation Act of the
State of Texas, certifies that the Board of Directors of the Corporation at a
meeting occurring March 27, 1997, at which a quorum was present and acting
throughout, duly adopted the following resolution reducing the number of shares
formerly designated as Series A, B and C (none of which are outstanding) to
zero and providing for a new Series A 8% Convertible Preferred Stock consisting
of 400,000 shares.
RESOLVED,
I.
REDUCTION OF SERIES A, B AND C
The number of shares of Preferred Stock formerly designated as Series
A, B and C, none of which are outstanding, are reduced to zero.
II.
SERIES A 8% CONVERTIBLE PREFERRED STOCK
1. Designation. The series of Preferred Stock established by this
resolution shall be designated "Series A 8% Convertible Preferred Stock," of
which 400,000 shares shall be designated having a par value of $2.00 per share.
<PAGE> 2
2. Preferences, Limitations and Rights of Series A 8% Convertible
Preferred Stock.
(A) General. Except as otherwise expressly provided by law, shares of
Series A 8% Convertible Preferred Stock shall have only the preferences and
relative rights expressly stated in this Certificate of Designation.
(B) Dividends.
(1) Amount; Time. Each share of Series A 8% Convertible Preferred
Stock at the time outstanding shall be entitled to receive, when and as
declared by the Board of Directors, out of any funds legally available
therefor, dividends at the rate of 8% of the initial liquidation value of $2.00
for each share per annum and no more.
(2) Cumulativity. Dividends payable in respect of Series A 8%
Convertible Preferred Stock shall accrue from day to day, whether or not earned
or declared and shall be cumulative. Accumulation of dividends on the Series A
8% Convertible Preferred Stock shall not bear interest.
(3) Priority Over Common Stock; Restriction on Purchases of
Common Stock. No dividend shall be declared or paid on the Corporation's Common
Stock ("Common Stock"), unless any dividends on outstanding Series A 8%
Convertible Preferred Stock for the current dividend period shall have been
declared and paid. No Common Stock shall be purchased for cash or tangible
assets by the Corporation so long as any Series A 8% Convertible Preferred
Stock remains outstanding.
2
<PAGE> 3
(C) Liquidation Preference. In the event of dissolution, liquidation,
or winding up of the Corporation (whether voluntary or involuntary), after
payment or provision for payment of debts but before any distribution to the
holders of Common Stock, the holders of Series A Convertible Preferred Stock
then outstanding shall be entitled to receive $2.00 per share, and an amount
per share equal to cumulated but unpaid dividends in respect of such shares of
Series A 8% Convertible Preferred Stock, and no more. All remaining assets
shall be distributed pro rata among the holders of Common Stock. If the
assets distributable among the holders of Series A 8% Convertible Preferred
Stock are insufficient to permit full payment to them, the entire assets shall
be distributed among the holders of the Series A 8% Convertible Preferred
Stock. Neither the consolidation, merger, or reorganization of the Corporation
with any other corporation or corporations, nor the purchase or redemption by
the Corporation of any of its outstanding shares shall be deemed to be
dissolution, liquidation, or winding up within the meaning of this paragraph.
(D) Redemption at Option of Corporation.
(1) Right; Method. All of the Series A Convertible Preferred
Stock may be redeemed at or following the third anniversary of the issuance of
any such Series A Convertible Preferred Stock at the option of the Corporation,
by resolution of the Board of Directors, provided that the Thirty Day Average
Stock Transaction Price of the Corporation's Common Stock shall equal or exceed
$2.50 for the Thirty Day Trading Period immediately
3
<PAGE> 4
preceding the sending of notice of redemption as provided below. The "Thirty
Day Average Stock Transaction Price" shall mean the average price, without
regard to volume, of the last reported trade of the Corporation's Common Stock
on any nationally recognized exchange or trading system such as the NASDAQ
Electronic Bulletin Board or the inter-broker trading system commonly known as
the "pink sheets". The "Thirty Day Trading Period" shall mean the
period which consists of 30 consecutive days, whether or not any shares of
Common Stock of the Corporation are actually traded in each of such days, when
the exchanges or trading systems in which the Corporation's Common Stock is
trading are open, without regard to weekends, holidays or other days when such
exchanges or trading systems are closed.
(2) Notice. Notice shall be in writing and given to the holders
of shares to be redeemed, either personally or by mail, not less than sixty nor
more than ninety days before the date fixed for redemption.
(E) Manner of Payment Upon Any Redemption.
(1) Payment. Holders of redeemed shares shall be paid in cash an
amount equal to par plus cumulated but unpaid dividends, and no more.
(2) Provision for Payment. On or before the date fixed for
redemption, the Corporation may provide for payment of a sum sufficient to
redeem the shares called for redemption either (a) by setting aside the sum,
separate from its other funds, in trust for the benefit of the holders of the
shares to be redeemed, or (b) by
4
<PAGE> 5
depositing such sum in a bank or trust company (either one in Texas having
capital and surplus of at least $20,000,000 according to its latest statement
of condition, or one anywhere in the United States duly appointed and acting as
transfer agent of the Corporation) as a trust fund, with irrevocable
instructions and authority to the bank or trust company to give or complete the
notice of redemption and to pay to the holders of the shares to be redeemed, on
or after the date fixed for redemption, the redemption price on surrender of
their respective share certificates. The holders of shares to be redeemed may
be evidenced by a list certified by the Corporation (by its president or a vice
president and by its secretary or an assistance secretary) or by its transfer
agent. If the Corporation so provides for payment, then from and after the date
fixed for redemption (a) the shares shall be deemed to be redeemed, (b) such
setting aside or deposit shall be deemed to constitute full payment for the
shares, (c) the shares shall no longer be deemed to be outstanding, (d) the
holders thereof shall cease to be shareholders with respect to such shares, and
(e) the holders shall have no rights with respect thereto except the right to
receive (without interest) their proportionate shares of the funds so set aside
or deposited upon surrender of their respective certificates. Any interest
accrued on funds so set aside or deposited shall belong to the Corporation. If
the holders of the shares do not, within six years after such deposit, claim
any amount so deposited for redemption thereof, the bank or trust company shall
upon demand pay over to the Corporation the balance of the funds so deposited,
and
5
<PAGE> 6
the bank or trust company shall thereupon be relieved of all responsibility to
such holders. If fewer than all outstanding shares of Series A Convertible
Preferred Stock are to be redeemed, the Corporation shall determine which
shares shall be redeemed by lot, pro rata, or other methods determined to be
appropriate by the Corporation.
(F) Status of Redeemed Shares. Shares of Series A 8% to Convertible
Preferred Stock which are redeemed shall be cancelled and shall be restored to
the status of authorized but unissued shares.
(G) Purchase. Except as specified in Section 2(B)(3) of this
Designation, nothing herein shall limit the right of the Corporation to
purchase any of its outstanding shares in accordance with law, by public or
private transaction.
(H) Voting. Each share of Series A 8% Convertible Preferred Stock
shall have the same voting rights as the shares of the Corporation's Common
Stock into which it may be converted.
(I) Rights of Conversion. The holders of Series A 8%
Convertible Preferred Stock shall have the conversion rights as follows:
(1) Right to Convert.
(i) Initial Rights. Each share of Series A 8% Convertible
Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share and
prior to the close of business on any date fixed for redemption which
applies to such share, at
6
<PAGE> 7
the office of the Corporation or any transfer agent for the Series A
8% Convertible Preferred Stock, into two shares of Common Stock in
respect of each share of Series A 8% Convertible Preferred Stock and
one share of Common Stock for each $.50 of due but unpaid dividends on
such share of Series A 8% Convertible Preferred Stock converted;
provided, however, that the number of shares of Common Stock into
which each share of Series A 8% Convertible Preferred Stock may be
converted shall be subject to adjustment as follows:
(ii) Rights at Three Years. If, at the third anniversary
of the date of issuance of any Series A 8% Convertible Preferred
Stock, the Thirty Day Average Stock Transaction Price of Common Stock
during the immediately preceding Thirty Day Trading Period (the "Three
Year Conversion Price") is below $1.00, the number of shares of Common
Stock to be received upon conversion of each share of Series A 8%
Convertible Preferred Stock shall be determined by dividing the sum of
Two Dollars by the Three Year Conversion Price, and to the extent of
any due but unpaid dividends on shares of Series A 8% Convertible
Preferred Stock converted, the amount of such due but unpaid dividends
shall likewise be convertible into Common Stock at a rate of $.50 or
the amount of the Three Year Conversion Price, whichever is lesser,
for each share of Common Stock (the "Three Year Conversion Rate"). The
Three Year Conversion Rate shall remain in effect
7
<PAGE> 8
thereafter unless adjusted at the 7th anniversary date of the issuance
of any Series A 8% Convertible Preferred Stock.
(iii) Rights at Seven Years. If, at the seventh anniversary
of the date of issuance of any Series A 8% Convertible Preferred
Stock, the Thirty Day Average Stock Transaction Price of Common Stock
during the immediately preceding Thirty Day Trading Period (the "Seven
Year Conversion Price") is below the Three Year Conversion Price, the
number of shares of Common Stock to be received upon conversion of
each share of Series A 8% Convertible Preferred Stock shall be
determined by dividing the sum of Two Dollars by the Seven Year
Conversion Price, and to the extent of any due but unpaid dividends on
shares of Series A 8% Convertible Preferred Stock converted, the
amount of such due but unpaid dividends shall likewise be convertible
into Common Stock at a rate of $.50 or the amount of the Seven Year
Conversion Price, whichever is lesser, for each share of Common Stock
(the "Seven Year Conversion Rate"). The Seven Year Conversion Rate
shall remain in effect at all times from and after the seventh
anniversary date of the issuance of any Series A 8% Convertible
Preferred Stock.
(iv) Conversion After Redemption Notice. In the event of a
call for redemption of any shares of Series A 8% Convertible Preferred
Stock, the conversion rights shall terminate as to the shares
designated for redemption at the
8
<PAGE> 9
close of business on the date fixed for redemption, unless default is
made in payment of the redemption price.
(2) Mechanics of Conversion. Before any holder of Series
A 8% Convertible Preferred Stock shall be entitled to convert the same into
shares of Common Stock, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series A 8% Convertible Preferred Stock, and shall give written
notice by mail, postage prepaid, to the Corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are
to be issued. The Corporation shall, as soon as practicable thereafter, issue
and deliver at such office to such holder of Series A 8% Convertible Preferred
Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender
of the shares of Series A 8% Convertible Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversions shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date.
9
<PAGE> 10
(3) Adjustments in the Average Stock Transaction Price Thresholds
and in the Number of Shares Issuable Upon Conversion. The Average Stock
Transaction Price thresholds referred to in Section 2D, and 2I (the "Price
Thresholds") and the number of shares of Common Stock issuable upon the
conversion of Series A 8% Convertible Preferred Stock shall be subject to
adjustments from time to time as follows:
(i) In the event the Corporation should at any time or
from time to time fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock the
determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common
Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of
Common Stock (hereinafter referred to as "Stock Equivalents") without
payment of any consideration by such holder for the additional shares
of Common Stock or the Stock Equivalents (including the additional
shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the
shares of Common Stock into which the Series A 8% Convertible
Preferred Stock may be converted shall include any such Stock
Equivalents which may be issued from time to time to the same effect
as if the Series A 8% Convertible Preferred Stock had been converted
into shares of
10
<PAGE> 11
Common Stock on the date of its issuance. Likewise, the Price
Thresholds shall as of such record date, apply to the Common Stock
plus the Stock Equivalents issued in respect of such Common Stock on
such record date.
(ii) If the number of shares of Common Stock outstanding
at any time is decreased by a combination of the outstanding shares of
Common Stock, then, following the record date of such combination, the
conversion ratio for the Series A 8% Convertible Preferred Stock shall
be appropriately adjusted so that the number of shares of Series A 8%
Convertible Preferred Stock surrendered on conversion for each two
shares of Common Stock to be issued shall be increased in proportion
to such decrease in outstanding shares of Common Stock. Likewise, the
Price Thresholds shall be increased in proportion to such decrease in
outstanding shares of Common Stock.
(iii) In the case of any reorganization of the Corporation
or consolidation of the Corporation with or any merger of the
Corporation with or into another entity or in case of any sale or
transfer to another entity of the property of the Corporation as an
entirety or substantially as an entirety, the corporation or other
entity resulting from such reorganization, or consolidation or
surviving such merger or to which such sale or transfer shall be made,
as the case may be, shall make suitable provisions so that the Series
A 8% Convertible Preferred Stock shall thereafter be convertible into
the kind and amount of shares of common stock or other
11
<PAGE> 12
securities or property receivable upon such reorganization,
consolidation, merger, sale or transfer by the holder of the number of
shares of Common Stock into which such shares of Series A 8%
Convertible Preferred Stock might have been converted immediately
prior to such consolidation, merger, sale or transfer. Likewise, the
Price Thresholds shall apply to the shares of common stock or other
securities or property receivable upon such reorganization, merger,
consolidation, sale or transfer, as appropriately adjusted to reflect
the amount of common stock or other securities or property received by
a holder of one share of Common Stock upon such reorganization,
merger, consolidation, transfer or sale. The provisions of this
subparagraph (iii) shall similarly apply to successive
reorganizations, consolidations, mergers, sales or transfers.
(iv) In the event that the Corporation effects a split,
subdivision of its Common Stock, or in the event that the number of
shares of its Common Stock is decreased by a combination of the
outstanding shares of Common Stock, the Price Thresholds shall be
appropriately adjusted so that the Price Thresholds are raised or
decreased in proportion to the number of outstanding shares of the
Corporation's Common Stock resulting from such split, subdivision or
combination as compared to the number of shares of Common Stock
outstanding immediately prior to such split, subdivision or
combination.
12
<PAGE> 13
3. No Senior Capital Stock Authorized as to Dividend Priority or
Liquidation. The Corporation shall not authorize or issue, or obligate itself
to authorize or issue, any other equity security senior to the Series A 8%
Convertible Preferred Stock as to priority of payment of dividends or
liquidation preference.
IN WITNESS WHEREOF, said South Texas Drilling & Exploration, Inc. has
caused this Certificate to be signed by Wm. Stacy Locke, its President, and
attested by Mary Lou Kilgore, its Secretary, this 15 day of April, 1997.
SOUTH TEXAS DRILLING &
EXPLORATION, INC.
By: /s/ WM. STACY LOCKE
--------------------------------
Wm. Stacy Locke, President
ATTEST:
/s/ MARY L. KILGORE
- -----------------------------
Mary Lou Kilgore, Secretary
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000320575
<NAME> SOUTH TEXAS DRILLING & EXPLORATION, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 407,755
<SECURITIES> 0
<RECEIVABLES> 1,375,839
<ALLOWANCES> 140,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,805,807
<PP&E> 10,887,935
<DEPRECIATION> 7,642,458
<TOTAL-ASSETS> 5,051,284
<CURRENT-LIABILITIES> 1,776,641
<BONDS> 0
0
235,000
<COMMON> 565,533
<OTHER-SE> 1,254,007
<TOTAL-LIABILITY-AND-EQUITY> 5,051,284
<SALES> 401,542
<TOTAL-REVENUES> 8,503,314
<CGS> 177,318
<TOTAL-COSTS> 7,951,981
<OTHER-EXPENSES> (45,356)
<LOSS-PROVISION> 140,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 596,689
<INCOME-TAX> 33,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 563,689
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
