<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, 1998
( ) 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)
<TABLE>
<S> <C>
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
</TABLE>
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 5, 1998): $6,079,806
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of June 5, 1998.
Class: Common Stock Shares Outstanding: 5,832,197
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 Company's main focus continues to be
its land contract drilling services and in fiscal year 1998, the oil and gas
operations contributed an immaterial amount towards the Company's gross revenue.
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 and
1996 in note 5 ("Business Segments and Supplementary Earnings Information") of
the Notes to Consolidated Financial Statements, which note is incorporated
herein by reference. Fiscal 1998 oil and gas operations are immaterial, and
therefore separate disclosure of this information has been omitted.
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 1998, the Company owned seven land drilling rigs with
approximate depth capabilities ranging from 6,000 feet to 12,000 feet. Of the
seven rigs, six are operational. The seventh rig was purchased in October, 1997,
and is scheduled to be refurbished during fiscal 1999. Of the remaining six
rigs, four were operated during all of fiscal 1998. The other two were in
operation from June, 1997, when they were purchased. Additionally, the Company
operated a leased rig, Rig 10, from June 1997 to January 1998. The Company's
rigs are presently operating in south Texas and along the Gulf Coast of Texas.
All six 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 10,500' and a
leased land drilling rig, Rig 10, with depth capability of 9,500'. The
acquisition was accomplished with $900,000 of third-party financing, $300,000 of
seller financing and $300,000 of the Company's Common Stock. The leased rig was
returned to the lessor in February, 1998.
On October 20, 1997, the Company purchased a Skytop-Brewster N-46 drilling
rig. This rig, designated Rig 15, is stored in the Company's yard in Kenedy,
Texas awaiting refurbishment. Once the rig is refurbished it will have a depth
capability of approximately 14,000 feet.
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<PAGE> 3
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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 1998 is set forth in the following
table:
<TABLE>
<CAPTION>
Approximate Aggregate
Rig Depth Utilization
Number Type Capability During 1998
------ ---- ---------- -----------
<S> <C> <C> <C>
4 Skytop - Brewster
N-46 11,500 72%
5 Gardner-Denver 500H 10,500 82%
6 Skytop - Brewster
DHI-4610 10,500 76%
9 Weiss W-45 8,500 71%
10(1) IDECO H-44 9,500 88%
11 Skytop - Brewster
N-46 12,500 85%
14 Skytop - Brewster
N-46 12,000 65%
</TABLE>
(1) Rig 10 was the leased rig which was returned to the lessor in February,
1998.
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
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<PAGE> 4
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
mobilization, labor, fuel usage and other costs) are included in the footage
charge. As compared to daywork contracts, footage contracts involve a higher
degree of risk to the Company.
Contracts entered into on a turnkey basis usually require the Company to
deliver to the operator a completed hole drilled to a specified depth. In
addition to all costs incurred when drilling on a footage basis, the Company is
usually also responsible for drilling fluids, water and other costs. As this
type of contract places a greater degree of risk on the Company than daywork or
footage contracts, the anticipated gross margin on this type of contract is
usually greater than on daywork or footage contracts.
Drilling contracts are obtained either through competitive bidding or
through direct negotiation. Contracts are usually entered into by the Company
covering the drilling of one well and obligate the Company to advance certain
costs and to assume certain expenses in connection with drilling operations.
During the year ended March 31, 1998 the Company drilled 68 wells with 59% of
contract drilling revenues attributable to daywork contracts, 10% to footage
contracts, and 31% to turnkey contracts. 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.
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. The
increased drilling activity continued through the third quarter of fiscal 1998,
but it has weakened considerably since January, 1998 due primarily to a
substantial decrease in oil prices.
During the year ended March 31, 1998, the largest customer of the Company's
drilling rigs was Michael Petroleum Corporation. This customer accounted for
approximately 18% of contract drilling revenues of the Company during that
period. Only one other customer, Samedan Oil Corporation with approximately 14%,
accounted for more than 10% of the Company's contract drilling revenues for
1998.
The Company actively markets its rigs and completed contracts for 37
customers in 1998 compared to 32 customers in 1997 and 27 customers in 1996.
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.
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.
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
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<PAGE> 5
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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 have been added since fiscal 1995. In fiscal 1997, the Company
sold its interest in one well. At the present time, the Company is in
negotiations to purchase additional working interests in the wells it operates.
Due to the Company's acquisitions of substantial amounts of drilling equipment
in fiscal 1998, the Company's oil and gas operations no longer constitute a
significant portion of the Company's operations. Accordingly, separate
disclosure of fiscal 1998 oil and gas information has been omitted from this
report. However, any information disclosed in years still being reported on in
this report will continue to be disclosed.
Production Information
The Company is involved in oil and gas exploration, development and
production. Oil and gas production accounted for approximately 1.8% of the
Company's total revenues in the fiscal year ended March 31, 1998 compared with
4.7% in the fiscal year ended March 31, 1997 and 5.1% in the fiscal year ended
March 31, 1996.
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Oil Production (in Bbls)(1) 10,007 12,260
Gas production (in Mcf)(1) 65,963 89,802
Revenues from production(1) $401,542 380,110
Production (lifting) costs(2) $177,318 169,008
Net Revenues $224,224 211,102
Average sales price:
Oil (per Bbl) $ 22 17.70
Gas (per Mcf) $ 3 1.84
Average production cost per unit (in
barrel equivalents)(3) $ 8 6.21
</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.
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<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(3) Average production costs per unit were determined on the basis of six
Mcf of gas being equivalent to one barrel of oil.
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.
Future Legislation
Currently there are many legislative proposals pertaining to regulation
of the oil and gas industry, which may directly or indirectly affect the
Company's activities. No prediction can be made as to what additional energy
legislation may be proposed, if any, or which bills may be enacted or when any
such bills, if enacted, would become effective.
Regulation of the Environment
The exploration, development, production and processing of oil and gas,
including the disposal of produced water, are subject to various federal and
state laws and regulations designed to protect the environment. Compliance with
these regulations is part of the Company's day-to-day operating procedures.
Infrequently, accidental discharge of such materials as oil, natural gas,
drilling fluids or contaminated water can and does occur. Such accidents can
require material expenditures to correct.
Various state and governmental agencies are considering, and some have
adopted, other laws and regulations regarding environmental control which could
adversely affect the business of the Company. Compliance with such measures,
together with any penalties resulting from noncompliance therewith, may increase
the cost of oil and gas development, production and processing operations or may
affect the ability of the Company to complete existing or future activities in a
timely manner.
Compliance with Regulations
The Company believes that it complies with all material legislation and
regulations affecting its operations in the drilling and operation of oil and
gas wells, and in controlling the discharge of wastes. Compliance has not, to
date, materially affected the capital expenditures, earnings or competitive
position of the Company, although these measures add to the costs of operating
drilling equipment in some instances, and in others they may operate to reduce
drilling activity. The Company does not expect to incur material capital
expenditures in the next fiscal year in order to comply with current
environmental control regulations. Further legislation or regulation may
reasonably be anticipated, but the effects thereof on operations cannot be
predicted.
The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the Environmental Protection Agency "community
right-to-know" regulations under Title III of the Federal Superfund Amendment
and Reauthorization Act and comparable state statutes require the Company to
organize and report certain information about the hazardous materials used in
its operations to employees, state and local government authorities, and local
citizens.
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<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
PRINCIPAL CUSTOMERS
During the fiscal year ended March 31, 1998, Michael Petroleum
Corporation accounted for 18% of the Company's total drilling revenues. Only one
other customer, Samedan Oil Corporation with approximately 14%, accounted for
10% or more of the Company's total drilling revenue. The loss of either 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 Company's rigs. 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 23, 1998, the Company had 161 full-time employees, of whom 135
were paid on an hourly basis and were engaged in operating the Company's
drilling rigs or in other operations. Of the total employees, 13 were
administrative employees and 13 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 currently involved in a lawsuit styled 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. A jury trial in
this case commenced in August, 1997. The jury found in favor of the company and
a judgment was entered November 7, 1997, granting the Company $163,000 plus
attorneys' fees of $70,000. The customer filed an appeal of the judgment and at
fiscal year-end, the case was in the early stages of the appeal. On June 10,
1998, the Company received $213,000 from National Energy Group in settlement of
the lawsuit. Per the terms of the settlement each of the parties agrees to
release the other from all claims related to the lawsuit. The Company's accounts
related to this matter will be adjusted in the period of resolution.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During 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.
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<PAGE> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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. In fiscal years prior to 1998, the Company's common stock
was lightly traded. Therefore, the Company reported bid and ask prices rather
than actual stock prices. In fiscal 1998, trading activity in the Company's
common stock became more regular and the stocks' high/low prices are now more
relevant. The following table sets forth for the period indicated quotations
from a marketmaker for the Company's common stock. For fiscal 1998, the table
presents the high and low stock price for each quarter. For fiscal 1997, the
table presents, as in prior years, the bid and ask prices as of the end of each
quarter.
<TABLE>
<CAPTION>
OVER-THE-COUNTER
-------------------------
1998 Low High
---- --- ----
<S> <C> <C>
First Quarter $0.4400 1.2500
Second Quarter 1.0625 2.1875
Third Quarter 2.0625 3.7500
Fourth Quarter 1.2500 2.5000
</TABLE>
<TABLE>
<CAPTION>
1997 Bid Ask
---- --- ---
<S> <C> <C>
First Quarter $0.3125 0.6250
Second Quarter 0.3750 0.7500
Third Quarter 0.4375 0.6250
Fourth Quarter 0.4375 0.7500
</TABLE>
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 5, 1998, 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 except for
dividends on the preferred stock issued in fiscal 1998.
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<PAGE> 9
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
March 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $17,091 8,503 7,500 5,494 7,050
Earnings before taxes, depreciation,
depletion and amortization and
other income (expense) 2,236 1,175 593 253 1,069
Earnings (loss) before income taxes 894 597 3 (244) 723
Net earnings (loss) applicable to common
stockholders 722 564 3 (244) 723
Earnings (loss) per common share-basic 0.13 0.11 - (0.05) 0.14
Earnings (loss) per common share-diluted 0.11 0.10 - (0.05) 0.13
Long-term debt, excluding
current installments 2,697 1,220 554 88 91
Shareholders' equity 6,816 2,054 1,477 1,541 1,744
Total assets 12,502 5,051 4,286 3,473 4,093
Capital expenditures 3,561 763 411 755 679
</TABLE>
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 the third quarter of fiscal 1998. During
fiscal 1997, the utilization rate for the Company's rigs was 80 percent while
operating four rigs. In fiscal 1998, the utilization rate decreased to 76
percent while operating up to seven rigs. The actual number of drilling days
increased to 1,684 in fiscal 1998 from 1,175 in fiscal 1997. Drilling rates
charged to customers on drilling contracts in fiscal 1998 showed some increase
over those charged in fiscal 1997. This increase in drilling rates reflects the
increased demand for drilling rigs during the period. At March 31, 1998, the
Company's current ratio was 1.37 compared to 1.02 at March 31, 1997. Working
capital at March 31, 1998 was $1,118,907 compared to $29,166 at March 31, 1997.
This increase was due, in part, to the increased drilling activity and to the
two preferred stock issues in fiscal 1998.
In June, 1997, the Company financed its purchase of drilling and rig
moving equipment from San Patricio Corporation with $1,050,000 in principal
amount of debt. Incident to this financing the Company obtained more favorable
terms for its debt facility secured by drilling and transportation equipment and
its equipment yard. Under the new terms, the term loan carries an interest rate
of prime plus 2.25% and the revolving loan an interest rate of prime plus 2.25%.
The monthly payments on the new note are $12,500 plus interest. In October,
1997, further financing was secured to purchase additional drilling equipment.
This loan was in the amount of $600,000 and carries an interest rate of prime
plus 2.25%. The monthly payments, based on seven-year amortization, are $7,143
plus interest. Also in October, 1997, the Company secured a $600,000 capital
expenditure line of credit for the purchase of additional drilling equipment.
This line carries an interest rate of prime plus 2.25%. The Company has made two
advances under this line. The monthly payments on these advances, in the amount
of $519,466, are $14,430 plus interest. All these loans are due in June, 1999
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<PAGE> 10
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
and, per the loan agreement, shall be automatically renewed for successive
periods of one year unless paid in full earlier or there is an Event of Default
for which no waiver is obtained from the lender.
In acquiring the drilling assets of San Patricio Corporation, the
Company also secured $300,000 in seller financing. This loan carries an interest
rate of 10% and is payable in monthly payments of $5,000 plus interest. The loan
is due in June, 2002.
In March, 1998, the Company purchased additional transportation
equipment. The equipment was purchased through the use of $60,000 in cash and
seller financing of $60,000. The debt is payable in monthly payments of $5,000
plus interest at 8%. The loan is due in April, 1999.
The ratio of trade accounts receivable to total revenue decreased to
2.2% at the end of fiscal 1998 from 6.8% at the end of fiscal 1997. This
decrease was the result of increased total revenue in fiscal 1998 and a decrease
in outstanding accounts receivable at year end. The ratio of the Company's
shareholders' equity in relation to outstanding debt (vendor and bank notes
payable) improved in fiscal 1998. At March 31, 1997, the ratio of shareholders'
equity to notes payable was 1 to .71. At March 31, 1998, the ratio was 1 to .50.
The increase in shareholders' equity was primarily due to the Company's
profitability and the issuance of preferred stock.
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 damages of $460,000 plus attorney's fees. Management, which
believes the customer's claim to be without merit, 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 jury trial in this case commenced in August,
1997. The jury found in favor of the Company and a judgment was entered in
November, 1997 granting the Company $163,000 plus attorneys' fees of $70,000.
The customer filed an appeal of the judgment and at fiscal year-end, the case
was in the early stages of the appeal. On June 10, 1998, the Company received
$213,000 from National Energy Group in settlement of the lawsuit. Per the terms
of the settlement each of the parties agrees to release the other from all
claims related to the lawsuit. The Company's accounts related to this matter
will be adjusted in the period of resolution.
Other significant factors affecting liquidity were problems on a turnkey
contract and expenses incurred while rigs were stacked, primarily in the fourth
quarter of fiscal 1998. The Company encountered problems with the drilling of a
well on a turnkey contract and was required to re-drill the well for the
operator. Because of the problems, the Company incurred additional costs in
attempting to correct the problems and in re-drilling the well. The direct
effect on working capital was a decrease of approximately $368,000. Liquidity
also suffered due to the additional time spent on the well, thereby depriving
the Company of potential drilling revenue from other contracts. During the month
of February, 1998, rig utilization declined significantly due to inclement
weather and to reduced rig demand. While rigs were stacked, the Company elected
to retain the drilling crews and to repair and maintain the rigs in preparation
for drilling activity in the future. In doing so, the Company incurred
approximately $175,000 in costs which could have been deferred to a later
period.
In April, 1997, the Company issued a new Series A 8% Convertible
Preferred Stock. The issue consisted of 400,000 shares with a redemption value
of $800,000. 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. Dividends are payable annually. This
Preferred Stock is convertible into 800,000 shares of Common Stock and one share
of Common Stock for each $.50 of due but unpaid dividends on the Series A 8%
Convertible Preferred Stock. The conversion rate is subject to adjustment on the
third and seventh anniversary dates of issuance, depending on the trading value
of the common stock. The stock is redeemable at the Company's option at or
following the third anniversary of the issuance of such stock provided,
-10-
<PAGE> 11
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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.
In January, 1998, the Company issued a new Series B 8% Convertible
Preferred Stock. The issue consisted of 184,615 shares with a redemption value
of $2,999,994. Dividends payable in respect of Series B 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 B 8% Convertible
Preferred Stock shall not bear interest. Dividends are payable annually. This
preferred stock is convertible into 923,075 shares of the Company's common stock
and one share of common stock for each $1.62 of due but unpaid dividends. The
conversion rate is subject to adjustment on its third and seventh anniversary
dates of issuance depending on the trading value of the common stock. The stock
is redeemable at the Company's option at or following the first anniversary of
the issuance of such stock provided, generally, that the price of the Company's
common stock equals or exceeds $5.00 per share. The proceeds from the stock have
been and will be used for equipment purchases, debt reduction and working
capital.
Changes in Financial Condition
During fiscal 1998, the Company had a net increase in property and
equipment of $6,080,000 before accumulated depreciation, depletion and
amortization. This net increase was the product of a write off of $418,000 in
fully depreciated drilling equipment and the expenditure of $6,498,000 for major
repairs and the purchase of additional equipment. Of this amount, $6,154,000 was
attributable to the purchase of drilling equipment, $280,000 to the purchase of
transportation equipment, $59,000 to the purchase or acquisition of oil and gas
properties or interests and $5,000 to the purchase of furniture and fixtures.
At March 31, 1998, the current portion of long-term debt was $629,000.
Of this amount, $1,000 was owed on oil and gas properties, $613,000 on drilling
equipment and $15,000 on land and buildings and improvements. Trade accounts
payable at March 31, 1998 were $1,650,000 compared to $1,147,000 at March 31,
1997. At March 31, 1998, long-term debt was $2,696,000. Of this amount, $203,000
was owed on land and buildings and equipment; and $2,493,000 on drilling
equipment.
Results of Operations
Rig utilization rates for the years ended March 31, 1998, 1997 and 1996
were 76%, 80% and 64%, respectively. In fiscal 1998, the Company completed 1,684
drilling days while in fiscal 1997, the Company completed 1,175 drilling days.
This was a 43% increase in number of drilling days in 1998 when the Company
operated up to seven rigs compared to fiscal 1997 when the Company operated four
rigs. This increase reflects the increased demand during the period for drilling
rigs and the increased efforts of the Company's staff to obtain contracts for
the rigs.
During fiscal 1998, the Company's drilling margin increased when
compared to both fiscal 1997 and fiscal 1996. In fiscal 1998, the drilling
margin was $2,689,711, while in fiscal 1997 and fiscal 1996 it was $1,366,798
and $912,230, respectively. The increase in fiscal 1998 over fiscal 1997 was
principally the result of the 43% increase in the number of drilling days during
fiscal 1998 and the increase in drilling rates charged on contracts. When
compared to drilling revenue, the drilling margin was 16%, 17% and 13% in fiscal
1998, fiscal 1997 and fiscal 1996, respectively. Two significant factors had a
negative impact on the drilling margin in fiscal 1998. The first was problems
with a turnkey contract. Because of problems with the well, the company was
required to re-drill the well for the operator and also incurred additional
costs in attempting to correct the problems on the original job. This resulted
in a loss of approximately $368,000. The second factor affecting the drilling
margin in fiscal 1998 was the significantly reduced rig utilization during the
month of February, 1998. The reduced utilization was caused by inclement weather
and by reduced rig
-11-
<PAGE> 12
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
demand. The Company decided to use the idle time to perform repair and
maintenance activities on the stacked rigs in preparation for drilling activity
in the future. These costs approximated $175,000.
The Company markets its rigs to a number of customers. In fiscal 1998,
the Company drilled for 37 different customers. In fiscal 1997, the Company
drilled for 32 different customers. Of the 37 customers in fiscal 1998, 26 were
customers the Company had not drilled for in fiscal 1997. These 26 customers
accounted for over 47% of the Company's drilling revenue in fiscal 1998. In
fiscal 1996, three customers accounted for 34% of total drilling revenue. In
fiscal 1997, three customers accounted for 24% of total drilling revenue. In
fiscal 1998, two customers accounted for 32% of total drilling revenue. Of these
two customers, none was included in the top three customers of fiscal 1997. 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 1998 decreased by $90,912 from fiscal
1997. The decrease was primarily due to a 15% decrease in the average price per
barrel of oil, a 3% decrease in the average price per MCF of gas, a 12% decrease
in oil production and a 17% decrease in gas production. In fiscal 1998, the
Company's average production cost per unit in barrel equivalents increased 16%
from fiscal 1997. This compares with a 36% increase in the average production
cost for 1997 compared to 1996.
Depreciation, depletion and amortization expense in fiscal 1998
increased to $1,114,866 from $623,614 in fiscal 1997. Depreciation expense
increased to $988,210 in fiscal 1998 from $475,135 in fiscal 1997. This increase
was the result of equipment purchased in late fiscal 1997 and fiscal 1998.
Depletion expense decreased to $126,656 in fiscal 1998 compared to $148,479 in
fiscal 1997. Production decreased to 17,915 barrel equivalents in fiscal 1998
from 21,001 barrel equivalents in fiscal 1997. In fiscal 1997 and fiscal 1998,
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 $549,656 in fiscal
1997 to $712,485 in fiscal 1998. The primary components of the change in general
administrative expenses were increases in payroll costs, consulting fees and
insurance.
Earnings from operations increased to $1,121,336 in fiscal 1998 from
$551,333 in fiscal 1997. Of the $1,121,336, $1,018,439 was contributed by
drilling operations and $102,897 by oil and gas operations.
The exploration, development, production and processing of oil and gas,
including the disposal of produced water, are subject to various federal and
state laws and regulations designed to protect the environment. Compliance with
these regulations is part of the Company's day-to-day operating procedures. The
Company is not aware of any potential clean-up obligations which would have a
material effect on its financial condition or results of operations.
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
-12-
<PAGE> 13
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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 June, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company believes that the disclosure of comprehensive
income in accordance with the provisions of SFAS No. 130 will not materially
impact the manner of presentation of its financial statements as currently and
previously reported.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company believes that the reporting
requirements regarding segments of an enterprise will not materially impact the
manner of presentation of its financial statements.
Year 2000
In fiscal 1998, the Company began the process of identifying, evaluating
and implementing changes to computer programs necessary to address the year 2000
issue. This issue affects computer systems that have time-sensitive programs
that may not properly recognize the year 2000. This could result in system
failures or miscalculations. The Company is currently addressing its internal
year 2000 issue with modifications to existing programs and conversions to new
programs. The Company does not expect to incur any material expenses relating to
year 2000 compliance.
-13-
<PAGE> 14
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, 1998 and 1997 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, 1998. 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, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 1998, 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 16, 1998
-14-
<PAGE> 15
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets
- ------
March 31,
-------------------------------
1998 1997
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,586,710 407,755
Receivables:
Trade, net of allowance for
doubtful accounts of $140,000 in
1998 and 1997 372,731 577,228
Contract drilling in progress 965,677 593,162
Employees and officers 68,191 65,449
Prepaid expenses 114,020 162,213
----------- ---------
Total current assets 4,107,329 1,805,807
----------- ---------
Property and equipment, at cost:
Drilling rigs and equipment 13,784,597 8,048,115
Oil and gas properties, based on full cost
accounting method 1,808,832 1,749,809
Transportation, office, land and other 1,374,762 1,090,011
----------- ---------
16,968,191 10,887,935
Less accumulated depreciation, depletion and
amortization 8,573,771 7,642,458
----------- ---------
Net property and equipment 8,394,420 3,245,477
----------- ---------
$12,501,749 5,051,284
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
-15-
<PAGE> 16
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
- ------------------------------------
March 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Note payable $ 60,000 --
Current installments of long-term
debt 628,816 240,756
Note payable to employee 17,198 20,638
Accounts payable 1,649,958 1,146,982
Accrued expenses:
Payroll and payroll taxes 279,416 174,772
Dividends payable 108,566 --
Other 244,468 193,493
------------ ------------
Total current liabilities 2,988,422 1,776,641
Note payable to employee, interest at 7% -- 17,198
Long-term debt, less current installments
and note payable to employee 2,696,919 1,202,905
------------ ------------
Total liabilities 5,685,341 2,996,744
------------ ------------
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 no shares
at March 31, 1998 and 235,000 shares
at March 31, 1997. Liquidation
preference value of $4.26 per share
($1,000,000); redeemable at the
Company's option at $1.00 per share
Redeemed in 1998 -- 235,000
Preferred stock, Series A, 8%, cumulative,
convertible, $2.00 redemption and liquidation
value. Authorized 400,000 shares; issued
and outstanding 400,000 shares at March 31,
1998 and no shares at March 31, 1997 800,000 --
Preferred stock, Series B, 8%, cumulative,
convertible, $16.25 redemption and liquidation
value. Authorized 184,615 shares; issued and
outstanding 184,615 shares at March 31, 1998
and no shares at March 31, 1997 2,999,994 --
Common stock, $.10 par value
Authorized 15,000,000 shares; issued
and outstanding 6,171,964 shares at
March 31, 1998 and 5,655,333 shares
at March 31, 1997 617,196 565,533
Additional paid-in capital 16,337,006 15,914,169
Accumulated deficit (13,800,883) (14,523,257)
------------ ------------
6,953,313 2,191,445
Less treasury stock, 339,767 shares at March 31,
1998 and March 31, 1997, at cost (136,905) (136,905)
------------ ------------
Total shareholders' equity 6,816,408 2,054,540
------------ ------------
$ 12,501,749 5,051,284
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-16-
<PAGE> 17
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Contract drilling $ 16,655,642 7,968,191 6,989,972
Oil and gas 310,630 401,542 380,110
Administrative overhead and other 124,329 133,581 129,572
------------ ------------ ------------
Total operating revenues 17,090,601 8,503,314 7,499,654
------------ ------------ ------------
Costs and expenses:
Contract drilling 13,965,931 6,601,393 6,077,742
Oil and gas 175,983 177,318 169,008
Depreciation, depletion and
amortization 1,114,866 623,614 576,894
General and administrative 712,485 549,656 520,402
Doubtful accounts -- -- 140,000
------------ ------------ ------------
Total operating costs and
expenses 15,969,265 7,951,981 7,484,046
------------ ------------ ------------
Earnings from operations 1,121,336 551,333 15,608
------------ ------------ ------------
Other income (expense):
Interest expense (306,279) (176,801) (108,121)
Interest income 50,676 15,295 5,443
Gain on sale of assets 27,895 6,862 273,251
Provision for litigation settlement -- 200,000 (200,000)
Minority interest in operation
of partnership -- -- 16,591
------------ ------------ ------------
Total other income (expense) (227,708) 45,356 (12,836)
------------ ------------ ------------
Earnings before income taxes 893,628 596,689 2,772
Income taxes 62,688 33,000 --
------------ ------------ ------------
Net earnings 830,940 563,689 2,772
Preferred stock dividend requirement 108,566 -- --
------------ ------------ ------------
Net earnings applicable to common stockholders $ 722,374 563,689 2,772
============ ============ ============
Earnings per common share-Basic $ 0.13 0.11 --
============ ============ ============
Earnings per common share - Diluted $ 0.11 0.10 --
============ ============ ============
Weighted average number of shares
outstanding-Basic 5,714,535 5,306,158 5,178,424
============ ============ ============
Weighted average number of shares
outstanding-Diluted 7,793,207 5,724,440 5,279,576
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<PAGE> 18
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Amount Additional
--------------------------- --------------------------- Paid-in
Common Preferred Common Preferred Capital
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995 5,408,000 235,000 $ 540,800 235,000 15,854,757
Issuance of common stock
for bonus to employee 50,000 -- 5,000 -- 6,500
Issuance of common stock
for fees to directors 8,000 -- 800 -- 1,040
Issuance of common stock
for exercise of warrant 35,000 -- 3,500 -- 6,300
Issuance of common stock
for exercise of option 100,000 -- 10,000 -- 30,630
Acquisition of 319,767 shares
of common stock in
exchange for equipment -- -- -- -- --
Net earnings -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1996 5,601,000 235,000 560,100 235,000 15,899,227
Acquisition of 20,000 shares -- -- -- -- --
Issuance of common stock
as compensation 53,333 -- 5,333 -- 14,667
Issuance of common stock
for exercise of option 1,000 -- 100 -- 275
Net earnings -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance as of March 31, 1997 5,655,333 235,000 $ 565,533 235,000 15,914,169
<CAPTION>
Total
Accumulated Treasury Shareholders'
Deficit Stock Equity
----------- ----------- -------------
<S> <C> <C> <C>
Balance at March 31, 1995 (15,089,718) -- 1,540,839
Issuance of common stock
for bonus to employee -- -- 11,500
Issuance of common stock
for fees to directors -- -- 1,840
Issuance of common stock
for exercise of warrant -- -- 9,800
Issuance of common stock
for exercise of option -- -- 40,630
Acquisition of 319,767 shares
of common stock in
exchange for equipment -- (129,905) (129,905)
Net earnings 2,772 -- 2,772
----------- ----------- -----------
Balance at March 31, 1996 (15,086,946) (129,905) 1,477,476
Acquisition of 20,000 shares -- (7,000) (7,000)
Issuance of common stock
as compensation -- -- 20,000
Issuance of common stock
for exercise of option -- -- 375
Net earnings 563,689 -- 563,689
----------- ----------- -----------
Balance as of March 31, 1997 (14,523,257) (136,905) 2,054,540
</TABLE>
See accompanying notes to consolidated financial statements
(Continued)
-18-
<PAGE> 19
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
Shares Amount Additional
---------------------------- --------------------------- Paid-in
Common Preferred Common Preferred Capital
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of March 31, 1997 5,655,333 235,000 $ 565,533 235,000 15,914,169
Issuance of common stock
as compensation 92,631 -- 9,263 -- 45,737
Issuance of common stock
for equipment 400,000 -- 40,000 -- 260,000
Purchase of preferred stock -- (235,000) -- (235,000) 160,000
Issuance of new series A
preferred stock -- 400,000 -- 800,000 --
Issuance of series B
preferred stock -- 184,615 -- 2,999,994 --
Fee paid on preferred stock
transaction -- -- -- -- (55,000)
Issuance of common stock
for exercise of options 24,000 -- 2,400 -- 12,100
Net earnings -- -- -- -- --
Preferred stock dividend -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance as of March 31, 1998 6,171,964 584,615 $ 617,196 3,799,994 16,337,006
=========== =========== =========== =========== ===========
<CAPTION>
Total
Accumulated Treasury Shareholders'
Deficit Stock Equity
----------- ----------- -------------
<S> <C> <C> <C>
Balance as of March 31, 1997 (14,523,257) (136,905) 2,054,540
Issuance of common stock
as compensation -- -- 55,000
Issuance of common stock
for equipment -- -- 300,000
Purchase of preferred stock -- -- (75,000)
Issuance of new series A
preferred stock -- -- 800,000
Issuance of series B
preferred stock -- -- 2,999,994
Fee paid on preferred stock
transaction -- -- (55,000)
Issuance of common stock
for exercise of options -- -- 14,500
Net earnings 830,940 -- 830,940
Preferred stock dividend (108,566) -- (108,566)
----------- ----------- -----------
Balance as of March 31, 1998 (13,800,883) (136,905) 6,816,408
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
-19-
<PAGE> 20
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 830,940 563,689 2,772
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation, depletion and
amortization 1,114,866 623,614 576,894
Provision for doubtful accounts -- -- 140,000
Provision for litigation -- (200,000) 200,000
Stock issued to directors and
employees 4,583 -- 13,340
Gain on sale of assets (27,895) (6,862) (273,251)
Minority interest in operations of
partnership -- -- (16,591)
Changes in current assets and
liabilities:
Receivables (170,760) (342,589) (311,150)
Prepaid expenses 48,193 (114,197) 11,990
Accounts payable 502,976 (108,523) 491,914
Accrued expenses 206,036 36,928 132,997
----------- ----------- -----------
Net cash provided by
operating activities $ 2,508,939 452,060 968,915
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
(Continued)
-20-
<PAGE> 21
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable $ 171,236 1,603,724 1,425,707
Purchase of preferred stock (75,000) -- --
Purchase of treasury stock -- (7,000) --
Proceeds from preferred stock 3,744,994 -- --
Proceeds from exercise of warrants -- -- 9,800
Proceeds from exercise of options 14,500 375 37,500
Payments of debt (888,257) (1,213,559) (2,078,094)
----------- ----------- -----------
Net cash provided (used) in financing activities 2,967,473 383,540 (605,087)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (3,561,035) (762,946) (410,757)
Proceeds from sale of property and
equipment 263,578 9,533 150,681
----------- ----------- -----------
Net cash (used) in investing activities (3,297,457) (753,413) (260,076)
----------- ----------- -----------
Net increase in cash and cash
equivalents 2,178,955 82,187 103,752
Beginning cash and cash equivalents 407,755 325,568 221,816
----------- ----------- -----------
Ending cash and cash equivalents $ 2,586,710 407,755 325,568
=========== =========== ===========
Supplementary disclosure:
Interest paid $ 307,257 187,441 101,289
Notes payable issued for equipment and
oil and gas properties 1,438,458 116,075 809,266
Treasury stock received for drilling equipment -- -- 129,905
Common stock issued for accrued compensation 55,000 20,000 --
Reimbursement receivable for prior litigation payment -- 90,000 --
Common stock issued for San Patricio Corporation
acquisition 300,000 -- --
Notes payable issued for San Patricio Corporation
acquisition 1,200,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE> 22
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
Company's main focus is considered to be its land contract drilling
services. The oil and gas operations contributed an immaterial amount
towards the Company's gross revenues in fiscal 1998 and constitute an
insignificant amount of its total assets, therefore, disclosure of
fiscal 1998 oil and gas information has been omitted. 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
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128 "Earnings per Share," which establishes standards for
computing and presenting earnings per share. This Standard, effective
for financial statements issued for periods ending after December 15,
1997, replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. In addition, this standard
requires dual presentation of basic and diluted earnings per share on
the face of the statement of operations. This Statement requires
restatement of all prior period EPS data presented. All prior-period
earnings per share data presented
(Continued)
-22-
<PAGE> 23
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
in the accompanying consolidated financial statements has been
restated to conform to the requirements of SFAS No. 128.
The following table presents a reconciliation of the numerators
and denominators of the basic EPS and diluted EPS comparisons as
required by FAS 128:
<TABLE>
<CAPTION>
Year Ended
March 31, 1998
--------------------------------------
Weighted Avg.
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net Earnings $ 830,940
Less: Preferred stock dividends 108,566
----------
Income available to common stockholders-basic 722,374 5,714,535 $ 0.13
=========
Effect of dilutive securities
Warrants 123,306
Options 1,008,686
Preferred stock 108,566 946,680
---------- ---------
Income available to common stockholders
and assumed conversions-diluted $ 830,940 7,793,207 $ 0.11
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
March 31, 1997
--------------------------------------
Weighted Avg.
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net earnings $ 563,689
Income available to common stockholders-basic 563,689 5,306,158 $ 0.11
========
Effect of dilutive securities
Warrants 95,059
Options -- 323,223
--------- ---------
Income available to common stockholders
and assumed conversions-diluted $ 563,689 5,724,440 $ 0.10
========= ========= ========
</TABLE>
(Continued)
-23-
<PAGE> 24
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year Ended
March 31, 1996
----------------------------------------------
Weighted Avg.
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net Earnings $ 2,772
-----------
Income available to common stockholders-basic 2,772 5,178,424 $ --
=========
Effect of dilutive securities
Warrants 81,885
Options -- 19,267
----------- ------------
Income available to common stockholders
and assumed conversions-diluted $ 2,772 5,279,576 $ --
=========== ============ =========
</TABLE>
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
(Continued)
-24-
<PAGE> 25
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Long -lived assets and intangible assets are reviewed for
impairment whenever events or circumstances provide evidence that
suggests that the carrying amount of the asset may not be recovered.
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, 1998 and
1997, cash includes a restricted account in the amount of $106,275 and
$102,629, respectively.
New Accounting Pronouncements
Comprehensive Income
In June, 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
displayed with the same prominence as other financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15,
1997. The Company believes that the disclosure of comprehensive income
in accordance with the provisions of SFAS No. 130 will not materially
impact the manner of presentation of its financial statements as
currently and previously reported.
Segment Reporting
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. The
Company believes that the reporting requirements regarding segments of
an enterprise will not materially impact the manner of presentation of
its financial statements.
(Continued)
-25-
<PAGE> 26
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Notes Payable and Long-term Debt
Notes payable and long-term debt of the Company are described
below:
<TABLE>
<CAPTION>
March 31,
--------------------------
1998 1997
-------- ------
<S> <C> <C>
Note payable to employee for unpaid compensation,
due in monthly payments of $1,720 plus interest at
7.0%, due in January, 1999. $ 17,198 37,836
Note payable to seller, secured by transportation
equipment, due in monthly payments of $5,000 plus
interest at 8%, due in April, 1999 60,000 --
Note payable, secured by a vehicle, due in monthly
payments of $380 including interest at 10.9%, due
in January, 2000. Paid in 1998. -- 11,047
Note payable, secured by a vehicle, due in monthly
payments of $426 including interest at 12.35%,
due in June, 1999. Paid in 1998 -- 9,676
Note payable, secured by a vehicle, due in monthly
payments of $498 including interest at 9.7%, due
in June, 1998. Paid in 1998. -- 6,566
Note payable, secured by a vehicle, due in monthly
payments of $393 including interest at 9.25%, due
in July, 2000. Paid in 1998. -- 13,469
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, 1998) plus
0.5%, due in September, 2005. (note b) 110,617 121,595
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) 106,805 109,885
Note payable to bank, secured by oil and gas properties, interest at
the bank's prime rate (9.50% at March 31, 1998)
plus 1%, due January, 1999. (note a) 1,000 85,113
</TABLE>
(Continued)
-26-
<PAGE> 27
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
March 31,
-----------------------------
1998 1997
----------- ----------
<S> <C> <C>
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, 1998)
plus 2.25%, due June, 1999. (note c) 907,738 1,086,310
Note payable to seller, secured by drilling equipment, due in monthly
installments of $5,000 plus interest at 10%, due in
June, 2002. 255,000 --
Notes payable, secured by drilling equipment, transportation equipment,
land and improvements, due in monthly payments of $19,643 plus interest
at prime (8.5% at March 31, 1998)
plus 2.25%, due June, 1999. (note d) 1,482,143 --
Notes payable, secured by drilling equipment, transportation equipment,
land and improvements, due in monthly payments of $14,430 plus interest
at prime (8.5% at March 31, 1998)
Plus 2.25%, due June, 1999. (note e) 462,432 --
---------- ---------
3,402,933 1,481,497
Less current portion 706,014 261,394
---------- ---------
$2,696,919 1,220,103
========== =========
</TABLE>
Long-term debt maturing each year subsequent to March 31, 1998 is
as follows: 1999 - $706,014; 2000 - $1,805,498; 2001 - $648,856; 2002
- $80,262; 2003 - $37,285 and thereafter - $125,018.
At March 31, 1998, the Company had obtained waivers with respect
to capital expenditure and dividend covenants and was in compliance
with all other 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 1.0 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, 1998, 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, 1998. In November, 1995 the Company closed on
financing with
(Continued)
-27-
<PAGE> 28
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1998) plus
2.25% 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, 1999. 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, 1998) plus 2.25%. The revolving line of credit had no
outstanding balance at March 31, 1998.
Note d: In June, 1997, the Company closed additional financing
with the same lender for the purchase of drilling and transportation
equipment. This note, in the amount of $1,050,000, carries an interest
rate of prime (8.5% at March 31, 1998) plus 2.25% and is due in June,
1999. The note provides for monthly payments of $12,500 (based on seven
year amortization) plus interest. In October, 1997, the same lender
approved and funded another loan for drilling equipment. This loan, in
the amount of $600,000, has terms identical to the loan closed in June,
1997. This note provides for monthly payments of $7,143 plus interest.
Note e: In October, 1997, this lender approved a line of credit
in the amount of $600,000 for capital expenditures. This line carries
an interest rate of prime (8.5% at March 31, 1998) plus 2.25% and is
due in June, 1999. In fiscal 1998, two draws were made on the capital
expenditure line. The first, in the amount of $370,730, provides for
monthly payments of $10,298 (three year amortization) plus interest.
The second, in the amount of $148,736, provides for monthly payments of
$4,132 (three year amortization) plus interest. At March 31, 1998,
$80,534 was available under the capital expenditures line of credit.
(3) Income Taxes
Due to the utilization of net operating loss carryforwards, the
Company had no Federal income tax liability at March 31, 1997 and an
estimated alternative minimum tax liability of $18,000 at March 31,
1998. The Company has also accrued a $44,688 liability for state
franchise taxes for fiscal 1998 and a $33,000 liability for fiscal
1997.
At March 31, 1998, for Federal income tax purposes the Company
had a net operating loss carryforward of approximately $14,934,000,
investment tax credit carryforwards of approximately $15,000 and
minimum tax credit carryforward of approximately $18,000 available to
offset future taxable income and taxes.
(Continued)
-28-
<PAGE> 29
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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>
1999 $11,219,000 9,000
2000 889,000 5,000
2001 1,973,000 1,000
2002 452,000 --
2007 401,000 --
----------- -----------
$14,934,000 15,000
=========== ===========
</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, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts $ 52,000 48,000
Investment tax credit and minimum
tax credit carryforwards 25,000 125,000
Property and equipment, principally due to
differences in depreciation 49,000 --
Net operating loss carryforwards 5,516,000 5,379,000
----------- -----------
Total gross deferred tax assets 5,642,000 5,552,000
Less valuation allowance (5,493,000) (5,113,000)
----------- -----------
Total deferred tax assets 149,000 439,000
----------- -----------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation -- 275,000
Oil and gas properties, principally due to
intangible drilling costs and differences
in depletion 149,000 164,000
----------- -----------
Total gross deferred tax liabilities 149,000 439,000
----------- -----------
Net deferred tax asset $ -- --
=========== ===========
</TABLE>
A valuation allowance has been established to decrease total
gross deferred tax assets to the amount of the total gross 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, 1997 was $5,113,000. The net change in
total valuation allowance for the year ended March 31, 1998 was an
increase of $380,000 due to the change in the corresponding gross
deferred tax assets and liabilities.
(Continued)
-29-
<PAGE> 30
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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, 1998 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,
1998, 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, 1998.
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, 1998, 100,000 shares have been purchased and 60,000
shares have been canceled 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, 15,000 of which have been
exercised as of March 31, 1998.
On December 12, 1995, the Board of Directors issued certain officers
options to purchase 100,000 shares of the Company's common stock at $.41
per share, none of which has been exercised and 50,000 shares of which
have been canceled as of March 31, 1998.
On June 15, 1996, the Board of Directors issued certain directors
options to purchase 10,000 shares of the Company's common stock at $.47
per share, 5,000 of which have been exercised as of March 31, 1998.
On July 1, 1997, the Board of Directors issued certain directors
options to purchase 15,000 shares of the Company's common stock at $1.38
per share, 5,000 of which have been exercised as of March 31, 1998.
Under the Company's stock option plan, employee 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.
In addition, on June 18, 1997, the Board of Directors issued a seller
of drilling equipment an option to purchase 150,000 shares of the
Company's common stock at $1.50 per share, none of which has been
exercised as of March 31, 1998.
(Continued)
-30-
<PAGE> 31
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>
1998 1997 1996
------------------------ -------------------------- ---------------------------
Exercise Exercise Exercise
Price per Price per Price Per
Options Option Options Option Options Option
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Outstanding
Beginning of year 1,272,500 $.375-0.47 1,325,500 $ .375-.41 -- --
Granted 165,000 $1.38-1.50 10,000 $ 0.470 1,428,500 $ .375-.41
Exercised (24,000) $.375-1.38 (1,000) $ 0.375 (100,000) $ 0.375
Canceled (60,000) 0.375 (62,000) $ .375-.41 (3,000) $ 0.375
---------- ---------- ---------- ---------- ---------- -----------
Balance Outstanding
End of year 1,353,500 $.375-1.50 1,272,500 $ .375-.47 1,325,500 $ .375-.41
========== ========== ========== ========== ========== ===========
Options Exercisable
End of year 681,500 296,500 20,000
========== ========== ===========
</TABLE>
At March 31, 1998, the weighted average price of options outstanding was
$0.50 per share and the weighted average price of exercisable options was
$0.64 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>
1998 1997 1996
----------- ------- -------
<S> <C> <C> <C>
Net earnings-as reported $ 830,940 563,689 2,772
Net earnings-pro forma 774,797 485,869 (99,925)
Net earnings per share-as reported-basic 0.13 0.11 --
Net earnings per share-as reported-diluted 0.11 0.10 --
Net earnings per share-pro forma-basic 0.12 0.09 (0.02)
Net earnings per share-pro forma-diluted 0.10 0.08 --
Weighted-average fair value of options,
granted during the year 0.63 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 65%, 46% and 46%, weighted average risk-free interest rates
of 6.3%, 6.7% and 6.3% for grants in 1998, 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.
(Continued)
-31-
<PAGE> 32
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. The oil and gas
operations contributed an immaterial amount towards the Company's gross
revenues in fiscal 1998 and constitute an insignificant amount of its
total assets, therefore, disclosure of fiscal 1998 oil and gas
information has been omitted. Information concerning business segments
and supplementary earnings information is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Contract drilling $8,001,352 7,024,144
Oil and gas 501,962 475,510
---------- ----------
$8,503,314 7,499,654
========== ==========
Earnings (loss) from operations:
Contract drilling $ 376,439 (65,506)
Oil and gas 174,894 81,114
---------- ----------
$ 551,333 15,608
========== ==========
Identifiable assets at end of period:
Contract drilling $4,375,971 3,501,058
Oil and gas 675,313 784,592
---------- ----------
$5,051,284 4,285,650
========== ==========
Depreciation, depletion and amortization:
Contract drilling $ 475,135 384,400
Oil and gas 148,479 192,494
---------- ----------
$ 623,614 576,894
========== ==========
Capital expenditures:
Contract drilling $ 765,450 1,154,698
Oil and gas 5,000 7,485
---------- ----------
$ 770,450 1,162,183
========== ==========
Maintenance and repairs $ 566,194 502,844
========== ==========
</TABLE>
In fiscal 1998, two customers each accounted for 10% or more of
contract drilling revenues. The revenue attributed to those customers was
$2,968,694 and $2,326,773.
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.
(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.
(Continued)
-32-
<PAGE> 33
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Commitments and Contingencies
The Company is currently involved in a lawsuit styled 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, 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 jury trial in this case commenced in August, 1997. The jury
found in favor of the Company and a judgment was entered in November,
1997 granting the Company $163,000 plus attorneys' fees of $70,000. The
customer filed an appeal of the judgment and at fiscal year-end, the case
was in the early stages of the appeal. On June 10, 1998, the Company
received $213,000 from National Energy Group in settlement of the
lawsuit. Per the terms of the settlement, each of the parties agrees to
release the other from all claims related to the lawsuit. The Company's
accounts related to this matter will be adjusted in the period of
resolution.
(8) Fair Value of Financial Instruments
Cash and cash equivalents, trade receivables and payables and short-term
debt:
The Company holds cash and cash equivalents, 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.
(9) Acquisition
In June, 1997, the Company acquired the drilling operations of San
Patricio Corporation which included two land drilling rigs, rig handling
trucks and trailers and miscellaneous drilling equipment. In addition,
the Company assumed the lease of a third land drilling rig. The leased
rig was returned to the lessor in February, 1998. The aggregate purchase
price of $1,500,000 consisted of $900,000 of third-party financing,
$300,000 of seller financing and $300,000 of the Company's Common Stock.
The transaction was accounted for as a purchase with the results of
operations being included in the Statement of Operations since the
acquisition date.
The following pro forma financial information for the years ended
March 31, 1998 and 1997 gives effect to the above acquisition as though
it were effective at the beginning of each period. The pro forma
information may not be indicative of the results that would have occurred
had the acquisition been effective on the dates 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.
(Continued)
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<PAGE> 34
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Pro-Forma (Unaudited)
Years Ended
March 31,
-------------------------------------------
1998 1997
---------------- ----------
<S> <C> <C>
Total Revenues $ 19,465,810 16,205,542
Net income applicable to common stock 881,966 439,530
Earnings per common share - basic 0.15 0.08
Earnings per common share - diluted 0.13 0.08
Weighted average common and common equivalent
shares outstanding - basic 5,714,535 5,306,158
Weighted average common and common equivalent
shares outstanding - diluted 7,793,207 5,724,440
</TABLE>
(10) Preferred Stock
In April, 1997, the Company issued a new Series A 8% Convertible
Preferred Stock. The issue consisted of 400,000 shares with a redemption
value of $800,000. 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. Dividends are
payable annually. Dividends of $61,333 were accrued as of March 31, 1998.
Subsequent to March 31, 1998 a payment of $64,000 was made to the
preferred stockholder. This Preferred Stock is convertible into 800,000
shares of Common Stock and one share of Common Stock for each $.50 of due
but unpaid dividends on the Series A 8% Convertible Preferred Stock. The
conversion rate is subject to adjustment on the third and seventh
anniversary dates of issuance, depending on the trading value of the
common 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.
In January, 1998, the Company issued a new Series B 8% Convertible
Preferred Stock. The issue consisted of 184,615 shares with a redemption
value of $2,999,994. Dividends payable in respect of Series B 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 B 8% Convertible Preferred Stock shall not bear interest.
Dividends are payable annually. Dividends of $47,233 were accrued as of
March 31, 1998. This preferred stock is convertible into 923,075 shares of
the Company's common stock and one share of common stock for each $1.62 of
due but unpaid dividends. The conversion rate is subject to adjustment on
its third and seventh anniversary dates of issuance depending on the
trading value of the common stock. The stock is redeemable at the
Company's option at or following the first anniversary of the issuance of
such stock provided, generally, that the price of the Company's common
stock equals or exceeds $5.00 per share. The proceeds from the stock have
been and will be used for equipment purchases, debt reduction and working
capital.
11) 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. Due to the Company's acquisitions of substantial
amounts of drilling equipment in fiscal 1998, the
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<PAGE> 35
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Company's oil and gas operations no longer constitute a significant
portion of the Company's assets. Therefore, to the extent permitted,
fiscal year 1998 discussion and disclosure of information on oil and gas
operations will be omitted.
The aggregate amount of capitalized costs relating to oil and gas
producing activities at the dates indicated are as follows:
<TABLE>
<CAPTION>
March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Proved properties $ 1,749,809 1,749,467
Unproved properties -- --
----------- -----------
1,749,809 1,749,467
Accumulated depletion (1,161,309) (1,012,830)
----------- -----------
$ 588,500 736,637
=========== ===========
Depletion rate per unit of
production (net equivalent
barrel, exclusive of ceiling
limitation adjustment) $ 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, 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>
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<PAGE> 36
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------
1997 1996
------------------- --------------------
(Bbl) (Mcf) (Bbl) (Mcf)
<S> <C> <C> <C> <C>
Proved developed
reserves:
Balance at
beginning of
year 60,420 302,960 69,890 362,300
======= ======= ======= =======
Balance at end
of year 72,970 412,540 60,420 302,960
======= ======= ======= =======
</TABLE>
Costs incurred for property acquisition, exploration and development
activities are summarized below:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1997 1996
------ ------
<S> <C> <C>
Property acquisition costs $ -- --
Development costs 5,000 7,485
------ ------
$5,000 7,485
====== ======
</TABLE>
Results of operations for producing activities for the periods
indicated were as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues $ 401,542 380,110
Production costs (177,318) (169,008)
Depletion (148,479) (192,494)
--------- ---------
Results of operations from
producing activities
(excluding corporate
overhead and interest
costs) $ 75,745 18,608
========= =========
</TABLE>
The following is a standardized measure of the discounted net future
cash flows and changes applicable to proved oil and gas reserves required
by FASB 69. The future cash flows are based on estimated oil and gas
reserves utilizing prices and costs in effect as of year end discounted
at 10% per year and assuming continuation of existing economic
conditions.
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for this
table is a reserve study, as prepared by an in-house petroleum engineer,
which contains estimates of quantities and rates of production of
reserves. Revisions of previous year estimates can have a significant
impact on these results. Also, exploration costs in one year may lead to
significant discoveries in later years and may significantly change
previous estimates of proved reserves and their valuation. Therefore, the
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<PAGE> 37
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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
----------- -----------
<S> <C> <C>
Estimated future cash flows $ 2,356,000 10,314,000
Estimated future production
costs (1,364,000) (3,013,000)
Estimated future development
costs -- (1,547,000)
----------- -----------
Estimated future net cash
flows before income taxes 992,000 5,754,000
Estimated future income taxes (66,000) (1,684,000)
Ten percent discount for
estimated timing of future
cash flows (214,000) (1,372,000)
----------- -----------
Standardized measure of
discounted estimated future
net cash flows $ 712,000 2,698,000
=========== ===========
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)
Extensions, discoveries and
other additions, less
related costs -- --
Changes in estimated future
development costs 1,041,000 179,000
Revisions of previous
quantity estimates (1,743,000) (369,000)
Net changes in prices (1,996,000) 1,010,000
Accretion of discount 367,000 302,000
Income taxes 1,022,000 (223,000)
Other (439,000) (241,000)
----------- -----------
Net increase (decrease) $(1,986,000) 435,000
=========== ===========
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 38
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ROBERT R. MARMOR, 72, 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, 49, 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, II, 71, a Director since May, 1988. Dr. Tichenor is
Distinguished Corporation Chief Executive Professor of Business at Gardner-Webb
University Broyhill School of Management since May, 1997. He was Distinguished
Corporation Chief Executive-in-Residence/Professor at The Indiana University of
Pennsylvania from January 1, 1995 to May, 1997. Mr. Tichenor was Vice-Chancellor
at Elizabeth City State University from February, 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.,
Johnston Printing Co and Essex Bank of Virginia.
ALVIS L. DOWELL, 62, 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, 42, 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, 59, 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.
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<PAGE> 39
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CHRIS F. PARMA, 48, 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, 1998, 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 1998 85,730 -- 1,231(1) 55,000(2) -- --
1997 71,750 -- 479(1) 52,083(3) -- --
1996 33,000 -- 479(1) 18,333(4) -- -- 3,130(5)
Al L. Dowell
CEO 1996 56,250 -- 2,244(6) 11,960(7) -- -- --
</TABLE>
(1) Includes value of personal use of company-provided vehicle.
(2) Includes 12,342 shares paid per employment agreement.
(3) Includes 84,734 shares accrued per employment agreement.
(4) Includes 48,889 shares accrued per employment agreement.
(5) Includes value realized on exercise of 100,000 shares of Stock Option
Plan granted May, 1995. See "Option/SAR Grants in Last Fiscal Year".
(6) Includes value of personal use of company-provided vehicle and Directors'
fee paid by the Company.
(7) 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.
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<PAGE> 40
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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. In
fiscal 1998, the Board reinstated the $1,000 fee per quarter for outside
directors for the period from July, 1996 through March, 1997.
The following table summarizes as to the chief executive officer of the
Company, the number and terms of stock options granted during the year ended
March 31, 1998:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total Potential
Number of Options/ Realized Value at
Securities SARs Assumed Annual Rates of
Underlying Granted to Stock Price Appreciation
Options/ Employees Exercise for Option Term
SARs in Fiscal or Base Expiration ------------------------
Name Granted(#) Year Price($/sh) Date 5%($) 10%($)
---- ----------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
No stock options were granted in the current fiscal year.
</TABLE>
The following table shows as to the chief executive officer of the Company
the net value realized (market value less exercise price) with respect to stock
options exercisable/unexercisable during the last year:
Aggregated Option/SAR Exercises in Last
Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End(#) FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
- --------------- --------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Wm. Stacy Locke -- -- 420,000/620,000 472,500/697,500
</TABLE>
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<PAGE> 41
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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, 1998:
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>
No stock warrants were granted in the current fiscal year.
</TABLE>
The following table shows as to each of the executive officers of the
Company the net value of securities or cash realized (market value less exercise
price) with respect to stock warrants exercisable/unexercisable during the last
year:
Aggregated Stock Warrant Exercises in Last Fiscal Year
and Fiscal Year End Stock Warrant Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Stock Warrants Stock Warrants
Shares at FY-End at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---- ----------- -------- -------------- ---------------
<S> <C>
In the current fiscal year, there were no stock warrant exercises by
executive officers nor were there any stock warrant values at year end.
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 5, 1998,
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, the Series A
Preferred Stock and the Series B Preferred Stock, each director of the Company,
and all officers and directors of the Company as a group. Except as otherwise
indicated, each person has sole investment and voting power with respect to the
shares shown.
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<PAGE> 42
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nature of Percentage
Title of Name and Address of Beneficial Ownership
Class Beneficial Owner Ownership of Class(7)
------------------ --------------------------- ---------- -----------
<S> <C> <C> <C>
Preferred Series A T.L.L. Temple Foundation 400,000 100.0%
109 Temple Blvd., Suite 300
Lufkin, Texas 75901-7321
Preferred Series B T.L.L. Temple Foundation 153,915 83.4%
109 Temple Blvd., Suite 300
Lufkin, Texas 75901-7321
Preferred Series B Temple Interests L.P. 30,700 16.6%
109 Temple Blvd, Suite 100
Lufkin, Texas 75901-7321
Common Rowan Companies, Inc. 750,000 10.5%
1900 Post Oak Tower
5051 Westheimer
Houston, TX 77056
Common Robert R. Marmor 422,393(1) 5.9%
9310 Broadway, Bldg. I
San Antonio, TX 78217
Common William D. Hibbetts 146,612(2) 2.0%
13007 Blanche Coker
San Antonio, TX 78216
Common Charles B. Tichenor 58,000 .8%
Box 342 Gardner-Webb University
Boiling Spring, NC 28017
Common Alvis L. Dowell 162,000(3) 2.3%
1167 Fairway Dr. W
Lindale, Tx 75771
Common Wm. Stacy Locke 1,397,965(5) 19.5%
9310 Broadway, Bldg. I
San Antonio, Texas 78217
</TABLE>
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<PAGE> 43
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nature of Percentage
Title of Name and Address of Beneficial Ownership
Class Beneficial Owner Ownership of Class(7)
-------- ------------------------------------------ ---------- -----------
<S> <C> <C> <C>
Common Richard Phillips 390,144(4) 5.4%
5701 Agnes Street
Corpus Christi, Texas 78408
Common Rodney Lewis 120,725 1.7%
10101 Reunion Pl., Suite 250
San Antonio, Texas 78216
All officers and directors as a group (9 2,866,680(6) 39.9%
persons)
</TABLE>
(1) Does not include 180,420 shares owned by Mr. Marmor's children and
grandchildren. Mr. Marmor disclaims beneficial ownership and has no
voting rights or dispositive power in these 180,420 shares.
(2) Includes options issued to Mr. Hibbetts by the Board of Directors to
purchase 15,000 shares .
(3) Includes options issued to Mr. Dowell by the Board of Directors to
purchase 3,913 shares .
(4) Includes 240,000 shares and an option issued to San Patricio
Corporation, which is wholly owned by Richard Phillips, to purchase an
additional 150,000 shares, .
(5) Includes options issued to Mr. Locke to purchase an additional
1,040,000 shares. (See Item 13.)
(6) Includes options to purchase 223,913 shares issued to the officers and
directors by the Board of Directors. Also includes an option to
purchase an additional 1,040,000 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
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<PAGE> 44
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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. All of Mr. Locke's options would become exercisable upon any
acquisition or change in control of the Company.
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, 1998 and 1997.
Consolidated Statements of Operations for the years ended March
31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended March
31, 1998, 1997 and 1996.
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).
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<PAGE> 45
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
3. The following exhibits are filed as part of this Report:
<TABLE>
<S> <C>
(3) Articles of Incorporation and Bylaws of the Company (previously filed as an Exhibit
to the company's 1981 Annual Report on Form 10-K, File No. 2-70145).
(10)(a) Stock Purchase and Options Agreement dated December 28, 1981 between the Company
and Rowan Companies, Inc. ("Rowan") (previously filed as an Exhibit to the Company's
1981 Annual Report on Form 10-K, File No. 2-70145).
(10)(b) Amended and Restated Agreement of Sale dated December 28, 1981 between the
Company and Rowan relating to acquisition of the Tender Rigs (previously filed as an
Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
(10)(c) Note Purchase and Warrant Agreement between the Company and Connecticut General
Life Insurance Company and Teachers Insurance and Annuity Association 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).
</TABLE>
-45-
<PAGE> 46
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
(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).
(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).
</TABLE>
-46-
<PAGE> 47
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
(10)(v) Rig Lease and Refurbishing Agreement (Rig 11) dated September 21, 1990 between the
Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's
1991 Annual Report on Form 10-K, File No. 2-70145).
(10)(w) Rig Lease and Refurbishing Agreement (Rig 12) dated September 21, 1990 between the
Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's
1991 Annual Report on Form 10-K, File No. 2-70145).
(10)(x) Revised and restated rig Lease and Refurbishing Agreement regarding Rig 11 and Rig 12
dated September 27, 1991 between the Company and LB Sales and Leasing, Inc.
(previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File
No. 2-70145).
(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 (previously filed as an Exhibit to the Company's 1996 Annual Report on Form
10-K, File No. 2-70145).
(10)(ee) Non-Statutory Stock Option Agreement dated June 18, 1997 between the Company and
San Patricio Corporation (previously filed as an Exhibit to the Company's 1996 Annual
Report on Form 10-K, File No. 2-70145).
(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 (previously filed as an Exhibit to the Company's 1996 Annual
Report on Form 10-K, File No. 2-70145).
</TABLE>
-47-
<PAGE> 48
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
(10)(gg) Third Amended Certificate of Designation, Correcting An Error In The Second Amended
Certificate of Designation and Designating the Voting Powers, Preferences And Right Of
A New Series B 8% Convertible Preferred Stock dated June 9, 1998.
(10)(hh) First Amendment To Loan And Security Agreement dated May 8, 1996 between the
Company and Finova Capital Corporation dated June 18, 1997.
(10)(ii) Second Amendment To Loan and Security Agreement dated May 8, 1996 between the
Company and Finova Capital Corporation.
(22) Subsidiaries of the registrant (previously filed as an Exhibit to the Company's 1992 Annual
Report on Form 10-K, File No. 2-70145).
(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.
</TABLE>
-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, 1996:
Allowance for doubtful
receivables $ -- 140,000 -- 140,000
========= ======== ========== ========
Year ended March 31, 1997:
Allowance for doubtful
receivables $ 140,000 -- -- 140,000
========= ======== ========== ========
Year ended March 31, 1998:
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 day of June,
1998 thereunto duly authorized.
By /s/ Robert R. Marmor
----------------------------------
Robert R. Marmor, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- ----------------------- -------------
<S> <C> <C>
/s/ Robert R. Marmor Chairman and Director June 25, 1998
- ----------------------------
Robert R. Marmor
/s/ Wm. Stacy Locke President and Chief June 25, 1998
- ---------------------------- Executive Officer and
Wm. Stacy Locke Director
/s/ Al Dowell Director June 25, 1998
- ----------------------------
Al Dowell
/s/ William D. Hibbetts Director June 25, 1998
- ----------------------------
William D. Hibbetts
/s/ Chris F. Parma Vice President and June 25, 1998
- ---------------------------- Chief Financial Officer
Chris F. Parma
</TABLE>
-50-
<PAGE> 51
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT No. DESCRIPTION
- ---------------------------------------------------------------------------------------------------------
<S> <C>
(3) Articles of Incorporation and Bylaws of the Company (previously filed as an Exhibit
to the company's 1981 Annual Report on Form 10-K, File No. 2-70145).
(10)(a) Stock Purchase and Options Agreement dated December 28, 1981 between the Company
and Rowan Companies, Inc. ("Rowan") (previously filed as an Exhibit to the Company's
1981 Annual Report on Form 10-K, File No. 2-70145).
(10)(b) Amended and Restated Agreement of Sale dated December 28, 1981 between the
Company and Rowan relating to acquisition of the Tender Rigs (previously filed as an
Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
(10)(c) Note Purchase and Warrant Agreement between the Company and Connecticut General
Life Insurance Company and Teachers Insurance and Annuity Association 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).
</TABLE>
<PAGE> 52
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
(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).
(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).
</TABLE>
<PAGE> 53
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
(10)(v) Rig Lease and Refurbishing Agreement (Rig 11) dated September 21, 1990 between the
Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's
1991 Annual Report on Form 10-K, File No. 2-70145).
(10)(w) Rig Lease and Refurbishing Agreement (Rig 12) dated September 21, 1990 between the
Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's
1991 Annual Report on Form 10-K, File No. 2-70145).
(10)(x) Revised and restated rig Lease and Refurbishing Agreement regarding Rig 11 and Rig 12
dated September 27, 1991 between the Company and LB Sales and Leasing, Inc.
(previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File
No. 2-70145).
(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 (previously filed as an Exhibit to the Company's 1996 Annual Report on Form
10-K, File No. 2-70145).
(10)(ee) Non-Statutory Stock Option Agreement dated June 18, 1997 between the Company and
San Patricio Corporation (previously filed as an Exhibit to the Company's 1996 Annual
Report on Form 10-K, File No. 2-70145).
(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 (previously filed as an Exhibit to the Company's 1996 Annual
Report on Form 10-K, File No. 2-70145).
</TABLE>
<PAGE> 54
<TABLE>
<S> <C>
(10)(gg) Third Amended Certificate of Designation, Correcting An Error In The Second Amended
Certificate of Designation and Designating the Voting Powers, Preferences And Right Of
A New Series B 8% Convertible Preferred Stock dated June 9, 1998.
(10)(hh) First Amendment To Loan And Security Agreement dated May 8, 1996 between the
Company and Finova Capital Corporation dated June 18, 1997.
(10)(ii) Second Amendment To Loan and Security Agreement dated May 8, 1996 between the
Company and Finova Capital Corporation.
(22) Subsidiaries of the registrant (previously filed as an Exhibit to the Company's 1992 Annual
Report on Form 10-K, File No. 2-70145).
(27) Financial Data Schedule
</TABLE>
<PAGE> 1
THIRD AMENDED CERTIFICATE OF DESIGNATION,
CORRECTING AN ERROR IN THE SECOND AMENDED CERTIFICATE OF DESIGNATION AND
DESIGNATING THE VOTING POWERS, PREFERENCES
AND RIGHTS OF A NEW SERIES B 8% CONVERTIBLE PREFERRED STOCK OF
SOUTH TEXAS DRILLING & EXPLORATION, INC.
A Texas Corporation
FILED
In the Office of the
Secretary of State of Texas
Jan 14, 1998
Corporations Section
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 December 18, 1997, at which a quorum was present and acting
throughout, duly adopted the following resolution providing for a new Series B
8% Convertible Preferred Stock consisting of 184,615 shares.
RESOLVED,
I.
All references to Series A 8% Convertible Preferred Stock in the
Second Amended Certificate of Designation as having a par value of $2.00 per
share is hereby corrected to $1.00 par value per share. In addition, Section
2(E)(1) is corrected in its entirety to read as follows: "(1) Payment.
Holders of redeemed shares shall be paid in cash an amount equal to $2.00 plus
cumulated but unpaid dividends, and no more."
II.
SERIES B 8% CONVERTIBLE PREFERRED STOCK
1. Designation. The series of Preferred Stock established by
this resolution shall be designated "Series B 8% Convertible Preferred Stock,"
of which 184,615 shares shall be designated having a par value of $1.00 per
share.
<PAGE> 2
2. Preferences, Limitations and Rights of Series B 8% Convertible
Preferred Stock.
(A) General. Except as otherwise expressly provided by law, shares
of Series B 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 B 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
$16.25 for each share per annum and no more.
(2) Cumulativity. Dividends payable in respect of Series B
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 B 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 B 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 B 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 and after the
payment to of the Liquidation Preference owing to the holders of the
Corporation's Series A 8% Convertible Preferred Stock, but before any
distribution to the holders of Common Stock, the holders of Series B
Convertible Preferred Stock then outstanding shall be entitled to receive
$16.25 per share, and an amount per share equal to cumulated but unpaid
dividends in respect of such shares of Series B 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 B 8% Convertible Preferred Stock are insufficient to permit full payment
to them, the entire remaining assets (after the payment of or provision for
payment of debts and after the payment to of the Liquidation Preference owing
to the holders of the Corporation's Series A 8% Convertible Preferred Stock)
shall be distributed among the holders of the Series B 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 B Convertible Preferred
Stock may be redeemed at or following the first
3
<PAGE> 4
anniversary of the issuance of any such Series B Convertible Preferred Stock at
the option of the Corporation, by resolution of the Board of Directors,
provided that (i) the Thirty Day Average Stock Transaction Price of the
Corporation's Common Stock shall equal or exceed $5.00 for the Thirty Day
Trading Period immediately preceding the sending of notice of redemption as
provided below, and (ii) to the extent that any such redemption may occur
during the three year period following the issuance of such Series B
Convertible Preferred Stock, during such Thirty Day Trading Period, the
Corporation's Common Stock is listed on the NASDAQ Stock Market, the NASDAQ
Small Cap quotation system, the American Stock Exchange or any successor to
such trading exchanges. 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
4
<PAGE> 5
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 $16.25 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 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
5
<PAGE> 6
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 the bank or trust company shall thereupon be relieved
of all responsibility to such holders. If fewer than all outstanding shares of
Series B 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 B 8% 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.
6
<PAGE> 7
(H) Voting. Each share of Series B 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 B 8% Convertible
Preferred Stock shall have the conversion rights as follows:
(1) Right to Convert.
(i) Initial Rights. Each share of Series B 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 the office of the Corporation or any
transfer agent for the Series B 8% Convertible Preferred Stock, into
five shares of Common Stock in respect of each share of Series B 8%
Convertible Preferred Stock and one share of Common Stock for each
$1.625 of due but unpaid dividends on such share of Series B 8%
Convertible Preferred Stock converted; provided, however, that the
number of shares of Common Stock into which each share of Series B 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 B 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
7
<PAGE> 8
Conversion Price") is below $3.25, the number of shares of Common
Stock to be received upon conversion of each share of Series B 8%
Convertible Preferred Stock shall be determined by dividing the sum of
$16.25 by the Three Year Conversion Price, and to the extent of any
due but unpaid dividends on shares of Series B 8% Convertible
Preferred Stock converted, the amount of such due but unpaid dividends
shall likewise be convertible into Common Stock at a rate of $1.625 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 thereafter
unless adjusted at the 7th anniversary date of the issuance of any
Series B 8% Convertible Preferred Stock.
(iii) Rights at Seven Years. If, at the seventh anniversary
of the date of issuance of any Series B 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 B 8% Convertible Preferred Stock shall be
determined by dividing the sum of $16.25 by the Seven Year Conversion
Price, and to the extent of any due but unpaid dividends on shares of
Series B 8% Convertible Preferred Stock converted, the amount of such
due but unpaid dividends shall likewise be convertible into Common
Stock at
8
<PAGE> 9
a rate of $1.625 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 B 8% Convertible Preferred Stock.
(iv) Conversion After Redemption Notice. In the event of a
call for redemption of any shares of Series B 8% Convertible Preferred
Stock, the conversion rights shall terminate as to the shares
designated for redemption at the 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 B
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 B 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 B 8% Convertible Preferred
Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common
9
<PAGE> 10
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 B 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.
(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 B 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
10
<PAGE> 11
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 B 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 B 8% Convertible Preferred Stock had been converted
into shares of 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 B 8% Convertible Preferred Stock shall
be appropriately adjusted so that the number of shares of Series B 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
11
<PAGE> 12
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 B 8% Convertible Preferred Stock shall
thereafter be convertible into the kind and amount of shares of common
stock or other 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 B 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
12
<PAGE> 13
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.
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 B 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 9th day of January, 1998.
SOUTH TEXAS DRILLING &
EXPLORATION, INC.
By: /s/ WM. STACY LOCKE
--------------------------------
Wm. Stacy Locke, President
ATTEST:
/s/ MARY LOU KILGORE
- --------------------------------
Mary Lou Kilgore, Secretary
13
<PAGE> 1
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment"),
dated as of June 18, 1997, is entered into between FINOVA CAPITAL CORPORATION,
a Delaware corporation ("FINOVA"), with a place of business at 311 South Wacker
Drive, Suite 4400, Chicago, Illinois 60606-6618, and SOUTH TEXAS DRILLING &
EXPLORATION, INC., a Texas corporation ("Borrower"), with its chief executive
office located at 9310 Broadway, Building I, San Antonio, Texas 78217.
RECITAL
A. Borrower and FINOVA have previously entered into that certain
Loan and Security Agreement and related Schedule to Loan and Security
Agreement, each dated as of May 8, 1996 (collectively, the "Loan Agreement"),
pursuant to which FINOVA has made certain loans and financial accommodations
available to Borrower. Terms used herein without definition shall have the
meanings ascribed to them in the Loan Agreement.
B. Borrower has requested FINOVA to provide additional financing
to fund the acquisition of certain assets to be acquired from San Patricio
Corporation, a Texas corporation ("San Patricio"), to fund the acquisition of a
mud pump, to extend the term of the credit facilities, to modify certain
covenants and to adjust the interest rates applicable to the credit facilities.
C. FINOVA is willing to further amend the Loan Agreement under
the terms and conditions set forth in this Amendment. Borrower is entering into
this Amendment with the understanding and agreement that, except as
specifically provided herein, none of FINOVA's rights or remedies as set forth
in the Loan Agreement is being waived or modified by the terms of this
Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. FINOVA's address for all purposes of the Loan Agreement is
changed to: 311 South Wacker Drive, Suite 4400, Chicago, Illinois 60606-6618.
2. The term "Term Loan" is hereby amended to be read as a
collective term to include both Term Loan A and Term Loan B as defined in the
Schedule as amended by this Amendment, and "Term Loan" shall be read to include
both Term Loan A and Term Loan B unless the context otherwise requires a more
limited reading to mean, individually, either Term Loan A or Term Loan B.
<PAGE> 2
3. The second to the last sentence of Section 1.1 of the Loan
Agreement is hereby amended to read as follows:
"The maximum aggregate amount of Loans available to Borrower
from time to time hereunder shall be reduced dollar for
dollar, for the period from the Closing Date through June 17,
1997, from the Initial Total Facility Amount upon amortization
of the original principal amount of Term Loan A; and for the
period after June 18, 1997, from the Subsequent Total Facility
Amount upon amortization of both the remaining outstanding
principal amount of Term Loan A as of June 18, 1997, and the
original principal amount of Term Loan B."
4. Section 4.1 of the Loan Agreement is hereby amended to read as
follows:
"4.1 Security Interest in the Collateral. To secure the
payment and performance of the Obligations when due, Borrower
hereby grants to FINOVA a security interest in all of
Borrower's now owned or hereafter acquired or arising
Inventory, Equipment, Receivables, and General Intangibles,
including, without limitation, all of Borrower's deposit
accounts, money, any and all property now or at any time
hereafter in FINOVA's possession (including claims and credit
balances), investment property, proceeds of letters of credit,
and all proceeds (including proceeds of any insurance
policies, proceeds of proceeds and claims against third
parties), all products and all books and records related to
any of the foregoing (all of the foregoing, together with all
other property in which FINOVA may be granted a lien or
security interest, is referred to herein, collectively, as the
"Collateral")."
5. The following definitions are added to Section 18.1 of the
Loan Agreement:
"'San Patricio' means San Patricio Corporation, a Texas
corporation."
"'San Patricio Assets' has the meaning set forth in the
Schedule."
6. The definition of Initial Total Facility Amount as set forth
in the Schedule is amended to read as follows:
"INITIAL TOTAL FACILITY AMOUNT (SECTION 1.1), for the period
from the Closing Date through June 17, 1997:
$1,750,000"
7. The following definition of Subsequent Total Facility Amount
is added to the Schedule following the definition of Initial Total Facility
Amount:
2
<PAGE> 3
"SUBSEQUENT TOTAL FACILITY AMOUNT (SECTION 1.1), for the
period following June 17, 1997: The outstanding principal
balance of Term Loan A as of June 18, 1997 plus $1,550,000."
8. The definition of Term Loan as set forth in the Schedule is
amended to read as follows:
"B. TERM LOAN (collectively, Term Loan A and Term Loan B,
or either Term Loan A or Term Loan B, in each case as the
context requires):
(1) TERM LOAN A: A term loan in the original
principal amount of One Million Two Hundred Fifty Thousand
Dollars ($1,250,000) (the "Term Loan A"), which shall be
evidenced by and payable in accordance with the terms of the
Term Loan A Amended and Restated Secured Promissory Note.
(2) TERM LOAN B: A term loan in the original
principal amount of One Million Fifty Thousand Dollars
($1,050,000) (the "Term Loan B"), which shall be evidenced and
payable in accordance with the terms of the Term Loan B
Secured Promissory Note, the principal amount thereof advanced
by FINOVA to fund Borrower's purchase of: (i) certain assets
of San Patricio at a cost to Borrower of $1,500,000, $800,000
of the purchase price funded by Term Loan B, $100,000 from the
Borrower's cash-on-hand, $300,000 in assigned value of the
common stock of the Borrower issued to San Patricio, and the
balance of $300,000 funded through Subordinated Debt obtained
by the Borrower from San Patricio, and (ii) a mud pump at a
cost to Borrower of $284,212.50, $250,000 of which shall be
funded by Term Loan B."
9. The first sentence of the paragraph entitled "Interest" under
the INTEREST AND FEES Section of the Schedule is hereby amended to read as
follows:
"Borrower shall pay FINOVA interest on the daily outstanding
balance of Borrower's Receivable Loans account at a per annum
rate of two and three-quarters (2.75) percentage points in
excess of the rate of interest announced publicly by
Citibank, N.A., from time to time as its "base rate" (or any
successor thereto), which may not be such institution's lowest
rate (the "Base Rate") for the period from the Closing Date
through June 17, 1997, and thereafter at a per annum rate of
two and one-quarter (2.25) percentage points in excess of the
Base Rate."
3
<PAGE> 4
10. The item "Permitted Incumbrances" under the BORROWER
INFORMATION Section of the Schedule is hereby amended to read as follows:
"Permitted Encumbrances (Section 18.1):
(1) See Exhibit 18.1 attached hereto and
incorporated herein by this reference.
(2) Subordinated Debt in the original principal
amount of $300,000 advanced by San Patricio to Borrower to
fund the balance of the purchase price of the assets to be
acquired by Borrower from San Patricio Corporation (the "San
Patricio Assets") not funded through Term Loan B, which
indebtedness: (a) shall be subordinate to the Obligations
pursuant to, and repayable in accordance with, the terms and
conditions of an Intercreditor and Subordination Agreement
between San Patricio and FINOVA, and acknowledged to by the
Borrower, the terms and conditions of which shall be
acceptable to FINOVA in its sole discretion, and (b) may be
secured by Borrower's grant of a second security interest in
the San Patricio Assets subordinate to the prior security
interest of FINOVA in the San Patricio Asserts, pursuant to a
security agreement between San Patricio and Borrower the terms
and conditions of which shall be acceptable to FINOVA in its
sole discretion."
11. The Total Debt Service Coverage financial covenant set forth
under the FINANCIAL COVENANTS Section of the Schedule is amended to read as
follows:
"Total Debt Service Coverage.
Borrower shall maintain Total Debt Service Coverage
of not less than 1.0 to 1.0."
12. The Capital Expenditures covenant set forth under the NEGATIVE
COVENANTS Section of the Schedule is amended to read as follows:
"Capital Expenditures.
Borrower shall not make or incur any Capital
Expenditure of any kind if, after giving effect
thereto, the aggregate amount of all such Capital
Expenditures by Borrower in any fiscal year
(beginning with the March 31, 1997 fiscal year) would
exceed Seven Hundred Twenty Thousand Dollars
($720,000). However, for the purposes of calculating
the amount of such Capital Expenditures, the San
Patricio Assets and the mud pump purchased by
Borrower for $284,212.50 shall be excluded."
4
<PAGE> 5
13. The Compensation covenant set forth under the NEGATIVE
COVENANTS Section of the Schedule is amended to read as follows:
"Compensation.
Borrower shall not pay total compensation, including
salaries, withdrawals, fees, bonuses, commissions,
drawing accounts and other payments, whether directly
or indirectly, in money or otherwise, during any
fiscal year to all of Borrower's executives, officers
and directors (or any relative thereof) in an amount
in excess of $350,000, in the case of Borrower's 1998
fiscal year, or in excess of one hundred twenty
percent (120%) of the total compensation paid by
Borrower to such individuals during its immediately
preceding fiscal year, in the case of each subsequent
fiscal year of Borrower."
14. The TERM Section of the Schedule is hereby amended to read as
follows:
"The initial term of this Agreement shall be from May 8, 1996
through June 1, 1999 (the "Initial Term") and shall be
automatically renewed for successive periods of one (1) year
each (each, a "Renewal Term"), unless earlier terminated as
provided in Section 16 or 17 above or elsewhere in this
Agreement."
15. The TERMINATION FEE Section of the Schedule is hereby amended
to read as follows:
"The Termination Fee provided in Section 16.4 shall be an
amount equal to the following percentage of the average daily
outstanding balance of the Receivable Loans for the 180-day
period (or lesser period if applicable) preceding the date of
termination:
(i) three percent (3.0%), if such early
termination occurs on or prior to June 1, 1998;
(ii) one percent (1.0%), if such early termination
occurs after June 1, 1998."
16. Effectiveness of this Amendment. FINOVA must have received
the following items, in form and content acceptable to FINOVA, before this
Amendment is effective and before FINOVA is required to extend any credit to
Borrower as provided for by this Amendment. The date on which all of the
following conditions have been satisfied is the "Effective Date".
(a) Amendment. This Amendment fully executed in a
sufficient number of counterparts for distribution to FINOVA and
Borrower.
5
<PAGE> 6
(b) Authorizations. Evidence that the execution,
delivery and performance by Borrower and each subordinating creditor of
this Amendment and any instrument or agreement required under this
Amendment have been duly authorized.
(c) Representations and Warranties. The Representations
and Warranties set forth in the Loan Agreement must be true and
correct.
(d) Consent. FINOVA has received counterparts of the
Consent appended hereto (the "Consent") executed by Mr. Wm. Stacy
Locke.
(e) Intercreditor Agreement. FINOVA and San Patricio
shall have entered into an Intercreditor and Subordination Agreement
with respect to the Subordinated Debt owed by Borrower to San Patricio,
and acknowledged by Borrower, the terms and conditions of which shall
be acceptable to FINOVA in its sole discretion.
(f) Review of Subordinated Debt Documents. All
agreements, instruments and documents pertaining to the Subordinated
Debt owed by Borrower to San Patricio shall have been delivered by
Borrower to FINOVA and FINOVA shall have reviewed and found acceptable,
in its sole discretion, such agreements, instruments and documents.
(g) Other Required Documentation. All other documents and
legal matters in connection with the transactions contemplated by this
Agreement shall have been delivered or executed or recorded and shall
be in form and substance satisfactory to FINOVA.
(h) Payment of Modification Fee. FINOVA shall have
received from Borrower a Modification Fee of $5,500 for the processing
and approval of this Amendment.
17. Representations and Warranties. The Borrower represents and
warrants as follows:
(a) Authority. The Borrower has the requisite corporate
power and authority to execute and deliver this Amendment and to
perform its obligations hereunder and under the Loan Documents (as
amended or modified hereby) to which it is a party. The execution,
delivery and performance by the Borrower of this Amendment, and the
performance by Borrower of each Loan Document (as amended or modified
hereby) to which it is a party have been duly approved by all necessary
corporate action of Borrower and no other corporate proceedings on the
part of Borrower are necessary to consummate such transactions.
(b) Enforceability. This Amendment has been duly
executed and delivered by the Borrower. This Amendment and each Loan
Document (as amended or modified hereby) is the legal, valid and
binding obligation of Borrower hereto or thereto, enforceable against
Borrower in accordance with its terms, and is in full force and effect.
6
<PAGE> 7
(c) Representations and Warranties. The representations
and warranties contained in each Loan Document (other than any such
representations or warranties that, by their terms, are specifically
made as of a date other than the date hereof) are correct on and as of
the date hereof as though made on and as of the date hereof.
(d) No Default. No event has occurred and is continuing
that constitutes an Event of Default.
18. Choice of Law. The validity of this Amendment, its
construction, interpretation and enforcement, the rights of the parties
hereunder, shall be determined under, governed by, and construed in accordance
with the internal laws of the State of Arizona governing contracts only to be
performed in that State.
19. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment or the Consent by
telefacsimile shall be effective as delivery of a manually executed counterpart
of this Amendment or such Consent.
20. Due Execution. The execution, delivery and performance of
this Amendment are within the power of Borrower, have been duly authorized by
all necessary corporate action, have received all necessary governmental
approval, if any, and do not contravene any law or any contractual restrictions
binding on Borrower.
21. Reference to and Effect on the Loan Documents.
(a) Upon and after the effectiveness of this Amendment,
each reference in the Loan Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Loan Agreement, and
each reference in the other Loan Documents to "the Loan Agreement",
"thereof" or words of like import referring to the Loan Agreement,
shall mean and be a reference to the Loan Agreement as modified and
amended hereby.
(b) Except as specifically amended above, the Loan
Agreement and all other Loan Documents, are and shall continue to be in
full force and effect and are hereby in all respects ratified and
confirmed and shall constitute the legal, valid, binding and
enforceable obligations of Borrower to FINOVA.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of FINOVA under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
(d) To the extent that any terms and conditions in any of
the Loan Documents shall contradict or be in conflict with any terms or
conditions of the Loan Agreement, after giving effect to this
Amendment, such terms and conditions are
7
<PAGE> 8
hereby deemed modified or amended accordingly to reflect the terms and
conditions of the Loan Agreement as modified or amended hereby.
22. Ratification. Borrower hereby restates, ratifies and
reaffirms each and every term and condition set forth in the Loan Agreement, as
amended hereby, and the Loan Documents effective as of the date hereof.
23. Estoppel. To induce FINOVA to enter into this Amendment and
to continue to make advances to Borrower under the Loan Agreement, Borrower
hereby acknowledges and agrees that, after giving effect to this Amendment, as
of the date hereof, there exists no Event of Default and no right of offset,
defense, counterclaim or objection in favor of Borrower as against FINOVA with
respect to the Obligations.
IN WITNESS WHEREOF, the parties have entered into this Amendment as of
the date first above written.
BORROWER: FINOVA:
SOUTH TEXAS DRILLING & FINOVA CAPITAL CORPORATION
EXPLORATION, INC.
BY /s/ WM. STACY LOCKE BY /s/ THOMAS GIBBONS
------------------------- -----------------------------
TITLE President & CEO TITLE Vice President
---------------------- --------------------------
8
<PAGE> 9
CONSENT
Dated as of June 18, 1997
The undersigned hereby consents and agrees to the foregoing Amendment and
hereby confirms and agrees that his Confirmation and Support Agreement dated as
of May 8, 1996 in favor of FINOVA (the "Support Agreement") is, and shall
continue to be in, in full force and effect and is hereby ratified and
confirmed in all respects except that, upon the effectiveness of, and on and
after the date of said Amendment, each reference in the Support Agreement to
the Loan Agreement, "thereunder", "thereof" or words of like import referring
to the Loan Agreement, shall mean and be a reference to the Loan Agreement as
amended or modified by the said Amendment.
/s/ WM. STACY LOCKE
--------------------------------
WM. STACY LOCKE
9
<PAGE> 1
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of October 21, 1997, is entered into between FINOVA
CAPITAL CORPORATION, a Delaware corporation, ("FINOVA"), with a place of
business at 311 South Wacker Drive, Suite 4400, Chicago, Illinois 60606-6618,
and SOUTH TEXAS DRILLING & EXPLORATION, INC., a Texas corporation ("Borrower"),
with its chief executive office located at 9310 Broadway, Building I, San
Antonio, Texas 78217.
RECITAL
A. Borrower and FINOVA have previously entered into that certain
Loan and Security Agreement dated as of May 8, 1996, as amended by that certain
First Amendment to Loan and Security Agreement dated as of June 18, 1997, (the
"Loan Agreement"), pursuant to which FINOVA has made certain loans and
financial accommodations available to Borrower. Terms used herein without
definition shall have the meanings ascribed to them in the Loan Agreement.
B. Borrower has requested FINOVA to amend the Loan Agreement to
(i) increase the Subsequent Total Facility Amount, (ii) provide for a new term
loan in the original principal amount of Six Hundred Thousand Dollars
($600,000) to finance the acquisition of a Skytop Brewster N-46 drilling rig,
(iii) provide for a new credit facility to finance certain Capital Expenditures
of Borrower, and (iv) increase the amount of Capital Expenditures Borrower may
incur in any fiscal year. Borrower has further requested that FINOVA waive
compliance by Borrower with the negative covenant pertaining to Capital
Expenditures.
C. FINOVA is willing to further amend the Loan Agreement and make
such waiver under the terms and conditions set forth in this Amendment.
Borrower is entering into this Amendment with the understanding and agreement
that, except as specifically provided herein, none of FINOVA's rights or
remedies as set forth in the Loan Agreement is being waived or modified by the
terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Amendment to "Loans" Provisions.
(a) The second to the last sentence of Section 1.1 of the
Loan Agreement, entitled "Loan Facilities", is hereby amended in its
entirety to read as follows:
"The maximum aggregate amount of Loans available to Borrower
from time to time hereunder shall be reduced dollar for
dollar, for the period from the Closing Date through June 17,
1997, from the Initial Total Facility Amount upon
<PAGE> 2
amortization of the original principal amount of Term Loan A;
and for the period after June 18, 1997, from the Subsequent
Total Facility Amount upon amortization of the remaining
outstanding principal amount of Term Loan A as of June 18,
1997, the original principal amount of Term Loan B, the
original principal amount of Term Loan C and the aggregate
amount borrowed under the Capital Expenditure Facility."
(b) The definition set forth in the Schedule to the Loan
Agreement under the heading "Subsequent Total Facility Amount (Section
1.1)" is hereby amended in its entirety as follows:
"SUBSEQUENT TOTAL FACILITY AMOUNT (SECTION 1.1), for the
period following June 17, 1997:
The outstanding principal balance of Term Loan A as of June
18, 1997 plus Two Million Seven Hundred Fifty Thousand Dollars
($2,750,000)."
(c) Paragraph B of the Section in the Schedule to the
Loan Agreement entitled "Loans (Section 1.2)" is hereby amended in its
entirety as follows:
"B. TERM LOAN:
(1) TERM LOAN A: A term loan in the original
principal amount of One Million Two Hundred Fifty Thousand
Dollars ($1,250,000) (the "Term Loan A"), which shall be
evidenced by and payable in accordance with the terms of the
Term Loan A Amended and Restated Secured Promissory Note (the
"Term Loan A Note").
(2) TERM LOAN B: A term loan in the original
principal amount of One Million Fifty Thousand Dollars
($1,050,000) (the "Term Loan B"), which shall be evidenced and
payable in accordance with the terms of the Term Loan B
Secured Promissory Note (the "Term Loan B Note"), the
principal amount thereof advanced by FINOVA to fund Borrower's
purchase of: (i) certain assets of San Patricio at a cost to
Borrower of $1,500,000, $800,000 of the purchase price funded
by Term Loan B, $100,000 from the Borrower's cash-on-hand,
$300,000 in assigned value of the common stock of the Borrower
issued to San Patricio, and the balance of $300,000 funded
through Subordinated Debt obtained by the Borrower from San
Patricio, and (ii) a mud pump at a cost to Borrower of
$284,212.50, $250,000 of which shall be funded by Term Loan
B."
2
<PAGE> 3
(3) TERM LOAN C: A term loan in the original
principal amount of Six Hundred Thousand Dollars ($600,000)
(the "Term Loan C"), which shall be evidenced by and payable
in accordance with the terms of the Term Loan C Secured
Promissory Note (the "Term Loan C Note")."
2. Amendment to Negative Covenant Provisions. The covenant set
forth in the Schedule to the Loan Agreement under the heading "Capital
Expenditures" in the Section entitled "Negative Covenants (Section 14)" is
hereby amended in its entirety to read as follows:
"Capital Expenditures: Borrower shall not make or incur any Capital
Expenditure of any kind if, after giving
effect thereto, the aggregate amount of all
such Capital Expenditures by Borrower in any
fiscal year would exceed One Million Five
Hundred Thousand Dollars ($1,500,000).
However, for the purposes of calculating the
amount of such Capital Expenditures, (a) the
San Patricio Assets, (b) the mud pump
purchased by Borrower for $284,212.50, (c)
the Skytop Brewster N-46 drilling rig and
associated equipment purchased from Simmons
Drilling Corp. on or about October 21, 1997
and (d) the Capital Expenditures purchased
with funds from the Capital Expenditure Loan
Facility shall be excluded."
3. Amendment to the Definitions in the Loan Agreement.
(a) The definition of "Term Loan" set forth in Section 18
of the Loan Agreement is hereby amended in its entirety as follows:
"Term Loan" means collectively, Term Loan A, Term Loan B and
Term Loan C, or individually, Term Loan A, Term Loan B or Term
Loan C, in each case as the context requires."
(b) The definition of "Term Loan Note" set forth in
Section 18 of the Loan Agreement is hereby amended in its entirety as
follows:
"Term Loan Note" means collectively, Term Loan Note A, Term
Loan Note B and Term Loan Note C, or individually, Term Loan
Note A, Term Loan Note B and Term Loan Note C, in each case as
the context requires."
4. Capital Expenditure Loan Facility. FINOVA shall provide
non-revolving loans to Borrower, each of which shall be in a principal amount
of not less than Twenty Five Thousand Dollars ($25,000) and all of which shall
not exceed Six Hundred Thousand Dollars ($600,000) at any time, to facilitate
Borrower's acquisition of new Equipment for uses directly related to Borrower's
business operations as conducted as of the date of this Amendment. Each loan
under this facility (individually, a "Capital Expenditure Loan" and
3
<PAGE> 4
collectively, the "Capital Expenditure Loans") shall be evidenced by and
repayable in accordance with the terms of a Secured Capital Expenditure Loan
Note, the form of which is attached hereto as Exhibit A, executed by Borrower
to the order of FINOVA, (individually, a "Capital Expenditure Loan Note" and
collectively, the "Capital Expenditure Loan Notes"). Obligations owing under
the Capital Expenditure Loan Notes shall constitute Obligations and shall be
secured by all of the Collateral.
Provided that no Event of Default has occurred and is continuing,
FINOVA will make Capital Expenditure Loans to Borrower upon Borrower's
presentment to FINOVA, in form and substance reasonably acceptable to FINOVA,
of invoices, delivery and installation receipts, and other evidence required by
FINOVA to document the acquisition, delivery, installation and use by Borrower
in its business of the specific items of Equipment to be acquired and financed
hereunder. Upon approval by FINOVA, FINOVA will loan Borrower up to eighty
percent (80%) of the cost of the Equipment as reflected in the invoice
therefor; provided, however, the Capital Expenditure Loans shall be limited to
the cost of the purchased Equipment itself, and shall not include any ancillary
costs or expenses associated with the acquisition of such Equipment, such as,
but not limited to, sales tax, freight, duty and other transportation charges,
installation and delivery charges, brokerage commissions, maintenance costs,
and similar costs and expenses.
5. Waiver by FINOVA of Compliance with Capital Expenditure
Covenant. Borrower hereby acknowledges that, it is not in compliance with the
negative covenant relating to Capital Expenditures set forth in Section 14 of
the Loan Agreement and that such non-compliance constitutes an Event of Default
under the Loan Agreement. FINOVA hereby waives compliance by Borrower with such
Capital Expenditures covenant before October 21, 1997, and shall not exercise
its rights and remedies under the Loan Agreement or applicable law in respect
of such Event of Default; provided, however, that FINOVA shall be free to
exercise all of its rights and remedies under the Loan Agreement in the event
of Borrower's violation or breach after October 21, 1997, of such Capital
Expenditures covenant. The foregoing waiver is not a continuing waiver, and
FINOVA does not by this waiver amend the terms and provisions of the Loan
Agreement. Upon the occurrence of any Event of Default after the date hereof,
or in the event that FINOVA learns of any Event of Default which occurred prior
to the date hereof (other than a breach of the Capital Expenditures covenant
before October 21, 1997), FINOVA shall be free to exercise any and all of its
various rights and remedies under the Loan Agreement.
6. Effectiveness of this Amendment. FINOVA must have received
the following items, in form and content acceptable to FINOVA, before this
Amendment is effective and before FINOVA is required to extend any credit to
Borrower as provided for by this Amendment. The date on which all of the
following conditions have been satisfied is the "Closing Date".
(a) Amendment. This Amendment fully executed in a
sufficient number of counterparts for distribution to FINOVA and
Borrower.
4
<PAGE> 5
(b) Authorizations. Evidence that the execution,
delivery and performance by Borrower and each guarantor or
subordinating creditor of this Amendment and any instrument or
agreement required under this Amendment have been duly authorized.
(c) Representations and Warranties. The representations
and warranties set forth in the Loan Agreement must be true and
correct.
(d) Other Required Documentation. All other documents and
legal matters in connection with the transactions contemplated by this
Amendment shall have been delivered or executed or recorded and shall
be in form and substance satisfactory to FINOVA.
(e) Payment of Modification Fee. FINOVA shall have
received from Borrower a modification fee of Twelve Thousand Dollars
($12,000) for the processing and approval of this Amendment.
7. Representations and Warranties. The Borrower represents and
warrants as follows:
(a) Authority. The Borrower has the requisite corporate
power and authority to execute and deliver this Amendment, as
applicable, and to perform its obligations hereunder and under the Loan
Documents (as amended or modified hereby) to which it is a party. The
execution, delivery and performance by the Borrower of this Amendment,
and the performance by each Loan Party of each Loan Document (as
amended or modified hereby) to which it is a party have been duly
approved by all necessary corporate action of such Loan Party and no
other corporate proceedings on the part of such Loan Party are
necessary to consummate such transactions.
(b) Enforceability. This Amendment has been duly
executed and delivered by the Borrower. This Amendment and each Loan
Document (as amended or modified hereby) is the legal, valid and
binding obligation of each Loan Party hereto or thereto, enforceable
against such Loan Party in accordance with its terms, and is in full
force and effect.
(c) Representations and Warranties. The representations
and warranties contained in each Loan Document (other than any such
representations or warranties that, by their terms, are specifically
made as of a date other than the date hereof) are correct on and as of
the date hereof as though made on and as of the date hereof.
(d) No Default. No event has occurred and is continuing
that constitutes an Event of Default except as referenced in paragraph
5 hereof.
8. Choice of Law. The validity of this Amendment, its
construction, interpretation and enforcement, the rights of the parties
hereunder, shall be determined under, governed by, and construed in accordance
with the internal laws of the State of Arizona governing contracts only to be
performed in that State.
5
<PAGE> 6
9. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment by telefacsimile
shall be effective as delivery of a manually executed counterpart of this
Amendment.
10. Due Execution. The execution, delivery and performance of
this Amendment are within the power of Borrower, have been duly authorized by
all necessary corporate action, have received all necessary governmental
approval, if any, and do not contravene any law or any contractual restrictions
binding on Borrower.
11. Reference to and Effect on the Loan Documents.
(a) Upon and after the effectiveness of this Amendment,
each reference in the Loan Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Loan Agreement, and
each reference in the other Loan Documents to "the Loan Agreement",
"thereof" or words of like import referring to the Loan Agreement,
shall mean and be a reference to the Loan Agreement as modified and
amended hereby.
(b) Except as specifically amended above, the Loan
Agreement and all other Loan Documents, are and shall continue to be in
full force and effect and are hereby in all respects ratified and
confirmed and shall constitute the legal, valid, binding and
enforceable obligations of Borrower to FINOVA.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of FINOVA under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
(d) To the extent that any terms and conditions in any of
the Loan Documents shall contradict or be in conflict with any terms or
conditions of the Loan Agreement, after giving effect to this
Amendment, such terms and conditions are hereby deemed modified or
amended accordingly to reflect the terms and conditions of the Loan
Agreement as modified or amended hereby.
12. Ratification. Borrower hereby restates, ratifies and
reaffirms each and every term and condition set forth in the Loan Agreement, as
amended hereby, and the Loan Documents effective as of the date hereof.
13. Estoppel. To induce FINOVA to enter into this Amendment and
to continue to make advances to Borrower under the Loan Agreement, Borrower
hereby acknowledges and agrees that, after giving effect to this Amendment, as
of the date hereof, there exists no Event of Default except as referenced in
paragraph 5 hereof and no right of offset, defense, counterclaim or objection
in favor of Borrower as against FINOVA with respect to the Obligations.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have entered into this Amendment as of
the date first above written.
"BORROWER"
SOUTH TEXAS DRILLING & EXPLORATION, INC.
a Texas corporation
By: /s/ Wm. Stacy Locke
----------------------------------------
Title: President and CEO
-------------------------------------
"FINOVA"
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By: /s/ KENNETH SEPP
----------------------------------------
Title: Vice President
-------------------------------------
7
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,586,710
<SECURITIES> 0
<RECEIVABLES> 1,546,599
<ALLOWANCES> 140,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,107,329
<PP&E> 16,968,191
<DEPRECIATION> 8,573,771
<TOTAL-ASSETS> 12,501,749
<CURRENT-LIABILITIES> 2,988,422
<BONDS> 0
0
3,799,994
<COMMON> 617,196
<OTHER-SE> 2,399,218
<TOTAL-LIABILITY-AND-EQUITY> 12,501,749
<SALES> 310,630
<TOTAL-REVENUES> 17,090,601
<CGS> 175,983
<TOTAL-COSTS> 15,969,265
<OTHER-EXPENSES> 227,708
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 893,628
<INCOME-TAX> 62,688
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 722,374
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.11
</TABLE>
