<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, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 2-70145
SOUTH TEXAS DRILLING & EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2088619
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9310 Broadway, Bldg. I San Antonio, Texas 78217
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 210-828-7689
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.10 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant (computed by reference to the closing sales prices on June 1,
1999): $4,165,036
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of June 1, 1999.
Class: Common Stock Shares Outstanding: 6,100,784
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; and oil and gas exploration and
development activity for its own account. The Company's main focus continues to
be its land contract drilling services and in fiscal year 1999, the oil and gas
operations contributed an immaterial amount towards the Company's gross revenue.
In fiscal 1999, the Company sold the 19 wells it was operating at the time. 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 year ended March 31, 1997 in note 5
("Business Segments and Supplementary Earnings Information") of the Notes to
Consolidated Financial Statements, which note is incorporated herein by
reference. Fiscal 1999 and 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 7,000 feet to 12,000 feet. Of the
seven rigs, six are operational. The seventh rig was purchased in October, 1997,
and will be refurbished when market conditions improve. Of the remaining six
rigs, all were operated during fiscal 1999; however, Rig 9, the Company's
smallest rig, has been stacked in the Company's yard since February, 1999.
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 1999 is set forth in the following
table:
<TABLE>
<CAPTION>
Approximate Aggregate
Rig Depth Utilization
Number Type Capability During 1999
------ ---- ---------- -----------
<S> <C> <C> <C>
4 Skytop-Brewster N-46 11,500 62%
5 Gardner-Denver 500H 10,500 55%
6 Skytop-Brewster DHI-4610 10,500 64%
9 Weiss W-45 8,500 52%
11 Skytop-Brewster N-46 12,000 82%
14 Skytop-Brewster N-46 12,000 38%
</TABLE>
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<PAGE> 3
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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.
Contracts
All contracts under which the Company is presently conducting its land
drilling operations provide for rate charges determined on a daywork, footage or
turnkey basis, with rates dependent on the anticipated complexity of drilling
the well, on-site drilling conditions, the type of equipment to be used, the
Company's estimate of the risks involved, the duration of the work to be
performed and competitors' rates among other considerations. Daywork contracts
provide for a fixed charge per day for drilling the well, and the customer
generally bears the major portion of the related costs and risks of drilling.
With certain limitations, contracts entered into on a footage basis provide
for an agreed price per foot drilled regardless of the time required or the
problems involved in drilling the well. Related costs of drilling (i.e., rig
mobilization, labor, fuel usage and other costs) are included in the footage
charge. As compared to daywork contracts, footage contracts involve a higher
degree of risk to the Company.
Contracts entered into on a turnkey basis usually require the Company to
deliver to the operator a completed hole drilled to a specified depth. In
addition to all costs incurred when drilling on a footage basis, the Company is
usually also responsible for drilling fluids, water and other costs. As this
type of contract places a greater degree of risk on the Company than daywork or
footage contracts, the anticipated gross margin on this type of contract is
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, 1999, the Company drilled 53 wells with 46% of
contract drilling revenues attributable to daywork contracts, 2% to footage
contracts, and 52% to turnkey contracts. 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.
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. 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, 1999, the Company's largest customer,
Michael Petroleum Corporation, accounted for approximately 28% of contract
drilling revenues. No other customer accounted for more than 10% of the
Company's contract drilling revenues for 1999. The Company actively markets its
rigs and completed contracts for 26 customers in 1999 compared to 37 customers
in 1998 and 32 customers in 1997. 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.
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<PAGE> 4
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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,
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 events could cause serious damage to equipment,
personnel, property and/or the financial condition of the Company. In addition,
there is a risk that damage to the environment could result from some of the
Company's operations, particularly through oil spillage or extensive,
uncontrolled fires. While the Company believes that it is adequately insured
against normal and foreseeable risks in its operations in accordance with
industry standards, such insurance may not be adequate to protect the Company
against liability from all consequences of well disasters, extensive fire
damage, or damage to the environment. In the event that such insurance was not
adequate, the occurrence of a significant event could have a material adverse
effect on the Company's financial position and results of operations. Under
current conditions, the Company anticipates that its present insurance coverage
will be maintained, but no assurance can be given that insurance coverage will
continue to be available at rates considered reasonable or that certain types of
coverage will be available at any cost.
OIL AND GAS OPERATIONS AND PROPERTIES
The Company's oil and gas operations consisted 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. In fiscal 1997, the Company sold its interest in one well; and in fiscal
1999, it sold its interests in the remaining 19 wells for $285,000 cash. Due to
the Company's acquisitions of substantial amounts of drilling equipment in
fiscal 1997 and 1998 and the sale of the operated properties in fiscal 1999, the
Company's oil and gas operations no longer constitute a significant portion of
the Company's operations. Accordingly, separate disclosure of oil and gas
information for fiscal 1998 and 1999 has been omitted from this report.
Production Information
The Company was involved in oil and gas exploration, development and
production until its sale of operated properties in February, 1999. Oil and gas
production accounted for approximately 1.2% of the Company's total revenues in
the fiscal year ended March 31, 1999 compared with 1.8 % in the fiscal year
ended March 31, 1998 and 4.7% in the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
Year Ended
March 31, 1997
--------------
<S> <C>
Oil Production (in Bbls) (1) 10,007
Gas production (in Mcf) (1) 65,963
Revenues from production (1) $ 401,542
Production (lifting) costs (2) $ 177,318
Net Revenues $ 224,224
Average sales price:
Oil (per Bbl) $ 22
Gas (per Mcf) $ 3
Average production cost per unit (in
barrel equivalents) (3) $ 8
</TABLE>
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<PAGE> 5
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(1) Oil and gas production is shown net of royalties attributable to the
interests of others and is based upon production reports furnished to the
Company by the operators.
(2) "Production (lifting) costs" are costs directly related to the extraction of
oil or gas including production taxes, but do not include depreciation, or
amortization of exploration and development costs.
(3) Average production costs per unit were determined on the basis of six Mcf of
gas being equivalent to one barrel of oil.
GOVERNMENTAL REGULATION
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 materials such 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> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
PRINCIPAL CUSTOMERS
During the fiscal year ended March 31, 1999, Michael Petroleum Corporation
accounted for 28% of the Company's total drilling revenues. No other customer
accounted for 10% or more of the Company's total drilling revenue. The loss of
this customer could have a material adverse effect on the Company's business
resulting from rig down time while attempting to find other users of the
Company's rigs. See "Contract Drilling - Contracts" in this Item I.
EMPLOYEES
At May 13, 1999, the Company had 107 full-time employees, of whom 91 were
paid on an hourly basis and were engaged in operating the Company's drilling
rigs or in other operations. Of the total employees, nine were administrative
employees and seven were supervisory. None of the employees are represented by
any union or collective bargaining group, and there is no history of strikes,
slow downs, or other material labor disputes. Management believes that the
Company's relations with its employees are satisfactory.
ITEM 2. PROPERTIES
For purposes of property description, see "Contract Drilling - Drilling
Equipment" and "Oil and Gas Operations and Properties" contained in this Part I.
The Company's principal executive office in San Antonio, Texas is maintained in
office space which the Company purchased in September, 1995. The Company also
owns a six-acre tract in Kenedy, Texas utilized as an operating yard.
ITEM 3. LEGAL PROCEEDINGS
Subsequent to the end of fiscal 1999, the Company settled Civil Action No.
SA 98 CA 752 HG, South Texas Drilling & Exploration, Inc. v. Stonewall Surplus
Lines Insurance Company in the United States District Court for the Western
District of Texas, San Antonio Division. In this action, the Company asked the
Court to declare that it had no obligation to reimburse the attorneys' fees and
expenses incurred by Stonewall in a case previously settled by the Company.
Stonewall had counterclaimed to be reimbursed for attorneys' fees and expenses
paid with regard to that previously settled case. The Company has recorded the
settlement which did not have a material impact on the Company's financial
statements.
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> 7
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 for
the Company's common stock. The table presents the high and low stock price for
each quarter.
<TABLE>
<CAPTION>
OVER-THE-COUNTER
----------------
1999 Low High
------- ------
<S> <C> <C>
First Quarter $1.1250 1.6875
Second Quarter 0.6875 1.3125
Third Quarter 0.5625 1.6500
Fourth Quarter 0.3750 0.6875
<CAPTION>
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>
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 1, 1999, 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> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
March 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $12,908 17,091 8,503 7,500 5,494
Earnings before taxes, depreciation,
depletion and amortization and
other income (expense) 725 2,236 1,175 593 253
Earnings (loss) before income taxes (1,278) 894 597 3 (244)
Net earnings (loss) applicable to common
stockholders (1,612) 722 564 3 (244)
Earnings (loss) per common share-basic (0.27) 0.13 0.11 -- (0.05)
Earnings (loss) per common share-diluted (0.27) 0.11 0.10 -- (0.05)
Long-term debt, excluding
current installments 2,354 2,697 1,220 554 88
Shareholders' equity 5,322 6,816 2,054 1,477 1,541
Total assets 10,007 12,502 5,051 4,286 3,473
Capital expenditures 856 3,561 763 411 755
</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 1998,
the utilization rate for the Company's rigs was 76 percent. In fiscal 1999, the
utilization rate decreased to 59 percent. The actual number of drilling days
decreased to 1,289 in fiscal 1999 from 1,684 in fiscal 1998. Drilling rates
charged to customers on drilling contracts in fiscal 1999 decreased over those
charged in fiscal 1998. This decrease in drilling rates reflects the decreased
demand for drilling rigs during the period. At March 31, 1999, the Company's
current ratio was 1.24 compared to 1.37 at March 31, 1998. Working capital at
March 31, 1999 was $553,063 compared to $1,118,907 at March 31, 1998. This
decrease was due to the decreased drilling activity.
In November, 1998, the Company refinanced its outstanding debt consolidating
several notes into one note which matures in October, 2000. In addition, the
lender reduced the interest rate, redefined several items pertinent to the
calculation of covenants and waived past violations of the debt service coverage
covenant. According to the terms of the refinanced debt agreement, the loan
carries an interest rate of prime (7.75% at March 31, 1999) plus 1.75%; and is
payable in equal monthly installments of $30,655 in principal, based on a
seven-year amortization, plus interest. As part of the refinancing, the lender
also reduced the interest rate on the revolving line of credit secured by the
Company's trade account receivables to prime (7.75% at March 31, 1999) plus
1.75%. The revolving line of credit had no outstanding balance at March 31,
1999.
The ratio of trade accounts receivable, including contract drilling in
progress, to total revenue increased to 9.6% at the end of fiscal 1999 from 7.8%
at the end of fiscal 1998. This increase was the result of decreased total
revenue in fiscal 1999. The ratio of the Company's shareholders' equity in
relation to outstanding debt (vendor and bank notes payable) decreased in fiscal
1999. At March 31, 1998, the ratio of shareholders' equity to notes payable was
1 to .50. At March 31, 1999, the ratio was 1 to .53.
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<PAGE> 9
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
A factor affecting liquidity was problems on a turnkey contract in the
second quarter of fiscal 1999. 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 $460,000. Liquidity
also suffered due to the additional time spent on the well, thereby depriving
the Company of potential drilling revenue from other contracts.
Changes in Financial Condition
During fiscal 1999, the Company had a net decrease in property and
equipment of $1,234,000 before accumulated depreciation, depletion and
amortization. This net decrease was comprised of the disposition of $173,000 in
drilling equipment , the disposition of $1,834,000 in oil and gas properties,
the disposition of $111,000 in transportation equipment and the expenditure of
$884,000 for major repairs and the purchase of additional equipment. Of this
amount, $832,000 was attributable to the purchase or major repair of drilling
equipment, $26,000 to the purchase of transportation equipment, $25,000 to the
purchase or acquisition of oil and gas properties or interests before the sale
of all properties and $1,000 to the purchase of furniture and fixtures.
At March 31, 1999, the current portion of long-term debt was $444,000.
Of this amount, $428,000 was owed on drilling equipment and $16,000 on land and
buildings and improvements. Trade accounts payable at March 31, 1999 were
$1,249,000 compared to $1,650,000 at March 31, 1998. At March 31, 1999,
long-term debt was $2,354,000. Of this amount, $2,168,000 was owed on drilling
equipment and $186,000 on land and buildings and equipment.
Results of Operations
Rig utilization rates for the years ended March 31, 1999, 1998 and 1997
were 59%, 76% and 80%, respectively. In fiscal 1999, the Company completed 1,289
drilling days while in fiscal 1998, the Company completed 1,684 drilling days.
This was a 23% decrease in number of drilling days in fiscal 1999 compared to
fiscal 1998. This decrease reflects the decreased demand during the period for
drilling rigs.
During fiscal 1999, the Company's drilling margin decreased when
compared to fiscal 1998 and increased when compared to fiscal 1997. In fiscal
1999, the drilling margin was $1,447,037, while in fiscal 1998 and fiscal 1997
it was $2,689,711 and $1,366,798, respectively. The decrease in fiscal 1999 over
fiscal 1998 was principally the result of the 23% decrease in the number of
drilling days during fiscal 1999 and the decrease in drilling rates charged on
contracts. When compared to drilling revenue, the drilling margin was 11%, 16%
and 17% in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Several
significant factors had a negative impact on the drilling margin in fiscal 1999.
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 $460,000. The second factor
affecting the drilling margin in fiscal 1999 was the significantly reduced rig
utilization. The reduced utilization was caused by reduced rig demand. The third
factor affecting the drilling margin in fiscal 1999 was the decrease of more
than $1,500 per day on drilling rates charged on contracts.
The Company markets its rigs to a number of customers. In fiscal 1999,
the Company drilled for 26 different customers. In fiscal 1998, the Company
drilled for 37 different customers. Of the 26 customers in fiscal 1999, 14 were
customers the Company had not drilled for in fiscal 1998. These 14 customers
accounted for 37% of the Company's drilling revenue in fiscal 1999. In fiscal
1997, three customers accounted for 24% of total drilling revenue. In fiscal
1998, two customers accounted for 32% of total drilling revenue. In fiscal 1999,
one customer accounted for 28% of total drilling revenue. This customer was also
the top customer in fiscal 1998. The loss of this customer could have a material
adverse effect on the Company's business resulting from rig down time while
attempting to find other users of the rig concerned.
Oil and gas revenue for fiscal 1999 decreased by $145,448 from fiscal
1998. The decrease was primarily due to a 40% decrease in the average price per
barrel of oil, a 20% decrease in the average price per MCF of gas, a 24%
decrease in oil production and a 24% decrease in gas production. In February,
1999, the Company sold its interests in the 19 wells, which
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<PAGE> 10
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
was operating for $285,000 cash. No gain or loss was recognized on the
transaction because the properties, prior to the sale, had been written down to
the negotiated sale price pending closing of the transaction.
Depreciation, depletion and amortization expense in fiscal 1999
increased to $1,729,920 from $1,114,866 in fiscal 1998. Depreciation expense
increased to $1,468,607 in fiscal 1999 from $988,210 in fiscal 1998. This
increase was the result of equipment purchased in late fiscal 1998 and fiscal
1999. Depletion expense increased to $261,313 in fiscal 1999 compared to
$126,656 in fiscal 1998 due to the application of the ceiling limitation test.
In fiscal 1998, the Company was not subject to the ceiling test limitation as it
applies to oil and gas properties. Under this 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. Production decreased to 13,611 barrel
equivalents in fiscal 1999 from 17,915 barrel equivalents in fiscal 1998.
General and administrative expenses increased from $712,485 in fiscal
1998 to $803,632 in fiscal 1999. The primary components of the change in general
administrative expenses were legal and professional fees incurred in an
unsuccessful merger transaction and the accrual of a retirement package for the
former chairman of the Company who resigned in November, 1998. The amount of the
retirement package charged to expense in the current fiscal year, discounted due
to payments being made in the future, was approximately $107,000.
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 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 adoption of the provisions of SFAS No. 130 has not had an
impact on the manner of presentation of the Company's financial statements as
currently and previously reported because there are no items of other
comprehensive income.
-10-
<PAGE> 11
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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 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 adoption of SFAS No. 131 has not significantly impacted the manner
of presentation of the Company's financial statements as there are no segments
other than the contract drilling operations.
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 has addressed
its internal year 2000 issue with some modifications to existing programs.
Additionally, contact has been made with financial institutions, major vendors
and customers with regard to the year 2000 issue. The Company does not expect to
incur any material expenses relating to year 2000 compliance. If the Company
were to take no action in dealing with the potential problem, management
believes the Company would still be able to continue its operations. The Company
does not rely on any computer-driven equipment to perform its operations. If any
equipment were to be affected, it would be in the general and administrative
area, primarily accounting and document preparation. These activities could be
performed manually until the computer-related problems could be remedied.
Market Risk
The Company is subject to market risk exposure related to changes in
interest rates on some of its debt secured by drilling equipment, transportation
equipment, land and improvements and its revolving line of credit. The debt
secured by drilling equipment and transportation equipment has an interest rate
of prime (7.75% at March 31, 1999) plus 1.75%. The debt secured by land and
improvements has an interest rate of prime for this lender (8.75% at March 31,
1999) plus 0.5%. At March 31, 1999, the outstanding debt subject to a variable
interest rate was $2,489,258. An increase or decrease of 1% in the interest rate
would have a corresponding decrease or increase in net income of approximately
$25,000 annually. The revolving line of credit, which had no outstanding balance
at March 31, 1999 and therefore no exposure to a change in interest rates, has
an interest rate of prime (7.75% at March 31, 1999) plus 1.75%.
-11-
<PAGE> 12
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 accompanying consolidated balance sheets of South
Texas Drilling & Exploration, Inc. and subsidiaries as of March 31, 1999 and
1998 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,
1999. 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, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 1999, 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 LLP
San Antonio, Texas
June 9, 1999
-12-
<PAGE> 13
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
<TABLE>
<CAPTION>
March 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,411,493 2,586,710
Receivables:
Trade, net of allowance for
doubtful accounts of $0 in 1999
and $140,000 in 1998 1,021,948 372,731
Contract drilling in progress 221,000 965,677
Employees and officers 75,000 68,191
Prepaid expenses 154,591 114,020
----------- -----------
Total current assets 2,884,032 4,107,329
----------- -----------
Property and equipment, at cost:
Drilling rigs and equipment 14,443,187 13,784,597
Oil and gas properties, based on full cost
accounting method -- 1,808,832
Transportation, office, land and other 1,290,823 1,374,762
----------- -----------
15,734,010 16,968,191
Less accumulated depreciation, depletion and
amortization 8,611,165 8,573,771
----------- -----------
Net property and equipment 7,122,845 8,394,420
----------- -----------
$10,006,877 12,501,749
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
-13-
<PAGE> 14
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current liabilities:
Current installments of long-term
debt $ 443,565 $ 628,816
Note payable -- 60,000
Note payable to employee -- 17,198
Accounts payable 1,249,083 1,649,958
Accrued expenses:
Payroll and payroll taxes 113,137 279,416
Dividends payable 348,565 108,566
Other 176,619 244,468
------------ ------------
Total current liabilities 2,330,969 2,988,422
Long-term debt, less current installments
and note payable to employee 2,354,205 2,696,919
------------ ------------
Total liabilities 4,685,174 5,685,341
------------ ------------
Shareholders' equity:
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,
1999 and March 31, 1998 800,000 800,000
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, 1999
and March 31, 1998 2,999,994 2,999,994
Common stock, $.10 par value
Authorized 15,000,000 shares; issued
and outstanding 6,100,784 shares at
March 31, 1999 and 6,171,964 shares
at March 31, 1998 610,078 617,196
Additional paid-in capital 16,324,031 16,337,006
Accumulated deficit (15,412,400) (13,800,883)
------------ ------------
5,321,703 6,953,313
Less treasury stock, no shares at March 31, 1999
and 339,767 shares at March 31, 1998, at cost -- (136,905)
------------ ------------
Total shareholders' equity 5,321,703 6,816,408
------------ ------------
$ 10,006,877 12,501,749
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-14-
<PAGE> 15
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Contract drilling $ 12,659,391 $ 16,655,642 $ 7,968,191
Oil and gas 165,182 310,630 401,542
Administrative overhead and other 83,433 124,329 133,581
------------ ------------ ------------
Total operating revenues 12,908,006 17,090,601 8,503,314
------------ ------------ ------------
Costs and expenses:
Contract drilling 11,212,354 13,965,931 6,601,393
Oil and gas 167,417 175,983 177,318
Depreciation, depletion and
amortization 1,729,920 1,114,866 623,614
General and administrative 803,632 712,485 549,656
------------ ------------ ------------
Total operating costs and
expenses 13,913,323 15,969,265 7,951,981
------------ ------------ ------------
Earnings (loss) from operations (1,005,317) 1,121,336 551,333
------------ ------------ ------------
Other income (expense):
Interest expense (319,060) (306,279) (176,801)
Interest income 90,558 50,676 15,295
Gain (loss) on sale of assets (43,831) 27,895 6,862
Provision for litigation settlement -- -- 200,000
------------ ------------ ------------
Total other income (expense) (272,333) (227,708) 45,356
------------ ------------ ------------
Earnings (loss) before income taxes (1,277,650) 893,628 596,689
Income taxes 29,868 62,688 33,000
------------ ------------ ------------
Net earnings (loss) (1,307,518) 830,940 563,689
Preferred stock dividend requirement 303,999 108,566 --
------------ ------------ ------------
Net earnings (loss) applicable to common stockholders $ (1,611,517) 722,374 563,689
============ ============ ============
Earnings (loss) per common share-Basic $ (0.27) 0.13 0.11
============ ============ ============
Earnings (loss) per common share - Diluted $ (0.27) 0.11 0.10
============ ============ ============
Weighted average number of shares
outstanding-Basic 5,935,748 5,714,535 5,306,158
============ ============ ============
Weighted average number of shares
outstanding-Diluted 5,935,748 7,793,207 5,724,440
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE> 16
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Shares Amount Paid-in Accumulated Treasury Shareholders'
Common Preferred Common Preferred Capital Deficit Stock Equity
---------- --------- --------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of March 31, 1996 5,601,000 235,000 $ 560,100 235,000 15,899,227 (15,086,946) (129,905) 1,477,476
Acquisition of 20,000 shares -- -- -- -- -- -- (7,000) (7,000)
Issuance of common stock
as compensation 53,333 -- 5,333 -- 14,667 -- -- 20,000
Issuance of common stock
for exercise of option 1,000 -- 100 -- 275 -- -- 375
Net earnings -- -- -- -- -- 563,689 -- 563,689
---------- --------- --------- ---------- ----------- ----------- ----------- -------------
Balance as of March 31, 1997 5,655,333 235,000 565,533 235,000 15,914,169 (14,523,257) (136,905) 2,054,540
Issuance of common stock
as compensation 92,631 -- 9,263 -- 45,737 55,000
Issuance of common stock
for equipment 400,000 -- 40,000 -- 260,000 -- -- 300,000
Purchase of preferred stock (235,000) (235,000) 160,000 -- -- (75,000)
Issuance of new series A
preferred stock -- 400,000 -- 800,000 -- -- -- 800,000
Issuance of series B
preferred stock -- 184,615 -- 2,999,994 -- -- -- 2,999,994
Fee paid on preferred stock
transaction -- -- -- -- (55,000) -- -- (55,000)
Issuance of common stock
for exercise of options 24,000 -- 2,400 -- 12,100 -- -- 14,500
Net earnings -- -- -- -- -- 830,940 -- 830,940
Preferred stock dividend -- -- -- -- -- (108,566) -- (108,566)
---------- --------- --------- ---------- ----------- ----------- ----------- -------------
Balance as of March 31, 1998 6,171,964 584,615 617,196 3,799,994 16,337,006 (13,800,883) (136,905) 6,816,408
Issuance of common stock for
exercise of warrants 100,000 -- 10,000 -- 5,000 -- -- 15,000
Issuance of common stock for
exercise of options 168,587 -- 16,859 -- 84,953 -- -- 101,812
Cancellation of treasury shares (339,767) -- (33,977) -- (102,928) -- 136,905 --
Net loss -- -- -- -- -- (1,307,518) -- (1,307,518)
Preferred stock dividend -- -- -- -- -- (303,999) -- (303,999)
---------- --------- --------- ---------- ----------- ----------- ----------- -------------
Balance as of March 31, 1999 6,100,784 584,615 $ 610,078 3,799,994 16,324,031 (15,412,400) -- 5,321,703
========== ========= ========= ========== =========== =========== =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
-16-
<PAGE> 17
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(1,307,518) 830,940 563,689
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation, depletion and
amortization 1,729,920 1,114,866 623,614
Provision for litigation -- -- (200,000)
Stock issued to directors and
employees -- 4,583 --
Gain (loss) on sale of assets 43,492 (27,895) (6,862)
Changes in current assets and
liabilities:
Receivables 88,651 (170,760) (342,589)
Prepaid expenses (40,571) 48,193 (114,197)
Accounts payable (400,875) 502,976 (108,523)
Accrued expenses 207,690 206,036 36,928
----------- ----------- -----------
Net cash provided (used) by
operating activities $ (94,591) 2,508,939 452,060
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
-17-
<PAGE> 18
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable $ -- 171,236 1,603,724
Purchase of preferred stock -- (75,000) --
Purchase of treasury stock -- -- (7,000)
Proceeds from preferred stock -- 3,744,994 --
Payment of preferred dividend (64,000) -- --
Proceeds from exercise of options and warrants 90,375 14,500 375
Payments of debt (605,162) (888,257) (1,213,559)
----------- ----------- -----------
Net cash provided (used) in financing activities (578,787) (2,967,473) 383,540
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (856,204) (3,561,035) (762,946)
Proceeds from sale of property and
equipment 354,365 263,578 9,533
----------- ----------- -----------
Net cash (used) in investing activities (501,839) (3,297,457) (753,413)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,175,217) 2,178,955 82,187
Beginning cash and cash equivalents 2,586,710 407,755 325,568
----------- ----------- -----------
Ending cash and cash equivalents $ 1,411,493 2,586,710 407,755
=========== =========== ===========
Supplementary disclosure:
Interest paid $ 319,596 307,257 187,441
Notes payable issued for equipment and
oil and gas properties -- 1,438,458 116,075
Common stock issued for accrued compensation 26,437 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.
-18-
<PAGE> 19
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 until this year, engaged 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 were sold in fiscal 1999. The
consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. 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
The Company computes and presents earnings (loss) per common share in
accordance with FAS No. 128 "Earnings per Share." This standard requires
dual presentation of basic and diluted earnings (loss) per share on the
face of the statement of operations. For fiscal 1999, the effect of
securities such as warrants, options and preferred stock on loss per common
share was not included as it was antidilutive.
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, 1999
---------------------------------------
Weighted Avg.
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(1,307,518)
Less: Preferred stock dividends 303,999
-----------
Loss applicable to common stockholders-basic
and diluted $(1,611,517) 5,935,748 $ (0.27)
=========== ========= =========
</TABLE>
(Continued)
-19-
<PAGE> 20
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<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, 1998
---------------------------------------
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>
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 are disclosed in Note 4.
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, which include items such as insurance and licenses,
are routinely expensed in the normal course of business over the periods of
benefit.
(Continued)
-20-
<PAGE> 21
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Property and Equipment
Oil and gas producing activities are accounted for using the full cost
method. Under the full cost method, all costs incurred in the acquisition,
exploration and development of all oil and gas properties, including
surrendered and abandoned leaseholds, delay lease rentals and dry hole
costs, are capitalized. All costs related to production, general corporate
overhead and other similar activities are expensed in the period incurred.
Depletion of oil and gas properties is provided by the unit of
production method based on the Company's interest in the aggregated,
estimated recoverable reserves of all properties. Depletion includes a
ceiling limitation adjustment required under the full cost method of
accounting. The ceiling limitation adjustment is applicable when the
carrying value of oil and gas properties exceeds the discounted net present
worth of estimated future cash flows on those properties based on prices at
the end of the period.
Depreciation of drilling, transportation and other equipment is
provided using the straight-line method over estimated useful lives ranging
from three to twelve 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. In performing the review
for recoverability, the future cash flows expected to result from the use
of the asset and its eventual disposition are estimated. If the sum of the
expected future cash flows is less than the carrying amount of the asset,
an impairment loss is recognized.
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, cash included a
restricted account in the amount of $106,275.
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 has not had an impact on the manner of
presentation of its financial statements as currently and previously
reported because there are no items of other comprehensive income.
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 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 has not
significantly impacted the manner of presentation of its financial
statements.
(Continued)
-21-
<PAGE> 22
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,
------------------------
1999 1998
----------- ----------
<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
Note payable to seller, secured by transportation
equipment, due in monthly payments of $5,000 plus
interest at 8%. -- 60,000
Note payable to bank, secured by land and improvements,
due in monthly payments of $1,900 including interest at
the bank's prime rate (8.75% at March 31, 1999) plus
0.5%, due in September, 2005. 98,187 110,617
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. 103,512 106,805
Note payable to bank, secured by oil and gas properties,
interest at the bank's prime rate (8.75% at March 31, 1999)
plus 1%. -- 1,000
Note payable to seller, secured by drilling equipment, due in
monthly installments of $5,000 plus interest at 10%, due in
June, 2002. 205,000 255,000
Note payable, secured by drilling equipment, transportation
equipment, land and improvements, due in monthly payments
of $30,655 plus interest at prime (7.75% at March 31, 1999)
plus 1.75%, due October, 2000. (note a) 2,391,071 2,852,313
----------- ----------
2,797,770 3,402,933
Less current portion 443,565 706,014
----------- ----------
$ 2,354,205 2,696,919
=========== ==========
</TABLE>
Long-term debt maturing each year subsequent to March 31, 1999 is as
follows: 2000 - $443,565; 2001 - $2,101,640; 2002 - $80,262; 2003 -
$47,285; 2004 - $24,515 and thereafter - $100,503.
At March 31, 1999, the Company was in compliance with all 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
the end of each calendar quarter.
Note a: In November, 1998, the company refinanced its outstanding debt
consolidating several notes into one note which matures in October, 2000.
In addition, the lender reduced the interest rate, redefined several items
pertinent to the calculation of covenants and waived past violations of the
debt service coverage covenant. According to the terms of the refinanced
debt agreement, the loan carries an interest rate of prime (7.75% at March
31, 1999) plus 1.75%; and is payable
(Continued)
-22-
<PAGE> 23
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
in equal monthly installments of $30,655 in principal, based on a
seven-year amortization, plus interest. As part of the refinancing, the
lender also reduced the interest rate on the revolving line of credit
secured by the Company's trade account receivables to prime (7.75% at March
31, 1999) plus 1.75%. The revolving line of credit had no outstanding
balance at March 31, 1999.
(3) Income Taxes
In fiscal years 1999 and 1998, the expected tax benefit computed by
applying the Federal statutory rate of 34% to income (loss) before income
taxes differs from income tax expense (benefit) principally due to
valuation allowance, utilization and expiration of net operating losses,
and state income tax. The Company has also accrued a $29,868 liability for
state franchise taxes for fiscal 1999 and a $44,688 liability for fiscal
1998.
At March 31, 1999, for Federal income tax purposes the Company had a
net operating loss carryforward of approximately $13,135,000, investment
tax credit carryforwards of approximately $20,000 and minimum tax credit
carryforward of approximately $18,000 available to offset future taxable
income and taxes.
Unless utilized, net operating loss and investment tax credit
carryforwards will expire as follows:
<TABLE>
<CAPTION>
Net Investment
Operating Tax
Year Loss Credits
---- ----------- ----------
<S> <C> <C>
2000 $ 1,025,000 18,000
2001 10,161,000 2,000
2002 565,000 --
2003 83,000 --
2007 401,000 --
2013 900,000 --
----------- ----------
$13,135,000 20,000
=========== ==========
</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, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
March 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts $ -- 52,000
Investment tax credit and minimum
tax credit carryforwards 38,000 25,000
Property and equipment, principally due to
differences in depreciation 46,000 49,000
Net operating loss carryforwards 4,843,000 5,516,000
----------- ----------
Total gross deferred tax assets 4,927,000 5,642,000
Less valuation allowance (4,927,000) (5,493,000)
----------- ----------
Total deferred tax assets -- 149,000
----------- ----------
Deferred tax liabilities:
Oil and gas properties, principally due to
intangible drilling costs and differences
in depletion -- 149,000
----------- ----------
Total gross deferred tax liabilities -- 149,000
----------- ----------
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, 1998 was $5,493,000. The net change in total valuation
allowance for the
(Continued)
-23-
<PAGE> 24
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
year ended March 31, 1999 was a decrease of $566,000 due to the change in
the corresponding gross deferred tax assets and liabilities.
(4) Stock Options, Warrants and Stock Option Plan
In December, 1988, the Board of Directors issued certain directors,
officers and employees warrants to purchase 435,000 shares of the Company's
common stock at $.15 per share, of which four warrants for a total of
155,000 shares have been exercised as of March 31, 1999 and two warrants
for 245,000 shares have been canceled and four warrants for 35,000 shares
have expired. These warrants were exercisable upon issuance and expired
December 8, 1998.
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,
1999.
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, 1999, 100,000 shares have been purchased and 300,000
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, 82,500 of which have been exercised and
15,000 of which have been canceled as of March 31, 1999.
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 have been
canceled as of March 31, 1999.
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, 1999.
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, 6,087 of which have been exercised and 8,913 of which have been
canceled as of March 31, 1999.
On June 15, 1998, the Board of Directors issued certain directors
options to purchase 45,000 shares of the Company's common stock at $1.4375
per share. All these options were subsequently canceled. Therefore, none of
these options is outstanding as of March 31, 1999.
On March 12, 1999, the Board of Directors issued an option to Mr.
Little, Chairman and Chief Executive Officer, to purchase 100,000 shares of
the Company's common stock at $.75 per share. At March 31, 1999, 100,000
shares have been purchased under this option. Associated with the exercise
of this option was a $75,000 receivable from Mr. Little. This receivable
was collected subsequent to the balance sheet date.
On March 12, 1999, the Board of Directors issued an option to Mr.
Little to purchase 650,000 shares of the Company's common stock at $.75 per
share of which none have been exercised as of March 31, 1999. This option
expires on March 12, 2009.
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, 1999.
(Continued)
-24-
<PAGE> 25
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>
1999 1998 1997
--------------------------- -------------------------- --------------------------
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 1,353,500 $ .375-1.50 1,272,500 $ .375-.47 1,325,500 $ .375-.41
Granted 795,000 $ .75-1.438 165,000 $ 1.38-1.50 10,000 $ 0.470
Exercised (168,587) $ .375-1.38 (24,000) $ .375-1.38 (1,000) $ 0.375
Canceled (293,913) $ .375-1.438 (60,000) $ 0.375 (62,000) $ .375-.41
----------- ------------ ----------- ----------- ----------- -----------
Balance Outstanding
End of year 1,686,000 $ .375-1.50 1,353,500 $ .375-1.50 1,272,500 $ .375-.41
=========== ============ =========== =========== =========== ===========
Options Exercisable
End of year 854,000 681,500 296,500
=========== =========== ===========
</TABLE>
At March 31, 1999, the weighted average price of options outstanding
was $0.62 per share and the weighted average price of exercisable options
was $0.57 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>
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Net earnings-as reported $(1,307,518) 830,940 563,689
Net earnings-pro forma (1,372,858) 774,797 485,869
Net earnings per share-as reported-basic (0.27) 0.13 0.11
Net earnings per share-as reported-diluted (0.27) 0.11 0.10
Net earnings per share-pro forma-basic (0.28) 0.12 0.09
Net earnings per share-pro forma-diluted (0.28) 0.10 0.08
Weighted-average fair value of options,
granted during the year 0.31 0.63 0.23
</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 70%, 65% and 46%, weighted average risk-free interest rates
of 5.1%, 6.3% and 6.7% for grants in 1999, 1998 and 1997, 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)
-25-
<PAGE> 26
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
until fiscal 1999, 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 1999 and fiscal 1998 and constituted an
insignificant amount of its total assets, therefore, disclosure of fiscal
1999 and fiscal 1998 oil and gas information has been omitted. Information
concerning business segments and supplementary earnings information is as
follows:
<TABLE>
<CAPTION>
Year Ended
March 31, 1997
--------------
<S> <C>
Revenues:
Contract drilling $8,001,352
Oil and gas 501,962
----------
$8,503,314
==========
Earnings from operations:
Contract drilling $ 376,439
Oil and gas 174,894
----------
$ 551,333
==========
Identifiable assets at end of period:
Contract drilling $4,375,971
Oil and gas 675,313
----------
$5,051,284
==========
Depreciation, depletion and amortization:
Contract drilling $ 475,135
Oil and gas 148,479
----------
$ 623,614
==========
Capital expenditures:
Contract drilling $ 765,450
Oil and gas 5,000
----------
$ 770,450
==========
Maintenance and repairs $ 566,194
==========
</TABLE>
In fiscal 1999, only one customer accounted for 10% or more of
contract drilling revenues. The revenue attributed to that customer was
$3,555,284.
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.
(6) Commitments and Contingencies
Subsequent to the end of fiscal 1999, the Company settled Civil Action
No. SA 98 CA 752 HG, South Texas Drilling & Exploration, Inc. v. Stonewall
Surplus Lines Insurance Company in the United States District Court for the
Western District of Texas, San Antonio Division. In this action, the
Company asked the Court to declare that it had no obligation to reimburse
the attorneys' fees and expenses incurred by Stonewall in a case previously
settled by the Company. Stonewall had counterclaimed to be reimbursed for
attorneys' fees and expenses paid with regard to that previously settled
case. The Company has recorded the settlement which did not have a material
impact on the Company's financial statements.
(7) Fair Value of Financial Instruments
Cash and cash equivalents, trade receivables and payables and short-term
debt:
(Continued)
-26-
<PAGE> 27
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
(8) 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's exploration and production were conducted
in the United States. Due to the Company's acquisitions of substantial
amounts of drilling equipment in fiscal 1998 and the sale of the operated
oil and gas properties in fiscal 1999, the Company's oil and gas operations
no longer constitute a significant portion of the Company's assets.
Therefore, to the extent permitted, fiscal year 1999 and 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
--------------
<S> <C>
Proved properties $ 1,749,809
Unproved properties --
--------------
1,749,809
Accumulated depletion (1,161,309)
--------------
$ 588,500
==============
Depletion rate per unit of production (net
equivalent barrel, exclusive of ceiling
limitation adjustment) $ 7.07
==============
</TABLE>
During the period indicated in the preceding table, no internal costs were
capitalized. Internal costs incurred during this period were in the nature
of general corporate overhead. All costs related to production, general
corporate overhead and other similar activities are expensed in the period
incurred. Costs of site restoration and dismantlement and abandonment have
historically been equal to or less than revenue earned from salvage of the
well equipment. Such costs, net of the salvage revenue, are added to or
subtracted from the full cost of oil and gas properties. These costs have
been minimal in the years being reported.
(Continued)
-27-
<PAGE> 28
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth information with respect to quantities of
net proved oil and gas reserves, as estimated by an in-house petroleum
engineer, and changes in proved reserves. Estimates of reserves and
production performance are subjective and may change materially as actual
production information becomes available.
<TABLE>
<CAPTION>
Oil and
Condensate Gas
(Bbls) (Mcf)
---------- ----------
<S> <C> <C>
Estimated quantity, March 31, 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>
<TABLE>
<CAPTION>
Year Ended
March 31, 1997
------------------------
(Bbl) (Mcf)
-------- --------
<S> <C> <C>
Proved developed reserves:
Balance at beginning of year 60,420 302,960
======== ========
Balance at end of year 72,970 412,540
======== ========
</TABLE>
Costs incurred for property acquisition, exploration and development
activities are summarized below:
<TABLE>
<CAPTION>
Year Ended
March 31, 1997
--------------
<S> <C>
Property acquisition costs $ --
Development costs 5,000
--------------
$ 5,000
==============
</TABLE>
Results of operations for producing activities for the period
indicated were as follows:
<TABLE>
<CAPTION>
Year Ended
March 31, 1997
--------------
<S> <C>
Revenues $ 401,542
Production costs (177,318)
Depletion (148,479)
--------------
Results of operations from producing activities
(excluding corporate overhead and interest costs) $ 75,745
==============
</TABLE>
The following is a standardized measure of the discounted net future
cash flows and changes applicable to proved oil and gas reserves required
by FASB 69. The future cash flows are based on estimated oil and gas
reserves utilizing prices and costs in effect as of year end discounted at
10% per year and assuming continuation of existing economic conditions.
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for this
table is a reserve study, as prepared by an in-house petroleum engineer,
which contains estimates of quantities and rates of production of reserves.
Revisions of previous year estimates can have a significant impact on these
results. Also, exploration costs in one year may lead to significant
discoveries in later years and may significantly change previous estimates
of proved reserves and their valuation. Therefore, the standardized measure
of discounted future net cash flow is not necessarily a "best estimate" of
the fair value of the Company's proved oil and gas properties.
(Continued)
-28-
<PAGE> 29
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year Ended
March 31, 1997
--------------
<S> <C>
Estimated future cash flows $ 2,356,000
Estimated future production costs (1,364,000)
Estimated future development cost --
-----------
Estimated future net cash flows before
income taxes 992,000
Estimated future income taxes (66,000)
Ten percent discount for estimated timing
of future cash flows (214,000)
-----------
Standardized measure of discounted
estimated future net cash flows $ 712,000
===========
Changes in standardized measure of
discounted estimated future net cash flows:
Sales of oil and gas produced, net
of production costs $ (238,000)
Extensions, discoveries and other
additions, less related costs --
Changes in estimated future
development costs 1,041,000
Revisions of previous quantity estimates (1,743,000)
Net changes in prices (1,996,000)
Accretion of discount 367,000
Income taxes 1,022,000
Other (439,000)
-----------
Net increase (decrease) $(1,986,000)
===========
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
-29-
<PAGE> 30
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the current members of the Board of Directors of
the Company. In November, 1998, Mr. Robert R. Marmor, former Chairman of the
Board, resigned. His duties as Chairman were assumed by Michael E. Little who
also assumed the duties of Chief Executive Officer. Subsequent to Mr. Marmor's
resignation, Mr. Charles Tichenor and Mr. Al Dowell also resigned their
positions as Directors of the Company. They were not replaced on the Board.
MICHAEL E. LITTLE, 44, Chairman of the Board and Chief Executive Officer
since November, 1998. From March 1982 to October, 1998, Mr. Little served as
President, Chief Executive Officer and a director of Dawson Production Services,
Inc., and Chairman of the Board since 1983. From 1980 to 1982, he was Vice
President of Cambern Engineering, Inc., a company that provided drilling and
completion consulting services in the Texas Gulf Coast area. From 1976 to 1980,
he was employed by Chevron USA as a drilling foreman in Midland, Texas and as a
drilling engineer in New Orleans, Louisiana. Mr. Little received his Bachelor of
Science degree in Petroleum Engineering in 1978 from Texas Tech University.
WILLIAM D. HIBBETTS, 50, 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.
RODNEY R. LEWIS, 43, a Director since June, 1997. He has served as
President and Managing Partner of Lewis Petro Properties, Inc., Cerrito
Gathering Company and their affiliates since their inception in 1983. He has
been involved in the oil and gas industry in the Webb County area since 1978, at
which time he was employed by Stampede Energy in Ontario, Canada to supervise
field activities in Webb County. From 1979 until the formation of his operating
company in 1983, Mr. Lewis has been actively involved in Webb, Dimmit and
LaSalle counties building various entities into a vertically integrated group of
natural gas drilling, producing, developing and marketing companies.
RICHARD PHILLIPS, 68, a Director since June, 1997. From 1981 he has served
as President of San Patricio Corporation in Corpus Christi, Texas, an oil and
gas operator and three-rig drilling contractor which sold its drilling related
assets to the Company in 1997. Mr. Phillips was engaged in petroleum engineering
consulting from 1979 until 1981 when he founded San Patricio Corporation.
WM. STACY LOCKE, 43, a Director since May 1, 1995. Mr. Locke is President
and Chief Operating Officer since November, 1998. He was President and Chief
Executive Officer from May, 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.
CHRIS F. PARMA, 49, 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, 1999, to the chief executive officer and to the president of the
Company. No other officer was paid total compensation of $100,000 or more.
-30-
<PAGE> 31
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Summary Compensation Table
<TABLE>
<CAPTION>
Other Annual Restricted Warrants/ LTIP All Other
Name and Salary Bonus Compensation Stock Award Options/ SARs Pay-outs Compensation
Principal Position Year $ $ $ $ # $ $
------------------ ------ -------- ------- -------------- ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wm. Stacy Locke
President 1999 94,392 -- 993(1) -- -- --
CEO 1998 85,730 -- 1,231(1) 55,000(2) -- -- --
CEO 1997 71,750 -- 479(1) 52,083(3) -- -- --
Michael E. Little
CEO 1999 15,915 -- -- - -- -- --
</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.
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 once again received $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 $1,000 fee per quarter for outside directors for
the period from July, 1996 through March, 1997.
The following table summarizes as to the chief executive officer of
the Company, the number and terms of stock options granted during the year
ended March 31, 1999:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total Potential
Number of Options/ Realized Value at
Securities SARs Assumed Annual Rates of
Underlying Granted to Stock Price Appreciation
Options/ Employees Exercise or for Option Term
SARs in Fiscal Base Expiration -------------------------
Name Granted (#) Year Price ($/sh) Date 5% ($) 10%($)
---- ----------- ---------- ------------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Little 100,000 13% $0.75 04/01/1999 -- --
650,000 87% $0.75 03/12/2009 108,085 460,836
</TABLE>
-31-
<PAGE> 32
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
The following table shows as to the chief executive officer of the Company
the net value realized (market value less exercise price) with respect to stock
options exercisable/unexercisable during the last year:
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) Unexercisable Unexercisable
---- ---------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Michael E. Little 100,000 -- 0 / 650,000 0/0
</TABLE>
The following table summarizes as to each of the executive officers of the
Company, the number and terms of stock warrants granted during the year ended
March 31, 1999:
Stock Warrants Granted in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
% of Total
Warrants
Stock Granted to
Warrant Employees in Exercise Expiration
Name Grants Fiscal Year Price Date
- ---- ------ ------------- -------- ----------
<S> <C> <C> <C> <C>
</TABLE>
No stock warrants were granted in the current fiscal year.
The following table shows as to each of the executive officers of the
Company the net value of securities or cash realized (market value less exercise
price) with respect to stock warrants exercisable/unexercisable during the last
year:
Aggregated Stock Warrant Exercises in Last Fiscal Year
and Fiscal Year End Stock Warrant Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Stock Warrants Stock Warrants
Shares at FY-End at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---- ----------- -------- -------------- --------------
<S> <C> <C> <C> <C>
</TABLE>
In the current fiscal year, there were no stock warrant exercises by
executive officers nor were there any stock warrant values at year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 1, 1999,
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> 33
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 9.6%
1900 Post Oak Tower
5051 Westheimer
Houston, TX 77056
Common Robert R. Marmor 422,393(1) 5.4%
9310 Broadway, Bldg. I
San Antonio, TX 78217
Common William D. Hibbetts 141,612(2) 1.8%
13007 Blanche Coker
San Antonio, TX 78216
Common Michael E. Little 785,000(3) 10.1%
9310 Broadway, Bldg. 1
San Antonio, Texas 78217
Common Wm. Stacy Locke 1,157,965(4) 14.9%
9310 Broadway, Bldg. I
San Antonio, Texas 78217
Common Richard Phillips 390,144(5) 5.0%
5701 Agnes Street
Corpus Christi, Texas 78408
Common Rodney Lewis 109,865 1.4%
10101 Reunion Pl., Suite 250
San Antonio, Texas 78216
All officers and directors as a group (6 2,639,586(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 10,000 shares.
(3) Includes options issued to Mr. Little by the Board of Directors to purchase
650,000 shares.
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<PAGE> 34
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(4) Includes options issued to Mr. Locke to purchase 800,000 shares.
(5) 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.
(6) Includes options to purchase 1,665,000 shares issued to the officers and
directors by the Board of Directors.
(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 chairman and chief executive officer, Mr. Michael E.
Little, commenced employment by the Company on November 15, 1998,
under a two year employment agreement calling for a base salary of
$40,000 for the first year of the two year term and no less than
$40,000 for year two. Mr. Little was also granted an option to
purchase 100,000 shares of the Company's common stock at a price
of $0.75 per share. This option, which was scheduled to expire
April 1, 1999, was exercised in March, 1999. Mr. Little was
granted another option to purchase 650,000 shares of the Company's
common stock at a price of $0.75 per share. These options shall
vest at a rate of 20% per year for each 12-month period Mr. Little
is employed by the Company. All of Mr. Little's options would
become exercisable upon a change in control of the Company.
During the current fiscal year, the employment contract of Mr. Wm.
Stacy Locke was amended. Under the terms of the amendment, Mr.
Locke will be employed as President and Chief Operating Officer of
the Company through April 30, 2001. He will be paid a base salary
of $95,000 per year. The amended agreement also reduced the
number of shares of Company common stock subject to the incentive
stock option granted to Mr. Locke in May, 1995, from 1,200,000
shares to 960,000 shares.
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, 1999 and 1998.
Consolidated Statements of Operations for the years ended March
31, 1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended March
31, 1999, 1998 and 1997.
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> 35
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
3. The following exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
- (3) Articles of Incorporation and Bylaws of the Company (previously filed as an Exhibit to
the company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(a) Stock Purchase and Options Agreement dated December 28, 1981 between the Company
and Rowan Companies, Inc. ("Rowan") (previously filed as an Exhibit to the Company's
1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(b) Amended and Restated Agreement of Sale dated December 28, 1981 between the
Company and Rowan relating to acquisition of the Tender Rigs (previously filed as an
Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(c) Note Purchase and Warrant Agreement between the Company and Connecticut General
Life Insurance Company and Teachers Insurance and Annuity Association relating to
acquisition of the Tender Rigs (previously filed as an Exhibit to the Company's 1981
Annual Report on Form 10-K, File No. 2-70145).
- (10)(d) Amendment No. 2 to Warrant Agreement dated April 12, 1984 between the Company
and Connecticut General Life Insurance Company and Teachers Insurance and Annuity
Association (previously filed as an Exhibit to the Company's 1983 Annual Report on
Form 10-K, File No. 2-70145).
- (10)(e) Letter of Basic Terms dated April 12, 1984 between the Company and Connecticut
General Life Insurance Company and Teachers Insurance and Annuity Association
regarding the recapitalization or reorganization of South Texas Offshore Drilling
Company (previously filed as an Exhibit to the Company's 1983 Annual Report on Form
10-K, File No. 2-70145).
- (10)(f) Agreement dated April 12, 1984 among the Company and Connecticut General Life
Insurance Company and Teachers Insurance and Annuity Association of America
releasing certain obligations of the Company (previously filed as an Exhibit to the
Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(g) Loan Agreement dated December 28, 1981 between the Company and Frost National
Bank of San Antonio (previously filed as an Exhibit to the Company's 1983 Annual
Report on Form 10-K, File No. 2-70145).
- (10)(h) Second Amendment dated April 13, 1984 to the Loan Agreement dated December 28,
1981 between the Company and Frost National Bank of San Antonio (previously filed as
an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(I) Modification of General Guaranty dated April 13, 1984 between the Company and Frost
National Bank of San Antonio modifying the Company's guarantee of the Promissory
Note of South Texas/1200, Ltd. (previously filed as an Exhibit to the Company's 1983
Annual Report on Form 10-K, File No. 2-70145).
- (10)(j) The Company's 1983 Non-qualified Stock Option Plan (previously filed as an Exhibit to
the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(k) Letter from Hoy M. Booker deferring enforcement of legal remedies (previously filed as
an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(l) Letter from R. L. Kirkwood deferring enforcement of legal remedies (previously filed as
an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (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
</TABLE>
-35-
<PAGE> 36
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
National Bank of San Antonio (previously filed as an Exhibit to the Company's 1984
Annual Report on Form 10-K, File No. 2-70145).
- (10)(n) Agreement and Release dated January 3, 1986, between the Company and Hoy M.
Booker and Robert L. Kirkwood regarding the assignment of certain oil and gas
properties in satisfaction of certain promissory notes (previously filed as an
Exhibit to the Company's 1985 Annual Report on Form 10-K, File No. 2-70145).
- (10)(o) Debt Cancellation Agreement dated March 24, 1986 between the company and Frost
National Bank of San Antonio (previously filed as an Exhibit to the Company's 1985
Annual Report on Form 10-K, File No. 2-70145).
- (10)(p) Amendment #1 To Debt Cancellation Agreement dated March 24, 1986 between the
Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the
Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(q) Amendment #2 To Debt Cancellation Agreement dated March 24, 1986 between the
Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the
Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(r) Modification and Extension of Term Note dated April 16, 1986 between the Company
and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's
1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(s) Bill of Sale of Oil and Gas Drilling Rigs dated April 16, 1986 between the Company and
Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's
1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(t) Convertible subordinated note dated January 1, 1989 between the Company and Frost
Bank (previously filed as an Exhibit to the Company's 1989 Annual Report on Form
10-K, File No. 2-70145).
- (10)(u) Convertible subordinated note dated November 1, 1988 between the Company and Larry
Temple (previously filed as an Exhibit to the Company's 1989 Annual Report on Form
10-K, File No. 2-70145).
- (10)(v) Rig Lease and Refurbishing Agreement (Rig 11) dated September 21, 1990 between the
Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's
1991 Annual Report on Form 10-K, File No. 2-70145).
- (10)(w) Rig Lease and Refurbishing Agreement (Rig 12) dated September 21, 1990 between the
Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's
1991 Annual Report on Form 10-K, File No. 2-70145).
- (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).
</TABLE>
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<PAGE> 37
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
- (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).
- (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.
40 (10)(jj) Third Amendment to Loan and Security Agreement dated May 6, 1996 between the
Company and Finova capital Corporation dated November 1, 1998.
53 (10)(kk) Executive Employment Agreement dated November 16, 1998 between the Company and
Michael E. Little.
62 (10)(ll) First Amendment to Executive Employment Agreement dated May 1, 1995 between the
Company and Wm. Stacy Locke dated November 16, 1998.
- (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>
(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.
-37-
<PAGE> 38
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
SCHEDULE II
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, 1997:
Allowance for doubtful
receivables $ 140,000 -- -- 140,000
========= ======== ========== ========
Year ended March 31, 1998:
Allowance for doubtful
receivables $ 140,000 -- -- 140,000
========= ======== ========== ========
Year ended March 31, 1999:
Allowance for doubtful
receivables $ 140,000 -- 140,000 --
========= ======== ========== ========
</TABLE>
-38-
<PAGE> 39
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, South Texas Drilling & Exploration, Inc. has duly caused
this report to be signed on its behalf by the undersigned, this 24th day of
June, 1999 thereunto duly authorized.
By /s/ MICHAEL E. LITTLE
----------------------------------
Michael E. Little, 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/ Michael E. Little Chairman, Chief Executive June 24, 1999
- ----------------------- Officer and Director
Michael E. Little
/s/ Wm. Stacy Locke President, Chief June 24, 1999
- ----------------------- Operating Officer and
Wm. Stacy Locke Director
/s/ William D. Hibbetts Director June 24, 1999
- -----------------------
William D. Hibbetts
/s/ Chris F. Parma Vice President and June 24, 1999
- ----------------------- Chief Financial Officer
Chris F. Parma
</TABLE>
-39-
<PAGE> 40
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
40 (10)(jj) Third Amendment to Loan and Security Agreement dated May 6, 1996 between the
Company and Finova capital Corporation dated November 1, 1998.
53 (10)(kk) Executive Employment Agreement dated November 16, 1998 between the Company and
Michael E. Little.
62 (10)(ll) First Amendment to Executive Employment Agreement dated May 1, 1995 between the
Company and Wm. Stacy Locke dated November 16, 1998.
- (27) Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10(jj)
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"),
dated as of November 1, 1998, is entered into between FINOVA CAPITAL
CORPORATION, a Delaware corporation, ("FINOVA"), and SOUTH TEXAS DRILLING &
EXPLORATION, INC., a Texas corporation ("Borrower").
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 and that
certain Second Amendment to Loan and Security Agreement dated as of October 21,
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 (a) amend the Loan Agreement to (i)
extend the Initial Term to November 1, 2000, (ii) consolidate Term Loan A, Term
Loan B, Term Loan C and the outstanding amounts under the Capital Expenditure
Facility as of the date hereof under one promissory note and (iii) reduce the
interest rate for Receivable Loans and the Term Loans; and (b) reset and waive
compliance by Borrower with the financial covenant pertaining to minimum debt
service coverage ratio set forth in the Loan Agreement.
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 of the Loan Agreement.
(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
from the Subsequent Total Facility Amount upon amortization of
the outstanding principal amount of the Term Loan and the
aggregate amount borrowed under the Capital Expenditure
Facility and the aggregate amount of Receivable Loans
outstanding."
<PAGE> 2
(b) The definition set forth in the Schedule to the Loan
Agreement under the section entitled "INITIAL TOTAL FACILITY AMOUNT
(Section 1.1)" is hereby amended in its entirety as follows:
"INITIAL TOTAL FACILITY AMOUNT (SECTION 1.1):
One Million Seven Hundred Fifty Thousand Dollars
($1,750,000)"
(c) The definition set forth in the Schedule to the Loan
Agreement under the section entitled "SUBSEQUENT TOTAL FACILITY AMOUNT
(Section 1.1)" is hereby amended in its entirety as follows:
"SUBSEQUENT TOTAL FACILITY AMOUNT (SECTION 1.1):
Three Million Six Hundred Seventy Five Thousand
Dollars ($3,675,000)"
(d) 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: A term loan against the value of Borrower's
machinery and equipment in the original principal amount of
Two Million Five Hundred Seventy Five Thousand Dollars
($2,575,000) (the 'Term Loan') which shall be evidenced by and
payable in accordance with the terms of a Secured Promissory
Note by Borrower in favor of FINOVA, substantially in the form
of Exhibit A attached hereto (the 'Term Note')."
2. Amendment to "Interest Rate and Other Charges" Provisions of the
Loan Agreement. The first sentence of the paragraph entitled "Interest" under
the Section in the Schedule to the Loan Agreement entitled "INTEREST AND FEES
(Section 3.1)" is hereby amended in its entirety as follows:
"Interest. Borrower shall pay FINOVA interest on the daily
outstanding balance of Borrower's Receivable Loans account at a per
annum rate of one and three-quarters (1.75) 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')."
3. Amendment to Financial Covenant Provisions of the Loan Agreement.
The covenant set forth in the Schedule to the Loan Agreement under the heading
"Total Debt Service Coverage" in the Section entitled "FINANCIAL COVENANTS
(Section 13.14)" is hereby amended in its entirety to read as follows:
"Total Debt Service
Coverage: Borrower shall maintain Total Debt Service
Coverage of not less than 1.0 to 1.0."
2
<PAGE> 3
4. Amendment to Term; Termination Provisions of the Loan Agreement.
(a) The paragraph set forth in the Schedule to the Loan
Agreement under the section entitled "TERM (Section 16.1)" is hereby
amended in its entirety as follows:
"The initial term of this Agreement shall be from May
8, 1996 through November 1, 2000 (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."
(b) The paragraph set forth in the Schedule to the Loan
Agreement under the section entitled "TERMINATION FEE (Section 16.4)"
is hereby amended in its entirety as follows:
"The Termination Fee provided in Section 16.4 shall be in the
amount set forth below during the periods indicated:
(i) two percent (2%) of the Subsequent Total Facility Amount,
if such early termination occurs on or before November 1, 1999; or
(ii) one percent (1%) of the Subsequent Total Facility Amount,
if such early termination occurs after November 1, 1999."
5. 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 Note' has the meaning set forth in the
Schedule."
(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' has the meaning set forth in the
Schedule."
(c) The definition of "Total Debt Service Coverage" set forth
in Section 18 of the Loan Agreement is hereby amended in its entirety
as follows:
"'Total Debt Service Coverage' means the ratio of
Operating Cash Flow for the fiscal quarter then ended on March
31, June 30, September 30 or December 31 to the Total Debt
Service for the fiscal quarter then ended on the same date."
6. Consolidation of Term Loans. FINOVA and Borrower acknowledge and
agree that (a) the outstanding amounts as of the date hereof under Term Loan A,
Term Loan B, Term Loan C and the Capital Expenditure Facility are hereby
consolidated as the "Term Loan" under the Loan Agreement; (b) the Term Loan A
Amended and Restated Secured Promissory Note
3
<PAGE> 4
dated as of May 8, 1996 in the original principal amount of One Million Two
Hundred Fifty Thousand Dollars ($1,250,000), the Term Loan B Secured Promissory
Note dated as of June 18, 1997 in the original principal amount of One Million
Fifty Thousand Dollars ($1,050,000), the Term Loan C Secured Promissory Note
dated as of October 21, 1997 in the original principal amount of Six Hundred
Thousand Dollars ($600,000), the Secured Capital Expenditure Loan Note dated as
of October 22, 1997 in the original principal amount of Three Hundred Seventy
Thousand Seven Hundred Thirty Dollars ($370,730) and the Secured Capital
Expenditure Loan Note dated as of December 1, 1997 in the original principal
amount of One Hundred Forty Eight Thousand Seven Hundred Thirty Six Dollars
($148,736) are hereby replaced in their entirety with that certain Secured
Promissory Note in the original principal amount of Two Million Five Hundred
Seventy Five Thousand Dollars ($2,575,000) by Borrower in favor of FINOVA
substantially in the form of Exhibit A attached hereto; and (c) Exhibit A
attached hereto is hereby added to the Loan Agreement as Exhibit A thereto.
7. Waiver by FINOVA of Compliance with Financial Covenant. Borrower
hereby acknowledges (i) that it was not in compliance with the financial
covenant relating to the Total Debt Service Coverage ratio set forth in Section
13.14 of the Schedule to the Loan Agreement as of the months ending May 31,
1998, June 30, 1998, July 31, 1998, August 31, 1998 and September 30, 1998, (ii)
that it has advised FINOVA that it will not be in compliance with such financial
covenant as of the month ending October 31, 1998 and (iii) that such
non-compliance constitutes an Event of Default under the Loan Agreement. FINOVA
hereby waives compliance by Borrower with such Total Debt Service Coverage
financial covenant for such months, 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 31, 1998, of such Total Debt Service Coverage
financial 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 Total Debt Service Coverage financial
covenant for the months referenced above), FINOVA shall be free to exercise
any and all of its various rights and remedies under the Loan Agreement.
8. 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.
(a) Amendment. This Amendment fully executed in a sufficient
number of counterparts for distribution to FINOVA and Borrower.
(b) Term Note. The Term Note duly executed by Borrower in
favor of FINOVA.
(c) 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.
4
<PAGE> 5
(d) Representations and Warranties. The representations and
warranties set forth in the Loan Agreement must be true and correct.
(e) 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.
(f) Payment of Modification Fee. FINOVA shall have received
from Borrower a modification fee of Ten Thousand Dollars ($10,000) for
the processing and approval of this Amendment.
9. 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 7
hereof.
10. 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.
11. 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
5
<PAGE> 6
Amendment by telefacsimile shall be effective as delivery of a manually executed
counterpart of this Amendment.
12. 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.
13. 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.
14. 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.
15. 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
6 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/ [ILLEGIBLE]
--------------------------------
Title: President & CEO
-----------------------------
"FINOVA"
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By: /s/ [ILLEGIBLE]
--------------------------------
Title: VP
-----------------------------
7
<PAGE> 8
EXHIBIT A
SECURED PROMISSORY NOTE
$2,575,000 November 1, 1998
FOR VALUE RECEIVED, SOUTH TEXAS DRILLING & EXPLORATION, INC., a Texas
corporation ("Borrower"), promises to pay to the order of FINOVA CAPITAL
CORPORATION, a Delaware corporation ("FINOVA"), at its offices at 311 South
Wacker Drive, Suite 4400, Chicago, Illinois, or at such other place or places as
FINOVA may from time to time designate in writing, the principal sum of Two
Million Five Hundred Seventy Five Thousand Dollars ($2,575,000), plus interest
in the manner and upon the terms and conditions set forth below. This Secured
Promissory Note ("Note") is made pursuant to that certain Loan and Security
Agreement dated as of May 8, 1996, as amended, between FINOVA and Borrower (the
"Loan Agreement"), the provisions of which are incorporated herein by this
reference. Capitalized terms herein, unless otherwise noted, shall have the
meaning set forth in the Loan Agreement.
1. Schedule of Payments.
This Note shall be payable as follows:
(a) Twenty-four (24) equal successive monthly installments of
principal of Thirty Thousand Six Hundred Fifty Four and 76/100 Dollars
($30,654.76) each on the first day of each month, beginning November 1, 1998,
and continuing through and including October 1, 1998: and
(b) A final installment of One Million Eight Hundred Thirty
Nine Thousand Two Hundred Eighty Five and 80/100 Dollars ($1,839,285.80) on
November 1, 2000, together with accrued interest on the principal balance from
time to time remaining unpaid, payable monthly on the first day of each and
every month, beginning November 1, 1998.
2. Rate and Payment of Interest.
Interest shall be computed on the basis of a 360-day year for the
actual number of days elapsed, and shall be at the rate of one and
three-quarters (1.75) percentage points above the Prime Rate (as hereinafter
defined), computed on the basis of a 360-day year; provided, however, upon the
occurrence and during the continuance of an Event of Default (as hereinafter
defined), interest shall accrue on the outstanding principal balance of this
Note at a default rate (the "Default Rate") of three and three-quarters (3.75)
percentage points above the Prime Rate, and shall be payable on demand. "Prime
Rate" means, for any day, the rate of interest per annum (over a year of 360
days) announced by Citibank, N.A. (the "Bank"), from time to time, as its "base
rate" (or any successor thereto) in effect on such day. The Prime Rate is not
necessarily the lowest rate charged by the Bank. The applicable rate of interest
assessed hereunder will be increased or decreased from time to time hereafter in
an amount equal to any
<PAGE> 9
increase or decrease hereafter made by the Bank in the Prime Rate. A change in
the Prime Rate shall be effective on the first day following such change.
3. Prepayment.
Prepayment may be made under this Note in whole but not in part,
subject to the Termination Fee set forth in the Loan Agreement, provided that
such prepayment is preceded by not less than five (5) business days prior
written notice to FINOVA and accompanied by all accrued and unpaid interest and
the full amount of the applicable Termination Fee. Notwithstanding anything
herein to the contrary, in the event the Loan Agreement is terminated by
Borrower, by FINOVA or by any other person at any time, then the entire unpaid
principal balance of this Note, together with all accrued and unpaid interest
hereon and the full amount of the applicable Termination Fee, shall become
immediately due and payable in full on the effective date of such termination,
without presentment, notice or demand of any kind.
4. Events of Defaults.
The occurrence of any one of the following events shall constitute a
default by Borrower under this Note (hereinafter an "Event of Default"):
(a) if Borrower fails to pay to FINOVA an installment of
principal or interest hereunder when due;
(b) if Borrower fails to pay any of its Obligations (as
defined in the Loan Agreement) to FINOVA when due and payable or declared due
and payable;
(c) if Borrower fails or neglects to perform, keep or observe
any term, provision, covenant, warranty or representation contained in this Note
or the Loan Agreement (other than as referred to in Section 4(a) or Section
4(b)), which is required to be performed, kept or observed by Borrower or if a
default occurs under the Loan Agreement; or
(d) the occurrence of a default or an event of default under
any agreement, instrument or document heretofore, now or at any time or times
hereafter delivered to FINOVA by Borrower or by any guarantor of part or all of
Borrower's Obligations to FINOVA.
5. Remedies.
Upon the occurrence of any Event of Default hereunder, in addition to
FINOVA's right to charge interest on the Obligations at the Default Rate:
(a) at the option of FINOVA, the entire unpaid amount of all
of the Obligations, including without limitation the Termination Fee, shall
become immediately due and payable without demand, notice or legal process of
any kind;
(b) FINOVA may, at its option, without demand, notice or legal
process of any kind, exercise any and all rights and remedies granted to it by
the Loan Agreement or by any other agreement now or hereafter existing between
FINOVA and Borrower or between FINOVA and any guarantor of part or all of
Borrower's liabilities to FINOVA; and
2
<PAGE> 10
(c) FINOVA may at its option exercise from time to time any
other rights and remedies available to it under the Uniform Commercial Code or
other law of the State of Arizona.
The remedies of FINOVA as provided herein and in the Loan Agreement
shall be cumulative and concurrent, and may be pursued singularly, successively,
or together, at the sole discretion of FINOVA. No act of omission or commission
of FINOVA, including specifically any failure to exercise any right, remedy or
recourse, shall be deemed to be a waiver or release of the same, such waiver or
release to be effected only through a written document executed by FINOVA and
then only to the extent specifically recited therein. A waiver or release with
reference to any one event shall not be construed as continuing, as a bar to, or
as a waiver or release of, any subsequent right, remedy or recourse as to a
subsequent event.
6. General Provisions.
(a) Borrower warrants and represents to FINOVA that Borrower
has used and will continue to use the loans and advances represented by this
Note solely for proper business purposes, and consistent with all applicable
laws and statutes.
(b) This Note is secured by the Collateral described in the
Loan Agreement.
(c) Borrower waives presentment, demand and protest, notice of
protest, notice of presentment and all other notices and demands in connection
with the enforcement of FINOVA's rights hereunder, except as specifically
provided and called for by this Note, and hereby consents to, and waives notice
of, the release, addition, or substitution, with or without consideration, of
any collateral or of any person liable for payment of this Note. Any failure of
FINOVA to exercise any right available hereunder or otherwise shall not be
construed as a waiver of the right to exercise the same or as a waiver of any
other right at any other time.
(d) If this Note is not paid when due or upon the occurrence
of an Event of Default, Borrower further promises to pay all costs of
collection, foreclosure fees, attorneys fees and expert witness fees incurred by
FINOVA, whether or not suit is filed hereon, and the fees, costs and expenses as
provided in the Loan Agreement.
(e) The contracted for rate of interest of the loan
contemplated hereby, without limitation, shall consist of the following:
(i) the interest rate set forth on the Schedule,
calculated and applied to the principal balance of this Note in accordance with
the provisions of this Note;
(ii) interest after an Event of Default, calculated
and applied to the amounts due under this Note in accordance with the provisions
hereof; and
(iii) all Additional Sums (as herein defined), if
any.
Borrower agrees to pay an effective contracted for rate of interest which is the
sum of the above-referenced elements. All examination fees, attorneys fees,
expert witness fees, letter of credit fees, collateral monitoring fees, closing
fees, facility fees, Termination Fees, Minimum Interest
3
<PAGE> 11
Charges, other charges, goods, things in action or any other sums or things of
value paid or payable by Borrower (collectively, the "Additional Sums "),
whether pursuant to this Note, the Loan Agreement or any other documents or
instruments in any way pertaining to this lending transaction, or otherwise with
respect to this lending transaction, that under any applicable law may be deemed
to be interest with respect to this lending transaction, for the purpose of any
applicable law that may limit the maximum amount of interest to be charged with
respect to this lending transaction, shall be payable by Borrower as, and shall
be deemed to be, additional interest and for such purposes only, the agreed upon
and "contracted for rate of interest" of this lending transaction shall be
deemed to be increased by the rate of interest resulting from the inclusion of
the Additional Sums.
(f) It is the intent of the parties to comply with the usury
laws of the State of Arizona (the "Applicable Usury Law "). Accordingly, it is
agreed that notwithstanding any provisions to the contrary in this Agreement, or
in any of the documents securing payment hereof or otherwise relating hereto, in
no event shall this Agreement or such documents require the payment or permit
the collection of interest in excess of the maximum contract rate permitted by
the Applicable Usury Law (the "Maximum Interest Rate"). In the event:
(i) any such excess of interest otherwise would be
contracted for, charged or received from Borrower or otherwise in connection
with the loan evidenced hereby;
(ii) the maturity of the Obligations is accelerated
in whole or in part; or
(iii) all or part of the Obligations shall be
prepaid, so that under any of such circumstances the amount of interest
contracted for, shared or received in connection with the loan evidenced hereby,
would exceed the Maximum Interest Rate, then in any such event:
(A) the provisions of this Section 6(f)
shall govern and control;
(B) neither Borrower nor any other Person
now or hereafter liable for the payment of the Obligations shall be obligated to
pay the amount of such interest to the extent that it is in excess of the
Maximum Interest Rate;
(C) any such excess which may have been
collected shall be either applied as a credit against the then unpaid principal
amount of the Obligations or refunded to Borrower, at FINOVA's option; and
(D) the effective rate of interest shall be
automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law:
(I) all calculations of interest
which are made for the purpose of determining whether such rate would exceed the
Maximum Interest Rate shall be made by amortizing, prorating, allocating and
spreading during the period of the full stated term of the loan evidenced
hereby, all interest at any time contracted for, charged or received from
Borrower or otherwise in connection with such loan; and
4
<PAGE> 12
(II) in the event that the effective rate of
interest on the loan should at any time exceed the Maximum Interest Rate, such
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to
time, if and when the effective interest rate on the loan otherwise falls below
the Maximum Interest Rate, to the extent that interest paid to the date of
calculation does not exceed the Maximum Interest Rate, until the entire amount
of interest which would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law has been paid in full.
Borrower further agrees that should the Maximum Interest Rate be increased at
any time hereafter because of a change in the Applicable Usury Law, then to the
extent not prohibited by the Applicable Usury Law, such increases shall apply to
all indebtedness evidenced hereby regardless of when incurred; but, again to the
extent not prohibited by the Applicable Usury Law, should the Maximum Interest
Rate be decreased because of a change in the Applicable Usury Law, such
decreases shall not apply to the indebtedness evidenced hereby regardless of
when incurred.
(g) FINOVA may at any time transfer this Note and FINOVA's
rights in any or all collateral securing this Note, and FINOVA thereafter shall
be relieved from all liability with respect to such collateral arising after the
date of such transfer.
(h) This Note shall be binding upon Borrower and its legal
representatives, successors and assigns. Wherever possible, each provision of
this Note shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Note shall be prohibited by or
invalid under such law, such provision shall be severable, and be ineffective to
the extent of such prohibition or invalidity, without invalidating the remaining
provisions of this Note.
7. GOVERNING LAW; WAIVERS.
THIS NOTE HAS BEEN DELIVERED FOR ACCEPTANCE BY FINOVA IN PHOENIX,
ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ARIZONA, AS
THE SAME MAY FROM TIME TO TIME BE IN EFFECT, INCLUDING, WITHOUT LIMITATION, THE
UNIFORM COMMERCIAL CODE AS ADOPTED IN ARIZONA. BORROWER HEREBY:
(a) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED IN MARICOPA COUNTY, ARIZONA OVER ANY ACTION OR PROCEEDING
TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS NOTE;
(b) WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON
BORROWER, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MESSENGER,
CERTIFIED MAIL OR REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS SET FORTH
BELOW AND SERVICE SO MADE SHALL BE DEEMED
5
<PAGE> 13
TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE
SAME SHALL HAVE BEEN POSTED TO BORROWER'S ADDRESS;
(c) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT BORROWER MAY
EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF
ANY SUCH ACTION OR PROCEEDING;
(d) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY
SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW;
(e) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING
AGAINST FINOVA OR ANY OF FINOVA'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR
PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS NOTE IN ANY
COURT OTHER THAN ONE LOCATED IN MARICOPA COUNTY, ARIZONA; AND
(f) IRREVOCABLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION ARISING UNDER OR IN CONNECTION WITH THIS NOTE.
NOTHING IN THIS SECTION SHALL AFFECT OR IMPAIR FINOVA'S RIGHT TO SERVE
LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR FINOVA'S RIGHT TO BRING ANY
ACTION OR PROCEEDING AGAINST BORROWER OR BORROWER'S PROPERTY IN THE COURTS OF
ANY OTHER JURISDICTION.
IN WITNESS WHEREOF, this Note has been executed and delivered as of the
date first set forth above.
SOUTH TEXAS DRILLING & EXPLORATION,
INC., a Texas corporation
By: /s/ WM. STACY LOCKE
--------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
Federal Taxpayer Identification #: 74-2088619
Address: 9310 Broadway, Building I
San Antonio, Texas 78217
6
<PAGE> 1
EXHIBIT 10(kk)
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT ("AGREEMENT") is made and entered
into to be effective November 16, 1998 ("EFFECTIVE DATE"), by and between SOUTH
TEXAS DRILLING & EXPLORATION, INC. (together with its successors, "COMPANY") and
MICHAEL E. LITTLE ("EXECUTIVE").
RECITAL
The Company desires to employ Executive, and Executive desires to be
employed by the Company, pursuant to the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth in this Agreement, Executive and the Company agree as follows:
1. RESPONSIBILITIES:
a. Executive and Company acknowledge and agree that Executive shall be
employed as Chief Executive Officer and Chairman of the Board of the Company.
Executive agrees that he will devote his reasonable best efforts and such
portion of his time, attention and skill to the business of the Company as is
necessary to perform his obligations under this Agreement.
b. Executive acknowledges and agrees that, as Chief Executive Officer
and Chairman of the Board of the Company, he shall be responsible for actively
supervising the overall management of the Company and its subsidiaries, subject
to and in accordance with the authority and direction of the Board of Directors
of the Company ("BOARD OF DIRECTORS").
2. COMPENSATION: During his employment pursuant to this Agreement, the
Company agrees to provide Executive the following compensation:
a. BASE SALARY: Executive shall be paid an annual salary ("ANNUAL BASE
SALARY") of $40,000 for the first year of the Initial Term (as herein defined)
of Executive's employment with the Company. For the second year of the Initial
Term of Executive's employment, and for each year afterwards, Executive shall be
paid an Annual Base Salary which will be reasonably determined by Executive and
the Company; provided, however, that for each term after the Initial Term, the
Annual Base Salary shall be no less than $40,000. Such salary shall be subject
to withholding for the prescribed federal income tax, social security and other
items as required by law and for other items consistent with the Company's
policy with respect to health insurance and other benefit plans for similarly
situated employees.
b. BUSINESS EXPENSES: The Company shall reimburse all reasonable travel
and entertainment expenses incurred by Executive in connection with the
performance of his duties pursuant to this Agreement. Executive shall provide
the Company with a written accounting of
Executive Employment Agreement
Michael E. Little - Page 1
<PAGE> 2
his expenses on a form which satisfies applicable federal income tax reporting
or record keeping requirements. The Company shall also reimburse all reasonable
automobile expenses, as per the standard policy for executives of the Company,
as such policy may be amended from time to time by the Company.
c. DISCRETIONARY INCENTIVE BONUS: Executive may from time to time be
awarded a discretionary incentive bonus, as determined by the Board of
Directors of the Company, during the term of his employment under this
Agreement. This bonus shall be based on the financial performance of the
Company and shall be consistent with the incentive bonuses paid to other
executives of the Company.
d. EMPLOYEE BENEFITS: During the term of this Agreement, Executive shall
be entitled to receive and/or participate in such benefits, including vacation,
sick leave, health insurance, life insurance, disability insurance and
retirement benefits as are made available to other executives of the Company.
3. TERM AND TERMINATION: The duration of this Agreement shall be defined and
determined as follows:
a. INITIAL TERM: This Agreement shall continue in full force and effect
for two (2) years ("INITIAL TERM"), commencing on the Effective Date and
expiring on November 15, 2000, ("EXPIRATION DATE"), unless terminated prior to
the Expiration Date in accordance with this Agreement.
b. RENEWAL: Upon the Expiration Date, this Agreement shall renew
automatically for additional one-year terms unless either party notifies the
other party within thirty (30) days of the end of the Initial Term, or any
additional one-year term, of his or its intent to terminate the Agreement upon
the expiration of the then-current term.
c. TERMINATION: Upon termination of this Agreement for any reason, the
Company shall pay to Executive any and all Annual Base Salary and accrued
benefits due Executive through the date of termination. This Agreement may be
terminated as follows:
(1) DEATH: In the event of Executive's death, this Agreement shall
terminate immediately, without notice, on the date of Executive's death;
provided, however, that, in addition to the payment of any and all Annual Base
Salary and accrued benefits due Executive through the date of termination, the
Company shall also pay to Executive's estate the Annual Base Salary that
Executive would have earned for a period of ninety (90) days following the date
of death and a pro rata amount of the discretionary incentive bonus, if any,
paid to Executive for the prior contract year, in the time and manner in which
Executive would have been paid such compensation. In addition, Executive's
designated beneficiaries shall be entitled to receive any life insurance
benefits provided to Executive in accordance with the applicable plan documents
and/or insurance policies governing such benefits.
Executive Employment Agreement
Michael E. Little - Page 2
<PAGE> 3
(2) DISABILITY: In the event Executive becomes physically or
mentally disabled so that he is unable to perform the essential functions of
his position, with reasonable accommodation, for a period of one hundred eighty
(180) consecutive days, this Agreement shall terminate immediately, without
notice.
(3) WITH GOOD CAUSE:
(a) This Agreement may be terminated by the Company providing
thirty (30) days prior written notice to Executive that the Company is
terminating the Agreement with good cause ("WITH GOOD CAUSE") at any time during
his employment. In the event that With Good Cause exists for terminating this
Agreement, the Company may elect to provide Executive with thirty (30) days pay
in lieu of notice, in addition to any other amounts due under this Agreement.
(b) For purposes of this Agreement, With Good Cause shall be
defined as follows: (i) conviction of any act or omission constituting fraud
under the law of the State of Texas; (ii) conviction of, or a plea of nolo
contendere to, a felony; (iii) embezzlement or theft of Company property or
funds; or (iv) failure of Executive to follow the instructions of the Board of
Directors as approved by a majority of the Board members at a meeting of the
Board of Directors.
(c) In the event the Company believes With Good Cause exists
for terminating this Agreement pursuant to this section, the Company shall be
required to first give Executive written notice of the acts or omissions
constituting With Good Cause, and no notice of termination With Good Cause shall
be communicated by the Company unless and until Executive fails to cure such
acts or omissions (to the extent such acts or omissions can be cured) within
fifteen (15) days after receipt of the notice stating the acts or omissions
constituting With Good Cause.
(d) In the event the Company communicates a notice stating
Executive's acts or omissions constituting With Good Cause pursuant to this
section, Executive shall have the right to a hearing before the Board of
Directors, within fifteen (15) days after the date the notice stating
Executive's acts or omissions constituting With Good Cause is received, to
contest the alleged With Good Cause stated in the notice.
(4) WITHOUT GOOD CAUSE:
(a) This Agreement shall terminate by the Company providing
thirty (30) days written notice to Executive that the Company is terminating
the Agreement without good cause ("WITHOUT GOOD CAUSE"), at any time during his
employment; provided, however, that the Company shall be required to pay
severance in accordance with the severance provisions in Section 4.
(b) Any termination of this Agreement by the company which is
not With Good Cause, or which does not result from the death of Executive,
or the disability of
Executive Employment Agreement
Michael E. Little - Page 3
<PAGE> 4
Executive, shall be deemed to be a termination Without Good Cause. Furthermore,
in the event that the Company communicates a notice of termination With Good
Cause, and a third party finder of fact determine that no Good Cause exists or
existed for the notice of termination With Good Cause to be communicated by the
Company to Executive, then such notice shall be deemed to have been a
communication of a notice of termination Without Good Cause, as appropriate,
for all purposes under this Agreement.
(5) RESIGNATION: Executive shall be entitled to terminate this
Agreement by providing the Company with a written notice of resignation at
least thirty (30) days prior to his intended resignation date, subject to the
following provisions:
(a) WITH GOOD REASON: Executive shall have the right to resign
with good reason ("WITH GOOD REASON"). With Good Reason shall be defined as,
(i) the Company's failure in any material respect to perform any provision of
this Agreement; (ii) any material changes in the duties and responsibilities of
Executive under this Agreement without the written consent of Executive; (iii)
the hiring or promotion by the Company of another executive employee to a
position of equal or greater responsibility of the management of the Company
without the written consent of Executive; (iv) the Company's directing
Executive to work at a location other than San Antonio, Texas; (v) after a
Change of Control (as defined in EXHIBIT A), any material change which, in the
sole but reasonable discretion of Executive, impacts detrimentally upon
Executive's position within the Company.
(b) WITHOUT GOOD REASON: Any resignation by Executive for any
reason other than With Good Reason, as defined above, shall be deemed to be a
resignation without good reason ("WITHOUT GOOD REASON").
4. SEVERANCE: Upon termination by the Company Without Good Cause, or upon a
termination by Executive With Good Reason, the Company shall pay to Executive,
as severance pay ("SEVERANCE PAY"), the greater of (i) $40,000, and (ii) the
total remaining Annual Base Salary due Executive for the entire remaining term
of the Initial Term of the Agreement. By way of example only, if the Company
terminated Executive Without Good Cause on December 16, 1998, the Company
would pay Executive $76,666.67 as Severance Pay. The Severance Pay shall be
paid to Executive in one lump sum, minus any required statutory payroll
deductions, within five (5) days of termination of Executive's employment
relationship with the Company. The Severance Pay specified in this section
shall be in addition to the payment of any and all unpaid Annual Base Salary
and accrued benefits due Executive through the date of termination.
5. STOCK OPTIONS: The Company hereby grants Executive the right to purchase
100,000 shares of common stock of the Company, at a purchase price of $0.75 per
share. Executive's right to purchase this 100,000 shares of common stock shall
automatically expire on April 1, 1999. Executive shall have the right to
purchase some or all of such 100,000 shares of common stock, in Executive's
sole discretion. The Company shall also grant Executive options pursuant to an
incentive stock option plan maintained by the Company to purchase 650,000 shares
of the Company's common stock ("OPTION STOCK") at $0.75 per share. Executive's
options shall vest at a rate of 20% per year (i.e., 130,000 shares per year)
for each 12-month period Executive is
Executive Employment Agreement
Michael E. Little - Page 4
<PAGE> 5
employed by the Company. Upon resignation for Good Reason by Executive or
termination Without Good Cause by the Company, all of Executive's options shall
vest automatically upon the date of termination of Executive's employment. Upon
resignation without Good Reason by Executive or termination With Cause by the
Company, all of Executive's now vested options shall terminate automatically
upon the date of termination of Executive's employment. Furthermore, the
parties acknowledge that Executive has agreed to assume the position of Chief
Executive Officer and Chairman of the Board and to enter into this Agreement
based upon his confidence in the current shareholders of the Company and the
support of the Board of Directors for the development of a new strategy for the
Company. Accordingly, if the Company should undergo a Change of Control, all
stock options then held by Executive for the purchase of equity securities of
the Company shall immediately become vested, effective on the date of the
Change of Control. Executive shall have the right to exercise any option to
purchase part of the Option Stock granted to him by the Company after such
option has vested in accordance with the vesting provisions set forth in the
option agreement reflecting the grant of options by the Company.
6. SUCCESSORS AND ASSIGNS: The parties acknowledge and agree that this
Agreement may not be assigned by either party without the written consent of
the other party. In the event of a Change of Control, the Company's obligations
under this Agreement shall be assumed by the person or entity that survives
such transaction, or by the person purchasing assets constituting such Change
of Control. In the event of Executive's death, this Agreement shall be
enforceable by Executive's estate, executors or legal representatives, but
only to the extent that such persons may collect any compensation (including
through the exercise of stock options) due to Executive under this Agreement.
7. INDEMNIFICATION: During and after the employment of Executive pursuant to
this Agreement, the Company shall indemnify Executive against all judgments,
penalties, fines, assessments, losses, amounts paid in settlement and
reasonable expenses (including, but not limited to, attorneys' fees) for which
Executive may become liable as a result of his performance of his duties and
responsibilities pursuant to this Agreement, to the fullest extent permissible
under the laws of the State of Texas. This provision shall be in addition to
any other provisions of the Company's Articles of Incorporation, Bylaws or
Indemnification Agreements providing for indemnification to Executive.
8. RULES OF CONSTRUCTION: The following provisions shall govern the
interpretation and enforcement of this Agreement:
a. SEVERABILITY: The parties acknowledge and agree that each provision
of this Agreement shall be enforceable independently of every other provision.
Furthermore, the parties acknowledge and agree that, in the event any provision
of this Agreement is determined to be unenforceable for any reason, the
remaining covenants and/or provisions will remain effective, binding and
enforceable.
b. WAIVER: The parties acknowledge and agree that the failure of either
to enforce any provision of this Agreement shall not constitute a waiver of
that particular provision, or of any other provisions, of this Agreement.
Executive Employment Agreement
Michael E. Little - Page 5
<PAGE> 6
c. CHOICE OF LAW/VENUE: The parties acknowledge and agree that except
as specifically provided otherwise in this Agreement, the law of Texas will
govern the validity, interpretation and effect of this Agreement and any other
dispute relating to, or arising out of, the employment relationship between the
Company and Executive. Proper venue for any litigation or arbitration concerning
this Agreement shall be in San Antonio, Texas.
d. MODIFICATION: The parties acknowledge and agree that this Agreement
constitutes the complete and entire agreement between the parties; that the
parties have executed this Agreement based upon the express terms and provisions
set forth herein; that the parties have not relied on any representations, oral
or written, which are not set forth in this Agreement; that no previous
agreement, either oral or written, shall have any effect on the terms or
provisions of this Agreement; and that all previous agreements, either oral or
written, are expressly superseded and revoked by this Agreement. In addition,
the parties acknowledge and agree that the provisions of this Agreement may not
be modified by any subsequent agreement unless the modifying agreement (i) is in
writing (ii) contains an express provision referencing this Agreement (iii) is
signed by Executive and (iv) is approved by the Board of Directors.
e. EXECUTION: The parties agree that this Agreement may be executed in
multiple counterparts, each of which shall be deemed an original for all
purposes.
f. HEADINGS: The parties agree that the subject headings set forth at
the beginning of each section in this Agreement are provided for ease of
reference only, and shall not be utilized for any purpose in connection with the
construction, interpretation or enforcement of this Agreement.
9. LEGAL CONSULTATION: The parties acknowledge and agree that both parties have
been accorded a reasonable opportunity to review this Agreement with legal
counsel prior to executing the agreement.
10. NOTICES: The parties acknowledge and agree that any and all Notices
required to be delivered under the terms of this Agreement shall be forwarded
by personal delivery or certified U.S. mail. Notices shall be deemed to be
communicated and effective on the day of receipt. Such Notices shall be
addressed to each party as follows:
MICHAEL E. LITTLE
/s/ MICHAEL E. LITTLE
---------------------
---------------------
SOUTH TEXAS DRILLING & EXPLORATION, INC.
9310 Broadway Building I
San Antonio, Texas 78217
Executive Employment Agreement
Michael E. Little - Page 6
<PAGE> 7
With a copy to:
J. Rowland Cook, Esq.
Jenkens & Gilchrist,
A Professional Corporation
2200 One American Center
600 Congress Avenue
Austin, Texas 78701
Any party hereto may change its or his address for the purpose of receiving
notices and other communications as herein provided by a written notice given in
the manner aforesaid to the other party or parties hereto.
EXECUTED on this 31st day of March, 1999, to be effective as of the
16th day of November, 1998.
Dated: March 31, 1999 MICHAEL E. LITTLE
/s/ MICHAEL E. LITTLE
------------------------------------
DATED: March 31, 1999 SOUTH TEXAS DRILLING & EXPLORATION,
INC.
/s/ WILLIAM D. HIBBETTS
------------------------------------
William D. Hibbetts
/s/ RODNEY R. LEWIS
------------------------------------
Rodney R. Lewis
/s/ WM. STACY LOCKE
------------------------------------
Wm. Stacy Locke
/s/ RICHARD PHILLIPS
------------------------------------
Richard Phillips
Executive Employment Agreement
Michael E. Little - Page 7
<PAGE> 8
EXHIBIT A
DEFINITION OF CHANGE OF CONTROL
A Change of Control shall mean:
(1) a change in the ownership of the capital stock of the Company
where a corporation, person or group acting in concert ("PERSON") as described
in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended
("EXCHANGE ACT"), holds or acquires, directly or indirectly, beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of a number of shares of capital stock of the Company which constitutes 50% or
more of the combined voting power of the Company's then outstanding capital
stock then entitled to vote generally in the election of directors. If a Person
were the beneficial owner of 50% or more of the combined voting power of the
Company's then outstanding securities as of the Effective Date and such Person
thereafter accumulates more than 5% of additional voting power, a Change of
Control of the Company shall be deemed to have occurred, notwithstanding
anything in this Exhibit to the contrary; or
(2) the persons who were members of the Board of Directors
immediately prior to a tender offer, exchange offer, contested election or any
combination of the foregoing, cease to constitute a majority of the Board of
Directors of the Company; or
(3) a dissolution of the Company, or the adoption by the Company of
a plan of liquidation, or the adoption by the Company of a merger,
consolidation or reorganization involving the Company in which the Company is
not the surviving entity, or a sale of all or substantially all of the assets
of the Company (for purposes of this Agreement, a sale of all or substantially
all of the assets of the Company shall be deemed to occur if any Person
acquires, or during the 12-month period ending on the date of the most recent
acquisition by such Person, has acquired, gross assets of the Company that have
an aggregate fair market value equal to 50% or more of the fair market value of
all of the gross assets of the Company immediately prior to such acquisition or
acquisitions); or
(4) a tender offer or exchange offer is made by any Person which, if
successfully completed, would result in such Person beneficially owning (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) either 50% or
more of the Company's outstanding shares of Common Stock or shares of capital
stock having 50% or more of the combined voting power of the Company's then
outstanding capital stock (other than an offer made by the Company), and
sufficient shares are acquired under the offer to cause such person to own 50%
or more of the voting power; or
(5) a change in control is reported or is required to be reported by
the Company in response to either Item 6(e) of Schedule 14A of Regulations 14A
promulgated under the Exchange Act or Item 1 of Form 8-K promulgated under the
Exchange Act; or
Executive Employment Agreement
Michael E. Little - Page 8
<PAGE> 9
(6) during any period of two consecutive years, individuals
who, at the beginning of such period constituted the entire Board of Directors
of the Company, cease for any reason (other than death) to constitute a majority
of the directors, unless the election, or the nomination for election, by the
Company's stockholders, of each new director was approved by a vote of at least
a majority of the directors then still in office who were directors at the
beginning of the period.
A Change of Control shall include any other transactions or series of
related transactions occurring which have substantially the same effect as the
transactions specified in any of the preceding clauses of Section 4(a)(1)-(6).
However, a Change of Control shall not be deemed to occur if a Person becomes
the beneficial owner of the applicable percentage or more (as referenced above)
of the combined voting power of the Company's then outstanding securities solely
by reason of the Company's redemption or repurchase of securities; but further
acquisitions by such Person that cause such Person to be the beneficial owner of
the applicable percentage or more (as referenced above) of the combined voting
power of the Company's then outstanding securities shall be deemed a Change of
Control.
Notwithstanding any other provision of this definition of "Change of
Control," a Change of Control shall not be deemed to have occurred as a result
of Executive's acceptance of one or more of the signed resignation letters of
the members of the Board of Directors in Executive's possession as of the date
of execution of this Agreement by Executive.
Executive Employment Agreement
Michael E. Little - Page 9
<PAGE> 1
EXHIBIT 10(ll)
FIRST AMENDMENT TO EXECUTIVE
EMPLOYMENT AGREEMENT
This First Amendment to Executive Employment Agreement (the "Amendment"),
dated effective as of the 16th day of November, 1998, is between South Texas
Drilling & Exploration, Inc., a Texas corporation (the "Company"), and William
Stacy Locke (the "Employee").
RECITALS:
The Employee is currently employed by the Company pursuant to an Executive
Employment Agreement (the "Employment Agreement") dated effective as of the 25
day of April 1995.
The Company and the Employee desire to modify and amend certain terms and
provisions of the Employment Agreement and to approve, ratify and confirm the
Employment Agreement, as modified and amended by this Amendment.
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein set forth, the parties hereto have agreed, and do hereby agree as
follows:
A. Section 1 of the Employment Agreement is hereby modified and amended as
necessary to provide that:
1. The Company employs, as of the date of this Amendment, and will employ
Employee in the business of the Company as its President and Chief Operating
Officer, and the Employee works, as of the date of this Amendment, and will
continue to work for the Company as its President and Chief Operating Officer,
for the period beginning as of November 16, 1998 and ending April 30, 2001, and
thereafter from year to year (renewing automatically upon expiration of the
employment term ending April 30, 2001 and upon expiration of each one year
employment term thereafter), unless and until such employment shall have been
earlier terminated as provided in the Employment Agreement, as amended by this
Amendment; and
2. During his employment by the Company, the Employee shall perform such
duties as shall from time to time be delegated or assigned to him by the Chief
Executive Officer or Board of Directors of the Company.
B. Section 3 of the Employment Agreement, as it pertains to annual base salary,
is hereby modified and amended as necessary to provide that:
1. The Company, as of the date of this Amendment, pays and will continue
to pay Employee an annual base salary of $95,000 for the year commencing May 1,
1998 and ending April 30, 1999;
1
<PAGE> 2
2. The Company will pay Employee a minimum annual base salary of $95,000 in
each of years one and two of the two year period commencing May 1, 1999 and
ending April 30, 2001;
3. Employee's annual base salary shall be payable in cash in accordance
with the Company's customary payroll practices; and
4. After April 30, 2001, Employee's annual base salary shall be as
determined by the Board of Directors of the Company but shall in no event be
less than $95,000.
C. Section 6 of the Employment Agreement is hereby modified and amended to
amend Sections 6(a)(i), 6(a)(ii), 6(a)(iii) and 6(a)(iv) to read as follows:
(i) repeated material willful misconduct of Employee in the performance of
Employee's duties and responsibilities to the Company;
(ii) embezzlement or theft of Company property or funds;
(iii) conviction of Employee of any felony offense during the term of this
Agreement; or
(iv) conviction of any act or omission constituting fraud under the laws of
the State of Texas.
D. Section 6 of the Employment Agreement is hereby modified and amended to
delete Section 6(b) in its entirety and to add a new Section 6(b) to read as
follows:
(b) Upon termination of this Agreement for any reason, the Company
shall pay to Employee any and all unpaid annual base salary and accrued
benefits due Employee through the date of termination.
Upon termination of the Employee without cause, as hereinafter defined,
and only after providing thirty days prior written notice to Employee that
the Company is terminating this agreement without cause, or upon
termination of this Agreement by Employee with reason, as hereinafter
defined, the Company shall pay to Employee, as severance pay, the greater
of (i) $75,000 or (ii) the annual base salary for the entire remaining term
of the two year period ending April 30, 2001, in cash payable in one lump
sum within five days of termination of Employee's employment relationship
with the Company. Such severance pay shall be in addition to the payment of
any and all unpaid annual base salary and accrued benefits due Employee
through the date of termination.
2
<PAGE> 3
Termination without cause shall mean any termination of this Agreement
by the Company which is not with cause, as defined in Section 6(a) above.
Termination with reason shall mean any termination of this Agreement by
the Employee by way of Employee's resignation due to (i) the Company's
failure in any material respect to perform any term or provision of this
Agreement, (ii) any material changes in the duties and responsibilities of
Employee without the written consent of Employee, (iii) the hiring or
promotion by the Company after November 16, 1998 of another executive
employee (excluding Michael E. Little) to a position of equal or greater
responsibility for the management of the Company without the written
consent of Employee, (iv) the Company's directing Employee to work at a
location other than San Antonio, Texas; or (v) after a change of control
(as defined in Section 13(d) hereof), any material change which, in the
sole but reasonable discretion of Employee, impacts detrimentally upon
Employee's position within the Company.
Employee shall be entitled to terminate this Agreement, either with
reason (as defined above) or without reason, by providing the Company with
a written notice of resignation at least thirty days prior to his intended
resignation date.
This Agreement shall terminate immediately upon the death of Employee.
In such event, in addition to the payment of any and all unpaid annual base
salary and accrued benefits due Employee through the date of termination,
the Company shall also pay the Employee's estate the annual base salary
that Employee would have earned for a period of ninety days following the
date of death and a pro rata amount of any discretionary bonus and any
other amounts attributable to any bonus, incentive or similar program (such
discretionary bonus and programs referred to in Section 3 hereof) paid to
Employee for the prior contract year, in the time and manner Employee would
have been paid such compensation. In addition, Employee's designated
beneficiaries shall be entitled to receive any life insurance benefits
provided to Employee in accordance with the applicable plan documents
and/or insurance policies governing such benefits.
E. Section 11 of the Employment Agreement is hereby modified and amended to
provide that should Employee resign as a director of the Company at any time
during his employment under the Employment Agreement, as amended by this
Amendment, he shall, upon written notice to the Company requesting
reappointment to the Board of Directors of the Company, be reappointed to serve
on the Company's Board of Directors until the next annual meeting of
stockholders, and following such reappointment the Company will take all
reasonable steps to cause Employee to be included in the Company's authorized
slate of nominees for the Board of Directors at all annual or special meetings
of stockholders to vote for the election of directors.
3
<PAGE> 4
F. Section 13 of the Employment Agreement is hereby modified and amended to
reflect a reduction in the number of shares of Company common stock subject to
the incentive stock option granted to Employee as of May 1, 1995 (the
"Incentive Option"), which Incentive Option is referenced in Section 13(a) of
the Employment Agreement, from 1,200,000 shares to 960,000 shares. The
reduction in option shares shall effect a cancellation of 100,000 shares
becoming exercisable on April 30, 1999 and 140,000 shares becoming exercisable
on April 30, 2000.
Section 13(a) of the Employment Agreement is hereby modified and amended to
provide that the Company shall register on Form S-8 under the Securities Act of
1933, as amended, all shares issuable pursuant to the Incentive Option,
referenced in Section 13(a) of the Employment Agreement, prior to June 30,
1999.
Section 13(a) of the Employment Agreement is hereby modified and amended to
delete the last three sentences of Section 13(a), which sentences relate to the
Employee's maintenance of a specified interest in the Company's common stock.
Section 13(b) of the Employment Agreement is hereby modified and amended to
delete Section 13(b) in its entirety.
G. Except as modified and amended by this Amendment, the Employment Agreement
shall remain in full force and effect as written. References to the "Agreement"
in the Employment Agreement shall mean the Employment Agreement as amended by
this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
South Texas Drilling & Exploration, Inc.
By: /s/ MICHAEL E. LITTLE
------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
/s/ WILLIAM STACY LOCKE
----------------------------------------
William Stacy Locke
4
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