ITEM 1. BUSINESS
South Texas Drilling & Exploration, Inc. and its subsidiaries (the "Company") are engaged in the business of providing land contract drilling services for the oil and gas industry; oil and gas exploration and development activity for its own account; and operation of oil and gas wells for its own account and those of outside investors. The revenues; earnings (loss) from operations; identifiable assets; depreciation, depletion and amortization; and capital expenditures are reported for each of its business segments for the fiscal years ended March 31, 1997, 1996 and 1995 in note 5 ("Business Segments and Supplementary Earnings Information") of the Notes to Consolidated Financial Statements, which note is incorporated herein by reference.
This Form 10K contains certain "forward-looking" statements as such term is defined in The Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, one-time events and other factors described herein and in other filings made by the Company with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, or intended. The Company does not intend to update these forward-looking statements.
CONTRACT DRILLING
At the end of fiscal 1997, the Company owned four land drilling rigs with approximate depth capabilities ranging from 7,000 feet to 11,500 feet. All four rigs were operated during all of fiscal 1997. The Company's rigs are presently operating in south Texas, along the Gulf Coast of Texas and in the country of Belize, Central America. All four of the rigs are currently in operation.
On June 18, 1997, the Company closed on the purchase of the drilling operations of San Patricio Corporation, a drilling contractor based in Corpus Christi, Texas. Equipment purchased in this transaction included two land drilling rigs with depth capabilities ranging from 6,000' to 10,000' and a leased land drilling rig with depth capability of 9,500'.
Drilling Equipment
A land drilling rig consists of engines, drawworks, mast, pumps to circulate the drilling mud, blowout preventors, drillstring and related equipment. The size and type of rig used depends upon well depth and site conditions, among other factors. A description of the type and capability of the land drilling rigs operated by the Company during fiscal 1997 is set forth in the following table:
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. However, certain equipment items, such as used drill pipe, are becoming more difficult to find, requiring the purchase of more expensive new equipment.
Contracts
All contracts under which the Company is presently conducting its land drilling operations provide for rate charges determined on a daywork, footage or turnkey basis, with rates dependent on the anticipated complexity of drilling the well, on-site drilling conditions, the type of equipment to be used, the Company's estimate of the risks involved, the duration of the work to be performed and competitors' rates among other considerations. Daywork contracts provide for a fixed charge per day for drilling the well, and the customer generally bears the major portion of the related costs and risks of drilling.
With certain limitations, contracts entered into on a footage basis provide for an agreed price per foot drilled regardless of the time required or the problems involved in drilling the well. Related costs of drilling (i.e., rig mobilization, labor, fuel usage and other costs) are included in the footage charge. As compared to daywork contracts, footage contracts involve a higher degree of risk to the Company.
Contracts entered into on a turnkey basis usually require the Company to deliver to the operator a completed hole drilled to a specified depth. In addition to all costs incurred when drilling on a footage basis, the Company is usually also responsible for drilling fluids, water and other costs. As this type of contract places a greater degree of risk on the Company than daywork or footage contracts, the anticipated gross margin on this type of contract is usually greater than on daywork or footage contracts.
Drilling contracts are obtained either through competitive bidding or through direct negotiation. Contracts are usually entered into by the Company covering the drilling of one well and obligate the Company to advance certain
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
costs and to assume certain expenses in connection with drilling operations. During the year ended March 31, 1997 the Company drilled 46 wells with 72% of contract drilling revenues attributable to daywork contracts, 17% to footage contracts, and 11% to turnkey contracts. During the year ended March 31, 1996 the Company drilled 48 wells with 54% of contract drilling revenues attributable to daywork contracts, 20% to footage contracts, and 26% to turnkey contracts.
In several previous years uncertainty relating to oil and gas prices and the domestic gas surplus has led to significant reductions in drilling activity by oil and gas producing companies. Furthermore, the phased-in reduction of the highest marginal income tax rates applicable to individual investors has previously reduced commitments of capital to oil and gas drilling funds. Additionally, increased costs due to government regulation have resulted in the movement of much of the drilling activities to locations overseas. The aggregate impact of these diverse economic factors has resulted in significant reductions of oil company commitments to domestic oil and gas exploration and consequent slackening of overall demand for drilling rigs prior to fiscal 1997. Fiscal 1997, however, saw a reversal of the downward trend of prior years. Because of increased drilling activity and a decrease from prior years in the number of drilling rigs available, the Company has experienced increased demand for its rigs.
During the year ended March 31, 1997, the largest customer of the Company's drilling rigs was Sanchez-O'Brien Oil and Gas Corp. This customer accounted for approximately 14% of contract drilling revenues of the Company during that period. No other single customer accounted for more than 10% of the Company's contract drilling revenues for 1997.
The Company actively markets its rigs and completed contracts for 32 customers in 1997 compared to 27 customers in 1996 and 19 customers in 1995.
The loss of any of the Company's land drilling customers could have a material adverse effect on the Company's business, particularly with respect to the time required to find other users of the rig concerned. See "Competitive, Business and Operational Risks in Contract Drilling" in Part I. During the last quarter of fiscal 1991, drilling activity in south Texas began to decline, although, there was marked increase in activity during the third quarter of fiscal 1993 and the second and third quarters of fiscal 1994. During the first three quarters of fiscal 1995, drilling activity was stable but it decreased significantly in the last quarter of the fiscal year primarily due to a fall in natural gas prices. In fiscal 1996 drilling activity increased over that of prior years. This increased activity continued through fiscal 1997.
As part of its efforts to diversify and expand, the Company undertook a drilling contract in the country of Belize. The contract began in May, 1997, and should be completed in July, 1997. Under the contract, the Company is earning daywork rates greater than those being earned on contracts in south Texas. There is a likelihood that contracts for additional drilling in Central America will be executed. Management believes that this venture is an excellent opportunity for the Company to expand its sphere of operations and diversify its dependence on drilling in a limited geographical area.
Competitive, Business and Operational Risks in Contract Drilling
The Company encounters substantial competition in its contract drilling operations from other drilling contractors. The usual method of competition in the contract drilling industry is on the basis of price, customer relations, rig availability and suitability, service, performance and condition of equipment used. Competition for contract drilling is primarily on a regional basis, and many of the Company's competitors in south Texas have financial resources, and technical staffs and facilities substantially greater than those of the Company.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Land contract drilling in oil and gas operations is subject to a number of operational risks and hazards including blowouts, cratering, fires and explosions. Any one of these happenings could cause serious damage to equipment, personnel, property and/or the financial condition of the Company. In addition, there is a risk that damage to the environment could result from some of the Company's operations, particularly through oil spillage or extensive, uncontrolled fires. While the Company believes that it is adequately insured against normal and foreseeable risks in its operations in accordance with industry standards, such insurance may not be adequate to protect the Company against liability from all consequences of well disasters, extensive fire damage, or damage to the environment. In the event that such insurance was not adequate, the occurrence of a significant event could have a material adverse effect on the Company's financial position and results of operations. Under current conditions, the Company anticipates that its present insurance coverage will be maintained, but no assurance can be given that insurance coverage will continue to be available at rates considered reasonable or that certain types of coverage will be available at any cost.
OIL AND GAS OPERATIONS AND PROPERTIES
The Company's oil and gas operations consist of the ownership of certain oil and gas properties and the exploration, development and production of oil and gas. In June, 1992, the Company acquired operating interests in 17 producing wells. During fiscal 1994 and fiscal 1995 the Company drilled three additional wells. No wells were added in fiscal 1996 or fiscal 1997. In fiscal 1997, the Company sold its interest in one well. At the present time, the Company is in negotiations to purchase additional working interest in the wells it operates and is participating in small working interests with certain of its drilling customers.
Productive Wells and Acreage
At March 31, 1997, the Company had operating interests in 19 producing wells in Texas. Additionally, at March 31, 1997, the Company had additional minor investments in working interests and overriding royalty interests in productive wells and developed acreage in Texas. However, the Company believes the value and the amount of reserves in these properties are not significant in relation to the value and the reserves in the operating interests. Therefore, the working interests and overriding royalty interests have been omitted from this report. The following table presents information on the wells in which the Company has an operating interest:
(1) A "productive well" is a well either producing or capable of producing oil or gas. The Company owns no interests in wells with multiple completions.
(2) A "gross" well or acre is a well or acre in which a working interest is owned. "Net" wells or acres reflect the sum of fractional working interests owned in gross wells or acreage.
(3) "Developed acreage" is acreage spaced or assigned to productive wells.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Oil and gas properties in general are subject to customary royalty interests contracted for in connection with the acquisition of title, liens incident to operating agreements, liens for current taxes and other burdens and minor encumbrances, easements, and restrictions. The Company believes that the existence of such burdens will not materially detract from the general value of its working interests.
Exploration and Development
The Company's oil and gas exploration and development activities consist of the geological evaluation of prospective oil and gas properties, the acquisition of working interests in oil and gas leases, and the production and sale of oil and gas from such properties. The Company participates as an operator and a non-operator with other individuals, partnerships and corporations in its oil and gas operations, as is customary in the industry. In June, 1992, the Company acquired operating interests in 17 producing wells. During fiscal 1994 and fiscal 1995 the Company drilled three additional wells. No wells were added in fiscal 1996. During fiscal 1997 the Company sold its interest in one well. At the present time, the company is participating in two exploratory wells currently being drilled.
Net oil and gas reserves attributable to the interest of the Company, quantities of oil and gas available to be produced by the Company and the estimated future net revenue and present worth of future net revenue, discounted at 10% per annum, have been estimated as set forth in Note 9, "Oil and Gas Producing Activities", in the "Notes to Consolidated Financial Statements" of this Report. This note is incorporated herein by reference.
The Company does not believe that there have been any major discoveries or other favorable or adverse events since the date of the preparation of reserve estimates which would cause a significant change in the estimated proved reserves of future net revenue as set forth in "Oil and Gas Producing Activities" of the "Notes to Consolidated Financial Statements" of this Report.
Estimates of oil and gas reserves are projections based on engineering information and data. There are uncertainties inherent in the interpretation of all such data, and there can be no assurance that the reserves will be ultimately realized.
Except for filing reserve data with the Securities and Exchange Commission in various reports which are required to be filed under its rules, the Company is not required to and does not file any reports of reserves with any federal or state authority or agency.
In prior years, the Company participated with small interests as a working interest owner in various development wells. The Company will participate in development and exploratory wells in the future on a more focused basis and with larger working interest participation. Strategically, such investments will be low to medium risk ventures and/or participation in producing properties. During the periods covered by this Report, the Company had no investment in exploratory wells. The following table sets forth certain information with respect to the Company's investment in development wells during the years indicated:
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Production Information
The Company is involved in oil and gas exploration, development and production. Oil and gas production accounted for approximately 4.7% of the Company's total revenues in the fiscal year ended March 31, 1997 compared with 5.1% in the fiscal year ended March 31, 1996.
(1) Oil and gas production is shown net of royalties attributable to the interests of others and is based upon production reports furnished to the Company by the operators.
(2) "Production (lifting) costs" are costs directly related to the extraction of oil or gas including production taxes, but do not include depreciation, or amortization of exploration and development costs.
(3) Average production costs per unit were determined on the basis of six Mcf of gas being equivalent to one barrel of oil.
Marketing and Customers
Oil and gas produced by the Company are marketed under contracts in accordance with usual industry practice. Oil is sold under short-term agreements for delivery at or near the well site at posted field prices which may fluctuate depending on market conditions and the quality and classification of the oil produced.
The extent of demand for oil and gas and prices for oil and gas in general depend on domestic production and consumption, the amount of foreign oil imported and, in the case of gas, the proximity and capacity of natural gas pipelines. There can be no assurance that favorable market conditions will exist in the future, nor can it be determined what effect, if any, future regulation of the oil and gas industry will have upon the Company's marketing, operations or production.
GOVERNMENTAL REGULATION
Governmental regulations promulgated by various state and federal authorities directly influence the Company's operations insofar as they regulate operations of the Company's rigs, impact prices and therefore supplies of and demands for oil and gas, and influence various costs associated with petroleum exploration and production.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Regulation of Production
The production of oil and gas is subject to extensive federal and state laws, rules, orders and regulations governing a wide variety of matters. Numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for the failure to comply.
State statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Most states in which the Company operates or might operate also have statutes and regulations governing conservation matters, including the unitization or pooling of oil and gas properties, establishing of maximum rates of production from oil and gas wells and the spacing of such wells. Many states also restrict production to the market demand for oil and gas. Such statutes and regulations may limit the rate at which oil and gas could otherwise be produced from the Company's properties. As a result of domestic crude oil shortages, there has been no limit on allowable daily production on the basis of market demand since mid-1972, although at some locations production continues to be regulated for conservation purposes. In addition to the direct costs borne in complying with such regulations, operations and revenues may be impacted to the extent that certain regulations limit oil and gas production to below economic levels. Although the particular regulations applicable in each state in which operations may be conducted vary, such regulations are generally designed to ensure that oil and gas operations are carried out in a safe and efficient manner and to ensure that similarly situated operators are provided with reasonable opportunities to produce their respective fair shares of available oil and gas reserves. However, since these regulations generally apply to all oil and gas producers, management of the Company believes that these regulations should not put the Company at a material disadvantage to other oil and gas producers.
Regulation of Sales and Transportation of Natural Gas
Certain sales, transportation and resales of natural gas by the Company are subject to both federal and state laws and regulations, including the Natural Gas Act ("NGA") and the Natural Gas Policy Act of 1978 (the "NGPA") and regulations promulgated by the Federal Energy Regulatory Commission (the "FERC") under the NGA, the NGPA and other statutes. The provisions of the NGA and the NGPA, as well as the regulations thereunder, are complex and may affect all who produce, resell, transport, purchase or consume natural gas.
The FERC's transportation regulations primarily affect the operations of the Company by virtue of the need to deliver the Company's gas production to markets served by interstate or intrastate pipelines governed by these regulations. In most instances, interstate pipelines represent the only available method of accomplishing such transportation.
Federal and state authorities have issued numerous orders during the last several years governing the sale and transportation of natural gas and, no doubt, will continue to issue other orders and actions which may significantly affect the operations of the Company.
Price Controls on Liquid Hydrocarbons
Sales of crude oil, condensate, and natural gas liquids by the Company can at present be made at uncontrolled market prices. While there are currently no federal price controls on crude oil, condensate or natural gas liquids, there can be no assurance that Congress will not reenact controls at a future time.
Future Legislation
Currently there are many legislative proposals pertaining to regulation of the oil and gas industry, which may directly or indirectly affect the Company's activities. No prediction can be made as to what additional energy
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
legislation may be proposed, if any, or which bills may be enacted or when any such bills, if enacted, would become effective.
Regulation of the Environment
The exploration, development, production and processing of oil and gas, including the disposal of produced water, are subject to various federal and state laws and regulations designed to protect the environment. Compliance with these regulations is part of the Company's day-to-day operating procedures. Infrequently, accidental discharge of such materials as oil, natural gas, drilling fluids or contaminated water can and does occur. Such accidents can require material expenditures to correct.
Various state and governmental agencies are considering, and some have adopted, other laws and regulations regarding environmental control which could adversely affect the business of the Company. Compliance with such measures, together with any penalties resulting from noncompliance therewith, may increase the cost of oil and gas development, production and processing operations or may affect the ability of the Company to complete existing or future activities in a timely manner.
Compliance with Regulations
The Company believes that it complies with all material legislation and regulations affecting its operations in the drilling and operation of oil and gas wells, and in controlling the discharge of wastes. Compliance has not, to date, materially affected the capital expenditures, earnings or competitive position of the Company, although these measures add to the costs of operating drilling equipment in some instances, and in others they may operate to reduce drilling activity. The Company does not expect to incur material capital expenditures in the next fiscal year in order to comply with current environmental control regulations. Further legislation or regulation may reasonably be anticipated, but the effects thereof on operations cannot be predicted.
The Company is subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the Environmental Protection Agency "community right-to-know" regulations under Title III of the Federal Superfund Amendment and Reauthorization Act and comparable state statutes require the Company to organize and report certain information about the hazardous materials used in its operations to employees, state and local government authorities, and local citizens.
Taxation
Although the Company's business is subject to many provisions of the Internal Revenue Code, as amended, the depletion allowance and intangible drilling costs have particular significance to the exploration, development and production of oil and gas. Certain state taxes influence operations as well.
Competitive and Operational Risks in Oil and Gas Exploration and Production
The Company encounters substantial competition in its exploration and development operations from other oil and gas companies. The usual method of competition in the exploration, development and production segment is on the basis of lease acquisition, the cost of such acquisition, geologic information and its cost, availability of rigs at reasonable cost, successful drilling, completion and production, availability of pipelines if gas, and successful negotiation of oil and gas sales contracts. Many of the Company's competitors have resources, technical staff and facilities substantially greater than those of the Company.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Exploration and development of oil and gas reserves involves certain operational risks and hazards. Among these are blowouts, cratering, fires and explosions, and environmental damage, any one of which could potentially result in loss of prospect value and liability to the Company.
PRINCIPAL CUSTOMERS
During the fiscal year ended March 31, 1997, Sanchez-O'Brien Oil and Gas Corp. contributed 14% of the Company's total drilling revenues. This was the only customer to contribute 10% or more of the Company's total drilling revenues. See "Contract Drilling - Contracts" in this Item I.
EMPLOYEES
Prior to the last quarter of fiscal 1997, the Company leased its personnel from a personnel leasing company. In December, 1996, the leasing contract was terminated and the Company became the employer of the personnel.
At May 24, 1997, the Company had 94 full-time employees, of whom 78 were paid on an hourly basis and were engaged in operating the Company's drilling rigs or in other operations. Of the total employees, nine were administrative employees and seven were supervisory. None of the employees are represented by any union or collective bargaining group, and there is no history of strikes, slow downs, or other material labor disputes. Management believes that the Company's relations with its employees are satisfactory.
ITEM 2.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several personal injury lawsuits of a type which the Company considers routine for the contract drilling industry. These lawsuits arose out of injuries to personnel employed by third party employee leasing companies. These lawsuits are being defended either by the Company's general liability insurance carrier under what the Company considers to be adequate coverage, or pursuant to an Indemnity Agreement between the Company and the employee leasing company which employed the Plaintiff. The Company believes that the employee leasing company has adequate insurance coverage to cover those claims.
Among the lawsuits currently pending against the Company is National Energy Group, Inc. v. South Texas Drilling Company, cause No. 96-98, 357 Judicial District Court, Willacy County, Texas. This case arose out of a dispute with a drilling customer over a billing for work performed under a daywork drilling contract. In the course of drilling the well, some of the Company's equipment was lost in the hole. Under the terms of the contract, the customer was billed for the drilling operations and replacement cost of the lost equipment. The customer has declined to pay the billed amount of $279,000 alleging negligence and seeking damages in excess of $460,000 plus attorney's fees. This lawsuit is being defended by the Company's general liability insurance carrier with a reservation of rights letter. However, the Company believes it has meritorious defenses and is vigorously defending this litigation. The Company has filed a counter-suit seeking payment in full of the original invoice. The case was originally scheduled to go to trial in January, 1997. However, the plaintiff has been granted several postponements. The case is currently scheduled to go to trial in August, 1997.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Another case is the Jose C. Rodriguez and Margarita Rodriguez vs. Employer's Select Management Inc. and South Texas Drilling and Exploration, Inc., Cause No. 93-CI05512, 15th District Court, Bexar County, Texas. Personal injury by employee of Employer Select Management, Inc. ("STDE") was defended by Company's automobile liability insurer under a reservation of rights letter. This case was tried in June, 1995, under a partial settlement agreement and release between the Plaintiffs and the Company under which the Company's liability was limited by agreement to $200,000, payable in eleven (11) quarterly payments of $15,000 each and a final quarterly payment totalling $35,000, payments to commence within thirty (30) days of the entry of judgment. Under the terms of the agreement, to the extent the amount of any judgment is collected from the Company's automobile insurer the $200,000 payable by the Company shall be reduced. Judgment was entered against the Company on June 29, 1995, in the amount of $366,394 plus pre-judgment interest, after a non-jury trial. The Company's insurer took the position that the Plaintiff was an employee of the Company at the time the injuries were sustained and that the insurer is not liable for the amount of the judgment as the result of an employee exclusion in its policy. The insurer brought a declaratory judgment action against the Company and the Plaintiff in order to establish that the damages found are not covered by the Company's policy with the insurer. This declaratory judgment has been decided in favor of the Company. Consequently, the Company has been reimbursed for all payments made on its $200,000 settlement amount and has no obligation for any additional payments.
While the outcome of these matters cannot be determined at year end management believes the ultimate disposition of these matters will have no material adverse effect on the consolidated financial statements of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of the Company's security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The initial public offering of the Company's Common Stock occurred on February 4, 1981, and from that date until August 18, 1981, the Common Stock was traded in the over-the -counter market. From August 19, 1981 until February 10, 1986, the Company's Common Stock was listed on the American Stock Exchange (AMEX) (Symbol: SDR). On February 10, 1986, trading of the Company's stock was discontinued on the AMEX as the Company no longer met the net worth requirement for listing on the AMEX. At the present time, the Company's Common Stock (Symbol: STXD) is not traded on a stock exchange. However, the Company's Common Stock is traded in the "pink sheets". Shareholders interested in trading the Company's Common Stock should contact their stockbroker or the Company for further information. The following table sets forth for the period indicated quotations from a marketmaker for the Company's common stock.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
The above over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of June 20, 1997, there were approximately 1,000 registered stockholders of Common Stock of the Company.
The Board of Directors has followed a policy of reinvesting the earnings of the Company in its business and of not distributing any part thereof as dividends to shareholders. The Board of Directors has no present intention to initiate the payment of cash dividends, and future dividends of the Company will depend upon the earnings, capital requirements and financial condition of the Company and other relevant factors. Additionally, the Company's debt facility includes a provision preventing the Company from issuing dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share amounts)
In fiscal 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which eliminated the treatment of tax benefits from the use of net operating loss carryforwards as an extraordinary item in fiscal years after 1993.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Liquidity
During the past fifteen years, drilling activity in the oil and gas industry has been volatile with periods of high activity and other periods of low activity. In fiscal 1996, drilling activity began to increase. This increased activity continued through fiscal 1997. During fiscal 1996, the utilization rate for the Company's rigs was 64 percent while operating five rigs. In fiscal 1997, the utilization rate increased to 80 percent while operating four rigs. The actual number of drilling days increased to 1,175 in fiscal 1997 from 1,076 in fiscal 1996. Drilling rates charged to customers on drilling contracts in fiscal 1997 showed some increase over those charged in fiscal 1996. This increase in drilling rates reflects the increased demand for drilling rigs during the period. At March 31, 1997, the Company's current ratio was 1.02 compared to .51 at March 31, 1996. Working capital at March 31, 1997 was $29,166 compared to ($1,104,828) at March 31, 1996. This increase was due, in part, to the increased drilling activity and to the debt restructuring discussed below in this section.
During fiscal 1997, the Company terminated its line of credit with its bank. The line of credit was replaced with the revolving line of credit described below. The revolving line of credit was used only occasionally to meet cash requirements of the Company. Additional borrowings during the year included $90,000 for additional drilling equipment and $10,375 for the purchase of transportation equipment.
In May, 1996, the Company closed on a debt restructuring which included a term loan of $1,250,000 and a revolving line of credit of $500,000, which has allowed the Company to pay off all its bank debt with the exception of the loan secured by the headquarters building in San Antonio and a minimal balance on the loan secured by the oil and gas properties. The new debt also allowed the Company to pay off the seller financing on the rig purchased in May, 1995. Proceeds from the new debt were also used to reduce trade accounts payable and to provide funds for future drilling equipment purchases. The term loan is secured by drilling equipment, transportation equipment and the yard facility in Kenedy, Texas. The loan carries an interest rate of prime (8.50% at March 31, 1997) plus 3% and is payable in monthly payments of $14,881 plus interest. Payments are based on a seven-year amortization and the loan is due in June, 1998. The revolving loan is secured by the Company's trade accounts receivable and carries an interest rate of prime plus 2.75%. Subsequent to year end, the Company secured additional financing to purchase additional drilling equipment and rig moving equipment. The additional amount of financing was $1,050,000. In securing this financing, the Company also negotiated more favorable terms on its existing debt secured by drilling equipment, transportation equipment and the yard facility. Under the new terms, the term loan carries an interest rate of prime plus 2.25% and revolving loan an interest rate of prime plus 2.25%. The monthly payments on both notes are now $27,381 plus interest.
The ratio of trade accounts receivable to total revenue increased to 7.4% at the end of fiscal 1997 from 7.1% at the end of fiscal 1996. This increase was the result of the increased drilling activity in the fourth quarter of the fiscal year. The ratio of the Company's shareholders' equity in relation to outstanding debt (vendor and bank notes payable) increased in fiscal 1997. At March 31, 1996, the ratio of shareholders' equity to notes payable was 1 to .83. At March 31, 1997, the ratio was 1 to .71. The increase in shareholders' equity was primarily due to the Company's profitability.
The Company's liquidity was also affected by an uncollected account receivable of $279,000 from drilling operations in fiscal 1996. In this case, the Company drilled a well under a daywork contract. In the course of drilling the well, some of the Company's equipment was lost in the hole. Under the terms of the contract, the customer was billed for the drilling operations and the replacement cost of the lost equipment. The customer filed a lawsuit alleging negligence, denying responsibility for the $279,000 billed by the Company, and seeking additional
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
damages of $460,000 plus attorney's fees. Management, which believes the customer's claim to be without merit, has filed a counter-suit seeking payment in full of the original invoice in the amount of $279,000. In fiscal 1996, an allowance for uncollectible accounts in the amount of $140,000 was established for this account. A trial date has been scheduled in August, 1997.
In April, 1997, the Company issued a new Series A 8% Convertible Preferred Stock. The issue consisted of 400,000 shares with a designated par value of $2.00 per share. Dividends on the stock are cumulative. This Preferred Stock is convertible into two shares of Common Stock for each share of Preferred Stock and one share of Common Stock for each $.50 of due but unpaid dividends on the Series A 8% Convertible Preferred Stock. The stock is redeemable at the Company's option at or following the third anniversary of the issuance of such stock provided, generally, that the price of the Company's common stock equals or exceeds $2.50 per share. The proceeds from the stock were used to reduce trade accounts payable, bank debt and to acquire drilling equipment. Prior to the issuance of this new Series A preferred stock, the Company redeemed its previously issued and outstanding Series A preferred stock consisting of 235,000 shares of stock with a stated par value of $1.00 per share. The outstanding shares were redeemed for a cash payment of $75,000.
Included in the results of operations for fiscal 1997 was the reversal of the provision for litigation settlement in the amount of $200,000 established in fiscal 1996. The Plaintiff was unsuccessful in its efforts to have the lower courts findings reversed by the Fifth Circuit Court of Appeals. As a result of the Circuit Court's decision, the Company increased its net income by $200,000, increased its accounts receivable by $90,000 and decreased its notes payable by $110,000.
Changes in Financial Condition
During fiscal 1997, the Company had a net decrease in property and equipment of $222,000 before accumulated depreciation, depletion and amortization. This decrease was the result of a write off of $955,000 in fully depreciated drilling equipment, a reduction of $32,000 resulting from the trade in of transportation equipment, a reduction of $5,000 resulting from the salvage of oil and gas equipment and the expenditure of $770,000 for major repairs and the purchase of additional equipment. Of this amount, $716,000 was attributable to the purchase of drilling equipment, $44,000 to the purchase of transportation equipment, $5,000 to the purchase or acquisition of oil and gas properties, $4,000 to the purchase of building improvements and $1,000 to the purchase of furniture and fixtures.
At March 31, 1997, the current portion of long-term debt was $261,000. Of this amount, $33,000 was owed on oil and gas properties, $179,000 on drilling equipment, $13,000 on land and buildings and improvements, $17,000 on transportation equipment and $19,000 on unpaid salary to an employee. Trade accounts payable at March 31, 1997 were $1,147,000 compared to $1,256,000 at March 31, 1996. At March 31, 1997, long-term debt was $1,220,000. Of this amount, $218,000 was owed on land and buildings and equipment; $910,000 on drilling equipment; $50,000 on oil and gas properties; $19,000 to an employee for unpaid salary and $23,000 on transportation equipment.
Results of Operations
Rig utilization rates for the years ended March 31, 1997, 1996 and 1995 were 80%, 64% and 64%, respectively. In fiscal 1997, the Company completed 1,175 drilling days while in fiscal 1996, the Company completed 1,076 drilling days. This was a 9% increase in number of drilling days compared to fiscal 1996 despite the Company operating four rigs during fiscal 1997 compared to five rigs during fiscal 1996. This increase reflects the increased demand during the period for drilling rigs and the increased efforts of the Company's staff to obtain contracts for the rigs.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
During fiscal 1997, the Company's drilling margin increased when compared to both fiscal 1996 and fiscal 1995. In fiscal 1997, the drilling margin was $1,366,798, while in fiscal 1996 and fiscal 1995 it was $912,230 and $539,801, respectively. When to compared to drilling revenue, the drilling margin was 17%, 13% and 11% in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The increase in fiscal 1997 over fiscal 1996 was principally the result of the 9% increase in the number of drilling days during fiscal 1997 and increase in drilling rates charged on contracts.
The Company markets its rigs to a number of customers. In fiscal 1997, the Company drilled for 32 different customers. In fiscal 1996, the Company drilled for 27 different customers. Of the 32 customers in fiscal 1997, 25 were customers the Company had not drilled for in fiscal 1996. These 25 customers accounted for over 76% of the Company's drilling revenue in fiscal 1997. In fiscal 1995, two customers accounted for 36% of total drilling revenue. In fiscal 1996, three customers accounted for 34% of total drilling revenue. In fiscal 1997, three customers accounted for 24% of total drilling revenue. Of these three customers, none was included in the top three customers of fiscal 1996. The loss of any of these customers could have a material adverse effect on the Company's business resulting from the time required to find other users of the rig concerned.
Oil and gas revenue for fiscal 1997 increased by $21,432 from fiscal 1996. The increase was primarily due to a 26% increase in the average price per barrel of oil and a 48% increase in the average price per MCF of gas despite an 18% decrease in oil production and a 27% decrease in gas production. In fiscal 1997, the Company's average production cost per unit in barrel equivalents increased 36% from fiscal 1996. This compares with a 4% increase in the average production cost for 1996 compared to 1995.
Depreciation, depletion and amortization expense in fiscal 1997 increased to $623,614 from $576,894 in fiscal 1996. Depreciation expense increased to $475,135 in fiscal 1997 from $384,400 in fiscal 1996. This increase was the result of equipment purchased in late fiscal 1996 and fiscal 1997. Depletion expense decreased to $148,479 in fiscal 1997 compared to $192,494 in fiscal 1996. Production decreased to 21,001 barrel equivalents in fiscal 1997 from 27,227 barrel equivalents in fiscal 1996. In fiscal 1997, the Company was not subject to the ceiling test limitation as it applies to oil and gas properties. Under such a test, the depleted carrying value of the Company's oil and gas properties is compared to the net present worth of estimated future oil and gas revenues based on period end prices, discounted at 10%. If the depleted carrying value exceeds the discounted net present worth of estimated future oil and gas revenues, the carrying value must be written down. Conversely, if the discounted net present value exceeds the carrying value of the properties, no adjustment is made to the carrying value, even if there had been a write-off in prior years.
General and administrative expenses increased from $520,402 in fiscal 1996 to $549,656 in fiscal 1997. The primary components of the change in general administrative expenses were an increase in payroll costs and a decrease in legal fees.
Earnings from operations increased to $551,333 in fiscal 1997 from $15,608 in fiscal 1996. Of the $551,333, $376,439 was contributed by drilling operations and $174,894 by oil and gas operations. When compared with oil and gas operations, drilling operations generate significantly more revenue, but they are far more costly, requiring large expenditures for equipment, personnel and maintenance and repairs. Drilling operations also generate more risk for the Company, especially when the Company is drilling under footage and turnkey contracts. Oil and gas operations, on the other hand, normally do not require significant expenditures once the original purchase or investment is accomplished. Oil and gas operations require limited personnel involvement to produce the oil and gas, whereas drilling operations require continuous involvement of significant numbers of personnel to complete a contract.
The exploration, development, production and processing of oil and gas, including the disposal of produced water, are subject to various federal and state laws and regulations designed to protect the environment. Compliance
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
with these regulations is part of the Company's day-to-day operating procedures. The Company is not aware of any potential clean-up obligations which would have a material effect on its financial condition or results of operations.
As part of its efforts to diversify and expand, the Company undertook a drilling contract in the country of Belize. The contract began in May, 1997, and should be completed in July, 1997. Under the contract, the Company is earning daywork rates greater than those being earned on contracts in south Texas. There is a likelihood that contracts for additional drilling in Central America will be executed. Management believes that this venture is an excellent opportunity for the Company to expand its sphere of operations and diversify its dependence on drilling in a limited geographical area.
Forward Looking Information
This Form 10K contains certain "forward-looking" statements as such term is defined in The Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, one-time events and other factors described herein and in other filings made by the Company with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, or intended. The Company does not intend to update these forward-looking statements.
Accounting Matters
In March, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which the Company adopted on April 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations or liquidity.
In October, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995. The Company adopted this Statement on April 1, 1996. This Statement establishes financial accounting and reporting for stock-based employee compensation plans, including stock purchase plans, stock option plans, restricted stock and stock appreciation rights. The Statement requires a fair value based method of accounting for employee stock options or similar instruments and encourages a similar method for all employee stock compensation plans. This method measures compensation cost at the grant date based on the value of an award and recognizes it over the service period, usually the vesting period. However, the Statement also allows an entity to continue measuring compensation cost for such plans using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", provided, pro forma disclosures are made. Under the intrinsic value method, the Company records no compensation expense for stock options granted when the exercise price of options granted
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
is equal to the fair market value of the Company's common stock on the date of grant. The Company has chosen to continue to account for stock-based compensation under the intrinsic value method.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share." The Statement, which is effective for financial statements issued after December 15, 1997, simplifies the standards for computing earnings per share (EPS) and makes the U.S. standard for computing earnings per share more compatible with the EPS standards of other countries. The Company plans to adopt this Statement in the third quarter of fiscal 1998. This Statement requires restatement of all prior period EPS data presented. Thus basic net earnings (loss) per share for fiscal 1997 will be restated to $0.10 and there will be no restatement for fiscal 1996 as the adoption of the Statement did not change the EPS previously presented.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors South Texas Drilling & Exploration, Inc.:
We have audited the consolidated balance sheets of South Texas Drilling & Exploration, Inc. and subsidiaries as of March 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended March 31, 1997. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule (Schedule II) for each of the years in the three-year period ended March 31, 1997. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of South Texas Drilling & Exploration, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
San Antonio, Texas June 20, 1997
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
See accompanying notes to consolidated financial statements.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
See accompanying notes to consolidated financial statements.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
Business and Principles of Consolidation
The Company provides land contract drilling services for the oil and gas industry, primarily in southern Texas, and engages in oil and gas exploration and development activity for its own account. The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its limited partnership interest through December, 1995. All significant intercompany accounts and transactions have been eliminated in consolidation.
The financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and income and expenses for the periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of depreciation, depletion and amortization expense.
Reclassifications
Certain reclassifications of prior period amounts have been made to conform with the current period presentation.
Income Taxes
The Company files a consolidated Federal income tax return with its subsidiaries using a December 31 year-end.
Pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company follows the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Earnings (Loss) Per Common Share
Earnings (loss) per common and common equivalent share are based upon the weighted average number of outstanding shares during each period. Dilutive common equivalent shares consist of stock warrants and the weighted average is computed using the treasury stock method. Earnings (loss) per share computed on a fully diluted basis is not presented as it is not significantly different from earnings (loss) per share computed on a primary basis.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings per Share," which establishes standards for computing and presenting earnings per share. This Standard, effective for financial statements issued for periods ending after December 15, 1997, replaces the
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Notes to Consolidated Financial Statements
presentation of primary earnings per share with a presentation of basic earnings per share. In addition, this standard requires dual presentation of basic and diluted earnings per share on the face of the statement of operations. This Statement requires restatement of all prior period EPS data presented. Thus basic net earnings (loss) per share for fiscal 1997 will be restated to $0.10 and there will be no restatement for fiscal 1996 as the adoption of the Statement did not change the EPS previously presented.
Stock-Based Compensation
On April 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." This SFAS allows a Company to adopt a fair value based method of accounting for a stock-based employee compensation plan or to continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has chosen to continue to account for stock-based compensation under the intrinsic value method. Under this method, the Company records no compensation expense for stock options granted when the exercise price of options granted is equal to the fair market value of the Company's common stock on the date of grant. The pro forma effects of adoption of SFAS No. 123 is disclosed in footnote 4 in the Notes to Consolidated Financial Statements.
Contract Drilling in Progress
Contract drilling revenues are earned on footage, daywork and turnkey contracts and such revenues and related costs are included in the determination of earnings as work progresses. Contract drilling in progress consists of revenues earned on contracts which have not yet been billed.
Prepaid Expenses
Prepaid expenses include loan fees which are amortized over the life of the debt.
Property and Equipment
Oil and gas producing activities are accounted for using the full cost method. Under the full cost method, all costs incurred in the acquisition, exploration and development of all oil and gas properties, including surrendered and abandoned leaseholds, delay lease rentals and dry hole costs, are capitalized. All costs related to production, general corporate overhead and other similar activities are expensed in the period incurred.
Depletion of oil and gas properties is provided by the unit of production method based on the Company's interest in the aggregated, estimated recoverable reserves of all properties. Depletion includes a ceiling limitation adjustment required under the full cost method of accounting. The ceiling limitation adjustment is applicable when the carrying value of oil and gas properties exceeds the discounted net present worth of estimated future cash flows on those properties based on prices at the end of the period.
Depreciation of drilling, transportation and other equipment is provided using the straight-line method over estimated useful lives ranging from three to ten years.
Maintenance and repairs are charged to operations; renewals and betterments are charged to appropriate property and equipment accounts.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on April 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations or liquidity.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At March 31, 1997 and 1996, cash includes a restricted account in the amount of $102,629 and $99,000, respectively.
(2) Notes Payable and Long-term Debt
Notes payable and long-term debt of the Company is described below:
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-term debt maturing each year subsequent to March 31, 1997 is as follows: 1998 - $261,394; 1999 - $989,821; 2000 - $43,142; 2001 - $19,966; 2002 - $146,912 and thereafter - $20,262.
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SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At March 31, 1997, the Company was in compliance or has obtained waivers with respect to various negative and affirmative covenants on its note payable secured by drilling equipment, transportation equipment and land and improvements. Such covenants included the maintenance of a net worth of at least $1,500,000, a debt to net worth ratio of less than 2.0 to 1.0, and a total debt service coverage ratio of greater than 0.8 to 1.0, at all times.
Note a: On April 14, 1995, the Company executed a Master Real Estate Lien Note in the amount of $800,000 with a bank. This note provides the Company with a $400,000 "Guidance Line of Credit Facility" to be used for drilling, completion and equipping expenses of wells to be drilled. This note has an interest rate of one percent over the Bank's prime rate, 9.50% at March 31, 1997, and is due January 1, 1999. In addition to the Guidance Line of Credit Facility, the Master Note covers the other notes executed by the Company in favor of the Bank, and the loan secured by oil and gas properties purchased in 1992 and drilled in 1993.
Note b: In September, 1995, the Company executed a note payable, in the amount of $245,250, to a bank for the purchase of the office building which the Company occupies as its headquarters in San Antonio, Texas. The note has a term of ten years and is payable in monthly payments of $1,900 including interest at 0.5% over the Bank's prime rate, 9.50% at March 31, 1997. In November, 1995 the Company closed on financing with the Small Business Administration which became a second lien on the headquarters building. The loan is in the amount of $114,000 and was used to pay down the amount borrowed from the bank for the purchase. This debt has a 20 year term and is payable in monthly payments of $921 including interest at 6.713%.
Note c: On May 8, 1996, the Company closed on a debt restructuring which included a term loan of $1,250,000 and a revolving line of credit of $500,000, which allowed the Company to pay off all its bank debt with the exception of the loan secured by the headquarters building in San Antonio and a minimal balance on the loan secured by the oil and gas properties. The new debt also allowed the Company to pay off the seller financing on the rig purchased in May, 1995. Proceeds from the new debt were also used to reduce trade accounts payable and to provide funds for future drilling equipment purchases. The term loan is secured by drilling equipment, transportation equipment and the yard facility in Kenedy, Texas. The loan carries an interest rate of prime (8.50% at March 31, 1997) plus 3% and is payable in monthly payments of $14,881 plus interest. Payments are based on a seven-year amortization and the loan is due in June, 1998. The revolving line of credit is secured by the Company's trade accounts receivable and carries an interest rate of prime (8.5% at March 31, 1997) plus 2.75%. The revolving line of credit had no outstanding balance at March 31, 1997.
Note d: The debt was the result of a lawsuit in which the Company was a defendant. The ruling of the District Court was affirmed by the Fifth Circuit Court of Appeals. This relieved the Company of any further obligation on the original debt and required the plaintiff to reimburse the Company for payments previously made on the debt. Thus, the $200,000 provision for litigation settlement made in fiscal 1996 has been reversed and included in other income in fiscal 1997.
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Notes to Consolidated Financial Statements
(3) Income Taxes
Due to the utilization of net operating loss carryforwards, the Company had no Federal income tax liability at March 31, 1997 or 1996. The Company has accrued a $33,000 liability for state franchise taxes for fiscal 1997.
At March 31, 1997, for Federal income tax purposes the Company had a net operating loss carryforward of approximately $15,820,000 and investment tax credit carryforwards of approximately $125,000 available to offset future taxable income and taxes.
Unless utilized, net operating loss and investment tax credit carryforwards will expire as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 1997 and 1996 are presented below:
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Notes to Consolidated Financial Statements
A valuation allowance has been established to decrease total gross deferred tax assets to the amount of the total gross deferred tax liabilities due to the uncertainties involved in the ultimate realization of the deferred tax assets. The valuation allowance for deferred tax assets at March 31, 1996 was $5,871,000. The net change in total valuation allowance for the year ended March 31, 1997 was a decrease of $758,000 due to the change in the corresponding gross deferred tax assets and liabilities.
(4) Stock Options, Warrants and Stock Option Plan
In December, 1988, the Board of Directors issued certain directors, officers and employees warrants to purchase 435,000 shares of the Company's common stock at $.15 per share, of which three warrants for a total of 55,000 shares have been exercised as of March 31, 1997 and two warrants for 245,000 shares have been canceled. These warrants are exercisable upon issuance and expire December 8, 1998. As of March 31, 1997, 135,000 shares of Common stock were reserved for future issuance in connection with warrants issued to employees, directors, officers and former employees.
In August, 1992, the Board of Directors issued certain directors, officers and employees warrants to purchase 235,000 shares of the Company's stock at $.10 per share, all of which have been exercised as of March 31, 1997.
On May 1, 1995, the Board of Directors issued an option to Mr. Locke, President and Chief Executive Officer, to purchase 1,200,000 shares of the Company's common stock at $.375 per share. This option expires on May 1, 2005. At March 31, 1997, 100,000 shares have been purchased under this option.
On June 15, 1995, the Board of Directors issued certain directors, officers and employees options to purchase 128,500 shares of the Company's common stock at $.375 per share, none of which has been exercised as of March 31, 1997.
Under the Company's stock option plan, stock options become exercisable over a five year period and all options expire 10 years after the date of grant. All of the Company's options shall be granted at the fair market value of the Company's Common Stock on the date of grant. Accordingly as discussed in Note 1, no compensation expense relating to these options is recognized in the Company's results of operations.
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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:
At March 31, 1997, the weighted average price of options outstanding was $0.38 per share and the weighted average price of excercisable options was $0.38 per share.
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation." Accordingly, no compensation has been recognized for the stock option plan. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net earnings and net earnings per share would have been reduced to the pro forma amounts indicated in the table below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model. The model assumed expected volatility of 46% and 46%, weighted average risk-free interest rates of 6.7% and 6.3% for grants in 1997 and 1996, respectively, and an expected life of five years. As the Company has not declared dividends since it became a public entity, no dividend yield was used. Actual value realized, if any, is dependent on the future performance of the Company's common stock, and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes model.
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Notes to Consolidated Financial Statements
(5) Business Segments and Supplementary Earnings Information
The Company is engaged in contract drilling of oil and gas wells and in oil and gas exploration, development and production. Information concerning business segments and supplementary earnings information is as follows:
In fiscal 1997, only one customer accounted for 10% or more of contract drilling revenues. The revenue attributed to that customer was $1,116,322.
In fiscal 1996, only one customer accounted for 10% or more of contract drilling revenues. The revenue attributed to that customer was $1,204,983.
In fiscal 1995, two customers each accounted for 10% or more of contract drilling revenues. The revenue attributed to these customers was $1,121,651 and $662,567.
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Notes to Consolidated Financial Statements
(6) Related Party Transactions
A director owns an interest in several oil and gas properties in which the Company owns an interest. Two directors own interests in the well which the Company drilled in February, 1995 and continues to operate.
(7) Commitments and Contingencies
There was no rental expense for the year ended March 31, 1997. Rental expense for the years ended March 31, 1996 and 1995 was $2,421 and $15,825, respectively.
The Company is a defendant in several personal injury lawsuits of a type which the Company considers routine for the contract drilling industry. These lawsuits arose out of injuries to personnel under lease from third party employee leasing companies. These lawsuits are being defended either by the Company's general liability insurance carrier under what the Company considers to be adequate coverage, or pursuant to an Indemnity Agreement between the Company and the employee leasing company which employed the Plaintiff. The Company believes that the employee leasing company has adequate insurance coverage to cover those claims.
Among the lawsuits currently pending against the Company is National Energy Group, Inc. v. South Texas Drilling Company, cause No. 96-98, 357 Judicial District Court, Willacy County, Texas. This case arose out of a dispute with a drilling customer over a billing for work performed under a daywork drilling contract. In the course of drilling the well, some of the Company's equipment was lost in the hole. Under the terms of the contract, the customer was billed for the drilling operations and replacement cost of the lost equipment. The customer filed a lawsuit alleging negligence, denying responsibility for the $279,000 billed by the Company, and seeking additional damages of $460,000 plus attorney's fees. Management, which believes the customer's claim to be without merit, has filed a counter-suit seeking payment in full of the original invoice in the amount of $279,000. In fiscal 1996, an allowance for uncollectible accounts in the amount of $140,000 was established for this account. A trial date has been scheduled in August, 1997
While the final outcome of these matters cannot be determined at year end, management believes the ultimate disposition of these matters will have no material adverse effect on the consolidated financial statements of the Company.
(8) Subsequent Events
In April, 1997, the Company issued a new Series A 8% Convertible Preferred Stock. The issue consisted of 400,000 shares with a designated par value of $2.00 per share. Dividends on the stock are cumulative. This Preferred Stock is convertible into two shares of Common Stock for each share of Preferred Stock and one share of Common Stock for each $.50 of due but unpaid dividends on the Series A 8% Convertible Preferred Stock. The stock is redeemable at the Company's option at or following the third anniversary of the issuance of such stock provided, generally, that the price of the Company's common stock equals or exceeds $2.50 per share. The proceeds from the stock were used to reduce trade accounts payable, bank debt and to acquire drilling equipment. Prior to the issuance of this new Series A preferred stock, the Company redeemed its previously issued and outstanding Series A preferred stock consisting of 235,000 shares of stock with a stated par value of $1.00 per share. The outstanding shares were redeemed for a cash payment of $75,000.
-34- (Continued) SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In May, 1997, the Company began work on a drilling contract in the country of Belize. The contract should be completed in July, 1997. Under the terms of the contract, the Company is earning daywork rates greater than those currently being earned on contracts in south Texas. The operator is also assuming some of the expenses normally the responsibility of the contractor.
In June, 1997, the Company closed on the acquisition of the drilling operations of San Patricio Corporation. Assets acquired by the Company included two land drilling rigs, rig handling trucks and trailers and miscellaneous drilling equipment. In addition, the Company assumed a lease of a third land drilling rig. As a result of the acquisition, the Company now operates seven land drilling rigs, primarily in central and south Texas. The acquisition was accomplished with $900,000 of third-party financing, $300,000 of seller financing, $300,000 of the Company's Common Stock. The transaction will be accounted for as a purchase.
In June, 1997 the Company closed on additional financing of $1,050,000. This debt was used in part for the rig acquisition described above and for the purchase of additional drilling equipment. In securing this financing, the Company also negotiated more favorable terms on its existing debt secured by drilling equipment, transportation equipment and the yard facility. Under the new terms, both the term loan and the revolving loan carry an interest rate of prime plus 2.25%. The monthly payments on both notes are now $27,381 plus interest.
The following pro forma financial information for the year ended March 31, 1997 gives effect to the above acquisition as though it was effective at the beginning of the period. The pro forma information may not be indicative of the results that would have occurred had the acquisition been effective on the date indicated or of the results that may be obtained in the future. The pro forma information should be read in conjunction with the consolidated financial statements and notes thereto of the Company.
(9) Oil and Gas Producing Activities (Unaudited)
The Company's oil and gas properties and operations are presented in the consolidated financial statements on the full cost method of accounting. All of the Company' exploration and production is conducted in the United States with a small working interest in Belize, Central America.
The aggregate amount of capitalized costs relating to oil and gas producing activities at the dates indicated are as follows:
-35- (Continued) SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the periods indicated in the preceding table, no internal costs were capitalized. Internal costs incurred during these periods were in the nature of general corporate overhead. All costs related to production, general corporate overhead and other similar activities are expensed in the period incurred. Costs of site restoration and dismantlement and abandonment have historically been equal to or less than revenue earned from salvage of the well equipment. Such costs, net of the salvage revenue, are added to or subtracted from the full cost of oil and gas properties. These costs have been minimal in the years being reported.
The following table sets forth information with respect to quantities of net proved oil and gas reserves, as estimated by an in-house petroleum engineer, and changes in proved reserves. Estimates of reserves and production performance are subjective and may change materially as actual production information becomes available.
-36- (Continued) SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Costs incurred for property acquisition, exploration and development activities are summarized below:
Results of operations for producing activities for the periods indicated were as follows:
The following is a standardized measure of the discounted net future cash flows and changes applicable to proved oil and gas reserves required by FASB 69. The future cash flows are based on estimated oil and gas reserves utilizing prices and costs in effect as of year end discounted at 10% per year and assuming continuation of existing economic conditions.
The standardized measure of discounted future net cash flows, in management's opinion, should be examined with caution. The basis for this table is a reserve study, as prepared by an in-house petroleum engineer, which contains estimates of quantities and rates of production of reserves. Revisions of previous year estimates can have a significant impact on these results. Also, exploration costs in one year may lead
-37- (Continued) SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
to significant discoveries in later years and may significantly change previous estimates of proved reserves and their valuation. Therefore, the standardized measure of discounted future net cash flow is not necessarily a "best estimate" of the fair value of the Company's proved oil and gas properties.
-38- (Continued) SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Fair Value of Financial Instruments
Cash, trade receivables and payables and short-term debt:
The Company holds cash, trade receivables and payables and short-term debt. The carrying amount of these instruments approximates fair value due to the short maturity of the instruments.
Long-term debt:
The carrying amount of the Company's long-term debt approximates fair value due to the recent issuance of the debt and the variable interest rate.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ROBERT R. MARMOR, 71, Chairman of the Board since April, 1980. Mr. Marmor was Chief Executive Officer of the Company from April, 1980 until February, 1992 and President from June, 1984 until November, 1991, at which time he voluntarily resigned from these positions and recommended his replacement. From December, 1979 until April, 1980, Mr. Marmor was President of the Company. From September, 1979 until December, 1979, Mr. Marmor was engaged in founding the Company. From October, 1978 until September, 1979 he was associated as a petroleum engineering consultant with Max K. Watson & Associates, Inc. of Austin, Texas, petroleum and natural gas consultants. From 1977 to October, 1978 he was engaged in various personal investment ventures. Mr. Marmor was employed from 1971 to 1977 in Adelaide, Australia by Delhi International Oil Corporation, Dallas, Texas, and served as project development manager and later as operations manager responsible for the exploration, drilling and production divisions.
WILLIAM D. HIBBETTS, 48, CPA, a Director since June, 1984. Mr. Hibbetts is Chief Accounting Officer of Southwest Venture Management Company. He was Treasurer/Controller of Gary Pools, Inc. from May, 1986 to July, 1988. He served as an officer of the Company from January 1, 1982 until May 1, 1986. Mr. Hibbetts served in various positions as an accountant with KPMG Peat Marwick LLP from June, 1971 to December, 1981. Mr. Hibbetts served as manager in that accounting firm's audit group from July, 1978 to December, 1981.
CHARLES B. TICHENOR, 70, a Director since May, 1988. Mr. Tichenor is Corporation Chief Executive-in-Residence/Professor at The Indiana University of Pennsylvania since January 1, 1995. Mr. Tichenor was Vice-Chancellor at Elizabeth City State University from May, 1992 to December 31, 1994. He was a professor at the College of Business of Mississippi State University where he occupied the position of Distinguished Corporation Chief Executive Officer-in- Residence from 1987 to 1992. Mr. Tichenor is the retired Chairman of Champale, Inc., a Fortune 1000 Company, where he served as president and chairman of the board from 1975 to 1983. He is a member of the Board of Trustees of Rider College, Lawrenceville, NJ and he currently or formerly served on the Boards of Doughty Foods, Inc., NYP Container Corp., MCM Investments Co. and Johnston Printing Co.
-39- (Continued) SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ALVIS L. DOWELL, 61, a Director since February, 1991. Mr. Dowell was President and Chief Executive Officer from November 7, 1992 to May 1, 1995. He was Chief Operating Officer from February, 1991 and Vice President from May 2, 1991. From 1988 until 1991, Mr. Dowell was employed by Maersk Oil and Gas, Copenhagen, Denmark as Assistant Manager, Drilling Department. From 1972 to 1988, Mr. Dowell was with Aramco, Saudi Arabian Operations as Drilling Safety Engineer and later as Superintendent Offshore Drilling and then Drilling Manager. He served as Director/Safety and Loss Prevention, Safety Engineering and Regional Engineering Manager with Holiday Inns, Inc., Texas Employers Insurance and Northwestern National Insurance Company.
WM. STACY LOCKE, 41, a Director since May 1, 1995. Mr. Locke is President and Chief Executive Officer since May 1, 1995. He was Vice President- Investment Banking with Arneson, Kercheville, Ehrenberg & Associates, Inc. from January 1, 1993 to April 30, 1995. From 1988-1992, Mr. Locke was Vice President-Investment Banking with Chemical Banking Corporation, Texas Commerce Bank. He was Senior Geologist with Huffco Petroleum Corporation from 1982-1986. From 1979 to 1982 Mr. Locke worked for Tesoro Petroleum Corporation and Valero Energy as a Geologist.
MARY L. KILGORE, 58, Vice President of Administration since December, 1993 and Corporate Secretary of the Company since May, 1986, has been employed in various positions by the Company and its predecessor from August, 1978.
CHRIS F. PARMA, 47, CPA, Vice President and Chief Financial Officer since December, 1995. He has been employed as Controller of the Company since October, 1990. He served in various accounting positions from Staff Accountant to Controller from 1972 to 1990 with J. H. Uptmore & Associates, Inc., Real Estate Developer. He served as Vice President of Uptmore from 1985 to 1990.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company and its subsidiaries for services performed during the fiscal year ended March 31, 1997, to the chief executive officer of the Company. No other officer was paid total compensation of $100,000 or more. See Item 13 for a summary of compensation due to Mr. Locke, the chief executive officer of the Company, under his employment agreement with the Company.
Summary Compensation Table
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(1) Includes value of personal use of company-provided vehicle.
(2) Includes 84,734 shares accrued per employment agreement.
(3) Includes 48,889 shares accrued per employment agreement.
(4) Includes value realized on exercise of 100,000 shares of Stock Option Plan granted May, 1995. See "Option/SAR Grants in Last Fiscal Year".
(5) Includes value of personal use of company-provided vehicle and Directors' fee paid by the Company.
(6) Includes 50,000 shares issued as a bonus. Value is calculated based on the average of the bid and ask prices at issue date discounted due to 2-year restriction on sale or transfer of stock.
(7) Includes $2,885 voluntarily deferred at election of Executive.
(8) Includes 20,000 shares issued as bonus and 6,000 shares issued as a directors' fee. Value is calculated based on bid price at issue date discounted due to 2-year restriction on sale or transfer of stock.
From December, 1988, through June, 1995, Directors received 1,000 shares of the Company's common stock for each directors' meeting attended. From July, 1995 through June 1996, Directors who were not officers or employees of the Company received $1,000 each quarter for their service on the Board and $250 for each meeting attended. From July 1996 through March 1997 those Directors received $500 each quarter for their service on the Board and $250 for each meeting attended. Beginning in April 1997 the Directors will once again receive $1,000 each quarter for their service on the Board and $250 for each meeting attended. Directors who are not officers or employees of the Company and reside outside of the surrounding area in which a board meeting is held are entitled to reimbursement for travel expenses incurred by them in attending directors' meetings for their service on the Board and $250 for each meeting attended.
The following table summarizes as to the chief executive officer of the Company, the number and terms of stock options granted during the year ended March 31, 1997:
Option/SAR Grants in Last Fiscal Year
No stock options were granted in the current fiscal year.
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
The following table summarizes as to each of the executive officers of the Company, the number and terms of stock warrants granted during the year ended March 31, 1997:
Stock Warrants Granted in Last Fiscal Year Individual Grants
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
In the current fiscal year, there were no stock warrant exercises by executive officers nor were there any stock warrant values at year end.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 19, 1997, with respect to each person who is known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock and the Series A Preferred Stock, each director of the Company, and all officers and directors of the Company as a group. Except as otherwise indicated, each person has sole investment and voting power with respect to the shares shown.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
(1) The Rowan Companies, Inc. have granted an option, which initially expired on August 15, 1993, but has been extended to August 15, 1996, to Mr. Marmor to purchase its holdings of Common Stock in the Company.
(2) Does not include 30,420 shares owned by Mr. Marmor's children. Mr. Marmor disclaims beneficial ownership and has no voting rights or dispositive power in these 30,420 shares. Includes options issued to Mr. Marmor by the Board of Directors to purchase 50,000 shares.
(3) Includes options issued to Mr. Hibbetts by the Board of Directors to purchase 15,000 shares .
(4) Includes options issued to Mr. Tichenor by the Board of Directors to purchase 15,000 shares.
(5) Includes options issued to Mr. Locke to purchase an additional 1,100,000 shares. (See Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's president and chief executive officer, Mr. Wm. Stacy Locke, commenced employment by the Company on May 1, 1995, under a two year employment agreement calling for a base salary of $100,000 for the first year of the two year term and $150,000 for year two. $20,000 of Mr. Locke's first year's salary was paid in Common Stock valued at the average market value of such shares during March, 1996. Likewise, $55,000 of the $150,000 salary payable to Mr. Locke during the second year of his employment with the Company was paid in Common Stock valued at its average market value during March, 1997.
The terms of Mr. Locke's agreement required the Company to issue ISO's to Mr. Locke for 1,200,000 shares of Common Stock with an exercise price of $.375 per share. While Mr. Locke remains employed by the Company and after the earlier to occur of (i) May 1, 1998 or (ii) the acquisition by Mr. Locke of at least 10% of the Company's outstanding Common Stock, on a fully diluted basis, and assuming the exercise of all exercisable stock options held by Mr. Locke, on each May 1 Mr. Locke may accelerate his ability to exercise all or any part of the options to purchase 240,000 shares of Common Stock which would otherwise become exercisable on the next following May 1 under his ISO up to the amount necessary for him to achieve or maintain the 10% ownership of Common Stock determined as described above. After all of Mr. Locke's ISO's become exercisable, the Company has agreed to issue additional ISO's (or non-qualified options if ISO's cannot be made available) covering up to 240,000 shares on each May 1 at an exercise price equal to the then market value of Common Stock in order to provide Mr. Locke with an opportunity to acquire and maintain ownership of 10% of the Company's Common Stock on the basis described above. In the event the Company shall receive gross cash proceeds of $10 million or more in connection with an underwritten public offering of Common Stock, Mr. Locke's rights to additional options shall cease.
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements and Schedules and Exhibits
1. The following consolidated financial statements of South Texas Drilling & Exploration, Inc. and its subsidiaries are included in Part II, Item 8 of this Report:
Independent Auditors' Report.
Consolidated Balance Sheets at March 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended March 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Supplementary Income Statement Information is included in Part IV, Item 14, "Financial Statements and Supplementary data" of this Report.
Schedule II - Valuation and Qualifying Accounts.
(All other schedules are omitted as inapplicable, not required, or already covered in the financial statements and notes thereto).
3. The following exhibits are filed as part of this Report:
Page - ----
- (3) Articles of Incorporation and Bylaws of the Company (previously filed as an Exhibit to the company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(a) Stock Purchase and Options Agreement dated December 28, 1981 between the Company and Rowan Companies, Inc. ("Rowan") (previously filed as an Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(b) Amended and Restated Agreement of Sale dated December 28, 1981 between the Company and Rowan relating to acquisition of the Tender Rigs (previously filed as an Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
- (10)(c) Note Purchase and Warrant Agreement between the Company and Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association relating to acquisition of the Tender Rigs (previously filed as an Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(d) Amendment No. 2 to Warrant Agreement dated April 12, 1984 between the Company and Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(e) Letter of Basic Terms dated April 12, 1984 between the Company and Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association regarding the recapitalization or reorganization of South Texas Offshore Drilling Company (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(f) Agreement dated April 12, 1984 among the Company and Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association of America releasing certain obligations of the Company (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(g) Loan Agreement dated December 28, 1981 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(h) Second Amendment dated April 13, 1984 to the Loan Agreement dated December 28, 1981 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(i) Modification of General Guaranty dated April 13, 1984 between the Company and Frost National Bank of San Antonio modifying the Company's guarantee of the Promissory Note of South Texas/1200, Ltd. (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(j) The Company's 1983 Non-qualified Stock Option Plan (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(k) Letter from Hoy M. Booker deferring enforcement of legal remedies (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(l) Letter from R. L. Kirkwood deferring enforcement of legal remedies (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
- (10)(m) Modification of Representation and Warranty of Second Amendment dated April 13, 1984 to the Loan Agreement dated December 28, 1981 between the company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1984 Annual Report on Form 10-K, File No. 2-70145).
- (10)(n) Agreement and Release dated January 3, 1986, between the Company and Hoy M. Booker and Robert L. Kirkwood regarding the assignment of certain oil and gas properties in satisfaction of certain promissory notes (previously filed as an Exhibit to the Company's 1985 Annual Report on Form 10-K, File No. 2-70145).
- (10)(o) Debt Cancellation Agreement dated March 24, 1986 between the company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1985 Annual Report on Form 10-K, File No. 2-70145).
- (10)(p) Amendment #1 To Debt Cancellation Agreement dated March 24, 1986 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(q) Amendment #2 To Debt Cancellation Agreement dated March 24, 1986 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(r) Modification and Extension of Term Note dated April 16, 1986 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(s) Bill of Sale of Oil and Gas Drilling Rigs dated April 16, 1986 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(t) Convertible subordinated note dated January 1, 1989 between the Company and Frost Bank (previously filed as an Exhibit to the Company's 1989 Annual Report on Form 10-K, File No. 2-70145).
- (10)(u) Convertible subordinated note dated November 1, 1988 between the Company and Larry Temple (previously filed as an Exhibit to the Company's 1989 Annual Report on Form 10-K, File No. 2-70145).
- (10)(v) Rig Lease and Refurbishing Agreement (Rig 11) dated September 21, 1990 between the Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's 1991 Annual Report on Form 10-K, File No. 2-70145).
- (10)(w) Rig Lease and Refurbishing Agreement (Rig 12) dated September 21, 1990 between the Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's 1991 Annual Report on Form 10-K, File No. 2-70145).
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
- (10)(x) Revised and restated rig Lease and Refurbishing Agreement regarding Rig 11 and Rig 12 dated September 27, 1991 between the Company and LB Sales and Leasing, Inc.(previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File No. 2-70145).
- (10)(y) Settlement Agreement dated November 13, 1991 between the Company and Frio Drilling Company (previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File No. 2-70145).
- (10)(z) Settlement Agreement dated December 29, 1994 between the Company and L. B. Sales and Leasing, Inc. ( previously filed as an Exhibit to the Company's 1995 Annual Report on Form 10-K, File No. 2-70145).
- (10)(aa) Executive Employment Agreement dated May 1, 1995 between the Company and Wm. Stacy Locke (previously filed as an Exhibit to the Company's 1995 Annual Report on Form 10-K, File No. 2-70145).
- (10)(bb) Form of Loan and Security Agreement dated May 8, 1996 between the Company and Finova Capital Corporation (previously filed as an Exhibit to the Company's 1996 Annual Report on Form 10-K, File No. 2-70145).
- (10)(cc) Form of Schedule to Loan and Security Agreement dated May 8, 1996 between the Company and Finova Capital Corporation (previously filed as an Exhibit to the Company's 1996 Annual Report on Form 10-K, File No. 2-70145).
- (10)(dd) Asset Purchase Agreement May 23, 1997 between the Company and San Patricio Corporation .
- (10)(ee) Non-Statutory Stock Option Agreement dated June 18, 1997 between the Company and San Patricio Corporation.
- (10)(ff) Second Amended Certificate of Designation, Reducing The Number Of Shares Formerly Designated Series A, Series B and Series C Preferred Stock to Zero and Designating The Voting Powers, Preferences and Rights of A New Series A 8% Convertible Preferred Stock dated April 15, 1997 between the Company and T.L.L. Temple Foundation.
- (22) Subsidiaries of the registrant (previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File No. 2-70145).
- (27) Financial Data Schedule
(b) Reports of Form 8-K: No reports on Form 8-K were filed with the Securities and Exchange Commission during the last quarter of the period covered by this report.
SCHEDULE II
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, South Texas Drilling & Exploration, Inc. has duly caused this report to be signed on its behalf by the undersigned, this 24th day of June, 1997 thereunto duly authorized.
By ------------------------------------- Robert R. Marmor, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
- (3) Articles of Incorporation and Bylaws of the Company (previously filed as an Exhibit to the company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(a) Stock Purchase and Options Agreement dated December 28, 1981 between the Company and Rowan Companies, Inc. ("Rowan") (previously filed as an Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(b) Amended and Restated Agreement of Sale dated December 28, 1981 between the Company and Rowan relating to acquisition of the Tender Rigs (previously filed as an Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(c) Note Purchase and Warrant Agreement between the Company and Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association relating to acquisition of the Tender Rigs (previously filed as an Exhibit to the Company's 1981 Annual Report on Form 10-K, File No. 2-70145).
- (10)(d) Amendment No. 2 to Warrant Agreement dated April 12, 1984 between the Company and Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(e) Letter of Basic Terms dated April 12, 1984 between the Company and Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association regarding the recapitalization or reorganization of South Texas Offshore Drilling Company (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(f) Agreement dated April 12, 1984 among the Company and Connecticut General Life Insurance Company and Teachers Insurance and Annuity Association of America releasing certain obligations of the Company (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(g) Loan Agreement dated December 28, 1981 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(h) Second Amendment dated April 13, 1984 to the Loan Agreement dated December 28, 1981 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(i) Modification of General Guaranty dated April 13, 1984 between the Company and Frost National Bank of San Antonio modifying the Company's guarantee of the Promissory Note of South Texas/1200, Ltd. (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(j) The Company's 1983 Non-qualified Stock Option Plan (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(k) Letter from Hoy M. Booker deferring enforcement of legal remedies (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(l) Letter from R. L. Kirkwood deferring enforcement of legal remedies (previously filed as an Exhibit to the Company's 1983 Annual Report on Form 10-K, File No. 2-70145).
- (10)(m) Modification of Representation and Warranty of Second Amendment dated April 13, 1984 to the Loan Agreement dated December 28, 1981 between the company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1984 Annual Report on Form 10-K, File No. 2-70145).
- (10)(n) Agreement and Release dated January 3, 1986, between the Company and Hoy M. Booker and Robert L. Kirkwood regarding the assignment of certain oil and gas properties in satisfaction of certain promissory notes (previously filed as an Exhibit to the Company's 1985 Annual Report on Form 10-K, File No. 2-70145).
- (10)(o) Debt Cancellation Agreement dated March 24, 1986 between the company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1985 Annual Report on Form 10-K, File No. 2-70145).
- (10)(p) Amendment #1 To Debt Cancellation Agreement dated March 24, 1986 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(q) Amendment #2 To Debt Cancellation Agreement dated March 24, 1986 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(r) Modification and Extension of Term Note dated April 16, 1986 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual Report on Form 10- K, File No. 2-70145).
- (10)(s) Bill of Sale of Oil and Gas Drilling Rigs dated April 16, 1986 between the Company and Frost National Bank of San Antonio (previously filed as an Exhibit to the Company's 1986 Annual Report on Form 10-K, File No. 2-70145).
- (10)(t) Convertible subordinated note dated January 1, 1989 between the Company and Frost Bank (previously filed as an Exhibit to the Company's 1989 Annual Report on Form 10-K, File No. 2-70145).
- (10)(u) Convertible subordinated note dated November 1, 1988 between the Company and Larry Temple (previously filed as an Exhibit to the Company's 1989 Annual Report on Form 10-K, File No. 2-70145).
- (10)(v) Rig Lease and Refurbishing Agreement (Rig 11) dated September 21, 1990 between the Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's 1991 Annual Report on Form 10-K, File No. 2-70145).
- (10)(w) Rig Lease and Refurbishing Agreement (Rig 12) dated September 21, 1990 between the Company and LB Sales and Leasing, Inc. (previously filed as an Exhibit to the Company's 1991 Annual Report on Form 10-K, File No. 2-70145).
- (10)(x) Revised and restated rig Lease and Refurbishing Agreement regarding Rig 11 and Rig 12 dated September 27, 1991 between the Company and LB Sales and Leasing, Inc.(previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File No. 2-70145).
- (10)(y) Settlement Agreement dated November 13, 1991 between the Company and Frio Drilling Company (previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File No. 2-70145).
- (10)(z) Settlement Agreement dated December 29, 1994 between the Company and L. B. Sales and Leasing, Inc. ( previously filed as an Exhibit to the Company's 1995 Annual Report on Form 10-K, File No. 2-70145).
- (10)(aa) Executive Employment Agreement dated May 1, 1995 between the Company and Wm. Stacy Locke (previously filed as an Exhibit to the Company's 1995 Annual Report on Form 10-K, File No. 2-70145).
- (10)(bb) Form of Loan and Security Agreement dated May 8, 1996 between the Company and Finova Capital Corporation (previously filed as an Exhibit to the Company's 1996 Annual Report on Form 10-K, File No. 2-70145).
- (10)(cc) Form of Schedule to Loan and Security Agreement dated May 8, 1996 between the Company and Finova Capital Corporation (previously filed as an Exhibit to the Company's 1996 Annual Report on Form 10-K, File No. 2-70145).
- (10)(dd) Asset Purchase Agreement May 23, 1997 between the Company and San Patricio Corporation.
- (10)(ee) Non-Statutory Stock Option Agreement dated June 18, 1997 between the Company and San Patricio Corporation.
- (10)(ff) Second Amended Certificate of Designation, Reducing The Number Of Shares Formerly Designated Series A, Series B and Series C Preferred Stock to Zero and Designating The Voting Powers, Preferences and Rights of A New Series A 8% Convertible Preferred Stock dated April 15, 1997 between the Company and T.L.L. Temple Foundation.
- (22) Subsidiaries of the registrant (previously filed as an Exhibit to the Company's 1992 Annual Report on Form 10-K, File No. 2-70145).
- (27) Financial Data Schedule