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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 2-70145
SOUTH TEXAS DRILLING & EXPLORATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-2088619
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9310 BROADWAY, BLDG. I 78217
SAN ANTONIO, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 828-7689
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK $0.10 PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was $24,310,544 as of June 15, 2001.
As of June 15, 2001, there were 14,695,921 shares of common stock, par
value $0.10 per share, of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement related to the registrant's 2001 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.
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TABLE OF CONTENTS
PAGE
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PART I
Items 1 and 2. Business and Properties.................................................................... 1
Item 3. Legal Proceedings................................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 11
Item 6. Selected Financial Data.......................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 16
Item 8. Financial Statements and Supplementary Data...................................................... 17
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 34
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 34
Item 11. Executive Compensation........................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 34
Item 13. Certain Relationships and Related Transactions................................................... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 34
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PART I
Statements we make in this Annual Report on Form 10-K which express a belief,
expectation or intention, as well as those that are not historical fact, are
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to various risks,
uncertainties and assumptions, including those to which we refer under the
heading "Cautionary Statement Concerning Forward-Looking Statements" following
Items 1 and 2 of Part I of this report.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
South Texas Drilling & Exploration, Inc. provides contract land
drilling services to independent and major oil and gas exploration and
production companies. In addition to our drilling rigs, we provide the drilling
crews and most of the ancillary equipment needed to operate our drilling rigs.
We have focused our operations in the natural gas production regions of South
Texas and East Texas. Our company was incorporated in 1979 as the successor to a
business that had been operating since 1968. We conduct our operations through
our principal operating subsidiary, Pioneer Drilling Co., Ltd. Our common stock
trades on the American Stock Exchange under the symbol "PDC."
Over the past two fiscal years, we have significantly expanded our fleet of
drilling rigs through acquisitions. The following table summarizes these
acquisitions:
NUMBER OF
DATE ACQUISITION MARKET RIGS ACQUIRED
- ---- ----------- ------ -------------
September 1999 Howell Drilling, Inc. assets South Texas 2
August 2000 Pioneer Drilling Co. South Texas 4(1)
March 2001 Mustang Drilling, Ltd. assets East Texas 4
- ----------
(1) Includes one drilling rig under a lease arrangement.
As of June 15, 2001, our rig fleet consists of 17 drilling rigs, 13 of
which are operating in South Texas and four of which are operating in East
Texas. We have also contracted for the construction of two new drilling rigs and
the acquisition of one previously active drilling rig that we are refurbishing
from used components. We expect one of the new rigs will begin operating in July
2001 and the second new rig and the refurbished rig will both begin operating in
September 2001. We own all the rigs in our fleet except for one rig that we
operate under a continuing lease arrangement we assumed in the Pioneer Drilling
Co. acquisition.
We are acquiring the principal components of the two newly constructed
rigs from National Oilwell, Inc., a leading manufacturer of drilling rigs and
other equipment used in oil and gas drilling and production operations. Both of
these rigs will be capable of drilling wells as deep as 18,000 feet. In addition
to their deep-drilling capabilities, these rigs will employ several
technological advancements that have been developed in recent years, including
alternating-current drive motors to power their hoisting systems. With these
technological advancements, we believe these rigs will provide us the following
advantages over other rigs operating in our markets:
o greater mobility;
o increased control, efficiency and reliability;
o improved safety features; and
o improved environmental characteristics.
We conduct our operations primarily in South Texas and East Texas. We
believe that these markets have historically experienced greater utilization
rates and dayrates versus other domestic markets, due in large part to the heavy
concentration of
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natural gas reserves located in these markets. During fiscal 2001, substantially
all the wells we drilled for our customers were drilled in search of natural
gas. Natural gas reserves are typically found in deeper geological formations
and generally require premium equipment and quality crews to drill the wells.
Our business strategy is to own and operate a high quality fleet of
land drilling rigs in active drilling markets and position ourselves as the
contractor of choice for our customers in order to maximize rig utilization and
dayrates and enhance shareholder value. We intend to continue making additions
to our drilling fleet, either through acquisitions of businesses or selected
assets or through the construction of new drilling rigs. As we add to our fleet,
we intend to focus on the addition of rigs capable of performing deep drilling
for natural gas.
INDUSTRY OVERVIEW
The United States contract land drilling services industry is highly
cyclical. Volatility in oil and gas prices can produce wide swings in the levels
of overall drilling activity in the markets we serve and affect the demand for
our drilling services and the dayrates we can charge for our rigs. Past trends
in oil and gas prices and the outlook for future oil and gas prices strongly
influence the number of wells oil and gas exploration and production companies
decide to drill.
Beginning in 1998 and extending into 1999, the domestic contract land
drilling industry was adversely affected by an extended period of low oil and
gas prices and a domestic natural gas surplus. The price of West Texas
Intermediate crude dropped to a low of $10.76 in December 1998 and the price of
natural gas dropped to a low of $1.66 in February 1999. These conditions led to
significant reductions in the overall level of domestic land drilling activity
resulting in a historical low domestic land rig count of 393 rigs on April 23,
1999. Prior to this industry downturn, during 1997, the contract land drilling
industry experienced a significant level of drilling activity, with a domestic
land rig count of 899 rigs on December 26, 1997. Also in 1997, the average price
of natural gas delivered at Henry Hub, Louisiana was approximately $2.48 per
mmbtu and the average price of West Texas Intermediate crude was approximately
$20.59 per barrel.
Oil and natural gas prices rose sharply in calendar years 2000 and
2001. The average price of natural gas for 2000 was $4.32 per mmbtu and for the
period from January 1, 2001 through May 31, 2001 was $5.70. The average price of
West Texas Intermediate crude for 2000 was $30.38 per barrel and for the period
from January 1, 2001 through May 31, 2001 was $28.46.
Primarily as a result of the increase in oil and natural gas prices,
exploration and production companies have increased their capital spending
budgets. These increased spending budgets have increased the demand for contract
drilling services. The domestic land rig count climbed to 1,105 on May 31, 2001,
representing an increase in the domestic land rig count of 181.2% since the low
in April 1999 and of 22.9% since December 31, 1997. While market conditions have
improved in 2000 and into 2001, demand for contract land drilling services may
decline in the future.
For many years, the United States contract land drilling services
industry has been characterized by an oversupply of drilling rigs and a large
number of drilling contractors. However, since 1996, there has been significant
consolidation within the industry. We believe continued consolidation in the
industry will generate more stability in dayrates, even during industry
downturns. However, although consolidation in the industry is continuing in
2001, the industry is still highly fragmented and remains very competitive.
DRILLING EQUIPMENT
General
A land drilling rig consists of engines, a hoisting system, a rotating
system, pumps and related equipment to circulate drilling fluid, blowout
preventers and related equipment.
Diesel or gas engines are typically the main power sources for a
drilling rig. Power requirements for drilling jobs may vary considerably, but
most land drilling rigs employ two or more engines to generate between 500 and
2,000 horsepower, depending on well depth and rig design. Most drilling rigs
capable of drilling in deep formations, involving depths greater than 15,000
feet, use diesel-electric power units to generate and deliver electric current
through cables to electrical switch gear, then to direct-current electric motors
attached to the equipment in the hoisting, rotating and circulating systems.
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Drilling rigs use long strings of drill pipe and drill collars to drill
wells. Drilling rigs are also used to set heavy strings of large-diameter pipe,
or casing, inside the borehole. Because the total weight of the drill string and
the casing can exceed 500,000 pounds, drilling rigs require significant hoisting
and braking capacities. Generally, a drilling rig's hoisting system is made up
of a mast, or derrick, a traveling block and hook assembly that attaches to the
rotating system, a mechanism known as the drawworks, a drilling line and
ancillary equipment. The drawworks mechanism consists of a revolving drum,
around which the drilling line is wound, and a series of shafts, clutches and
chain and gear drives for generating speed changes and reverse motion. The
drawworks also houses the main brake, which has the capacity to stop and sustain
the weights used in the drilling process. When heavy loads are being lowered, a
hydraulic or electric auxiliary brake assists the main brake to absorb the great
amount of energy developed by the mass of the traveling block, hook assembly,
drill pipe, drill collars and drill bit or casing being lowered into the well.
The rotating equipment from top to bottom consists of a swivel, the
kelly cock, the kelly, the rotary table, drill pipe, drill collars and the drill
bit. We refer to the equipment between the swivel and the drill bit as the drill
stem. The swivel assembly sustains the weight of the drill stem, permits its
rotation and affords a rotating pressure seal and passageway for circulating
drilling fluid into the top of the drill string. The swivel also has a large
handle that fits inside the hook assembly at the bottom of the traveling block.
Drilling fluid enters the drill stem through a hose, called the rotary hose,
attached to the side of the swivel. The kelly is a triangular, square or
hexagonal piece of pipe, usually 40 feet long, that transmits torque from the
rotary table to the drill stem and permits its vertical movement as it is
lowered into the hole. The bottom end of the kelly fits inside a corresponding
triangle, square or hexagonal opening in a device called the kelly bushing. The
kelly bushing, in turn, fits into a part of the rotary table called the master
bushing. As the master bushing rotates, the kelly bushing also rotates, turning
the kelly, which rotates the drill pipe and thus the drill bit. Drilling fluid
is pumped through the kelly on its way to the bottom. The rotary table, equipped
with its master bushing and kelly bushing, supplies the necessary torque to turn
the drill stem. The drill pipe and drill collars are both steel tubes through
which drilling fluid can be pumped. Drill pipe, sometimes called drill string,
comes in 30 foot sections, or joints, with threaded sections on each end. Drill
collars are heavier than drill pipe and are also threaded on the ends. Collars
are used on the bottom of the drill stem to apply weight to the drilling bit. At
the end of the drill stem is the bit, which chews up the formation rock and
dislodges it so that drilling fluid can circulate the fragmented material back
up to the surface where the circulating system filters it out of the fluid.
Drilling fluid, often called mud, is a mixture of clays, chemicals and
water or oil, which is carefully formulated for the particular well being
drilled. Drilling mud accounts for a major portion of the equipment and cost of
drilling a well. Bulk storage of drilling fluid materials, the pumps and the mud
mixing equipment are placed at the start of the circulating system. Working mud
pits and reserve storage are at the other end of the system. Between these two
points the circulating system includes auxiliary equipment for drilling fluid
maintenance and equipment for well pressure control. Within the system, the
drilling mud is typically routed from the mud pits to the mud pump and from the
mud pump through a standpipe and the rotary hose to the drill stem. The drilling
mud travels down the drill stem to the bit, up the annular space between the
drill stem and the borehole and through the blowout preventer stack to the
return flow line. It then travels to a shale shaker for removal of rock
cuttings, then back to the mud pits, which are usually steel tanks. The
so-called reserve pits, usually one or two fairly shallow excavations, are used
for waste material and excess water around the location.
There are numerous factors that differentiate land drilling rigs,
including their power generation systems and their drilling depth capabilities.
The actual drilling depth capability of a rig may be less than or more than its
rated depth capability due to numerous factors, including the size, weight and
amount of the drill pipe on the rig. The intended well depth and the drill site
conditions determine the amount of drill pipe and other equipment needed to
drill a well. Generally, land rigs operate with crews of five to six persons.
Our Fleet of Drilling Rigs
As of June 15, 2001, our rig fleet consists of 17 drilling rigs. We
have also contracted for the construction of two new drilling rigs and the
acquisition of one previously active drilling rig that we are refurbishing from
used components. We expect to take delivery of one of the new rigs in July 2001
and the second new rig and the refurbished rig in September 2001. We own all the
rigs in our fleet except for one that we operate under a lease arrangement.
We are acquiring the principal components of the two newly constructed
rigs from National Oilwell, Inc., a leading manufacturer of drilling rigs and
other equipment used in oil and gas drilling and production operations. Both of
these rigs will
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be capable of drilling wells as deep as 18,000 feet. In addition to their
deep-drilling capabilities, these rigs will employ several technological
advancements that have been developed in recent years. These advancements
include alternating-current ("AC") motors, which provide an electric braking
mechanism that gives the hoisting system the capability of holding a full load
in a stationary position and eliminates the need for the drilling personnel to
operate an auxiliary brake. The AC technology also provides significantly
greater control in the drilling process and improves the efficiency in
"tripping" operations when the drill stem is being lowered into or raised from
the borehole for various reasons, including cleaning the borehole, changing the
drill bit or coming out of the hole to install casing. The AC technology also
requires a reduced number of diesel engines, which can generate fuel savings and
reduce maintenance requirements. These new rigs also employ computerized
"auto-driller" technology that increases the rate of penetration into the
formation by more closely monitoring the total weight on the drill bit and
automatically lowering the drill stem to maintain a constant pressure on the
drill bit. These rigs also have features that, as compared to other rigs, reduce
the time and expense associated with transporting the rig, installing it on
location and removing it when drilling operations are complete. They also
require less land clearing for installation and operation and are equipped with
drain lines that permit them to operate without discharging cuttings or other
drilling material into the environment.
With these technological advancements, we believe these rigs will
provide us the following advantages over other rigs operating in our markets:
o greater mobility;
o increased control, efficiency and reliability;
o improved safety features; and
o improved environmental characteristics.
The following table sets forth information regarding our drilling
fleet, including the three rigs we are acquiring:
Approximate
Drilling
Depth Estimated
Rig Capability Current Current Contract
Number Rig Design (feet) Location Customer Expiration
- ------ ---------- ----------- -------- -------- ----------
1 IRI Cabot 750E 10,000 South Texas Conoco Inc. July 2001
2 IRI Cabot 750E 10,000 South Texas Conoco Inc. July 2001
3 National 110UE 18,000 South Texas Dominion Resources July 2002
4(1) RMI 1000E 16,000 South Texas Dominion Resources April 2002
5 Gardner-Denver 500M 10,000 South Texas Dewbre Petroleum July 2001
6 Skytop DH4610 10,500 South Texas Devon Energy October 2001
7(2) IRI 1700E 18,000 -- Pogo Producing July 2002
8(3) IRI 1700E 18,000 -- Devon Energy September 2002
9 Weiss W-45 9,000 South Texas Edge Petroleum July 2001
10 Skytop Brewster N46 12,000 South Texas Kerr-McGee April 2002
11 Skytop Brewster N46 12,000 South Texas Pogo Producing June 2002
12 IRI Cabot 900 10,500 South Texas Edge Petroleum June 2002
14 Skytop Brewster N46 12,000 South Texas Kerr-McGee May 2002
15 IRI Cabot 750 10,000 South Texas Louis Dreyfus September 2001
16 IRI Cabot 750 10,000 South Texas EOG Resources December 2001
17 Ideco H-725 12,000 East Texas Mustang Drilling, December 2001
Ltd.
18 Brewster N-75 12,500 East Texas Stroud Exploration July 2001
19 Brewster N-75 12,500 East Texas R. Lacy, Inc. September 2001
20 BDW 800 13,500 East Texas Matador Petroleum October 2001
21(4) National 110UE 18,000 -- -- --
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- ---------
(1) We are leasing this rig under a lease arrangement we assumed as a
result of the Pioneer Drilling Co. acquisition. The primary term of
this lease has expired. However, under the lease terms, we are able to
extend the term of the lease on a well-to-well basis for so long as we
keep the rig under contract for drilling. (footnotes continued)
(2) We expect this new-build rig will become operational in July 2001. We
have obtained a one-year drilling contract from Pogo Producing Company,
which we expect to commence promptly after the rig becomes operational.
(3) We expect this new-build rig will become operational in September 2001.
We have obtained a one-year drilling contract from Devon Energy
Corporation, which we expect to commence promptly after the rig becomes
operational.
(4) We expect this refurbished rig will become operational in September
2001.
We believe that our drilling rigs and other related equipment are in
good operating condition. Our employees perform periodic maintenance and minor
repair work on our drilling rigs. We rely on various oilfield service companies
for major repair work and overhaul of our drilling equipment when needed. We
also engage in periodic improvement of our drilling equipment. In the event of
major breakdowns or mechanical problems, our rigs could be subject to
significant idle time and a resulting loss of revenue if the necessary repair
services were not immediately available. We have not experienced any substantial
downtime as the result of repair or overhaul of our equipment in the past three
years.
The following table sets forth information regarding utilization for
our fleet of drilling rigs and for the U.S. contract land drilling industry as a
whole. The industry information reflects all operational rigs for each period we
have indicated below, including rigs that are dissimilar to our rigs, in terms
of their age, design, performance capabilities and operational criteria.
Year ended March 31,
----------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
South Texas Drilling
Average number of operational rigs
for the period .................... 10.5 6.6 6.0 6.0 4.0
Average utilization rate .............. 91% 66% 66% 86% 90%
Industry(1)
Average number of operational rigs
for the period(1) ................. 1,003 778 518 713 820
Average utilization rate(2) ........... 85% 73% 51% 75% 86%
- ---------
(1) We obtained the industry average information from World Oil magazine.
(2) We obtained the industry average information from the Baker Hughes
Incorporated website.
We also own a fleet of 13 trucks and related transportation equipment
that we use to transport our drilling rigs to and from drilling sites.
DRILLING CONTRACTS
We obtain our contracts for drilling oil and gas wells either through
competitive bidding or through direct negotiations with customers. Our drilling
contracts generally provide for compensation on either a daywork, turnkey or
footage basis. Contract terms we offer generally depend on the complexity and
risk of operations, the on-site drilling conditions, the type of equipment used
and the anticipated duration of the work to be performed. Generally, our
contracts provide for the drilling of a single well and typically permit the
customer to terminate on short notice, usually on payment of a fee. Recently,
however, we have entered into a number of term contracts to provide drilling
services on a daywork basis ranging in length from six months to one year. These
term contracts include a per day termination rate approximately equal to 80% of
the daywork rate on each contract.
Daywork Contracts. Under daywork drilling contracts, we provide a
drilling rig with required personnel to our customer who supervises the drilling
of the well. We are paid based on a negotiated fixed rate per day while the rig
is used. Daywork drilling contracts specify the equipment to be used, the size
of the hole and the depth of the well. Under a daywork drilling
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contract, the customer bears a large portion of out-of-pocket costs of drilling
and we generally bear no part of the usual risks associated with drilling, such
as time delays and unanticipated costs.
Turnkey Contracts. Under a turnkey contract, we agree to drill a well
for our customer to a specified depth and under specified conditions for a fixed
price, regardless of the time required or the problems encountered in drilling
the well. We provide technical expertise and engineering services, as well as
most of the equipment and drilling supplies required to drill the well. We often
subcontract for related services, such as the provision of casing crews,
cementing and well logging. Under typical turnkey drilling arrangements, we do
not receive progress payments and are entitled to be paid by our customer only
after we have performed the terms of the drilling contract in full. Turnkey
contracts generally afford an opportunity to earn a higher return than would
normally be available on daywork contracts if the contract can be completed
successfully without complications.
The risks to us under a turnkey contract are substantially greater than
on a well drilled on a daywork basis, because we assume most of the risks
associated with drilling operations generally assumed by the operator in a
daywork contract, including the risk of blowout, loss of hole, stuck drill pipe,
machinery breakdowns, abnormal drilling conditions and risks associated with
subcontractors' services, supplies, cost escalations and personnel. We employ or
contract for engineering expertise to analyze seismic, geologic and drilling
data to identify and reduce some of the drilling risks assumed by us. We use the
results of this analysis to evaluate the risks of a proposed contract and seek
to account for such risks in our bid preparation. We believe that our operating
experience, qualified drilling personnel, risk management program, internal
engineering expertise and access to proficient third party engineering
contractors have allowed us to reduce some of the risks inherent in turnkey
drilling operations. We also maintain insurance coverage against some but not
all drilling hazards. However, the occurrence of uninsured or under-insured
losses or operating cost overruns on our turnkey jobs could have a material
adverse effect on our financial position and results of operations.
Footage Contracts. Under footage contracts, we are paid a fixed amount
for each foot drilled, regardless of the time required or the problems
encountered in drilling the well. We typically pay more of the out-of-pocket
costs associated with footage contracts compared with daywork contracts. Similar
to a turnkey contract, the risks to us on a footage contract are greater because
we assume most of the risks associated with drilling operations generally
assumed by the operator in a daywork contract, including the risk of blowout,
loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling
conditions and risks associated with subcontractors' services, supplies, cost
escalation and personnel. As with turnkey contracts, we manage this additional
risk through the use of engineering expertise and bid the footage contracts
accordingly, and we maintain insurance coverage against some but not all
drilling hazards. However, the occurrence of uninsured or under-insured losses
or operating cost overruns on our footage jobs could have a material adverse
effect on our financial position and results of operations.
During the year ended March 31, 2001, we drilled 101 wells, with 42% of
our contract drilling revenue attributable to daywork contracts, 57%
attributable to turnkey contracts and 1% attributable to footage contracts.
During the year ended March 31, 2000, we drilled 58 wells, with 22% of our
contract drilling revenue attributable to daywork contracts, 77% attributable to
turnkey contracts and 1% attributable to footage contracts. Currently, 16 of our
17 rigs are operating under daywork contracts.
CUSTOMERS AND MARKETING
Our contract drilling customers include independent and major oil and
gas exploration production companies. We completed contracts for 58 customers in
fiscal 2001, compared to 38 customers in fiscal 2000 and 26 customers in fiscal
1999. During the fiscal year ended March 31, 2001, our three largest customers,
Dominion Exploration & Production, Inc., Conoco Inc. and Pure Resources, Inc.
accounted for 13.6%, 8.8% and 6.3%, respectively, of our total contract drilling
revenue.
We primarily market our drilling rigs through employee marketing
representatives. These marketing representatives use personal contacts and
industry periodicals and publications to determine which operators are planning
to drill oil and gas wells in the near future. Once we have been placed on the
"bid list" for an operator, we will typically be given the opportunity to bid on
most future wells for that operator in the area.
From time to time we also enter into informal, nonbinding commitments
with our customers to provide drilling rigs for future periods at specified
rates plus fuel and mobilization charges, if applicable, and escalation
provisions. This practice is customary in the contract land drilling services
business during times of tightening rig supply.
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During late 2000 and 2001, we entered into a number of term contracts
with our customers ranging in length from six months to one year. The practical
effect of these term contracts is to protect us for the duration of the contract
from having the rig become idle and from unexpected declines in dayrates for our
rigs. Conversely, our customers benefit from term contracts by the assured
availability of a rig to meet their drilling schedule, and from contractual
protection against exposure to rapid increases in dayrates under well-by-well
drilling contracts. These term contracts are priced on a fixed dayrate basis
which allow us to earn an acceptable rate of return on the capital we are
employing. To the extent possible, we intend to continue entering into
additional term contracts from time to time based on market conditions.
COMPETITION
We encounter substantial competition from other drilling contractors.
Our primary market areas of South Texas and East Texas are highly fragmented and
competitive. The fact that drilling rigs are mobile and can be moved from one
market to another in response to market conditions heightens the competition in
the industry.
The drilling contracts we compete for are usually awarded on the basis
of competitive bids. We believe pricing and rig availability are the primary
factors our potential customers consider in determining which drilling
contractor to select. In addition, we believe the following factors are also
important:
o the type and condition of each of the competing drilling rigs;
o the mobility and efficiency of the rigs;
o the quality of service and experience of the rig crews;
o the safety records of the rigs;
o the offering of ancillary services; and
o the ability to provide drilling equipment adaptable to, and
personnel familiar with, new technologies and drilling
techniques.
While we must be competitive in our pricing, our competitive strategy
generally emphasizes the quality of our equipment, the safety record of our rigs
and the experience of our rig crews to differentiate us from our competitors.
Contract drilling companies compete primarily on a regional basis, and
the intensity of competition may vary significantly from region to region at any
particular time. If demand for drilling services improves in a region where we
operate, our competitors might respond by moving in suitable rigs from other
regions. An influx of rigs from other regions could rapidly intensify
competition and make any improvement in demand for drilling rigs in a particular
region short-lived.
Many of our competitors have greater financial, technical and other
resources than we do. Their greater capabilities in these areas may enable them
to:
o better withstand industry downturns;
o compete more effectively on the basis of price and technology;
o better retain skilled rig personnel; and
o build new rigs or acquire and refurbish existing rigs so as to
be able to place rigs into service more quickly than us in
periods of high drilling demand.
RAW MATERIALS
The materials and supplies we use in our drilling operations include
fuels to operate our drilling equipment, drilling mud, drill pipe, drill
collars, drill bits and cement. We do not rely on a single source of supply for
any of these items. While we are not currently experiencing any shortages, from
time to time there have been shortages of drilling equipment and supplies during
periods of high demand. Shortages could result in increased prices for drilling
equipment or supplies that we may be unable to pass on to customers. In
addition, during periods of shortages, the delivery times for equipment and
supplies can be substantially longer. Any significant delays in our obtaining
drilling equipment or supplies could limit drilling operations and
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jeopardize our relations with customers. In addition, shortages of drilling
equipment or supplies could delay and adversely affect our ability to obtain new
contracts for our rigs, which could have a material adverse effect on our
financial condition and results of operations.
OPERATING RISKS AND INSURANCE
Our operations are subject to the many hazards inherent in the contract
land drilling business, including the risks of:
o blowouts;
o fires and explosions;
o loss of well control;
o collapse of the borehole;
o lost or stuck drill strings; and
o damage or loss from natural disasters.
Any of these hazards can result in substantial liabilities or losses to
us from, among other things:
o suspension of drilling operations;
o damage to, or destruction of, our property and equipment and
that of others;
o personal injury and loss of life;
o damage to producing or potentially productive oil and gas
formations through which we drill; and
o environmental damage.
We seek to protect ourselves from some but not all operating hazards
through insurance coverage. However, some risks are either not insurable or
insurance is available only at rates that we consider uneconomical. Those risks
include pollution liability in excess of relatively low limits. Depending on
competitive conditions and other factors, we attempt to obtain contractual
protection against uninsured operating risks from our customers. However,
customers who provide contractual indemnification protection may not in all
cases maintain adequate insurance to support their indemnification obligations.
We can offer no assurance that our insurance or indemnification arrangements
will adequately protect us against liability or loss from all the hazards of our
operations. The occurrence of a significant event that we have not fully insured
or indemnified against or the failure of a customer to meet its indemnification
obligations to us could materially and adversely affect our results of
operations and financial condition. Furthermore, we may not be able to maintain
adequate insurance in the future at rates we consider reasonable.
Our current insurance coverages include property insurance on our rigs,
drilling equipment and real property. We also maintain casualty insurance, which
includes comprehensive general liability, commercial automobile, commercial
umbrella and workers' compensation insurance. Our insurance coverage for
property damage to our rigs and to our drilling equipment is based on our
estimate, as of October 2000, of the cost of comparable used equipment to
replace the insured property. The policy provides for a deductible on rigs of
$25,000 per occurrence. Our third party liability insurance coverage is $16
million per occurrence and in the aggregate, with a deductible of $10,000 per
occurrence. We believe that we are adequately insured for public liability and
property damage to others with respect to our operations. However, such
insurance may not be sufficient to protect us against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment.
In addition, we generally carry insurance coverage to protect against
certain hazards inherent in our turnkey and footage contract drilling
operations. This insurance covers "control-of-well," including blowouts above
and below the surface, re-drilling, seepage and pollution. This policy provides
coverage of either $3 million or $10 million, depending on the area in which the
well is drilled and its target depth. This policy also provides care, custody
and control insurance, with a limit of $500,000.
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EMPLOYEES
We currently have approximately 370 employees. Approximately 70 of
these employees are salaried administrative or supervisory employees. The rest
of our employees are hourly employees who operate or maintain our drilling rigs.
The number of hourly employees fluctuates depending on the number of drilling
projects we are engaged in at any particular time. None of our employment
arrangements are subject to collective bargaining arrangements.
Our operations require the services of employees having the technical
training and experience necessary to obtain the proper operational results. As a
result, our operations depend, to a considerable extent, on the continuing
availability of such personnel. Although we have not encountered material
difficulty in hiring and retaining qualified rig crews, shortages of qualified
personnel are occurring in our industry. If we should suffer any material loss
of personnel to competitors or be unable to employ additional or replacement
personnel with the requisite level of training and experience to adequately
operate our equipment, our operations could be materially and adversely
affected. While we believe our wage rates are competitive and our relationships
with our employees are satisfactory, a significant increase in the wages paid by
other employers could result in a reduction in our workforce, increases in wage
rates, or both. The occurrence of either of these events for a significant
period of time could have a material and adverse effect on our financial
condition and results of operations.
FACILITIES
We own our headquarters building in San Antonio, Texas. We also own a
15-acre rig storage and maintenance yard in Corpus Christi, Texas and lease a
six-acre storage and maintenance yard in Henderson, Texas, at a cost of $3,700
per month, pursuant to a lease extending through March 2006. We believe these
facilities are adequate to serve our current and anticipated needs.
GOVERNMENTAL REGULATION
Our operations are subject to stringent laws and regulations relating
to containment, disposal and controlling the discharge of hazardous oilfield
waste and other nonhazardous waste material into the environment, requiring
removal and cleanup under certain circumstances, or otherwise relating to the
protection of the environment. In addition, our operations are often conducted
in or near ecologically sensitive areas, such as wetlands, which are subject to
special protective measures and which may expose us to additional operating
costs and liabilities for accidental discharges of oil, natural gas, drilling
fluids or contaminated water or for noncompliance with other aspects of
applicable laws. We are also 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 us to
organize and report information about the hazardous materials we use in our
operations to employees, state and local government authorities and local
citizens.
Environmental laws and regulations are complex and subject to frequent
change. In some cases, they can impose liability for the entire cost of cleanup
on any responsible party without regard to negligence or fault and can impose
liability on us for the conduct of others or conditions others have caused, or
for our acts that complied with all applicable requirements when we performed
them. We may also be exposed to environmental or other liabilities originating
from businesses and assets which we purchased from others. Compliance with
applicable environmental laws and regulations has not, to date, materially
affected our capital expenditures, earnings or competitive position, although
compliance measures have added to our costs of operating drilling equipment in
some instances. We do not expect to incur material capital expenditures in our
next fiscal year in order to comply with current environment control
regulations. However, our compliance with amended, new or more stringent
requirements, stricter interpretations of existing requirements or the future
discovery of contamination may require us to make material expenditures or
subject us to liabilities that we currently do not anticipate.
In addition, our business depends on the demand for land drilling
services from the oil and gas industry and, therefore, is affected by tax,
environmental and other laws relating to the oil and gas industry generally, by
changes in those laws and by changes in related administrative regulations. It
is possible that these laws and regulations may in the future add significantly
to our operating costs or those of our customers or otherwise directly or
indirectly affect our operations.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and
potential security holders generally of some of the risks and uncertainties that
can affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about our company. These statements may include projections and estimates
concerning the timing and success of specific projects and our future backlog,
revenues, income and capital spending. Forward-looking statements are generally
accompanied by words such as "estimate," "project," "predict," "believe,"
"expect," "anticipate," "plan," "goal" or other words that convey the
uncertainty of future events or outcomes. Sometimes we will specifically
describe a statement as being a forward-looking statement and refer to this
cautionary statement.
In addition, various statements this Annual Report on Form 10-K
contains, including those that express a belief, expectation or intention, as
well as those that are not statements of historical fact, are forward-looking
statements. Those forward-looking statements appear in Items 1 and 2 - "Business
and Properties" and Item 3 - "Legal Proceedings" in Part I of this report and in
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations," Item 7A - "Quantitative and Qualitative Disclosures
About Market Risk" and in the Notes to Consolidated Financial Statements we have
included in Item 8 of Part II of this report and elsewhere in this report. These
forward-looking statements speak only as of the date of this report. We disclaim
any obligation to update these statements, and we caution you not to rely on
them unduly. We have based these forward-looking statements on our current
expectations and assumptions about future events. While our management considers
these expectations and assumptions to be reasonable, they are inherently subject
to significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. These risks, contingencies and uncertainties
relate to, among other matters, the following:
o general economic and business conditions and industry trends;
o the continued strength of the contract land drilling industry
in the geographic areas where we operate;
o decisions about onshore exploration and development projects
to be made by oil and gas companies;
o the highly competitive nature of our businesses;
o our future financial performance, including availability,
terms and deployment of capital;
o the continued availability of qualified personnel; and
o changes in, or our failure or inability to comply with,
government regulations, including those relating to the
environment.
We believe the items we have outlined above are important factors that
could cause our actual results to differ materially from those expressed in a
forward-looking statement made in this report or elsewhere by us or on our
behalf. We have discussed many of these factors in more detail elsewhere in this
report. These factors are not necessarily all the important factors that could
affect us. Unpredictable or unknown factors we have not discussed in this report
could also have material adverse effects on actual results of matters that are
the subject of our forward-looking statements. We do not intend to update our
description of important factors each time a potential important factor arises.
We advise our security holders that they should (1) be aware that important
factors not referred to above could affect the accuracy of our forward-looking
statements and (2) use caution and common sense when considering our
forward-looking statements.
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ITEM 3. LEGAL PROCEEDINGS
On June 28, 2000, one of our former employees, Jesse J. Sanchez, filed
a petition against us in the District Court for the 341st District in Webb
County, Texas. The petition asserts a claim for injuries allegedly resulting
from an accident involving one of our drilling rigs. The petition alleges, among
other things, that we intentionally failed to furnish Mr. Sanchez with a safe
workplace and that we believed our conduct was substantially certain to cause
Mr. Sanchez's injuries and related damages his wife and children allegedly
sustained. He claims that his actual damages do not exceed $2 million, and he is
seeking punitive damages in excess of $1 million. The petition also sets forth
claims by or on behalf of Mr. Sanchez's wife and children against us for loss of
consortium, support and services. In support of their claims, the Plaintiffs
have alleged that Mr. Sanchez's injuries were caused by the use of alcohol and
drugs by some of our other employees who were at the work site when the accident
occurred. Along with us, the Plaintiffs have sued the well operator, the project
engineer and an oilfield equipment manufacturer. We believe the substantive
allegations the petition contains have no merit and that this action was brought
to circumvent the workers' compensation insurance regime that should supply Mr.
Sanchez's only recourse in this matter. We are defending against these claims
vigorously.
In addition, due to the nature of our business, we are, from time to
time, involved in routine litigation or subject to disputes or claims related to
our business activities, including workers' compensation claims and
employment-related disputes. In the opinion of our management, none of the
pending litigation, disputes or claims against us will have a material adverse
effect on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our security holders during
the fourth quarter of fiscal 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of June 15, 2001, 14,695,921 million shares of our common stock were
outstanding, held by approximately 660 shareholders of record. The number of
record holders does not necessarily bear any relationship to the number of
beneficial owners of our common stock.
Our common stock began trading on the American Stock Exchange on March
8, 2001 under the symbol "PDC." Previously, our common stock was traded in the
over-the-counter market and quoted in the National Quotation Bureau's "Pink
Sheets" for more than 10 years. The following table sets forth, for each of the
periods indicated, the high and low closing prices per share as reported in the
Pink Sheets for the period through March 7, 2001 and the high and low sales
prices per share on the American Stock Exchange since that date. The Pink Sheets
quotations reflect interdealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual transactions.
Low High
------- ------
FISCAL YEAR ENDED MARCH 31, 2001:
First Quarter $1.3120 2.5310
Second Quarter 1.9680 3.1250
Third Quarter 1.7700 2.8750
Fourth Quarter 2.3750 5.1880
FISCAL YEAR ENDED MARCH 31, 2000:
First Quarter $0.5310 0.9060
Second Quarter 0.6870 1.1560
Third Quarter 0.6250 1.1870
Fourth Quarter 0.7180 2.5000
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The last reported sales price for our common stock on the American
Stock Exchange on June 15, 2001 was $4.95 per share.
We have not paid or declared any dividends and currently intend to
retain earnings to fund our working capital needs and growth opportunities. Any
future dividends will be at the discretion of our board of directors after
taking into account various factors it deems relevant, including our financial
condition and performance, cash needs, income tax consequences and the
restrictions Texas and other applicable laws and our credit facilities then
impose. Our debt arrangements include provisions that generally prohibit us from
paying dividends, other than dividends on our preferred stock. In October 2000,
we paid $160,614 in dividends to the sole holder of our Series A preferred
stock. The holder of those shares then converted them into 800,000 shares of our
common stock in accordance with the terms of the Series A preferred stock. We
did not pay any dividends on our Series B preferred stock in fiscal 2000 or
2001. At March 31, 2001, we had an aggregate of $766,581 of accrued and unpaid
dividends on our Series B preferred stock, which we paid in May 2001. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" in Item 7 of this report.
Recent Sales of Unregistered Securities
On March 30, 2001, we issued and sold for cash a $9,000,000 principal
amount, 4.86% subordinated debenture to WEDGE Energy Services, L.L.C. The
debenture had a maturity date of March 29, 2002 and was subordinated to all our
outstanding bank debt or debt incurred under our then current bank credit
facilities or any extension or renewal of any of those facilities. If we had
obtained shareholder approval of the conversion feature, the debenture would
have become convertible at our option or at the option of WEDGE into 2,400,000
shares of our common stock, at a conversion price of $3.75 per share. We did not
engage an underwriter and did not pay any commission to any third party in
connection with that sale. We used the proceeds from that sale to partially fund
our acquisition of the contract drilling assets of Mustang Drilling, Ltd. We
sold the debenture to WEDGE without registration under the Securities Act in
reliance on the exemption Section 4(2) of the Securities Act provides for
transactions not involving any public offering. We repurchased this debenture on
May 18, 2001. We funded the repayment of the $9,000,000 face amount of the
debenture, together with the payment of $59,535 of accrued interest, with a
short-term bank borrowing. We then sold an additional 2,400,000 shares of our
common stock to WEDGE in a private placement for $9,048,000, or $3.77 per share.
We used the proceeds from this sale to fund the repayment of the short-term bank
borrowing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" in Item 7 of this
report.
On May 31, 2001, San Patricio Corporation exercised an option to
acquire 150,000 shares of our common stock at a price of $1.50 per share. We
issued that option in connection with our acquisition of the contract land
drilling operations of San Patricio in fiscal 1998. We issued that option, and
the shares of common stock on exercise of that option, without registration
under the Securities Act in reliance on the exemption Section 4(2) of the
Securities Act provides for transactions not involving any public offering.
ITEM 6. SELECTED FINANCIAL DATA
The following information derives from our audited financial
statements. You should review this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this report and the historical financial statements and related notes
this report contains.
Years Ended
March 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Total operating revenues $ 50,205 $ 19,483 $ 12,908 $ 17,091 $ 8,503
Earnings before taxes, depreciation and
amortization and other income (expense) 7,612 2,050 725 2,236 1,175
Earnings (loss) before income taxes 3,838 (65) (1,278) 894 597
Preferred dividends 275 304 304 109 --
Net earnings (loss) applicable to common
stockholders 2,428 (384) (1,612) 722 564
Earnings (loss) per common share-basic 0.22 (0.06) (0.27) 0.13 0.11
Earnings (loss) per common share-diluted 0.19 (0.06) (0.27) 0.11 0.10
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Years Ended
March 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Long-term debt, excluding current installments 9,728 267 2,354 2,697 1,220
Shareholders' equity 17,827 6,783 5,322 6,816 2,054
Total assets 56,493 15,670 10,007 12,502 5,051
Capital expenditures 41,628 5,069 856 3,561 763
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements we make in the following discussion which express a belief,
expectation or intention, as well as those that are not historical fact, are
forward-looking statements that are subject to risks, uncertainties and
assumptions. Our actual results, performance or achievements, or industry
results, could differ materially from those we express in the following
discussion as a result of a variety of factors, including the risks and
uncertainties we have referred to under the heading "Cautionary Statement
Concerning Forward-Looking Statements" following Items 1 and 2 of Part I of this
report.
Liquidity and Capital Resources
Our cash and cash equivalents at March 31, 2001 were $2,492,934,
compared to $1,922,457 at March 31, 2000. Our current ratio, which we calculate
by dividing our current assets by our current liabilities, at March 31, 2001 was
0.35, compared to 0.62 at March 31, 2000. Our working capital deficit increased
to $15,179,194 at March 31, 2001 from $3,253,525 at March 31, 2000. The primary
reasons for the decline in our current ratio and the increase in our working
capital deficit were the borrowing of $12,000,000 on March 30, 2001 for use in
our acquisition of the contract drilling assets of Mustang Drilling, Ltd. and
the inclusion in accounts payable of approximately $1,500,000 relating to
equipment purchases for a new rig. Our accounts receivable increased to
$2,777,167 at March 31, 2001 from $1,174,035 at March 31, 2000, and contract
drilling in progress increased to $2,331,112 at March 31, 2001 from $774,553 at
March 31, 2000. The substantial increases in accounts receivable and contract
drilling in progress were due to our utilization of 12 rigs in 2001 compared to
8 rigs in 2000 and an increase in daywork rates.
On August 21, 2000, we acquired all the outstanding stock of Pioneer
Drilling Co., a Corpus Christi, Texas-based land drilling contractor. Pioneer
Drilling Co.'s assets included four land drilling rigs and associated machinery
and equipment. Pioneer Drilling Co. owned three of its rigs and leased the
fourth rig. The consideration we paid for the acquisition was $11,500,000,
consisting of a cash payment of $10,731,456 and the issuance of 341,576
restricted shares of our common stock at $2.25 per share. We accounted for this
acquisition as a purchase, and we have included the results of operations of
Pioneer Drilling Co. in our statement of operations since the date of
acquisition. We allocated the purchase price plus assumed net liabilities and a
deferred tax liability of $4,214,195 to the assets and liabilities based on
their relative fair values.
On March 30, 2001, we acquired all the contract drilling assets of
Mustang Drilling, Ltd., a land drilling contractor based in Henderson, Texas.
These assets included four land drilling rigs and associated equipment. We paid
$12,000,000 in cash for these assets. We accounted for this acquisition as a
purchase, and we have included the results of operations of these assets in our
statement of operations since the date of acquisition. We allocated the purchase
price to the assets based on their relative fair values.
Since March 31, 2000, the additions to our property and equipment were
$41,627,907. Additions consisted of the following:
o Pioneer Drilling Co. acquisition $17,387,527
o Mustang Drilling, Ltd. acquisition 12,075,000
o Rigs under construction 4,766,976
o Other drilling equipment 5,947,687
o Transportation equipment 909,480
o Other 541,237
-----------
$41,627,907
===========
Our debt obligations in the form of notes payable increased by a net of
$19,884,207 from March 31, 2000 to March 31, 2001. This increase principally
resulted from our incurrence of $24,000,000 in new debt in connection with the
Pioneer Drilling Co. and Mustang Drilling, Ltd. acquisitions, partially offset
by our repayment of $3,627,381 of debt to one of our lenders. WEDGE Energy
Services, L.L.C., our largest shareholder, and two banks provided the funds for
the acquisitions, including (1) $9,000,000 of subordinated debt from WEDGE and
(2) borrowings under bank credit facilities of $3,000,000 on March 30, 2001 and
$9,000,000 and $3,000,000 on August 21, 2000. We repaid the $9,000,000 of
subordinated debt on May 18, 2001 with
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a short-term bank borrowing that we subsequently repaid with the proceeds from
our May 18, 2001 issuance and sale of 2,400,000 shares of common stock to WEDGE,
at a purchase price of $3.77 per share. The $3,000,000 we borrowed on March 30,
2001 is part of our $12,000,000 bridge loan facility with our primary lender due
March 29, 2002. Interest on those borrowings is payable monthly at prime (8.0%
at March 31, 2001) plus one percent. The $9,000,000 bank debt we incurred in
August 2000 is payable in monthly principal payments of $107,143, based on a
seven-year amortization, plus interest at prime (8.0% at March 31, 2001) plus
one percent. The final maturity of this debt is August 11, 2003. The $3,000,000
bank debt we incurred in August 2000 is payable in 87 monthly installments, the
first three installments being for interest only, with interest at prime (8.0%
at March 31, 2001) plus one percent; the fourth through 86th installments will
be in the amount of $50,585 each, including interest; and the final installment,
due on November 15, 2007, will be in the amount of the remaining principal
balance plus accrued interest. Our bank loans contain various covenants
pertaining to leverage ratios, cash flow coverage ratios and capitalization or
net worth ratios. Under these credit arrangements, we determine compliance with
the ratios on an annual basis, except for the capitalization and net worth
ratios, which we determine on a quarterly basis.
Our accounts payable at March 31, 2001 were $7,606,982, an increase of
$3,642,048 from $3,964,934 at March 31, 2000. The primary reasons for this
increase were higher rig utilization, our utilization of twelve rigs in the
period ended March 31, 2001 compared with eight rigs in the period ended March
31, 2000, and approximately $1,500,000 of equipment purchases for a new rig.
In May 2000, we ordered two new IRI 1700E Series land drilling rigs.
These rigs will be equipped with several state-of-the-art technological
advancements and will be capable of drilling wells in the depth range of 8,000
to 18,000 feet. We expect the first of these rigs to become operational in July
2001 and the second rig to become operational in September 2001. We are also
acquiring an additional land drilling rig that we are refurbishing. As of March
31, 2001, we have spent approximately $4,767,000 on the construction of the two
new rigs and the refurbishing of another rig that we acquired in April 2001. We
do not expect the combined cost of these four rigs to exceed $23,000,000.
In February 2000, we completed a private placement of our common stock
to WEDGE. WEDGE paid us an aggregate of $1,500,000 for 1,153,846 shares of
common stock, or $1.30 per share. We used the proceeds from that sale for
general corporate purposes and to better position the Company for future growth.
In May 2000, we completed a second private placement of our common stock to
WEDGE. WEDGE paid us an aggregate of $8,000,000 for 3,678,161 shares of common
stock, or $2.175 per share. We used these proceeds to partially fund the
construction of the two new-build rigs and to partially fund the purchase of
Pioneer Drilling Co. As we discussed above, in May 2001, we sold an additional
2,400,000 shares of our common stock to WEDGE for $9,048,000, or $3.77 per
share.
In October 2000, the sole holder of our Series A preferred stock
converted those shares into 800,000 shares of our common stock in accordance
with the terms of the Series A preferred stock.
Results of Operations
Our rig utilization rates for the years ended March 31, 2001, 2000 and
1999 were 91%, 66% and 66%, respectively. In fiscal 2001, we completed 3,463
revenue days, as compared to 1,598 revenue days in fiscal 2000, an increase of
117%. This increase reflects the increased demand for drilling rigs we
experienced in fiscal 2001 and the increase in our drilling rig fleet from eight
to 16 rigs by the end of fiscal 2001.
During fiscal 2001, our drilling margin increased to $8,459,000 from
$2,616,000 in fiscal 2000 and $1,280,000 in fiscal 1999. The increase in fiscal
2001 over fiscal 2000 principally resulted from the 117% increase in the number
of revenue days we completed in fiscal 2001 and an increase in drilling rates we
charged under our drilling contracts. As a percentage of contract drilling
revenue, our drilling margin was 17%, 13% and 10% in fiscal 2001, fiscal 2000
and fiscal 1999, respectively. Two significant factors had a negative impact on
our drilling margin in fiscal 1999. Because of problems with a turnkey contract,
we were required to re-drill a well for a customer, and we incurred additional
costs in attempting to correct various problems associated with the original
drilling attempt. These complications resulted in a loss of approximately
$460,000 on the contract.
We market our rigs to a number of customers. In fiscal 2001, we drilled
wells for 58 different customers, compared to 38 customers in fiscal 2000 and 29
customers in fiscal 1999. 40 of our customers in fiscal 2001 were customers for
whom we had not drilled any wells in fiscal 2000. During the fiscal year ended
March 31, 2001, our three largest customers accounted for
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13.6%, 8.8% and 6.3%, respectively, of our total contract drilling revenue. None
of those customers was a customer of ours in fiscal 2000. In fiscal 2000, our
three largest customers accounted for 7.4%, 7.2% and 7.0%, respectively, of our
total contract drilling revenue. None of those customers was our largest
customer in fiscal 1999. In fiscal 1999, our largest customer accounted for 28%
of our total contract drilling revenue and no other customer accounted for more
than 10% of our contract drilling revenue.
Our depreciation and amortization expense in fiscal 2001 increased to
$3,738,000 from $1,809,000 and $1,730,000 in fiscal years 2000 and 1999,
respectively. The increase in fiscal 2001 resulted from a combination of
increased depreciation expense due to the Pioneer Drilling Co. acquisition and
the major refurbishment of four rigs in 2001. Effective April 1, 1999 we revised
the estimated useful lives of our drilling rigs in order to more accurately
reflect our historical experience with regard to our drilling rigs. This change
in estimated useful lives reduced depreciation expense in fiscal 2000 by
approximately $144,000 and the loss per common share, basic and diluted, by
$0.02. We had no depletion expense in fiscal 2001 or 2000 compared to $261,000
in fiscal 1999 due to the sale of our oil and gas properties in February 1999.
Our general and administrative expenses increased to $1,117,000 in
fiscal 2001 from $658,000 in fiscal 2000 and $804,000 in fiscal 1999. The
increase in fiscal 2001 resulted from increased payroll costs, expenses related
to our acquisitions and our re-listing on the American Stock Exchange. The
primary components of the higher costs in fiscal 1999 as compared to fiscal 2000
were legal and professional fees we incurred in an unsuccessful business
combination transaction and the accrual of a retirement package for our former
chairman, who resigned in November 1998. The amount of the retirement package
charged to expense in fiscal 1999, discounted to reflect the present value of
the future payments, was approximately $107,000.
Our contract land drilling operations are subject to various federal
and state laws and regulations designed to protect the environment. Maintaining
compliance with these regulations is part of our day-to-day operating
procedures. We are not aware of any potential clean-up obligations that would
have a material adverse effect on our financial condition or results of
operations.
Accounting Matters
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in its balance sheet and measure those instruments at their fair
values. If certain conditions are met, a derivative may be specifically
designated as a "fair value hedge," a "cash flow hedge," or a hedge of a foreign
currency exposure of a net investment in a foreign operation. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and the resulting designation. In June 1999,
the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133
to all fiscal quarters of all fiscal years beginning after June 15, 2000. We do
not expect that our adoption of SFAS No. 133 effective April 1, 2001 will have
any impact on our financial condition or results of operations, as we do not
have any derivative instruments and we do not engage in hedging activities.
In March 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." This
Interpretation, which became effective July 1, 2000, clarifies the application
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," for certain issues. We believe the adoption of FIN No. 44 will not
have a material impact on our financial condition or results of operations.
Inflation
As a result of the relatively low levels of inflation during the past
three fiscal years, inflation did not significantly affect our results of
operations in any of those years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk exposure related to changes in interest
rates on most of our outstanding debt. At March 31, 2001, we had outstanding
debt of $14,272,000 that was subject to variable interest rates, in each case
based on an
16
19
agreed percentage-point spread from the lender's prime interest rate. An
increase or decrease of 1% in the interest rate would have a corresponding
decrease or increase in our net income of approximately $143,000 annually. We
did not enter into these debt arrangements for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SOUTH TEXAS DRILLING & EXPLORATION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 18
Consolidated Balance Sheets as of March 31, 2001 and 2000 19
Consolidated Statements of Operations for the Years Ended 20
March 31, 2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity and 21
Comprehensive Income for the Years Ended March 31, 2001,
2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended 22
March 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements 23
17
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
South Texas Drilling & Exploration, Inc.:
We have audited the accompanying consolidated balance sheets of South
Texas Drilling & Exploration, Inc. and subsidiaries as of March 31, 2001 and
2000 and the related consolidated statements of operations, shareholders' equity
and comprehensive income and cash flows for each of the years in the three-year
period ended March 31, 2001. In connection with our audits of these consolidated
financial statements, we also have audited the related financial statement
schedule (Schedule II) for each of the years in the three-year period ended
March 31, 2001. 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 the
related financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
San Antonio, Texas
June 1, 2001
18
21
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
----------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,492,934 $ 1,922,457
Securities available for sale 338,395 1,003,116
Receivables:
Trade 2,777,167 1,174,035
Contract drilling in progress 2,331,112 774,553
Employees and officers 300 2,030
Prepaid expenses 312,276 489,952
------------ ------------
Total current assets: 8,252,184 5,366,143
------------ ------------
Property and equipment, at cost:
Drilling rigs and equipment 57,527,976 18,158,193
Transportation, office, land and other 2,781,750 1,442,248
------------ ------------
60,309,726 19,600,441
Less accumulated depreciation and amortization 12,115,268 9,296,357
------------ ------------
Net property and equipment 48,194,458 10,304,084
Other assets 46,322 --
------------ ------------
Total assets $ 56,492,964 $ 15,670,227
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 3,030,000 $ --
Subordinated debenture 9,000,000 --
Current installments of long-term debt 1,695,839 3,713,493
Current installments of capital lease obligations 83,307 --
Accounts payable 7,606,982 3,964,934
Federal income tax 50,198 --
Current deferred income taxes 56,750 --
Accrued expenses:
Payroll and payroll taxes 736,195 96,228
Dividends payable 766,581 652,565
Other 405,526 192,448
------------ ------------
Total current liabilities 23,431,378 8,619,668
Long-term debt, less current installments 9,727,672 267,067
Capital lease obligations, less current installments 327,949 --
Deferred income taxes 5,179,203 --
------------ ------------
Total liabilities 38,666,202 8,886,735
------------ ------------
Shareholders' equity:
Preferred stock, Series A, 8%, cumulative, convertible, $2.00 redemption and
liquidation value; 400,000 shares authorized; no shares and 400,000 shares
issued and outstanding at March 31, 2001 and March 31, 2000, respectively -- 800,000
Preferred stock, Series B, 8%, cumulative, convertible, $16.25 redemption and
liquidation value; 184,615 shares authorized, issued and outstanding at
March 31, 2001 and 2000 2,999,994 2,999,994
Common stock, $0.10 par value; 30,000,000 shares authorized; 12,145,921 shares and
7,274,684 shares issued and outstanding at March 31, 2001 and March 31, 2000,
respectively 1,214,592 727,468
Additional paid-in capital 26,869,916 17,723,569
Accumulated deficit (13,367,858) (15,796,017)
Accumulated other comprehensive income-unrealized
gain on securities available for sale 110,118 328,478
------------ ------------
Total shareholders' equity 17,826,762 6,783,492
------------ ------------
Total liabilities and shareholders' equity $ 56,492,964 $ 15,670,227
============ ============
See accompanying notes to consolidated financial statements.
19
22
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues:
Contract drilling $ 49,935,853 $ 19,391,025 $ 12,659,391
Other 269,546 92,086 248,615
------------ ------------ ------------
Total operating revenues 50,205,399 19,483,111 12,908,006
------------ ------------ ------------
Costs and expenses:
Contract drilling 41,476,824 16,775,108 11,379,771
Depreciation and amortization 3,737,533 1,808,557 1,729,920
General and administrative 1,116,727 658,174 803,632
------------ ------------ ------------
Total operating costs and expenses 46,331,084 19,241,839 13,913,323
------------ ------------ ------------
Earnings (loss) from operations 3,874,315 241,272 (1,005,317)
------------ ------------ ------------
Other income (expense):
Interest expense (888,863) (350,606) (319,060)
Interest income 316,025 85,407 90,558
Gain (loss) on sale of assets 536,486 (41,408) (43,831)
------------ ------------ ------------
Total other income (expense) (36,352) (306,607) (272,333)
------------ ------------ ------------
Earnings (loss) before income taxes 3,837,963 (65,335) (1,277,650)
Income taxes 1,135,174 14,283 29,868
------------ ------------ ------------
Net earnings (loss) 2,702,789 (79,618) (1,307,518)
Preferred stock dividend requirement 274,630 303,999 303,999
------------ ------------ ------------
Net earnings (loss) applicable to
common shareholders $ 2,428,159 $ (383,617) $ (1,611,517)
============ ============ ============
Earnings (loss) per common share -- Basic $ 0.22 $ (0.06) $ (0.27)
============ ============ ============
Earnings (loss) per common share -- Diluted $ 0.19 $ (0.06) $ (0.27)
============ ============ ============
Weighted average number of shares
outstanding -- Basic 11,137,171 6,242,140 5,935,748
============ ============ ============
Weighted average number of shares
outstanding -- Diluted 13,901,101 6,242,140 5,935,748
============ ============ ============
See accompanying notes to consolidated financial statements.
20
23
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Additional
Shares Shares Amount Amount Paid-In Accumulated
Common Preferred Common Preferred Capital Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balance as of March 31, 1998 6,171,964 584,615 $ 617,196 $ 3,799,994 $ 16,337,006 $(13,800,883)
Issuance of common stock for:
Exercise of warrants 100,000 -- 10,000 -- 5,000 --
Exercise of options 168,587 -- 16,859 -- 84,953 --
Cancellation of treasury shares (339,767) -- (33,977) -- (102,928) --
Net loss -- -- -- -- -- (1,307,518)
Preferred stock dividend -- -- -- -- -- (303,999)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of March 31, 1999 6,100,784 584,615 610,078 3,799,994 16,324,031 (15,412,400)
Comprehensive income:
Net loss -- -- -- -- -- (79,618)
Net unrealized change in
securities available for sale -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Issuance of common stock for:
Sale 1,153,846 -- 115,385 -- 1,384,615 --
Exercise of options 5,000 -- 500 -- 1,375 --
Compensation 15,054 -- 1,505 -- 13,548 --
Preferred stock dividend -- -- -- -- -- (303,999)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of March 31, 2000 7,274,684 584,615 727,468 3,799,994 17,723,569 (15,796,017)
Comprehensive income:
Net earnings -- -- -- -- -- 2,702,789
Net unrealized change in
securities available for sale -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Issuance of common stock for:
Sale 3,678,161 -- 367,816 -- 7,632,184 --
Acquisition 341,576 -- 34,158 -- 734,387 --
Conversion of preferred 800,000 (400,000) 80,000 (800,000) 720,000 --
Exercise of options 51,500 -- 5,150 -- 59,776 --
Preferred stock dividend -- -- -- -- -- (274,630)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of March 31, 2001 12,145,921 184,615 $ 1,214,592 $ 2,999,994 $ 26,869,916 $(13,367,858)
============ ============ ============ ============ ============ ============
Accumulated
Other
Comprehen- Total
Treasury sive Shareholders'
Stock Income Equity
------------ ------------ ------------
Balance as of March 31, 1998 $ (136,905) -- $ 6,816,408
Issuance of common stock for:
Exercise of warrants -- -- 15,000
Exercise of options -- -- 101,812
Cancellation of treasury shares 136,905 -- --
Net loss -- -- (1,307,518)
Preferred stock dividend -- -- (303,999)
------------ ------------ ------------
Balance as of March 31, 1999 -- -- 5,321,703
Comprehensive income:
Net loss -- -- (79,618)
Net unrealized change in
securities available for sale -- 328,478 328,478
------------
Total comprehensive income -- -- 248,860
------------
Issuance of common stock for:
Sale -- -- 1,500,000
Exercise of options -- -- 1,875
Compensation -- -- 15,053
Preferred stock dividend -- -- (303,999)
------------ ------------ ------------
Balance as of March 31, 2000 -- 328,478 6,783,492
Comprehensive income:
Net earnings -- -- 2,702,789
Net unrealized change in
securities available for sale -- (218,360) (218,360)
------------
Total comprehensive income -- -- 2,484,429
------------
Issuance of common stock for:
Sale -- -- 8,000,000
Acquisition -- -- 768,545
Conversion of preferred -- -- --
Exercise of options -- -- 64,926
Preferred stock dividend -- -- (274,630)
------------ ------------ ------------
Balance as of March 31, 2001 $ -- $ 110,118 $ 17,826,762
============ ============ ============
See accompanying notes to consolidated financial statements.
21
24
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 2,702,789 $ (79,618) $ (1,307,518)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,737,533 1,808,557 1,729,920
Stock issued to directors and employees -- 15,054 --
Loss (gain) on sale of assets (536,486) 41,408 43,492
Change in deferred income taxes 965,008 -- --
Changes in current assets and liabilities:
Receivables (3,157,961) (632,670) 88,651
Prepaid expenses 177,676 (335,361) (40,571)
Accounts payable 3,642,048 2,715,851 (400,875)
Federal income taxes 50,198 -- --
Accrued expenses 853,045 (1,076) (207,690)
------------ ------------ ------------
Net cash provided by (used in) operating activities 8,433,850 3,532,145 (94,591)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 15,547,477 1,776,645 --
Proceeds from subordinated debenture 9,000,000 -- --
Increase in other assets (46,322) -- --
Payment of preferred dividends (160,614) -- (64,000)
Proceeds from exercise of options and warrants 64,926 1,875 90,375
Proceeds from common stock 8,000,000 1,500,000 --
Payments of debt (6,336,803) (593,857) (605,162)
------------ ------------ ------------
Net cash provided by (used in) in financing activities 26,068,664 2,684,663 (578,787)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment:
Acquisitions (22,806,456) (2,513,000) (856,204)
Other (12,165,178) (2,556,138) --
Purchase of securities available for sale -- (674,638) --
Proceeds from sale of marketable securities 1,039,597 -- --
Proceeds from sale of property and equipment -- 37,932 354,365
------------ ------------ ------------
Net cash used in investing activities (33,932,037) (5,705,844) (501,839)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 570,477 510,964 (1,175,217)
Beginning cash and cash equivalents 1,922,457 1,411,493 2,586,710
------------ ------------ ------------
Ending cash and cash equivalents $ 2,492,934 $ 1,922,457 $ 1,411,493
============ ============ ============
Supplementary disclosure:
Interest paid $ 760,821 $ 351,126 $ 319,596
Income taxes paid 140,655 13,883 68,592
Dividends accrued 274,630 303,999 --
Conversion of preferred stock 800,000 -- --
Common stock issued for accrued compensation -- -- 26,437
Pioneer Drilling Co. acquisition:
Common Stock issued 768,545 -- --
Debt assumed 1,673,533 -- --
Deferred taxes assumed 4,214,195 -- --
See accompanying notes to consolidated financial statements.
22
25
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Principles of Consolidation
South Texas Drilling & Exploration, Inc. provides contract land
drilling services to oil and gas exploration and production companies in the
South Texas and East Texas markets. We conduct our operations through our
principal operating subsidiary, Pioneer Drilling Co., Ltd. The accompanying
consolidated financial statements include our accounts and the accounts of our
wholly owned subsidiaries. We have eliminated significant intercompany accounts
and transactions in consolidation.
We have prepared the accompanying consolidated financial statements in
accordance with accounting principals generally accepted in the United States of
America. In preparing the financial statements, we make various estimates and
assumptions that affect the amounts of assets and liabilities we report as of
the dates of the balance sheets and income and expenses we report for the
periods shown in the income statements and statements of cash flows. Our 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 and amortization expense.
Income Taxes
We file a consolidated federal income tax return with our subsidiaries
using a December 31 year-end. In May 2001, we filed an application with the
Internal Revenue Service to change our tax year-end to correspond to our March
31 fiscal year-end.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," we follow the asset and liability method of
accounting for income taxes, under which we recognize deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. We measure our deferred tax assets and liabilities
by using the enacted tax rates we expect to apply to taxable income in the years
in which we expect to recover or settle those temporary differences. Under SFAS
No. 109, we reflect in income the effect of a change in tax rates on deferred
tax assets and liabilities in the period during which the change occurs.
Earnings (Loss) Per Common Share
We compute and present earnings (loss) per common share in accordance
with SFAS No. 128 "Earnings per Share." This standard requires dual presentation
of basic and diluted earnings (loss) per share on the face of our statement of
operations. For fiscal 2000 and 1999, we did not include the effect of
securities such as warrants, options and preferred stock on loss per common
share because it was antidilutive.
The following table presents a reconciliation of the numerators and
denominators of the basic EPS and diluted EPS comparisons as required by SFAS
128:
23
26
Year Ended March 31,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
Basic
-----
Net earnings (loss) $ 2,702,789 $ (79,618) $(1,307,518)
Less: Preferred stock dividends 274,630 303,999 303,999
----------- ----------- -----------
Earnings (loss) applicable to common shareholders $ 2,428,159 $ (383,617) $(1,611,517)
----------- ----------- -----------
Weighted average shares 11,137,171 6,242,140 5,935,748
----------- ----------- -----------
Earning (loss) per share $ .22 $ (0.06) $ (0.27)
----------- ----------- -----------
Diluted
-------
Earnings (loss) applicable to common shareholders $ 2,428,159 $ (383,617) $(1,611,517)
Effect of dilutive securities:
Options -- -- --
Preferred stock 274,630 -- --
----------- ----------- -----------
Earnings (loss) available to common shareholders
and assumed conversion $ 2,702,789 $ (383,617) $(1,611,517)
----------- ----------- -----------
Weighted average shares:
Outstanding 11,137,171 6,242,140 5,935,748
Options 1,771,864 -- --
Preferred stock 992,066 -- --
----------- ----------- -----------
13,901,101 6,242,140 5,935,748
----------- ----------- -----------
Earnings (loss) per share $ 0.19 $ (.06) $ (.27)
=========== =========== ===========
Stock-based Compensation
We have adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 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
Principals Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." We have elected to continue accounting for stock-based compensation
under the intrinsic value method. Under this method, we record no compensation
expense for stock option grants when the exercise price of the options granted
is equal to the fair market value of our common stock on the date of grant. We
have disclosed the pro forma effects of our adoption of SFAS No. 123 in Note 7.
Revenue and Cost Recognition
We earn our contract drilling revenues under daywork, turnkey and
footage contracts. We recognize revenues on daywork contracts for the days
completed based on the dayrate each contract specifies. We recognize revenues
from our turnkey and footage contracts on the percentage-of-completion method
based on our estimate of the number of days to complete each well. Individual
wells are usually completed in less than 60 days.
We accrue estimated contract costs on turnkey and footage contracts for
each day of work completed based on our estimate of the total cost to complete
the contract divided by our estimate of the number of days to complete the
contract. Contract costs include labor, materials, supplies, repairs and
maintenance and operating overhead allocations. We charge general and
administrative expenses to expense as we incur them. Changes in job performance,
job conditions and estimated profitability on uncompleted contracts may result
in revisions to costs and income, including losses, which we recognize in the
period in which we determine the revisions.
The asset "contract drilling in progress" represents revenues we have
recognized in excess of amounts billed on contracts in progress.
24
27
Prepaid Expenses
Prepaid expenses include items such as insurance and licenses. We
routinely expense these items in the normal course of business over the periods
these expenses benefit.
Property and Equipment
We provide for depreciation of our drilling, transportation and other
equipment using the straight-line method over useful lives that we have
estimated and that range from three to 12 years. During the fiscal year ended
March 31, 2000, we increased the estimated useful lives of our drilling rigs to
reflect our historical experience with regard to our drilling rigs. The change
in estimated useful lives reduced our depreciation expense in fiscal 2000 by
approximately $144,000 and our loss per common share, basic and diluted, by
$0.02.
We charge our expenses for maintenance and repairs to operations. We
charge our expenses for renewals and betterments to the appropriate property and
equipment accounts.
We review our long-lived assets and intangible assets for impairment
whenever events or circumstances provide evidence that suggests that we may not
recover the carrying amounts of any of these assets. In performing the review
for recoverability, we estimate the future cash flows we expect to obtain from
the use of each asset and its eventual disposition. If the sum of these
estimated future cash flows is less than the carrying amount of the asset, we
recognize an impairment loss.
Cash Equivalents
For purposes of the statements of cash flows, we consider all highly
liquid debt instruments purchased with maturity of three months or less to be
cash equivalents.
Investment Securities
We carry our available-for-sale investment securities at their fair
values. Investment securities consist of common stock. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification basis.
As of March 31, 2001, these securities had an aggregate cost of $171,527, a
gross unrealized gain of $166,868 and an aggregate fair value of $338,395. As of
March 31, 2000, these securities had an aggregate cost of $674,638, a gross
unrealized gain of $328,478 and fair value of $1,003,116.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in its balance
sheet and measure those instruments at their fair values. If certain conditions
are met, a derivative may be specifically designated as a "fair value hedge," a
"cash flow hedge," or a hedge of a foreign currency exposure of a net investment
in a foreign operation. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. We do not expect that our adoption of
SFAS No. 133 effective April 1, 2001 will have any impact on our financial
condition or results of operations, as we do not have any derivative instruments
and we do not engage in hedging activities.
25
28
2. ACQUISITIONS
On September 29, 1999, we acquired the drilling operations of Howell
Drilling, Inc., a San Antonio, Texas-based land drilling contractor. The
acquisition included two drilling rigs, a Cabot 900 and a Cabot 750, drill pipe
and drill collars, assorted spare drilling equipment, transportation equipment
and office furniture and fixtures. We paid $2,513,000 for the Howell Drilling
assets, including related professional fees, of which we financed $1,750,000
with a commercial loan. We accounted for the transaction as a purchase, and we
have included the results of operations of the Howell Drilling assets in our
statement of operations since the acquisition date. We allocated the purchase
price based on the fair market values of the assets at the date of acquisition.
On August 21, 2000, we acquired all the outstanding stock of Pioneer
Drilling Co., a Corpus Christi, Texas-based land drilling contractor. Pioneer
Drilling Co.'s assets included four land drilling rigs and associated machinery
and equipment. Pioneer Drilling Co. owned three of its rigs and leased the
fourth rig. The consideration we paid for the acquisition, after giving effect
to a purchase price adjustment, was $11,500,000, consisting of a cash payment of
$10,731,456, which we financed with long-term debt as described in note 3, and
the issuance of 341,576 restricted shares of our common stock at $2.25 per
share. We accounted for this acquisition as a purchase, and we have included the
results of operations of Pioneer Drilling Co. in our statement of operations
since the date of acquisition. We allocated the purchase price plus assumed
liabilities and deferred tax liability of $4,214,195 to the assets and
liabilities based on their relative fair values.
On March 30, 2001, we acquired all the contract drilling assets of
Mustang Drilling, Ltd., a land drilling contractor based in Henderson, Texas.
These assets included four land drilling rigs and associated equipment. We paid
$12,000,000 in cash for these assets. We financed this acquisition with
$3,000,000 of the bank debt and the $9,000,000 subordinated debt described in
note 3. We accounted for this acquisition as a purchase, and we have included
the results of operations of these assets in our statement of operations since
the date of acquisition. We allocated the purchase price to the assets based on
their relative fair values.
The following pro forma financial information gives effect to the
Howell Drilling, Inc., Pioneer Drilling Co. and Mustang Drilling, Ltd.
acquisitions as though they were effective as of the beginning of fiscal 2000.
The information reflects our historical data and historical data from these
acquired businesses for the twelve months ended March 31, 2001 and 2000. The pro
forma information may not be indicative of the results we would have achieved
had we completed these acquisitions on April 1, 1999, or of the results that we
may achieve in the future. The pro forma information should be read in
conjunction with the accompanying historical financial statements and the other
notes to these financial statements.
Pro Forma (Unaudited)
Year Ended March 31,
---------------------------
2001 2000
------------ ------------
Total revenues $ 71,362,826 $ 54,059,156
Net earnings (loss) 2,544,362 (1,213,863)
Net earnings (loss) applicable to
common shareholders 2,269,732 (1,517,862)
Earnings (loss) per common share--Basic .17 (.17)
Earnings (loss) per common share--Diluted .15 (.17)
26
29
3. LONG-TERM DEBT, SUBORDINATED DEBT AND NOTE PAYABLE
Our long-term debt is described below:
March 31,
----------------------------
2001 2000
----------- ------------
Note payable, secured by drilling equipment, due in monthly payments
of $107,143 plus interest at prime (8% at March 31, 2001) plus 1.00%,
due August 2003 $ 8,250,000 $ --
Note payable, secured by drilling equipment, land and improvements, due
in monthly payments of $50,585, including interest at prime (8% at
March 31, 2001), due November 15, 2007 2,895,511 --
Notes payable, secured by drilling equipment, transportation equipment,
land and improvements, due in monthly payments of $51,488 plus interest
at prime (9% at March 31, 2000) plus 1.75%, due November 2000 -- 3,627,381
Note payable to bank, secured by land and improvements,
due in monthly payments of $1,900 including interest at
the bank's prime rate (9% at March 31, 2001) plus
0.5%, due in September 2005 68,283 84,442
Note payable to Small Business Administration, secured by second lien
on land and improvements, due in monthly payments of $921 including
interest at 6.713%, due in November 2015 96,227 99,991
Notes payable to bank, secured by vehicles, due in monthly payments of
$1,133 including interest at the prime rate (8% at March 31, 2001), due
through May 2003 28,490 23,746
Note payable to seller, secured by drilling equipment, due in
monthly installments of $5,000 plus interest at 10%, due in
June 2002 85,000 145,000
----------- ------------
11,423,511 3,980,560
Less current installments 1,695,839 3,713,493
----------- ------------
$ 9,727,672 $ 267,067
=========== ============
Long-term debt maturing each year subsequent to March 31, 2001 is as follows:
2002 $1,695,839
2003 $1,698,807
2004 $6,099,401
2005 $ 450,706
2006 $ 487,390
after 2006 $ 991,368
On March 30, 2001, we issued a $9,000,000, 4.86% subordinated debenture
to WEDGE Energy Services, L.L.C. We repaid this debenture on May 18, 2001 with
short-term bank debt that we subsequently repaid with the proceeds from a sale
of common stock to WEDGE. See Note 6.
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30
The $3,030,000 note payable to bank at March 31, 2001 is part of an
aggregate $12,000,000 credit facility due March 29, 2002. Interest is at prime
(8% at March 31, 2001) plus 1% due monthly.
We have a $1,000,000 line of credit available from a bank. Any
borrowings under this line of credit are secured by our trade receivables and
bear interest at a rate of prime (8% at March 31, 2001) plus 1.0%. At March 31,
2001, we had no outstanding advances under this line of credit.
At March 31, 2001, we were in compliance with all covenants applicable
to our outstanding debt. Those covenants include, among others, the maintenance
of ratios of debt to net worth, leverage, cash flow and capitalization. The
notes also restrict the payment of dividends on common stock.
4. LEASES
We lease real estate in Henderson, Texas and various equipment under
noncancelable operating leases with future lease obligations and minimum capital
lease payments as of March 31, 2001 as follows:
Year Ended Operating Capital
March 31, Leases Leases
---------- --------- ---------
2002 $ 91,296 $116,198
2003 55,296 116,198
2004 55,296 116,198
2005 55,296 110,971
2006 53,298 26,724
Thereafter -- 8,901
-------- --------
Total minimum lease payments $310,482 $495,190
========
Less amounts representing interest
(at rates ranging from 7.6% to 9.5%) 83,934
--------
Present value of net minimum
capital lease payments 411,256
Less current installments of capital lease obligations 83,307
--------
Capital lease obligations, excluding current
installments $327,949
========
Rent expense under these operating leases for the years ended March 31,
2001, 2000 and 1999 was $20,000, $0 and $0, respectively.
5. INCOME TAXES
Our provision for income taxes consisted of the following:
Year Ended March 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Current tax -- federal $ 49,593 $ -- $ --
Current tax -- state 120,573 14,283 29,868
Deferred tax -- federal 965,008 -- --
---------- ---------- ----------
$1,135,174 $ 14,283 $ 29,868
========== ========== ==========
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31
In fiscal years 2001, 2000 and 1999, our expected tax, which we compute
by applying the federal statutory rate of 34% to income (loss) before income
taxes, differs from our income tax expense (benefit) as follows:
Year Ended March 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Expected tax expense (benefit) $ 1,304,907 $ (22,214) $ (434,401)
Net operating loss carry forwards and
valuation allowances (335,422) 22,214 434,401
State taxes 79,578 14,283 29,868
Other 86,111 -- --
----------- ----------- -----------
$ 1,135,174 $ 14,283 $ 29,868
=========== =========== ===========
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the consolidated
financial statements. The components of our deferred income tax assets and
liabilities were as follows:
Year Ended March 31,
-------------------------
2001 2000
----------- -----------
Deferred tax assets:
Investment tax credit carry forwards $ -- $ 2,000
Property and equipment, principally due to differences in depreciation -- 95,000
Net operating loss carry forwards -- 4,212,000
----------- -----------
Total gross deferred tax assets -- 4,309,000
Less valuation allowance -- (4,309,000)
----------- -----------
Total deferred tax assets -- --
----------- -----------
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation 5,179,203 --
Unrealized gain on securities available for sale 56,750 --
----------- -----------
Total deferred tax liabilities 5,235,953 --
----------- -----------
Net deferred tax liability $ 5,235,953 $ --
=========== ===========
We had no valuation allowance for deferred tax assets as of March 31,
2001. At March 31, 2000, we had established a $4,309,000 valuation allowance for
certain deferred tax assets, primarily for federal net operating losses. The net
change for the valuation allowance for the year ended March 31, 2000 was a
reduction of $618,000. During the year ended March 31, 2001, two events occurred
which allowed us to reduce the valuation allowance account to zero.
Approximately, $8,000,000 of federal net operating losses expired, thereby
reducing both the deferred asset account and the valuation allowance account. In
addition, as discussed in note 2, we acquired Pioneer Drilling Co. in a stock
acquisition. Because of the low tax basis of the assets of Pioneer Drilling Co.
and our expectation of future taxable income from the combined operations, all
remaining federal net operating losses expected to be utilized reduced the
allocation of the purchase price of the assets acquired and the related
valuation allowance account.
In assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets
depends on the generation of future taxable income during the periods in which
those temporary differences become deductible. We consider the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based on the level of historical
taxable income and projections for future taxable income over the periods during
which the deferred tax assets are deductible, we believe it is more likely than
not that we will realize the benefits of these deductible differences.
29
32
6. EQUITY TRANSACTIONS
In February 2000, we sold in a private placement, 1,153,846 shares of
common stock to WEDGE Energy Services, L.L.C. for $1,500,000, or $1.30 per
share. In May 2000, we completed a second private placement of 3,678,161 shares
of common stock to WEDGE for $8,000,000, or $2.175 per share.
In August 2000, we issued 341,576 shares of common stock at $2.25 per
share as part of the consideration we paid in connection with our acquisition of
Pioneer Drilling Co.
In October 2000, the T.L.L. Temple Foundation converted its 400,000
shares of series A convertible preferred stock into 800,000 shares of common
stock at $1.00 per share.
Directors and employees exercised stock options and warrants for the
purchase of 51,500 shares of common stock at prices ranging from $0.15 to $2.50
per share during the year ended March 31, 2001 and five thousand shares at
$0.375 per share during the year ended March 31, 2000.
In accordance with the terms of our Series B Preferred Stock Agreement,
the conversion price was revised from $3.25 per share to $2.50 per share as of
January 20, 2001, the third anniversary of the date we entered into the
Preferred Stock Agreement. This revision was based on the average trading price
of our common stock for the 30 trading days preceding that anniversary date.
On May 18, 2001, we retired the 4.86% subordinated debenture we issued
to WEDGE on March 30, 2001 in connection with the Mustang Drilling, Ltd.
acquisition. We funded the repayment of the $9,000,000 face amount of the
debenture, together with the payment of $59,535 of accrued interest, with a
short-term bank borrowing. We then sold an additional 2,400,000 shares of our
common stock to WEDGE in a private placement for $9,048,000, or $3.77 per share.
We used the proceeds from this sale to fund the repayment of the short-term bank
borrowing.
7. STOCK OPTIONS, WARRANTS AND STOCK OPTION PLAN
Under our stock option plans, employee stock options generally become
exercisable over a five-year period, and all options generally expire 10 years
after the date of grant. Our plan provides that all options must have an
exercise price not less than the fair market value of our common stock on the
date of grant. Accordingly, as we discussed in Note 1, we do not recognize any
compensation expense relating to these options in our results of operations.
The following table provides information relating to our outstanding
stock options and warrants at March 31, 2001, 2000 and 1999:
2001 2000 1999
------------------------- ------------------------- -------------------------
SHARES SHARES SHARES
ISSUABLE ON EXERCISE ISSUABLE ON EXERCISE ISSUABLE ON EXERCISE
EXERCISE OF PRICE PER EXERCISE OF PRICE PER EXERCISE OF PRICE PER
OPTIONS SHARE OPTIONS SHARE OPTIONS SHARE
----------- ----------- ----------- ----------- ----------- -----------
Balance Outstanding
Beginning of year 1,759,000 $ 0.15-1.50 1,694,000 $ 0.15-1.50 1,353,500 $ 0.15-1.50
Granted 515,000 $ 2.25-4.60 720,000 $ .625-1.50 795,000 $ 0.75-1.438
Exercised (51,500) $ 0.15-2.50 (5,000) $ 0.375 (168,587) $ 0.375-1.38
Canceled (45,000) $0.375-1.50 (650,000) $ 0.75 (285,913) $0.375-1.438
--------- ----------- --------- ----------- --------- -----------
Balance Outstanding
End of year 2,177,500 $0.375-4.60 1,759,000 $ 0.15-1.50 1,694,000 $ 0.15-1.50
========= =========== ========= =========== ========= ============
Options Exercisable
End of year 1,172,500 1,175,500 862,000
========= ========= =========
As of March 31, 2001, there are no outstanding warrants.
30
33
At March 31, 2001, the weighted average exercise price of our
outstanding options was $1.12 per share and the weighted average exercise price
of our exercisable options was $0.62 per share.
On May 31, 2001, San Patricio Corporation exercised its option to
acquire 150,000 shares of our common stock at $1.50 per share.
We have adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, we have not recognized
any compensation expense attributable to our stock option plan. If we had
elected to recognize compensation cost based on the fair value of the options we
granted at their respective grant dates as SFAS No. 123 prescribes, our net
earnings (loss) and net earnings (loss) per share would have been reduced to the
pro forma amounts the table below indicates:
2001 2000 1999
---------- ----------- -----------
Net earnings (loss)-as reported $2,702,789 $ (79,618) $(1,307,518)
Net earnings (loss)-pro forma 2,343,565 (232,664) (1,372,858)
Net earnings (loss) per share-as reported-basic .22 (0.06) (0.27)
Net earnings (loss) per share-as reported-diluted .19 (0.06) (0.27)
Net earnings (loss) per share-pro forma-basic .19 (0.09) (0.28)
Net earnings (loss) per share-pro forma-diluted .17 (0.09) (0.28)
Weighted-average fair value of options,
granted during the year 2.29 0.47 0.31
We estimate the fair value of each option grant on the date of grant
using a Black-Scholes options-pricing model. This model assumed expected
volatility of 117%, 72% and 70% and weighted average risk-free interest rates of
5.4%, 6.0% and 5.1% for grants in 2001, 2000 and 1999, respectively, and an
expected life of five years. As we have not declared dividends since we became a
public company, we did not use a dividend yield. In each case, the actual value
that will be realized, if any, will depend on the future performance of our
common stock and overall stock market conditions. There is no assurance the
value an optionee actually realizes will be at or near the value we have
estimated using the Black-Scholes model.
8. BENEFIT PLAN
During October 1999, we adopted a 401(k) retirement plan for our
eligible employees. We may contribute, on a discretionary basis, a percentage of
an eligible employee's annual contribution, which we determine annually. Our
contributions for fiscal 2001 and 2000 were approximately $101,000 and $18,000,
respectively.
9. BUSINESS SEGMENTS AND SUPPLEMENTARY EARNINGS INFORMATION
Substantially all our operations relate to contract drilling of oil and
gas wells. Accordingly, we classify all our operations in a single segment.
Until fiscal 1999, we also engaged in oil and gas exploration, development and
production operations.
During the fiscal year ended March 31, 2001, our three largest
customers accounted for 13.6%, 8.8% and 6.3%, respectively, of our total
contract drilling revenue. None of those customers was a customer of ours in
fiscal 2000. In fiscal 2000, our three largest customers accounted for 7.4%,
7.2% and 7.0%, respectively, of our total contract drilling revenue. None of
those customers was our largest customer in fiscal 1999. In fiscal 1999, our
largest customer accounted for 28% of our total contract drilling revenue and no
other customer accounted for more than 10% of our contract drilling revenue.
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34
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, trade receivables and payables and
short-term debt:
The carrying amounts of our cash and cash equivalents, trade
receivables, payables and short-term debt approximate their fair values.
Long-term debt:
The carrying amount of our long-term debt approximates its fair value,
as supported by the recent issuance of the debt and the variable interest rate
applicable to substantially all the debt outstanding.
11. COMMITMENTS AND CONTINGENCIES
As of March 31, 2001, we were constructing two new land drilling rigs
and acquiring two additional land drilling rigs that we are refurbishing. The
combined cost of these rigs will be approximately $23,000,000. As of March 31,
2001, we have recorded costs of approximately $4,767,000 including capitalized
interest costs of approximately $56,000.
On June 28, 2000, one of our former employees, Jesse J. Sanchez, filed
a petition against us in the District Court for the 341st District in Webb
County, Texas. The petition asserts a claim for injuries allegedly resulting
from an accident involving one of our drilling rigs. The petition alleges, among
other things, that we intentionally failed to furnish Mr. Sanchez with a safe
workplace and that we believed our conduct was substantially certain to cause
Mr. Sanchez's injuries and related damages his wife and children allegedly
sustained. He claims that his actual damages do not exceed $2 million, and he is
seeking punitive damages in excess of $1 million. The petition also sets forth
claims by or on behalf of Mr. Sanchez's wife and children against us for loss of
consortium, support and services. In support of their claims, the Plaintiffs
have alleged that Mr. Sanchez's injuries were caused by the use of alcohol and
drugs by some of our other employees who were at the work site when the accident
occurred. Along with us, the Plaintiffs have sued the well operator, the project
engineer and an oilfield equipment manufacturer. We believe the substantive
allegations the petition contains have no merit and that this action was brought
to circumvent the workers' compensation insurance regime that should supply Mr.
Sanchez's only recourse in this matter. We are defending against these claims
vigorously.
In addition, due to the nature of our business, we are, from time to
time, involved in routine litigation or subject to disputes or claims related to
our business activities, including workers' compensation claims and
employment-related disputes. In the opinion of our management, none of the
pending litigation, disputes or claims against us will have a material adverse
effect on our financial condition or results of operations.
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35
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes quarterly financial data for 2001 and
2000 (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
2001
Revenues $ 8,868 $ 12,215 $ 14,682 $ 14,440 $ 50,205
Earnings from operations 684 491 665 2,034 3,874
Net earnings 649 383 258 1,413 2,703
Net earnings applicable
to common shareholders 573 307 196 1,352 2,428
Earnings per share:
Basic 0.06 0.03 0.02 0.11 0.22
Diluted 0.05 0.03 0.02 0.09 0.19
2000
Revenues $ 3,112 $ 3,304 $ 7,194 $ 5,873 $ 19,483
Earnings (loss) from operations 73 15 187 (34) 241
Net earnings (loss) 22 (34) 86 (154) (80)
Net earnings (loss) applicable
to common shareholders (54) (110) 10 (230) (384)
Earnings (loss) per share
Basic (0.01) (0.02) -- (0.03) (0.06)
Diluted (0.01) (0.02) -- (0.03) (0.06)
33
36
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
In Items 10, 11, 12 and 13 below, we are incorporating by reference the
information we refer to in those Items from the definitive proxy statement for
our 2001 Annual Meeting of Shareholders. We intend to file that definitive proxy
statement with the SEC by July 29, 2001.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Please see the information appearing under the headings "Proposal
No. 1--Election of Directors" and "Executives and Executive Compensation" in the
definitive proxy statement for our 2001 Annual Meeting of Shareholders for the
information this Item 10 requires.
ITEM 11. EXECUTIVE COMPENSATION
Please see the information appearing under the heading "Executives and
Executive Compensation" in the definitive proxy statement for our 2001 Annual
Meeting of Shareholders for the information this Item 11 requires.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Please see the information appearing under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the definitive proxy
statement for our 2001 Annual Meeting of Shareholders for the information this
Item 12 requires.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please see the information appearing under the heading "Certain
Transactions" in the definitive proxy statement for our 2001 Annual Meeting of
Shareholders for the information this Item 13 requires.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
See Index to Consolidated Financial Statements on page 15.
(2) Financial Statement Schedules:
Supplementary income statement information is included in Part
II, Item 8, "Financial Statements and Supplementary Data" of
this report. Schedule II - Valuation and Qualifying Accounts
is filed as part of this report. All other financial statement
schedules are omitted because they are not required or the
required information is shown in our consolidated financial
statements or the notes thereto.
(3) Exhibits. The following exhibits are filed as part of this
report:
34
37
EXHIBIT
NUMBER DESCRIPTION
2.1 -- Asset Purchase Agreement dated September 29, 1999 between Howell
Drilling, Inc. and South Texas Drilling & Exploration, Inc.
2.2 -- Asset Purchase Agreement dated February 14, 2001 between Mustang
Drilling, Ltd., Michael T. Wilhite, Sr., Andrew D. Mills and
Michael T. Wilhite, Jr.
2.3 -- Stock Purchase Agreement dated July 21, 2000 between South Texas
Drilling & Exploration, Inc. and the Shareholders of Pioneer
Drilling Co., Inc.
3.1 -- Articles of Incorporation of South Texas Drilling & Exploration,
Inc., as amended.
3.2 -- Bylaws of South Texas Drilling & Exploration, Inc.
4.1 -- Loan Agreement dated August 11, 2000 between South Texas Drilling
& Exploration, Inc. and The Frost National Bank.
4.2 -- First Amendment to Loan Agreement dated December 31, 2000 between
South Texas Drilling Co., Ltd. and The Frost National Bank.
4.3 -- Loan Agreement dated March 30, 2001 between Pioneer Drilling Co.,
Ltd. and The Frost National Bank.
4.4 -- Promissory Note dated June 18, 1997 between South Texas Drilling
& Exploration, Inc. and San Patricio Corporation.
4.5 -- Debenture Purchase Agreement dated March 30, 2001 between South
Texas Drilling & Exploration, Inc. and WEDGE Energy Services,
L.L.C.
4.6 -- Debenture Agreement dated March 30, 2001 between South Texas
Drilling & Exploration, Inc. and WEDGE Energy Services, L.L.C.
4.7 -- Subordination Agreement dated March 30, 2001 between South Texas
Drilling & Exploration, Inc. and American Bank, N.A. regarding
loan of $3,000,000.
4.8 -- Subordination Agreement dated March 30, 2001 between South Texas
Drilling & Exploration, Inc. and The Frost National Bank
regarding loans of $1,000,000 and $9,000,000.
4.9 -- Subordination Agreement dated March 30, 2001 between South Texas
Drilling & Exploration, Inc. and The Frost National Bank
regarding loans of $12,000,000.
4.10 -- Agreement dated May 18, 2001 between South Texas Drilling &
Exploration, Inc. and WEDGE Energy Services, L.L.C.
South Texas Drilling & Exploration, Inc. and some of its
subsidiaries are parties to debt instruments under which the
total amount of securities authorized does not exceed 10% of the
total assets of South Texas Drilling &
35
38
EXHIBIT
NUMBER DESCRIPTION
Exploration, Inc. and its subsidiaries on a consolidated basis.
Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K,
South Texas Drilling & Exploration, Inc. agrees to furnish a copy
of those instruments to the SEC on request.
9.1 -- Voting Agreement dated June 18, 1997 between Robert R. Marmor,
William D. Hibbetts, Wm. Stacy Locke, Alvis L. Dowell, Charles B
Tichenor and Richard Phillips.
9.2 -- Voting Agreement dated May 11, 2000 between Wm. Stacey Locke,
Michael E. Little, South Texas Drilling & Exploration, Inc. and
WEDGE Energy Services, L.L.C.
10.1+ -- Executive Employment Agreement dated May 1, 1995 between South
Texas Drilling & Exploration, Inc. and Wm. Stacy Locke.
10.2+ -- First Amendment to Executive Employment Agreement dated November
16, 1998 between South Texas Drilling & Exploration, Inc. and Wm.
Stacy Locke.
10.3+ -- Executive Employment Agreement dated November 16, 1998 between
South Texas Drilling & Exploration, Inc. and Michael E. Little.
10.4+ -- Second Amendment to Executive Employment Agreement dated August
21, 2000 between South Texas Drilling & Exploration, Inc. and Wm.
Stacy Locke.
10.5+ -- South Texas Drilling & Exploration, Inc.'s 1995 Stock Plan and
form of Stock Option Agreement.
10.6+ -- Non-Statutory Stock Option Agreement dated June 18, 1997 between
South Texas Drilling & Exploration, Inc. and San Patricio
Corporation.
10.7+ -- South Texas Drilling & Exploration, Inc.'s 1999 Stock Plan and
form of Stock Option Agreement.
10.8 -- Subscription Agreement dated February 17, 2000 between WEDGE
Energy Services, L.L.C. and South Texas Drilling & Exploration,
Inc.
10.9 -- Common Stock Purchase Agreement dated May 11, 2000 between WEDGE
Energy Services, L.L.C. and South Texas Drilling & Exploration,
Inc.
10.10 -- Common Stock Purchase Agreement dated May 18, 2001 between South
Texas Drilling & Exploration, Inc. and WEDGE Energy Services,
L.L.C.
10.11 -- Registration Rights Agreement dated May 18, 2001 between WEDGE
Energy Services, L.L.C. and South Texas Drilling & Exploration,
Inc.
10.12 -- Contract dated May 5, 2000 between IRI International Corporation
and South Texas Drilling & Exploration, Inc. for the purchase of
two drilling rigs.
21.1 -- Subsidiaries of South Texas Drilling & Exploration, Inc.
36
39
EXHIBIT
NUMBER DESCRIPTION
23.1 -- Consent of KPMG LLP.
- ---------
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
On March 22, 2001, we filed with the SEC a current report on Form 8-K
to update our prior disclosure of a lawsuit styled Sanchez v. Michael Petroleum
Corporation, et al. that had been filed against us and others in the District
Court of Webb County, Texas.
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40
SCHEDULE II
Valuation and Qualifying Accounts
Balance Charged
at to Costs Deductions Balance
Beginning and from at
of Year Expenses Accounts Year End
--------- -------- ---------- --------
Year ended March 31, 1999:
Allowance for doubtful receivables $ 140,000 -- $ 140,000 --
========= ========= ========= =========
Year ended March 31, 2000:
Allowance for doubtful receivables $ -- -- $ -- --
========= ========= ========= =========
Year ended March 31, 2001:
Allowance for doubtful receivables $ -- -- $ -- --
========= ========= ========= =========
38
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTH TEXAS DRILLING & EXPLORATION, INC.
June 21, 2001 By: /s/ MICHAEL E. LITTLE
-----------------------------------
Michael E. Little
Chairman of the Board and Chief
Executive Officer
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
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MICHAEL E. LITTLE
- ----------------------
Michael E. Little Chairman, Chief Executive Officer and June 21, 2001
Director (Principal Executive Officer)
/s/ WM. STACY LOCKE
- ----------------------
Wm. Stacy Locke President, Chief Financial Officer and June 21, 2001
Director (Principal Financial Officer)
/s/ WILLIAM D. HIBBETTS
- -----------------------
William D. Hibbetts Vice President, Chief Accounting June 21, 2001
Officer, Secretary and Director
(Principal Accounting Officer)
/s/ C. JOHN THOMPSON
- ----------------------
C. John Thompson Director June 21, 2001
/s/ JAMES M. TIDWELL
- ----------------------
James M. Tidwell Director June 21, 2001
/s/ WILLIAM H. WHITE
- ----------------------
William H. White Director June 21, 2001
39
42
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 - Asset Purchase Agreement dated September 29, 1999 between
Howell Drilling, Inc. and South Texas Drilling & Exploration,
Inc.
2.2 - Asset Purchase Agreement dated February 14, 2001 between
Mustang Drilling, Ltd., Michael T. Wilhite, Sr., Andrew D. Mills
and Michael T. Wilhite, Jr.
2.3 - Stock Purchase Agreement dated July 21, 2000 between South
Texas Drilling & Exploration, Inc. and the Shareholders of
Pioneer Drilling Co., Inc.
3.1 - Articles of Incorporation of South Texas Drilling &
Exploration, Inc., as amended.
3.2 - Bylaws of South Texas Drilling & Exploration, Inc.
4.1 - Loan Agreement dated August 11, 2000 between South Texas
Drilling & Exploration, Inc. and The Frost National Bank.
4.2 - First Amendment to Loan Agreement dated December 31, 2000
between South Texas Drilling & Exploration, Inc. and The Frost
National Bank.
4.3 - Loan Agreement dated March 30, 2001 between Pioneer Drilling
Co., Ltd. and The Frost National Bank.
4.4 - Promissory Note dated June 18, 1997 between South Texas
Drilling & Exploration, Inc. and San Patricio Corporation.
4.5 - Debenture Purchase Agreement dated March 30, 2001 between South
Texas Drilling & Exploration, Inc. and WEDGE Energy Services,
L.L.C.
4.6 - Debenture Agreement dated March 30, 2001 between South Texas
Drilling & Exploration, Inc. and WEDGE Energy Services, L.L.C.
4.7 - Subordination Agreement dated March 30, 2001 between South
Texas Drilling & Exploration, Inc. and American Bank, N.A.
regarding loan of $3,000,000.
4.8 - Subordination Agreement dated March 30, 2001 between South
Texas Drilling & Exploration, Inc. and The Frost National Bank
regarding loans of $1,000,000 and $9,000,000.
4.9 - Subordination Agreement dated March 30, 2001 between South
Texas Drilling & Exploration, Inc. and The Frost National Bank
regarding loans of $12,000,000.
4.10 - Agreement dated May 18, 2001 between South Texas Drilling &
Exploration, Inc. and WEDGE Energy Services, L.L.C.
South Texas Drilling & Exploration, Inc. and some of its
subsidiaries are parties to debt instruments under which the
total amount of securities authorized does not exceed 10% of the
total assets of South Texas Drilling & Exploration, Inc. and its
subsidiaries on a consolidated basis. Pursuant to paragraph
4(iii)(A) of Item 601(b) of Regulation S-K, South Texas Drilling
& Exploration, Inc. agrees to furnish a copy of those instruments
to the SEC on request.
43
9.1 - Voting Agreement dated June 18, 1997 between Robert R. Marmor,
William D. Hibbetts, Wm. Stacy Locke, Alvis L. Dowell, Charles B
Tichenor and Richard Phillips.
9.2 - Voting Agreement dated May 11, 2000 between Wm. Stacey Locke,
Michael E. Little, South Texas Drilling & Exploration, Inc. and
WEDGE Energy Services, L.L.C.
10.1+ - Executive Employment Agreement dated May 1, 1995 between South
Texas Drilling & Exploration, Inc. and Wm. Stacy Locke.
10.2+ - First Amendment to Executive Employment Agreement dated
November 16, 1998 between South Texas Drilling & Exploration,
Inc. and Wm. Stacy Locke.
10.3+ - Executive Employment Agreement dated November 16, 1998 between
South Texas Drilling & Exploration, Inc. and Michael E. Little.
10.4+ - Second Amendment to Executive Employment Agreement dated August
21, 2000 between South Texas Drilling & Exploration, Inc. and
Win. Stacy Locke.
10.5+ - South Texas Drilling & Exploration, Inc.'s 1995 Stock Plan and
form of Stock Option Agreement.
10.6+ - Non-Statutory Stock Option Agreement dated June 18, 1997
between South Texas Drilling & Exploration, Inc. and San Patricio
Corporation.
10.7+ - South Texas Drilling & Exploration, Inc.'s 1999 Stock Plan and
form of Outside Directors' Stock Option Agreement and form of
Incentive Stock Option Agreement.
10.8 - Subscription Agreement dated February 17, 2000 between WEDGE
Energy Services, L.L.C. and South Texas Drilling & Exploration, Inc.
10.9 - Common Stock Purchase Agreement dated May 11, 2000 between
WEDGE Energy Services, L.L.C. and South Texas Drilling &
Exploration, Inc.
10.10 - Common Stock Purchase Agreement dated May 18, 2001 between
South Texas Drilling & Exploration, Inc. and WEDGE Energy
Services, L.L.C.
10.11 - Registration Rights Agreement dated May 18, 2001 between WEDGE
Energy Services, L.L.C. and South Texas Drilling & Exploration,
Inc.
10.12 - Contract dated May 5, 2000 between IRI International
Corporation and South Texas Drilling & Exploration, Inc. for the
purchase of two drilling rigs.
21.1 Subsidiaries of South Texas Drilling & Exploration, Inc.
23.1 - Consent of KPMG LLP.