<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from N/A to
----------------- ----------------
Commission File Number 2-70145
SOUTH TEXAS DRILLING & EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2088619
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9310 Broadway, Bldg. I, San Antonio, Texas 78217
(Address of principal executive offices)
(Zip Code)
210-828-7689
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, address and former fiscal year, if changed since last report)
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
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. N/A
Yes No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding at November 12, 1996
----- --------------------------------
Common Stock, $.10 par value 5,314,566
<PAGE> 2
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1996 1996
------------- -----------
<S> <C> <C>
Current Assets:
Cash $ 140,476 325,568
Receivables 1,193,787 541,319
Contract drilling in progress 142,918 234,527
Prepaid expenses 106,959 48,016
----------- -----------
Total current assets 1,584,140 1,149,430
----------- -----------
Property and equipment 10,719,596 11,110,070
Accumulated depreciation, depletion and amortization 7,322,576 8,001,254
----------- -----------
Net property and equipment 3,397,020 3,108,816
----------- -----------
Investment in notes receivable 25,455 27,404
----------- -----------
Total assets 5,006,615 4,285,650
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt - 200,000
Current installments, long-term debt 296,581 467,416
Accounts payable 1,267,455 1,255,505
Prepaid drilling contracts 99,000 99,000
Accrued expenses 235,277 232,337
----------- -----------
Total current liabilities 1,898,313 2,254,258
Long-term debt 1,461,793 553,916
----------- -----------
Total liabilities 3,360,106 2,808,174
----------- -----------
Shareholders' equity:
Preferred stock, noncumulative, $1.00 par value. Authorized
1,000,000 shares; issued and outstanding 235,000 shares at
March 31, 1996 and September 30, 1996. 235,000 235,000
Common stock, $.10 par value. Authorized 15,000,000 shares: issued
and outstanding 5,601,000 at March 31, 1996 and 5,654,333 at
September 30, 1996. 565,433 560,100
Additional paid-in capital 15,913,894 15,899,227
Retained earnings (deficit) (14,930,913) (15,086,946)
----------- -----------
1,783,414 1,607,381
Less Treasury stock, at cost, 319,767 shares at March 31, 1996
and 339,767 shares at September 30, 1996 136,905 129,905
----------- -----------
Total shareholders' equity 1,646,509 1,477,476
----------- -----------
Total Liabilities and shareholders equity $ 5,006,615 4,285,650
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 3
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------ ------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Contract Drilling $1,910,806 1,325,512 4,005,938 3,342,755
Oil and gas 93,922 122,686 199,193 258,052
Management fees and other 28,729 5,893 72,303 28,462
---------- ---------- ---------- ----------
Total operating revenues 2,033,457 1,454,091 4,277,434 3,629,269
---------- ---------- ---------- ----------
Costs and expenses:
Contract drilling 1,581,758 1,254,289 3,385,208 3,058,425
Oil and gas 36,125 41,959 82,761 77,438
Depreciation, depletion and amortization 156,253 150,289 303,731 289,991
General and administrative 141,013 148,552 276,333 269,623
---------- ---------- ---------- ----------
Total operating costs and expenses 1,915,149 1,595,089 4,048,033 3,695,477
---------- ---------- ---------- ----------
Earnings (loss) from operations 118,308 (140,998) 229,401 (66,208)
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (48,509) (27,924) (86,319) (53,254)
Interest income 2,393 636 6,088 2,025
Gain on sale of assets 6,862 (17) 6,862 23,983
Minority interest in losses of
partnership - 48,327 - 32,000
---------- ---------- ---------- ----------
Total other income (expense) (39,254) 21,022 (73,369) 4,754
---------- ---------- ---------- ----------
Earnings before income taxes 79,054 (119,976) 156,032 (61,454)
Income taxes - - - -
---------- ---------- ---------- ----------
Net earnings $ 79,054 (119,976) 156,032 (61,454)
=========== ========== ========== ==========
Net earnings (loss) per common and common
equivalent share $ 0.01 ( 0.02) 0.03 (0.01)
=========== ========== ========== ==========
Weighted average number of shares 5,321,233 5,489,333 5,319,011 5,448,667
=========== ========== ========== ==========
</TABLE>
NOTE: At September 30, 1996 the Company has a remaining net operating loss
carryforward of approximately $15,820,000 and investment credit
carryforward of approximately $671,000.
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended
September 30,
--------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 156,032 (61,454)
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation, depletion, amortization 303,731 289,991
Stock issued to directors and employees as compensation - 13,340
Gain on sale of assets (6,862) (23,983)
Minority interest in equity of partnership - (32,000)
Changes in current assets and liabilities:
Accounts and notes receivable (650,518) (556,787)
Contract drilling in progress 91,609 205,251
Prepaid expenses (58,942) (24,111)
Accounts payable 11,951 406,430
Prepaid drilling contracts - 147,750
Accrued expenses 2,941 12,871
---------- ----------
Net cash provided (used) by operations (150,058) 377,298
---------- ----------
Cash flows from financing activities:
Payments of debt (1,036,308) (1,121,329)
Proceeds from notes payable 1,593,349 1,379,851
Purchase of treasury stock (7,000) -
Proceeds from exercise of warrants and options - 9,800
---------- ----------
Net cash provided (used in financing activities) 550,041 268,322
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (593,057) (864,997)
Proceeds from sale of equipment 7,982 26,500
---------- ----------
Net cash used in investing activities (585,075) (838,497)
---------- ----------
Net increase (decrease) in cash (185,092) (192,877)
Beginning cash and cash equivalents 325,568 221,816
---------- ----------
Ending cash and cash equivalents $ 140,476 28,939
========== ==========
Supplementary Disclosure:
Accrued officer's compensation paid through the issuance of
53,333 shares of common stock $ 20,000 -
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements include the
accounts of South Texas Drilling & Exploration, Inc and its wholly-owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
2. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
3. The Company uses the asset and liability method of Statement 109
for accounting for income taxes. Pursuant to this method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
4. At April 1, 1996, the Company had investment tax credit
carryforwards for Federal income tax purposes of approximately $671,000
(expiring 1996 through 2007) which are available to reduce future
Federal income taxes. In addition, the Company had net operating loss
carryforwards of approximately $15,820,000 (expiring 1998 through 2006)
which are also available to reduce future Federal income taxes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 1996, were $140,476
compared to $325,568 at March 31, 1996. The current ratio at September
30, 1996 was 0.83:1 compared to 0.51:1 at March 31, 1996. Working
capital increased to ($314,173) at September 30, 1996 from ($1,104,828)
at March 31, 1996. One of the main elements in this improvement in the
Company's working capital position was a restructuring of its debt which
took place in the first quarter of fiscal 1997. Accounts receivable
increased to $1,193,787 at September 30, 1996 from $541,319 at March 31,
1996. This increase was the result of the increased drilling activity
and the completion of contracts near the end of the current period.
Contract drilling in progress decreased to $142,918 at September 30,
1996 from $234,527 at March 31, 1996.
Since March 31, 1996, property and equipment costs decreased by
$390,474. This decrease was comprised of a reduction of $954,926 on the
write off of fully depreciated drilling equipment, a reduction of
$32,104 on the trade in of transportation equipment and an increase of
$596,556 in property and equipment. Of this amount, $570,023 was spent
on drilling equipment, $19,130 was spent on transportation equipment,
$4,364 was spent on building improvements, $2,230 was spent on
investment in oil and gas properties and $809 was spent on furniture and
fixtures. The primary element in the increase in drilling equipment was
the expenditure of $330,879 for the acquisition of drill pipe.
Debt obligations in the form of notes payable, both short term and
long term, increased by $537,042 from March 31, 1996 to September 30,
1996. The primary element of this increase was a restructuring of the
Company's credit facility. Through the restructuring, the Company
acquired a $500,000 revolving line of credit secured by the Company's
accounts receivable and a $1,250,000 term loan which was used to pay off
most of the Company's debt on drilling equipment, provide capital for
additional equipment purchases and reduce the Company's accounts
payable. The term loan is secured by the Company's drilling equipment,
transportation equipment, furniture and fixtures and the yard facility
in Kenedy, Texas. The revolving line of credit carries an interest rate
of prime (8.25% at September 30, 1996) plus 2.75% with interest payable
monthly. The term loan carries an interest rate of prime plus 3.0% with
monthly payments based on a seven year amortization. Through the
restructuring, the Company was able to reduce its working capital
deficit and to increase its current ratio.
5
<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Accounts payable at September 30, 1996 were $1,267,455, an increase
of $11,950 from $1,255,505 at March 31, 1996. Accrued expenses
increased to $235,277 at September 30, 1996 from $232,337 at March 31,
1996.
Results of Operations
Contract drilling revenue for the quarter ended September 30, 1996
was $1,910,806 compared to $1,325,512 in the same quarter a year
earlier, an increase of 44%. Oil and gas revenue decreased to $93,922
in the current quarter from $122,686 in the same quarter of the prior
year. Earnings before interest, taxes, depreciation, depletion and
amortization (EBITDA) was $274,561 in the current quarter compared to
$9,291 in the same quarter a year earlier and $533,132 for six months
ended September 30, 1996 compared to $223,783 for six months ended
September 30, 1995.
The increase in drilling revenue was due to increased drilling
activity, 268 days in the current quarter compared to 215 drilling days
in the same quarter a year earlier. Rig utilization increased to 73% in
the current quarter from 47% in the same quarter in fiscal 1996. During
the current quarter, the Company operated four drilling rigs, while in
fiscal 1996, the Company operated five rigs.
The decrease in oil and gas revenue in the current quarter was due
to lower production of both oil and gas. In the current quarter,
production was the equivalent of 5,232 barrels of oil, while in the same
quarter a year earlier production was the equivalent of 7,476 barrels of
oil. In the current quarter, the average prices received by the Company
were $21.24 per barrel of oil and $2.52 per mcf of gas. In the same
quarter in fiscal 1996, the Company received $17.12 per barrel of oil
and $1.66 per mcf of gas.
Total operating costs and expenses for the quarter ended September
30, 1996 were $1,915,149, up $320,060, from operating costs and expenses
of $1,595,089 in the same quarter a year earlier. When compared with
the same quarter a year earlier, contract drilling costs increased
$327,469 in the quarter ended September 30, 1996. The Company's average
daily drilling margin (drilling revenue less drilling costs) increased
to $1,228 per day in the current quarter from $331 per day in the same
quarter in fiscal 1996. Oil and gas costs and expenses were $36,125 in
the quarter ended September 30, 1996 compared with $41,959 in the same
quarter a year earlier. Depreciation, depletion and amortization costs
increased to $156,253 in the quarter ended September 30, 1996 from
$150,289 in the quarter ended September 30, 1995. The reason for this
increase was an increase in depreciation expense resulting from the
addition of equipment since September 30, 1995. General and
administrative expenses decreased to $141,013 in the current quarter
from $148,552 in the same quarter a year earlier.
Other income and expense decreased to ($39,254) in the current
quarter from $21,022 in the same quarter a year earlier. The reasons
for this decrease were an increase in interest expense, an increase in
the amount of obsolete and excess equipment sold and the elimination of
the minority interest in the losses of a partnership. The partnership,
a drilling partnership, was in operation in fiscal 1996. However,
operations were terminated in December, 1995, and the partnership was
dissolved in January, 1996.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 8, 1996, the Judge of the United States District Court for
the Western District of Texas, San Antonio Division, entered his
decision in Civil Action No. SA-95-CA-0736, Empire Fire and Marine
Insurance Co. vs. South Texas Drilling & Exploration, Inc. et al. This
action was brought against the Company by its automobile liability
insurance carrier who denied coverage in a personal injury case. The
judge held that the injured party was not an employee of the Company and
thus the insurance company had a contractual duty under the policy to
indemnify its insured, the Company. Under this decision, the Company
would have no further obligation to pay the injured party the remaining
$125,000 awarded him and the Company would recoup the $75,000 already
paid to the injured party. On September 9, 1996, the Empire Fire and
Marine Insurance Company filed an appeal with the United States Court of
Appeals for the Fifth Circuit. On September 20, 1996, the Company filed
a cross- appeal in the case.
6
<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. None
Pursuant to the requirements 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.
/s/ Robert R. Marmor
----------------------------------
Robert R. Marmor
Chairman of the Board
Dated: November 12, 1996
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Robert R. Marmor
- --------------------------------- Chairman of the Board November 12, 1996
Robert R. Marmor
/s/Wm. Stacy Locke President and Chief
- --------------------------------- Executive Officer November 12, 1996
Wm. Stacy Locke
/s/Chris F. Parma
- --------------------------------- Controller November 12, 1996
Chris F. Parma
</TABLE>
7
<PAGE> 8
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> SEP-30-1996
<CASH> 140,476
<SECURITIES> 0
<RECEIVABLES> 1,336,705
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,584,140
<PP&E> 10,719,596
<DEPRECIATION> 7,322,576
<TOTAL-ASSETS> 5,006,615
<CURRENT-LIABILITIES> 1,898,313
<BONDS> 0
0
235,000
<COMMON> 565,433
<OTHER-SE> 846,076
<TOTAL-LIABILITY-AND-EQUITY> 1,646,509
<SALES> 199,193
<TOTAL-REVENUES> 4,277,434
<CGS> 82,761
<TOTAL-COSTS> 4,048,033
<OTHER-EXPENSES> 73,369
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 156,032
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,032
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
