<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 December 31, 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.
<TABLE>
<CAPTION>
Class Outstanding at February 12, 1997
----- --------------------------------
<S> <C>
Common Stock, $.10 par value 5,315,566
</TABLE>
<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>
December 31, March 31,
ASSETS 1996 1996
------ ------------ -----------
<S> <C> <C>
Current Assets:
Cash $ 183,277 325,568
Receivables 1,288,091 541,319
Contract drilling in progress 211,908 234,527
Prepaid expenses 224,533 48,016
------------ -----------
Total current assets 1,907,809 1,149,430
------------ -----------
Property and equipment 10,761,237 11,110,070
Accumulated depreciation, depletion and amortization 7,483,056 8,001,254
------------ -----------
Net property and equipment 3,278,181 3,108,816
------------ -----------
Investment in notes receivable 25,456 27,404
------------ -----------
Total assets 5,211,446 4,285,650
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt - 200,000
Current installments, long-term debt 301,825 467,416
Accounts payable 1,502,253 1,255,505
Prepaid drilling contracts 132,900 99,000
Accrued expenses 200,814 232,337
------------ -----------
Total current liabilities 2,137,792 2,254,258
Long term debt 1,393,159 553,916
Minority interest - -
------------ -----------
Total liabilities 3,530,951 2,808,174
------------ -----------
Shareholders' equity:
Preferred stock, noncumulative, $1.00 par value.
Authorized 1,000,000 shares; issued and out-
standing 235,000 shares at December 31, and
March 31, 1996. 235,000 235,000
Common stock, $0.10 par value.
Authorized 15,000,000 shares; issued and out-
standing 5,655,333 at December 31 and
5,601,000 at March 31, 1996. 565,533 560,100
Additional paid-in capital 15,914,169 15,899,227
Retained earnings (deficit) (14,897,302) (15,086,946)
------------ -----------
1,817,400 1,607,381
Less Treasury stock, at cost, 339,767 shares 136,905 129,905
------------ -----------
Total shareholders' equity 1,680,495 1,477,476
------------ -----------
Total Liabilities and shareholders equity $ 5,211,446 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 Nine Months Ended
December 31, December 31,
------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract Drilling 1,911,088 1,847,471 5,917,026 5,190,226
Oil and gas 109,098 109,928 308,291 367,980
Management fees and other 36,394 (701) 108,697 27,761
--------- --------- --------- ---------
Total operating revenues 2,056,580 1,956,698 6,334,014 5,585,967
Costs and expenses:
Contract drilling 1,615,406 1,429,620 5,000,614 4,488,045
Oil and gas 49,643 48,039 132,404 125,477
. Depreciation, depletion and amortization 160,481 146,658 464,212 436,649
General and administrative 132,404 117,739 408,737 387,362
Doubtful accounts 25,250 - 25,250 -
--------- --------- --------- ---------
Total operating costs and expenses 1,983,184 1,742,056 6,031,217 5,437,533
--------- --------- --------- ---------
Earnings from operations 73,396 214,642 302,797 148,434
--------- --------- --------- ---------
Other income (expense):
Interest expense (44,934) (29,666) (131,253) (82,920)
Interest income 5,149 1,448 11,237 3,473
Gain on sale of assets - 141,423 6,862 165,406
Minority interest in earnings of
partnership - (15,408) - 16,592
--------- --------- --------- ---------
Total other income (expense) (39,785) 97,797 (113,154) 102,551
--------- --------- --------- ---------
Earnings before income taxes 33,611 312,439 189,643 250,985
Income taxes - - - -
--------- --------- --------- ---------
Net earnings 33,611 312,439 189,643 250,985
========= ========= ========= =========
Net earnings per common and common
equivalent share 0.01 0.05 0.03 0.04
========= ========= ========= =========
Weighted average number of shares 5,469,284 5,534,333 5,472,861 5,441,693
========= ========= ========= =========
</TABLE>
NOTE: At December 31, 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>
Nine Months Ended
December 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 189,643 250,985
Adjustments to reconcile net earnings
to net cash provided (used) by operating activities:
Depreciation, depletion, amortization 464,212 436,649
Provision for doubtful accounts 25,250 -
Stock issued to directors as compensation - 13,340
Gain on sale of assets (6,862) (165,407)
Minority interest in equity of partnership - (16,591)
Changes in current assets and liabilities:
Accounts and note receivable (770,073) (994,785)
Contract drilling in progress 22,619 437,563
Prepaid expenses (176,517) 29,737
Accounts payable 246,748 518,382
Prepaid drilling contracts 33,900 113,700
Accrued expenses (31,523) (77,751)
------------ ----------
Net cash provided (used) by operations (2,603) 545,822
------------ ----------
Cash flows from financing activities:
Payments of debt (1,110,071) (1,171,229)
Proceeds from notes payable 1,603,724 1,621,644
Purchase of treasury stock (7,000) -
Proceeds from exercise of warrants and options 375 47,300
------------ ----------
Net cash provided by financing activities 487,028 497,715
------------ ----------
Cash flows from investing activities:
Purchase of property and equipment (634,698) (1,063,494)
Proceeds from sale of equipment 7,982 42,837
------------ ----------
Net cash (used) in investing activities (626,716) (1,020,657)
------------ ----------
Net increase (decrease) in cash (142,291) 22,880
Beginning cash and cash equivalents 325,568 221,816
------------ ----------
Ending cash and cash equivalents $ 183,277 244,696
============ ==========
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 December 31, 1996, were $183,277
compared to $325,568 at March 31, 1996. The current ratio at December
31, 1996 was 0.89:1 compared to 0.51:1 at March 31, 1996. Working
capital increased to ($229,983) at December 31, 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 $1,288,091 at December 31, 1996 from $541,319 at March 31,
1996. This increase was the result of increased drilling activity and
the completion of contracts near the end of the current period.
Included in accounts receivable at both December 31 and March 31, 1996
is an account for which a reserve for doubtful accounts was established
in March, 1996 for one-half of the account balance. A court hearing on
the account is scheduled for April, 1997. Contract drilling in progress
decreased to $211,908 at December 31, 1996 from $234,527 at March 31,
1996. Prepaid expenses increased to $224,533 at December 31, 1996 from
$48,016 at March 31, 1996. This increase was the result of the purchase
of drilling supplies which will be used in future periods and the fees
associated with the debt refinancing which are being amortized over the
term of the financing.
Since March 31, 1996, property and equipment costs decreased by
$348,833. This decrease was the result of a write off of $954,926 in
fully depreciated drilling equipment, a reduction of $32,104 resulting
from the trade in of transportation equipment, a reduction of $3,108
resulting from the salvage of oil and gas equipment and the expenditure
of $641,305 for additional property and equipment. Of this amount,
$599,333 was spent on drilling equipment, $34,099 was spent on
transportation equipment, $4,364 was spent on building improvements,
5
<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$2,700 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 $673,652 from March 31, 1996 to December 31,
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 December 31, 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.
Accounts payable at December 31, 1996 were $1,502,253, an increase
of $246,748 from $1,255,505 at March 31, 1996. One reason for this
increase is the effect on cash flow of the uncollected account
receivable discussed above. Accrued expenses decreased to $200,814 at
December 31, 1996 from $232,337 at March 31, 1996.
Results of Operations
Contract drilling revenue for the quarter ended December 31, 1996
was $1,911,088 compared to $1,847,471 in the same quarter a year
earlier. Oil and gas revenue decreased to $109,098 in the current
quarter from $109,928 in the same quarter of the prior year. Earnings
before interest, taxes, depreciation, depletion and amortization
(EBITDA) was $233,877 in the current quarter compared to $361,300 in
the same quarter a year earlier and $767,009 for nine months ended
December 31, 1996 compared to $585,083 for nine months ended December
31, 1995.
The increase in drilling revenue was due to increased drilling
activity, 296 days in the current quarter compared to 285 drilling days
in the same quarter a year earlier. Rig utilization increased to 80% in
the current quarter from 63% 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 slight 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 5,176 barrels of oil, while in
the same quarter a year earlier production was the equivalent of 6,339
barrels of oil. However, an increase in the average prices of both oil
and gas helped reduce the effect of the lower production. In the
current quarter, the average prices received by the Company were $23.97
per barrel of oil and $3.02 per mcf of gas. In the same quarter in
fiscal 1996, the Company received $17.10 per barrel of oil and $1.85 per
mcf of gas.
Total operating costs and expenses for the quarter ended December
31, 1996 were $1,983,184, up $241,128, from operating costs and expenses
of $1,742,056 in the same quarter a year earlier. When compared with
the same quarter a year earlier, contract drilling costs increased
$185,786 in the quarter ended December 31, 1996. The Company's average
daily drilling margin (drilling revenue less drilling costs) decreased
to $999 per day in the current quarter from $1,466 per day in the same
quarter in fiscal 1996. The average daily drilling margin decreased in
the current quarter due to increased drilling costs and higher contract
move costs. Oil and gas costs and expenses were $49,643 in the quarter
ended December 31, 1996 compared with $48,039 in the same quarter
6
<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a year earlier. Depreciation, depletion and amortization costs
increased to $160,481 in the quarter ended December 31, 1996 from
$146,658 in the quarter ended December 31, 1995. The reason for this
increase was an increase in depreciation expense resulting from the
addition of equipment since December 31, 1995. General and
administrative expenses increased to $132,404 in the current quarter
from $117,739 in the same quarter a year earlier.
Other income and expense decreased to ($39,785) in the current
quarter from $97,797 in the same quarter a year earlier. The primary
reason for this decrease was the sale of a one-half interest in a
drilling rig which occurred in fiscal 1996 while there was no such
activity in fiscal 1997. In addition, in fiscal 1997 the minority
interest in the losses of a partnership was eliminated. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
7
<PAGE> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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: February 12, 1997
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 February 12, 1997
- -------------------------------
Robert R. Marmor
/s/Wm Stacy Locke President and Chief February 12, 1997
- ------------------------------- Executive Officer
Wm. Stacy Locke
/s/Chris F. Parma Vice President and Chief February 12, 1997
- -------------------------------- Financial Officer
Chris F. Parma
</TABLE>
8
<PAGE> 9
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000320575
<NAME> SOUTH TEXAS DRILLING AND EXPLORATION, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 183,277
<SECURITIES> 0
<RECEIVABLES> 1,499,999
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,907,809
<PP&E> 10,761,237
<DEPRECIATION> 7,483,056
<TOTAL-ASSETS> 5,211,446
<CURRENT-LIABILITIES> 2,137,792
<BONDS> 0
0
235,000
<COMMON> 565,533
<OTHER-SE> 879,962
<TOTAL-LIABILITY-AND-EQUITY> 5,211,446
<SALES> 308,291
<TOTAL-REVENUES> 6,334,014
<CGS> 132,404
<TOTAL-COSTS> 6,031,217
<OTHER-EXPENSES> 113,154
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 189,643
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 189,643
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
