<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, 1997
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 4, 1997
Common Stock, $.10 par value 5,808,194
<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 1997 1997
------ ---- ----
<S> <C> <C>
Current Assets:
Cash $ 593,043 407,755
Receivables 1,938,912 642,677
Contract drilling in progress 965,141 593,162
Prepaid expenses 207,752 162,213
------------ -----------
Total current assets 3,704,848 1,805,807
------------ -----------
Property and equipment 13,875,880 10,887,935
Accumulated depreciation, depletion and amortization 8,079,788 7,642,458
------------ -----------
Net property and equipment 5,796,092 3,245,477
------------ -----------
Total assets 9,500,940 5,051,284
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments, long-term debt 446,693 261,394
Accounts payable 2,261,120 1,146,982
Prepaid drilling contracts 99,000 99,000
Accrued expenses 517,877 269,265
------------ -----------
Total current liabilities 3,324,690 1,776,641
Long-term debt 2,154,401 1,220,103
------------ -----------
Total liabilities 5,479,091 2,996,744
------------ -----------
Shareholders' equity:
Preferred stock, noncumulative, $1.00 par value. Authorized
1,000,000 shares; issued and outstanding no shares at
September 30 and 235,000 shares at March 31, 1997 -- 235,000
Preferred stock, 8%, cumulative, convertible, $2.00 par value
Authorized 400,000 shares; issued and outstanding 400,000 shares at
September 30, and no shares at March 31, 1997 800,000 --
Common stock, $.10 par value. Authorized 15,000,000 shares;
issued 6,147,961 at September 30 and 5,655,333 at March 31, 1997 614,796 565,533
Additional paid-in capital 16,344,906 15,914,169
Retained earnings (deficit) (13,600,948) (14,523,257)
------------ -----------
4,158,754 2,191,445
Less Treasury stock, at cost, 339,767 shares 136,905 136,905
------------ -----------
Total shareholders' equity 4,021,849 2,054,540
------------ -----------
Total Liabilities and shareholders equity $ 9,500,940 5,051,284
============ ===========
</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,
--------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract Drilling $ 5,821,886 1,910,806 7,827,026 4,005,938
Oil and gas 82,035 93,922 170,016 199,193
Management fees and other 27,414 28,729 68,946 72,303
----------- ---------- ---------- ----------
Total operating revenues 5,931,335 2,033,457 8,065,988 4,277,434
----------- ---------- ---------- ----------
Costs and expenses:
Contract drilling 4,526,427 1,581,758 6,126,306 3,385,208
Oil and gas 35,437 36,125 84,356 82,761
Depreciation, depletion and amortization 262,878 156,253 437,854 303,731
General and administrative 202,844 141,013 401,394 276,333
----------- ---------- ---------- ----------
Total operating costs and expenses 5,027,586 1,915,149 7,049,910 4,048,033
----------- ---------- ---------- ----------
Earnings (loss) from operations 903,749 118,308 1,016,078 229,401
----------- ---------- ---------- ----------
Other income (expense):
Interest expense (73,210) (48,509) (119,345) (86,319)
Interest income 7,489 2,393 12,328 6,088
Gain on sale of assets 13,972 6,862 13,248 6,862
----------- ---------- ---------- ----------
Total other income (expense) (51,749) (39,254) (93,769) (73,369)
----------- ---------- ---------- ----------
Earnings before income taxes 852,000 79,054 922,309 156,032
Income taxes -- -- -- --
----------- ---------- ---------- ----------
Net earnings 852,000 79,054 922,309 156,032
Preferred stock dividend requirements 13,333 -- 29,333 --
----------- ---------- ---------- ----------
Net earnings applicable to common
stockholders $ 838,667 79,054 892,976 156,032
=========== ========== ========== ==========
Primary earnings per common and
common equivalent share $ 0.12 0.01 0.13 0.03
=========== ========== ========== ==========
Weighted average number of shares 7,010,894 5,321,233 6,862,122 5,319,011
=========== ========== ========== ==========
</TABLE>
NOTE: At September 30, 1997, the Company has a remaining net operating loss
carryforward of approximately $15,820,000 and investment tax credit
carryforward of approximately $125,000.
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,
------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 922,309 156,032
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation, depletion, amortization 437,854 303,731
Stock issued to directors and employees as compensation 55,000 --
Gain on sale of assets (13,248) (6,862)
Changes in current assets and liabilities:
Accounts and notes receivable (1,296,235) (650,518)
Contract drilling in progress (371,979) 91,609
Prepaid expenses (45,539) (58,942)
Accounts payable 1,114,138 11,951
Accrued expenses 248,612 2,941
----------- ----------
Net cash provided (used) by operations 1,050,912 (150,058)
----------- ----------
Cash flows from financing activities:
Payments of debt (275,270) (1,036,308)
Proceeds from notes payable 10,500 1,593,349
Purchase of treasury stock -- (7,000)
Purchase of preferred stock (75,000) --
Proceeds from issuance of preferred stock 765,000 --
----------- ----------
Net cash provided by financing activities 425,230 550,041
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,327,304) (593,057)
Proceeds from sale of equipment 36,449 7,982
----------- ----------
Net cash used in investing activities (1,290,855) (585,075)
----------- ----------
Net increase (decrease) in cash 185,287 (185,092)
Beginning cash and cash equivalents 407,755 325,568
----------- ----------
Ending cash and cash equivalents $ 593,042 140,476
=========== ==========
Supplementary Disclosure:
Equipment purchased with debt $ 1,384,368 --
Equipment purchased with stock 300,000 --
Accrued officer's compensation paid through the issuance 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, 1997, the Company had investment tax credit carryforwards
for Federal income tax purposes of approximately $125,000 (expiring 1997
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, 1997 were $593,043 compared to
$407,755 at March 31, 1997. The current ratio at September 30, 1997 was 1.1:1
compared to 1.0:1 at March 31, 1997. Working capital increased to $380,158 at
September 30, 1997 from $29,166 at March 31, 1997. Accounts receivable increased
to $1,938,912 at September 30, 1997 from $642,677 at March 31, 1997. Contract
drilling in progress increased to $965,141 at September 30, 1997 from $593,162
at March 31, 1997.
Since March 31, 1997, property and equipment costs increased by $2,987,945.
Of this amount, $2,867,680 was spent on drilling equipment, $113,106 was spent
on transportation equipment, $4,846 was spent on furniture and fixtures and
$2,312 was spent on investment in oil and gas properties. The primary element in
the increase in drilling equipment was the expenditure of $1,500,000 for the
acquisition, described below, of equipment from San Patricio Corporation. In
addition to the two drilling rigs purchased, the Company assumed San Patricio's
lease of a third rig. Even though the purchase closed in June, 1997, the
purchase agreement allowed San Patricio to complete jobs it was drilling at the
time. Consequently, during the first quarter of fiscal 1998, only one of the
rigs was placed in service by the Company. By July 8, 1997, the other two rigs
were placed into service by the Company.
In June, 1997, the Company closed on the acquisition of the drilling
operations of San Patricio Corporation. Assets acquired by the Company included
two land drilling rigs, rig handling trucks and trailers and miscellaneous
drilling equipment. In addition, the Company assumed a lease of a third land
drilling rig. As a result of the acquisition, the Company now operates seven
land drilling rigs, primarily in central and south Texas. The transaction was
accounted for as a purchase.
Debt obligations in the form of notes payable, both short term and long
term, increased by $1,119,597 from March 31, 1997 to September 30, 1997. The
primary element of the increase was the purchase of drilling equipment from San
Patricio Corporation which was described above. The purchase was accomplished
with the use of $900,000 in third-party financing, $300,000 in seller financing
and the issuance of $300,000 of the Company's common stock. The total third-
5
<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
party financing was $1,050,000. This note carries an interest rate of prime
(8.5% at September 30, 1997) plus 2.25% and is due in June, 1999. The note
provides for monthly payments of $12,500 (based on seven year amortization) plus
interest. Concurrent with the issuance of this note, the third party lender also
modified the terms of the loans closed in May, 1997. The interest rate on both
the revolving loan and the term loan was reduced to prime plus 2.25% and the due
date was extended to June, 1999. The $300,000 of seller financing is payable in
monthly payments of $5,000 plus interest at 10%. This note is due in June, 2002.
Accounts payable at September 30, 1997 were $2,261,120, an increase of
$1,114,138 from $1,146,982 at March 31, 1997. Accrued expenses increased to
$517,877 at September 30, 1997 from $269,265 at March 31, 1997. The primary
reason for the increase in accounts payable was the additional work generated by
the three rigs acquired in June, 1997.
In April, 1997, the Company issued a new Series A 8% Convertible Preferred
Stock. The issue consisted of 400,000 shares with a designated par value of
$2.00 per share. Dividends on the stock are cumulative. This Preferred Stock is
convertible into two shares of Common Stock for each share of Preferred Stock.
In the event dividends are due but unpaid by the Company, the conversion price
is reduced to one share of Common Stock for each $.50 of due but unpaid
dividends on the Series A 8% Convertible Preferred Stock. The stock is
redeemable at the Company's option at or following the third anniversary of the
issuance of such stock provided, generally, that the price of the Company's
Common Stock equals or exceeds $2.50 per share. The proceeds from the stock were
used to reduce trade accounts payable, bank debt and to acquire drilling
equipment. Prior to the issuance of this new Series A Preferred Stock, the
Company redeemed its previously issued and outstanding Series A Preferred Stock
consisting of 235,000 shares of stock with a stated par value of $1.00 per
share. The outstanding shares were redeemed for a cash payment of $75,000.
Results of Operations
Contract drilling revenue for the quarter ended September 30, 1997 was
$5,821,886 compared to $1,910,806 in the same quarter a year earlier. This
increase in drilling revenue was the result of an increase in drilling days, a
higher percentage of jobs drilled under footage and turnkey contracts and
increased day rates. In the current quarter, the Company had 520 drilling days
compared to 268 drilling days in the same quarter in fiscal 1997. The reason for
the increase in the number of drilling days in the current quarter was the
utilization of seven rigs in the current quarter compared to four rigs in the
same quarter in fiscal 1997. The rig utilization rate for the current quarter
was 83% compared to 73% in the same quarter a year earlier. The rig utilization
rate will not reach 100% because drilling days are defined as actual days
drilled and do not include days for mobilization of the rig. The average daily
drilling revenue increased to $11,194 from $7,130 in the corresponding quarter
of fiscal 1997, which reflects both the change in the types of jobs drilled and
increased day rates.
Oil and gas revenue for the quarter ended September 30, 1997 was $82,035
compared to $93,922 in the same quarter a year earlier. This decrease in revenue
in the current quarter was due to lower production of both oil and gas and a
lower average price for oil. In the current quarter, production was the
equivalent of 4,920 barrels of oil while in the same quarter a year earlier
production was the equivalent of 5,232 barrels of oil. In the current quarter,
the average prices received by the Company were $18.51 per barrel of oil and
$2.52 per mcf of gas. In the same quarter in fiscal 1997, the Company received
$21.19 per barrel of oil and $2.52 per mcf of gas.
Total operating costs and expenses for the quarter ended September 30, 1997
were $5,027,586, up $3,112,437, from operating costs and expenses of $1,915,149
in the same quarter a year earlier. When compared with the same quarter a year
earlier, contract drilling costs increased $2,944,669 in the quarter ended
September 30, 1997. Average drilling costs per day in the current quarter were
$8,705 compared to $5,902 in the same quarter a year earlier. Oil and gas costs
and expenses were $35,437 in the quarter ended September 30, 1997 compared with
$36,125 in the same quarter a year earlier. Depreciation, depletion and
amortization costs increased to $262,878 in the quarter ended September 30, 1997
from $156,253 in the quarter ended September 30, 1996. This increase was the
result of increased depreciation expense due to the addition of equipment since
September 30, 1996. General and administrative expenses increased to $202,844 in
the current quarter from $141,013 in the same quarter a year earlier. This
increase was primarily the result of increased payroll costs.
6
<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Other income (expense) increased to $(51,749) in the current quarter from
$(39,254) in the same quarter a year earlier, primarily due to increased
interest expense.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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
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 4, 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 November 4, 1997
- -------------------------
Robert R. Marmor
/s/Wm. Stacy Locke President and Chief November 4, 1997
- ------------------------- Executive Officer
Wm. Stacy Locke
/s/Chris F. Parma Chief Financial Officer November 4, 1997
- -------------------------
Chris F. Parma
</TABLE>
8
<PAGE> 9
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000320575
<NAME> SOUTH TEXAS DRILLING & EXPLORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 593,043
<SECURITIES> 0
<RECEIVABLES> 2,904,053
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,704,848
<PP&E> 13,875,880
<DEPRECIATION> 8,079,788
<TOTAL-ASSETS> 9,500,940
<CURRENT-LIABILITIES> 3,324,690
<BONDS> 0
0
800,000
<COMMON> 614,796
<OTHER-SE> 2,607,053
<TOTAL-LIABILITY-AND-EQUITY> 9,500,940
<SALES> 170,016
<TOTAL-REVENUES> 8,065,988
<CGS> 84,356
<TOTAL-COSTS> 7,049,910
<OTHER-EXPENSES> 93,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 922,309
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 922,309
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
