<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, 1998
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 November 4, 1998
----- -------------------------------
<S> <C>
Common Stock, $.10 par value 5,900,784
</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>
September 30, March 31,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,053,215 2,586,710
Receivables 1,627,261 440,922
Contract drilling in progress 289,500 965,677
Prepaid expenses 239,817 114,020
----------- -----------
Total current assets 4,209,793 4,107,329
----------- -----------
Property and equipment 17,533,385 16,968,191
Accumulated depreciation, depletion and amortization 9,263,931 8,573,771
----------- -----------
Net property and equipment 8,269,454 8,394,420
----------- -----------
Total assets $12,479,247 12,501,749
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(Continued)
2
<PAGE> 3
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 30,000 60,000
Current installments, long-term debt 459,283 646,014
Accounts payable 2,874,608 1,649,958
Prepaid drilling contracts -- 99,000
Accrued expenses 590,371 533,450
------------ ------------
Total current liabilities 3,954,262 2,988,422
Long-term debt 2,559,190 2,696,919
------------ ------------
Total liabilities 6,513,452 5,685,341
------------ ------------
Shareholders' equity:
Preferred stock, Series A, 8%, cumulative, convertible, $2.00 redemption and
liquidation value. Authorized 400,000 shares; issued and outstanding
400,000 shares at September 30, and at March 31, 1998 800,000 800,000
Preferred stock, Series B, 8%, cumulative, convertible, $16.25
redemption and liquidation value. Authorized 184,615 shares;
issued and outstanding 184,615 shares at September 30, and at
March 31, 1998 2,999,994 2,999,994
Common stock, $.10 par value. Authorized 15,000,000 shares;
issued 5,900,784 at September 30, and 6,171,964 at March 31, 1998 590,078 617,196
Additional paid-in capital 16,254,031 16,337,006
Retained earnings (deficit) (14,678,308) (13,800,883)
------------ ------------
5,965,795 6,953,313
Less treasury stock, at cost, no shares at September 30, and
339,767 shares at March 31, 1998 -- 136,905
------------ ------------
Total shareholders' equity 5,965,795 6,816,408
------------ ------------
Total liabilities and shareholders' equity $ 12,479,247 12,501,749
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Contract drilling $ 3,713,777 $ 5,821,886 7,899,655 7,827,026
Oil and gas 44,518 82,035 95,651 170,016
Management fees and other 24,262 27,414 50,018 68,946
----------- ----------- ----------- -----------
Total operating revenues 3,782,557 5,931,335 8,045,324 8,065,988
----------- ----------- ----------- -----------
Costs and expenses:
Contract drilling 3,605,264 4,526,427 7,332,156 6,126,306
Oil and gas 62,911 35,437 119,836 84,356
Depreciation, depletion and amortization 385,580 262,878 742,712 437,854
General and administrative 216,391 202,844 385,411 401,394
----------- ----------- ----------- -----------
Total operating costs and expenses 4,270,146 5,027,586 8,580,115 7,049,910
----------- ----------- ----------- -----------
Earnings (loss) from operations (487,589) 903,749 (534,791) 1,016,078
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (85,530) (73,210) (175,388) (119,345)
Interest income 28,109 7,489 55,649 12,328
Gain (loss) on sale of assets (41,265) 13,972 (41,265) 13,248
----------- ----------- ----------- -----------
Total other income (expense) (98,686) (51,749) (161,004) (93,769)
----------- ----------- ----------- -----------
Earnings (loss) before income taxes (586,275) 852,000 (695,795) 922,309
Income taxes 25,830 -- 29,630 --
----------- ----------- ----------- -----------
Net earnings (loss) (612,105) 852,000 (725,425) 922,309
Preferred stock dividend requirements 76,000 13,333 152,000 29,333
----------- ----------- ----------- -----------
Net earnings (loss) applicable to common
stockholders $ (688,105) 838,667 (877,425) 892,976
=========== =========== =========== ===========
Earnings (loss) per common-Basic $ (0.12) 0.14 (0.15) 0.16
=========== =========== =========== ===========
Earnings (loss) per common share - Diluted $ (0.12) 0.11 (0.15) 0.13
=========== =========== =========== ===========
Weighted average number of shares
outstanding-Basic 5,900,784 5,808,194 5,873,799 5,606,828
=========== =========== =========== ===========
Weighted average number shares
outstanding-Diluted 5,900,784 7,759,506 5,873,799 7,339,499
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended
September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ (725,425) 922,309
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation, depletion, amortization 742,712 437,854
Stock issued to directors and employees as compensation -- 55,000
Gain (loss) on sale of assets 41,265 (13,248)
Changes in current assets and liabilities:
Accounts and notes receivable (1,186,339) (1,296,235)
Contract drilling in progress 676,177 (371,979)
Prepaid expenses (125,797) (45,539)
Accounts payable 1,224,650 1,114,138
Prepaid drilling contracts (99,000) --
Accrued expenses (4,642) 248,612
----------- -----------
Net cash provided by operations $ 543,601 1,050,912
----------- -----------
Cash flows from financing activities:
Payments of debt $ (354,460) (275,270)
Proceeds from notes payable -- 10,500
Payment of dividends on preferred stock (64,000) --
Purchase of preferred stock -- (75,000)
Proceeds from issuance of preferred stock -- 765,000
Proceeds from exercise of warrants and options 375 --
----------- -----------
Net cash provided (used) by financing activities (418,085) 425,230
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (717,376) (1,327,304)
Proceeds from sale of equipment 58,365 36,449
----------- -----------
Net cash used in investing activities (659,011) (1,290,855)
----------- -----------
Net increase (decrease) in cash (533,495) (865,625)
Beginning cash and cash equivalents 2,586,710 407,755
----------- -----------
Ending cash and cash equivalents $ 2,053,215 593,042
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(Continued)
5
<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Supplementary Disclosure:
Equipment purchased with debt -- 1,384,368
Equipment purchased with stock -- 300,000
Common stock issued to directors 26,437 --
Retirement of treasury stock (136,905) --
Interest paid 175,708 117,852
Income taxes paid 26,100 11,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
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
basis. 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, 1998, the Company had investment tax credit carryforwards
for Federal income tax purposes of approximately $15,000 (expiring 1999
through 2001) which are available to reduce future Federal income taxes.
In addition, the Company had net operating loss carryforwards of
approximately $14,934,000 (expiring 1999 through 2007) which are also
available to reduce future Federal income taxes. A valuation allowance
has been established due to the uncertainty of the realization of the
deferred tax asset created by the net operating loss carryforward.
5. The following table presents a reconciliation of the numerators and
denominators of the basic EPS and diluted EPS computations as required
by Financial Accounting Standards No. 128:
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998
------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- ------
<S> <C> <C> <C>
Net loss $(612,107)
Less: preferred stock dividends (76,000)
---------
Basic EPS
Income available to common
stockholders - Basic and Diluted $(688,107) 5,900,784 $(0.12)
========= ========= ======
</TABLE>
7
<PAGE> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
September, 1997
----------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Net earnings $ 852,000
Less: Preferred stock dividends (13,333)
----------
Basic EPS
Income available to common stockholders - Basic 838,667 5,808,194 $ 0.14
=========
Effect of dilutive securities
Warrants 123,564
Options 1,027,748
Preferred stock 13,333 800,000
--------- ---------
Diluted EPS
Income available to common stockholders and
assumed conversions - Diluted $ 852,000 7,759,506 $ 0.11
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
September, 1998
----------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ----------
<S> <C> <C> <C>
Net earnings $(725,425)
Less: Preferred stock dividends (152,000)
---------
Basic EPS
Income available to common
stockholders - Basic and Diluted $(877,425) 5,873,799 $(0.15)
========= ========= ======
</TABLE>
8
<PAGE> 9
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months Ended
September, 1997
-----------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ------
<S> <C> <C> <C>
Net earnings $ 922,309
Less: Preferred stock dividends (29,333)
----------
Basic EPS
Income available to common stockholders - Basic 892,976 5,606,828 $ 0.16
========
Effect of dilutive securities
Warrants 118,253
Options 875,620
Preferred stock 29,333 738,798
---------- ---------
Diluted EPS
Income available to common stockholders and
assumed conversions - Diluted $ 922,309 7,339,499 $ 0.13
========== ========= =========
</TABLE>
6. At September 30, 1998, short-term debt and current installments of
long-term debt were $489,283, down from $706,014 at March 31, 1998. At
September 30, 1998, the Company was in violation of the debt service
coverage covenant with its lender; however, in early November, 1998, the
Company refinanced its debt with the lender extending the loan
maturities to November, 2000. In addition, the lender agreed to reduce
the interest rate, redefine several items pertinent to the calculation
of covenants and waive past violations of the debt service covenant. The
current maturities of long-term debt at September 30, 1998, have been
classified in accordance with the terms of the refinanced debt
agreement.
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, 1998 were $2,053,215 compared
to $2,586,710 at March 31, 1998. The current ratio at September 30, 1998 was
1.06 compared to 1.37 at March 31, 1998. Working capital decreased to $255,531
at September 30, 1998 from $1,118,907 at March 31, 1998. Accounts receivable
increased to $1,627,261 at September 30, 1998 from $440,922 at March 31, 1998.
Contract drilling in progress decreased to $289,500 at September 30, 1998 from
$965,677 at March 31, 1998. The substantial increase in accounts receivable and
the corresponding decrease in contract drilling in progress at September 30,
1998 compared to March 31, 1998, was due to the completion of several drilling
contracts near the end of the current quarter.
The Company had executed several loans with a third party lender which
were secured by drilling equipment, transportation equipment and land and
improvements. The loans, with payments based on amortization periods of three
9
<PAGE> 10
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
to seven years, were scheduled to mature in June, 1999, and the Company, at
September 30, 1998, was in violation of the debt service coverage covenant with
its lender. However, in early November, 1998, the Company refinanced its debt
with the lender creating one note which matures in November, 2000. In addition,
the lender agreed to reduce the interest rate, redefine several items pertinent
to the calculation of covenants and waive past violations of the debt service
covenant. According to the terms of the refinanced debt agreement, the loan
carries an interest rate of prime (8.00% at September 30, 1998) plus 1.75%; and
is payable in equal monthly installments of principal, based on a seven-year
amortization, plus interest. The loan also provides for an early prepayment
penalty of 2% in the first year of the loan and 1% thereafter.
Since March 31, 1998, property and equipment costs increased by a net of
$565,194. Of this amount, $673,099 was spent on drilling equipment, $16,437 was
spent on transportation equipment, $1,051 was spent on furniture and fixtures
and $21,784 was spent on investment in oil and gas properties. Drilling
equipment of $139,677 and transportation equipment of $7,500 were sold or
disposed of during the six months ended September 30, 1998.
Debt obligations in the form of notes payable, both short term and long
term, decreased by $354,460 from March 31, 1998 to September 30, 1998. Accounts
payable at September 30, 1998 were $2,874,608, an increase of $1,224,650 from
$1,649,958 at March 31, 1998. The primary reason for this increase was the
higher costs associated with turnkey contracts. Accrued expenses increased to
$590,371 at September 30, 1998 from $533,450 at March 31, 1998.
During the quarter ended September 30, 1998, the Company retired 339,767
shares of treasury stock.
Results of Operations
Contract drilling revenue for the quarter ended September 30, 1998 was
$3,713,777 compared to $5,821,886 in the same quarter a year earlier. This
decrease in drilling revenue was the result of a decrease in drilling days and
decreased dayrates caused by the downturn in drilling activity in the Company's
area of operations. In the current quarter, the Company had 330 drilling days
compared to 518 drilling days in the same quarter in fiscal 1998. The rig
utilization rate for the current quarter was 60% compared to 83% in the same
quarter a year earlier. The reasons for the decrease in the number of drilling
days in the current quarter were the utilization of six rigs in the current
quarter compared to seven rigs in the same quarter in fiscal 1998 and the
decreased utilization rate. Even though dayrates decreased, the average revenues
per drilling day increased to $11,254 from $11,239 in the corresponding quarter
of fiscal 1998. This increase was due to more revenue being earned from turnkey
contracts in the current quarter (61%) compared to the same quarter a year
earlier (42%).
Oil and gas revenue for the quarter ended September 30, 1998 was $44,518
compared to $82,035 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 lower
average prices for both oil and gas. In the current quarter, production was the
equivalent of 3,949 barrels of oil while in the same quarter a year earlier
production was the equivalent of 4,920 barrels of oil. In the current quarter,
the average prices received by the Company were $11.73 per barrel of oil and
$1.85 per mcf of gas compared to $18.51 per barrel of oil and $2.52 per mcf of
gas in the same quarter in fiscal 1998.
Total operating costs and expenses for the quarter ended September 30,
1998 were $4,270,148, down $757,438, from operating costs and expenses of
$5,027,586 in the same quarter a year earlier. When compared with the same
quarter a year earlier, contract drilling costs decreased $921,163 in the
quarter ended September 30, 1998. Average drilling costs per day in the current
quarter were $10,925 compared to $8,738 in the same quarter a year earlier. The
average daily drilling margin decreased to $329 in the current quarter from
$2,501 in the same quarter a year earlier. The primary reasons for the decrease
in the average drilling margin were a loss of approximately $396,000 incurred on
a turnkey drilling contract and the decreased dayrates. Oil and gas costs and
expenses were $62,911 in the quarter ended September 30, 1998 compared with
$35,437 in the same quarter a year earlier. Depreciation, depletion and
amortization costs increased to $385,580 in the quarter ended September 30, 1998
from $262,878 in the quarter ended September 30, 1997. This increase was the
result of increased depreciation expense due to the addition of equipment since
September 30, 1997. General and administrative expenses increased to $216,393 in
the current quarter from $202,844 in the same
10
<PAGE> 11
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
quarter a year earlier. In the current quarter, legal and professional fees
incurred in an unsuccessful merger transaction were approximately $53,000.
Other income and expense increased to $98,686 of net expenses in the
current quarter from $51,749 of net expenses in the same quarter a year earlier,
primarily due to increased interest expense.
Contract drilling revenue for the six months ended September 30, 1998
was $7,899,655 compared to $7,827,026 in the same period in fiscal 1998. This
increase in drilling revenue was the result of more contracts being drilled on a
turnkey basis in the current year, 58% of total revenue, compared to the same
period in fiscal 1998, 32% of total revenue. In the six months ended September
30, 1998, the Company had 730 drilling days compared to 820 drilling days in the
same period in fiscal 1998. The rig utilization rate for the six months ended
September 30, 1998, was 66% compared to 81% in the same period in fiscal 1998.
Average revenues per drilling day were $10,821 compared to $9,545 in the same
period in fiscal 1998.
Oil and gas revenue for the six months ended September 30, 1998 was
$95,651 compared to $170,016 in the same period a year earlier. This decrease in
revenue in the current year was due to lower production and lower average prices
for both oil and gas. In the current year, production was the equivalent of
8,044 barrels of oil while in the same period in the prior year production was
the equivalent of 8,971 barrels of oil. In the current year, the average prices
received by the Company were $12.10 per barrel of oil and $1.98 per mcf of gas
compared to $21.69 per barrel of oil and $2.73 per mcf of gas in the same period
in fiscal 1998.
Total operating costs and expenses for the six months ended September
30, 1998 were $8,580,115, up $1,530,205, from operating costs and expenses of
$7,049,910 in the same period a year earlier. Drilling costs increased
$1,205,850 in the current year when compared to the same period in fiscal 1998.
Average drilling costs per day in the current year were $10,044 compared to
$7,471 in the same period a year earlier. The increase in average daily drilling
costs resulted from the drilling of more contracts on a turnkey basis and losses
of approximately $621,000 on two turnkey contracts in the current year. Oil and
gas costs and expenses were $119,836 in the six months ended September 30, 1998
compared with $84,356 in the same period a year earlier. Depreciation, depletion
and amortization costs increased to $742,712 in the six months ended September
30, 1998 from $437,854 in the same period in fiscal 1998. General and
administrative expenses decreased to $385,411 in the six months ended September
30, 1998 from $401,394 in the same period in fiscal 1998.
Other income and expense increased to $161,004 of net expenses in the
six months ended September 30, 1998 from $93,769 of net expenses in the same
period a year earlier.
Accounting Matters
In June, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company believes that the disclosure of comprehensive
income in accordance with the provisions of SFAS No. 130 will not materially
impact the manner of presentation of its financial statements as currently and
previously reported.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning
11
<PAGE> 12
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
after December 15, 1997. The Company believes that the reporting requirements
regarding segments of an enterprise will not materially impact the manner of
presentation of its financial statements.
Year 2000
In fiscal 1998, the Company began the process of identifying, evaluating
and implementing changes to computer programs necessary to address the year 2000
issue. This issue affects computer systems that have time-sensitive programs
that may not properly recognize the year 2000. This could result in system
failures or miscalculations. The Company is currently addressing its internal
year 2000 issue with modifications to existing programs and conversions to new
programs. The provider of the Company's accounting software states that the
software has been year 2000 compliant since December, 1996 and limited testing
performed by the Company in the current quarter supports the statement. Other
software packages, such as spreadsheets and word processing have also been
tested on a limited basis and were found to be year 2000 compliant. The Company
does not expect to incur any material expenses relating to year 2000 compliance.
If the Company were to take no action in dealing with the potential problem,
management believes the Company would still be able to continue its operations.
The Company does not rely on any computer-driven equipment to perform its
drilling operations. If any equipment were to be affected, it would be in the
general and administrative area, primarily accounting and document preparation.
These activities could be performed manually until the computer-related problems
could be remedied.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 14, 1998 the Company became a co-defendant in Raymond
Keyser V. Administrative Resources, Ltd., Creative Employment concepts,
Inc., and South Texas Drilling, in the 288th Judicial District, Bexar
County, Texas. The Plaintiff is claiming that the named defendants
terminated his employment as a retaliatory discharge in violation of
Tex.Lab.Code Ann. ss.451.001, et seq. because he filed a workers'
compensation claim under the Workers' Compensation Act. Although no
specific damages have been alleged, the damages allowed under this cause
of action are "reasonable" damages. Case law has interpreted reasonable
damages to include actual back wages and benefits, future wages and
benefits, compensatory damages, exemplary or punitive damages and
attorneys' fees and costs.
The Company will defend on the grounds that (1) Plaintiff was not
an employee of the company but was an employee of one and/or both of the
other named defendants; (2) Plaintiff was terminated by one of the other
defendants; and (3) the Company was a nonsubscriber to workers'
compensation insurance as of the date of the alleged on the job injury
and Plaintiff's filing of a workers' compensation claim, and as such it
cannot be sued under Tex.Lab.Code Ann. ss.451.001, et. seq.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K. None
12
<PAGE> 13
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, 1998
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, 1998
Robert R. Marmor
/s/Wm. Stacy Locke
- ------------------------------ President and Chief
Wm. Stacy Locke Executive Officer November 4, 1998
/s/Chris F. Parma
- ------------------------------ Chief Financial Officer November 4, 1998
Chris F. Parma
</TABLE>
13
<PAGE> 14
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,053,215
<SECURITIES> 0
<RECEIVABLES> 1,916,761
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,209,793
<PP&E> 17,533,385
<DEPRECIATION> 9,263,931
<TOTAL-ASSETS> 12,479,247
<CURRENT-LIABILITIES> 3,954,262
<BONDS> 0
590,078
0
<COMMON> 3,799,994
<OTHER-SE> 1,575,723
<TOTAL-LIABILITY-AND-EQUITY> 12,479,247
<SALES> 95,651
<TOTAL-REVENUES> 8,045,324
<CGS> 119,836
<TOTAL-COSTS> 8,580,115
<OTHER-EXPENSES> 161,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (695,795)
<INCOME-TAX> 29,630
<INCOME-CONTINUING> (725,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (725,425)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
