<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 June 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. 1, 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 August 10, 1998
----- ------------------------------
Common Stock, $.10 par value, 5,900,784
<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>
June 30, March 31,
ASSETS 1998 1998
------ ----------- ----------
<S> <C> <C>
Current Assets:
Cash $ 1,930,730 2,586,710
Receivables 1,212,806 440,922
Contract drilling in progress 625,265 965,677
Prepaid expenses 93,670 114,020
----------- ----------
Total current assets 3,862,471 4,107,329
----------- ----------
Property and equipment 17,241,182 16,968,191
Accumulated depreciation, depletion
and amortization 8,877,757 8,573,771
----------- ----------
Net property and equipment 8,363,425 8,394,420
----------- ----------
Total assets 12,225,896 12,501,749
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt 45,000 60,000
Current installments, long-term debt 2,802,576 646,014
Accounts payable 1,909,277 1,649,958
Prepaid drilling contracts - 99,000
Accrued expenses 437,021 533,450
----------- ----------
Total current liabilities 5,193,874 2,988,422
Long term debt 378,122 2,696,919
----------- ----------
Total liabilities 5,571,996 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 June 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 June 30, and at March 31, 1998. 2,999,994 2,999,994
Common stock, $0.10 par value.
Authorized 15,000,000 shares;
issued 6,240,551 at June 30 and 6,171,964 at
March 31, 1998. 624,055 617,196
Additional paid-in capital 16,356,959 16,337,006
Retained earnings (deficit) (13,990,203) (13,800,883)
----------- ----------
6,790,805 6,953,313
Less Treasury stock, at cost, 339,767 shares at June 30
and at March 31, 1998 136,905 136,905
----------- ----------
Total shareholders' equity 6,653,900 6,816,408
----------- ----------
Total Liabilities and shareholders equity $12,225,896 12,501,749
=========== ===========
</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
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Contract drilling $ 4,185,878 2,005,140
Oil and gas 51,133 87,981
Management fees and other 25,756 41,532
------------ ------------
Total operating revenues 4,262,767 2,134,653
------------ ------------
Costs and expenses:
Contract drilling 3,726,892 1,599,879
Oil and gas 56,925 48,919
Depreciation, depletion and amortization 357,132 174,976
General and administrative 169,020 198,550
------------ ------------
Total operating costs and expenses 4,309,969 2,022,324
------------ ------------
Earnings (loss) from operations (47,202) 112,329
------------ ------------
Other income (expense):
Interest expense (89,858) (46,135)
Interest income 27,540 4,839
Loss on sale of assets -- (724)
------------ ------------
Total other income (expense) (62,318) (42,020)
------------ ------------
Earnings (loss) before income taxes (109,520) 70,309
Income taxes 3,800 --
------------ ------------
Net earnings (loss) (113,320) 70,309
Preferred stock dividend requirements 76,000 13,333
------------ ------------
Net earnings (loss) applicable to common stockholders $ (189,320) 56,976
============ ============
Earnings (loss) per common share-Basic $ (0.03) 0.01
============ ============
Earnings (loss) per common share-Diluted $ (0.03) 0.01
============ ============
Weighted average number of shares
outstanding - Basic 5,846,517 5,403,247
============ ============
Weighted average number of shares
outstanding - Diluted 5,846,517 6,806,841
============ ============
</TABLE>
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>
Three Months Ended
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (113,320) 70,309
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Depreciation, depletion, amortization 357,132 174,976
Stock issued to officer as compensation -- 55,000
Gain (loss) on sale of assets (1,692) 724
Change in current assets and liabilities:
Accounts and notes receivable (771,884) (130,016)
Contract drilling in progress 340,412 124,844
Prepaid expenses 20,350 (38,190)
Accounts payable 259,319 43,284
Prepaid drilling contracts (99,000) --
Accrued expenses (81,992) (20,248)
------------ ------------
Net cash provided (used) by operations (90,675) 280,683
------------ ------------
Cash flows from financing activities:
Payments of debt (177,235) (157,885)
Proceeds from notes payable -- 10,500
Purchase of preferred stock -- (75,000)
Payment of dividends (64,000) --
Proceeds from exercise of option 375 --
Proceeds from issuance of preferred stock -- 765,000
------------ ------------
Net cash provided (used) by financing activities (240,860) 542,615
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (382,010) (600,097)
Proceeds from sale of equipment 57,565 1,000
------------ ------------
Net cash used in investing activities (324,445) (599,097)
------------ ------------
Net increase (decrease) in cash (655,980) 224,201
Beginning cash and cash equivalents 2,586,710 407,755
------------ ------------
Ending cash and cash equivalents $ 1,930,730 631,956
============ ============
Equipment purchased with debt -- 1,384,368
Equipment purchased with stock -- 300,000
</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, 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 to decrease total gross deferred tax assets
(primarily, investment credit tax carryforwards and net operating loss
carry forwards) to the amount of the total gross deferred tax
liabilities due to the uncertainties involved in the ultimate
realization of the deferred tax assets.
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
June 30, 1998
-------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Net loss $(113,320)
Less: Preferred stock dividends (76,000)
---------
Basic EPS
Income available to common
stockholders - Basic and Diluted $(189,320) 5,846,517 $(0.03)
========= ========= ======
</TABLE>
Continued
5
<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1997
-------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Net earnings $ 70,309
Less: Preferred stock dividends (13,333)
----------
Basic EPS
Income available to common stockholders - Basic 56,976 5,403,247 $ 0.01
======
Effect of dilutive securities
Warrants 107,434
Options 619,237
Preferred stock 13,333 676,923
---------- ---------
Diluted EPS
Income available to common stockholders and
assumed conversions - Diluted $ 70,309 6,806,841 $ 0.01
========= ========= ======
</TABLE>
6. At June 30, 1998, short-term debt and current installments of long-term
debt were $2,847,576, up from $706,014 at March 31, 1998. The reason for
the increase was the reclassification of debt due to its maturity date.
The Company has executed several loans with a third party lender which
are secured by drilling equipment, transportation equipment and land and
improvements. The loans, with payments based on amortization periods of
three to seven years, are all due in June, 1999. Per the loan
agreements, the loans shall be automatically renewed for successive
periods of one year unless paid in full earlier or there is an Event of
Default for which no waiver is obtained from the lender. The Company is
in violation of the debt service coverage covenant with its lender. As
of the filing date of the report, a waiver has not been formally
requested. However, the Company has contacted the lender and preliminary
discussions have been held regarding issuance of a waiver and
restructuring of the covenant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents at June 30, 1998 were $1,930,730 compared to
$2,586,710 at March 31, 1998. The current ratio at June 30, 1998 was .74
compared to 1.37 at March 31, 1998. Working capital decreased to a deficit of
$(1,331,403) at June 30, 1998 from $1,118,907 at March 31, 1998. The primary
reason for the decrease in the current ratio and in working capital was the
increase in current installments of long term debt. The Company has executed
several loans with a third party lender which are secured by drilling equipment,
transportation equipment and land and improvements. The loans, with payments
based on amortization periods of three to seven years, are all due in June,
1999. Per the loan agreements, the loans shall be automatically renewed for
successive periods of one year unless paid in full earlier or there is an Event
of Default for which no waiver is obtained from the lender. The Company is in
violation of the debt service coverage covenant with its lender. As of the
filing date of the report, a waiver has not been formally requested. However,
the Company has contacted the lender and preliminary discussions have been held
regarding issuance of a waiver and restructuring of the covenant. While there
can be no assurance, the Company believes it will
6
<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
be able to obtain a waiver and/or a restructuring of the covenant. Accounts
receivable increased to $1,212,806 at 1998 from $440,922 at March 31, 1998.
Contract drilling in progress decreased to $625,265 at June 30, 1998 from
$965,677 at March 31, 1998.
Since March 31, 1998, property and equipment costs increased by $272,991. Of
this amount, $369,992 was spent on drilling equipment, $10,500 was spent on oil
and gas properties and $1,518 was spent on transportation equipment. Drilling
equipment of $109,019 was sold during the three months ended June 30, 1998.
Debt obligations in the form of notes payable, both short term and long
term, decreased by $177,235 from March 31, 1998 to June 30, 1998. Accounts
payable at June 30, 1998 were $1,909,277, an increase of $259,319 from
$1,649,958 at March 31, 1998. Accrued expenses decreased to $437,021 at June 30,
1998 from $533,450 at March 31, 1998.
Results of Operations
- ---------------------
Contract drilling revenue for the quarter ended June 30, 1998 was $4,185,878
compared to $2,005,140 in the same quarter a year earlier. This increase in
drilling revenue was the result of an increase in drilling days. In the current
quarter, the Company had 400 drilling days compared to 282 drilling days in the
same quarter in fiscal 1998. The primary reason for the increase in the number
of drilling days was the utilization of six rigs during the current quarter
compared to four rigs in the same quarter in fiscal 1998. The rig utilization
rate for the current quarter was 73% compared to 75% in the same quarter a year
earlier. The average daily drilling rate increased to $10,465 from $7,110 in the
corresponding quarter of fiscal 1998. This increase in the average daily
drilling rate was the result of a change in the type of drilling contracts
completed and a small increase in day rates charged on drilling contracts. In
the current quarter, 56% of drilling revenue came from turnkey
contracts--contracts which typically command the highest daily drilling
rates--and 44% of drilling revenue came from daywork contracts--contracts which
typically command the lowest daily drilling rates. In the same quarter in fiscal
1998, 88% of drilling revenue came from daywork contracts while only 4% came
from turnkey contracts.
Oil and gas revenue for the quarter ended June 30, 1998 was $51,133 compared
to $87,981 in the same quarter a year earlier. This decrease in revenue in the
current quarter was due to lower prices for both oil and gas. In the current
quarter, the average prices received by the Company were $12.42 per barrel of
oil and $2.12 per mcf of gas. In the same quarter in fiscal 1998, the Company
received $25.25 per barrel of oil and $3.02 per mcf of gas. In the current
quarter, production was the equivalent of 4,095 barrels of oil while in the same
quarter a year earlier production was the equivalent of 4,051 barrels of oil.
Total operating costs and expenses for the quarter ended June 30, 1998 were
$4,309,969, up $2,287,645, from operating costs and expenses of $2,022,324 in
the same quarter a year earlier. When compared with the same quarter a year
earlier, contract drilling costs increased $2,127,013 in the quarter ended June
30, 1998. Average drilling costs per day in the current quarter were $9,317
compared to $5,673 in the same quarter a year earlier. The average daily
drilling margin decreased to $1,148 in the current quarter from $1,437 in the
same quarter a year earlier. The primary reason for the decrease in the average
daily drilling margin was a loss of approximately $225,000 incurred on a turnkey
drilling contract. Additionally, the Company encountered problems on another
turnkey contract entered into subsequent to June 30, 1998 which will result in a
loss on that contract. The loss will be reported in the financial statements for
the second fiscal quarter. Oil and gas costs and expenses were $56,925 in the
quarter ended June 30, 1998 compared with $48,919 in the same quarter a year
earlier. Depreciation, depletion and amortization costs increased to $357,132 in
the quarter ended June 30, 1998 from $174,976 in the quarter ended June 30,
1997. This increase was the result of increased depreciation expense due to the
addition of equipment since June, 1997. General and administrative expenses
decreased to $169,020 in the current quarter from $198,550 in the same quarter a
year earlier. This decrease was primarily the result of decreased payroll costs.
Other income and expense decreased to $(62,318) in the current quarter from
$(42,020) in the same quarter a year earlier, primarily due to increased
interest expense.
7
<PAGE> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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 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.
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
In the current quarter, the Company settled a lawsuit with one of its
customers, National Energy Group, Inc. This case arose out of a dispute over
billing for work performed under a daywork contract. A jury found in favor of
the Company in August, 1997. However, the customer appealed the verdict. In
June, 1998, a settlement of the case was negotiated. Per the terms of the
settlement, the Company received $213,000 from National Energy Group, Inc. and
each of the parties agreed to release the other from all claims related to the
lawsuit. The Company's financial statements for the current quarter reflect the
settlement of this case which did not result in any gain or loss.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
---------
None.
(b) Reports on Form 8-K.
--------------------
None
8
<PAGE> 9
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: August 10, 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 August 10, 1998
- ----------------------------
Robert R. Marmor
/s/Wm. Stacy Locke President and Chief August 10, 1998
- ---------------------------- Executive Officer and
Wm. Stacy Locke Director
/s/Chris F. Parma
- ---------------------------- Vice President and August 10, 1998
Chris F. Parma Chief Financial Officer
</TABLE>
9
<PAGE> 10
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000320575
<NAME> SOUTH TEXAS DRILLING & EXPLORATION, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,930,730
<SECURITIES> 0
<RECEIVABLES> 1,838,071
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,862,471
<PP&E> 17,241,182
<DEPRECIATION> 8,877,757
<TOTAL-ASSETS> 12,225,896
<CURRENT-LIABILITIES> 5,193,874
<BONDS> 0
0
3,799,994
<COMMON> 624,055
<OTHER-SE> 2,229,851
<TOTAL-LIABILITY-AND-EQUITY> 12,225,896
<SALES> 51,133
<TOTAL-REVENUES> 4,262,767
<CGS> 56,925
<TOTAL-COSTS> 4,309,969
<OTHER-EXPENSES> 62,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (109,520)
<INCOME-TAX> 3,800
<INCOME-CONTINUING> (113,320)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113,320)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
