<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, 1999.
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.
<TABLE>
<CAPTION>
Class Outstanding at August 6, 1999
----- -----------------------------
<S> <C>
Common Stock, $.10 par value, 6,100,784
</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>
June 30, March 31,
ASSETS 1999 1999
- ------ ------------ ------------
<S> <C> <C>
Current assets
Cash $ 1,303,539 1,411,493
Receivables 1,536,632 1,096,948
Contract drilling in progress 577,939 221,000
Prepaid expenses 111,783 154,591
------------ ------------
Total current assets 3,529,893 2,884,032
------------ ------------
Property and equipment 16,012,791 15,734,010
Accumulated depreciation, depletion and amortization (8,958,173) (8,611,165)
------------ ------------
Net property and equipment 7,054,618 7,122,845
------------ ------------
Total assets 10,584,511 10,006,877
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments, long-term debt 446,107 443,565
Accounts payable 1,999,556 1,249,083
Accrued expenses 631,081 638,321
------------ ------------
Total current liabilities 3,076,744 2,330,969
Long-term debt 2,240,436 2,354,205
------------ ------------
Total liabilities 5,317,180 4,685,174
------------ ------------
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, 1999 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, 1999 2,999,994 2,999,994
Common stock, $.10 par value. Authorized 15,000,000 shares, issued
6,100,784 at June 30 and at March 31, 1999 610,078 610,078
Additional paid-in capital 16,324,031 16,324,031
Accumulated (deficit) (15,466,772) (15,412,400)
------------ ------------
5,267,331 5,321,703
------------ ------------
Total shareholders' equity 5,267,331 5,321,703
------------ ------------
Total liabilities and shareholders' equity $ 10,584,511 10,006,877
============ ============
</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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Contract drilling $ 3,100,040 4,185,878
Oil and gas 4,122 51,133
Management fees and other 8,177 25,756
----------- -----------
Total operating revenues 3,112,339 4,262,767
----------- -----------
Costs and expenses:
Contract drilling 2,487,917 3,726,892
Oil and gas -- 56,925
Depreciation, depletion and amortization 354,509 357,132
General and administrative 197,096 169,020
----------- -----------
Total operating costs and expenses 3,039,522 4,309,969
----------- -----------
Earnings (loss) from operations 72,817 (47,202)
----------- -----------
Other income (expense):
Interest expense (66,096) (89,858)
Interest income 16,730 27,540
Gain on sale of assets 1,400 --
----------- -----------
Total other income (expense) (47,966) (62,318)
----------- -----------
Earnings (loss) before income taxes 24,851 (109,520)
Income taxes 3,223 3,800
----------- -----------
Net earnings (loss) 21,628 (113,320)
Preferred stock dividend requirements 76,000 76,000
----------- -----------
Net (loss) applicable to common stockholders $ (54,372) (189,320)
=========== ===========
Loss per common share - Basic and Diluted $ (0.01) (0.03)
=========== ===========
Weighted average number of shares outstanding - Basic
and Diluted 6,100,784 5,846,517
=========== ===========
</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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 21,628 (113,320)
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Depreciation, depletion, amortization 354,509 357,132
Gain on sale of assets (1,400) (1,692)
Changes in current assets and liabilities:
Accounts and notes receivable (439,684) (771,884)
Contract drilling in progress (356,939) 340,412
Prepaid expenses 42,808 20,350
Accounts payable 750,473 259,319
Prepaid drilling contracts -- (99,000)
Accrued expenses (83,240) (81,992)
----------- -----------
Net cash provided (used) by operations 288,155 (90,675)
----------- -----------
Cash flows from financing activities:
Payments of debt (111,228) (177,235)
Payment of dividends on preferred stock -- (64,000)
Proceeds from exercise of options -- 375
----------- -----------
Net cash used in financing activities (111,228) (240,860)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (286,281) (382,010)
Proceeds from sale of equipment 1,400 57,565
----------- -----------
Net cash used in investing activities (284,881) (324,445)
----------- -----------
Net decrease in cash (107,954) (655,980)
Beginning cash and cash equivalents 1,411,493 2,586,710
----------- -----------
Ending cash and cash equivalents $ 1,303,539 1,930,730
=========== ===========
Supplementary Disclosure:
Interest paid 65,737 90,018
Dividend accrual 76,000 76,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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, 1999, the Company had investment tax credit carryforwards of
approximately $20,000 (expiring 2000 through 2001) and minimum tax credit
carryforwards of approximately $18,000, which are available to reduce future
Federal income taxes. In addition, the Company had net operating loss
carryforwards of approximately $13,135,000 (expiring 2000 through 2013),
which are also available to reduce future taxable income and taxes. A
valuation allowance has been established to decrease total gross deferred
tax assets (primarily investment credit tax carryforwards and net operating
loss carryforwards) 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, 1999
------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net earnings $ 21,628
Less: Preferred stock dividends (76,000)
-----------
Income (loss) available to common
stockholders - Basic and Diluted $ (54,372) 6,100,784 $(0.01)
=========== ========= ======
</TABLE>
Continued
5
<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998
------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net earnings (loss) $(113,320)
Less: Preferred stock dividends (76,000)
---------
Income (loss) available to common
stockholders - Basic and Diluted
$(189,320) 5,846,517 $(0.03)
========= ========= ======
</TABLE>
6. In the quarter ended June 30, 1999, the Company changed its estimated useful
lives on drilling rigs. This change was implemented in order to more
accurately reflect the Company's historical experience with regard to its
drilling rigs. Because of this change, net income for the quarter ended June
30, 1999, was approximately $36,000 higher than it would have been if the
useful lives had not been changed. The change did not have any effect on
earnings (loss) per share-basic and diluted.
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, 1999 were $1,303,539 compared to
$1,411,493 at March 31, 1999. The current ratio at June 30, 1999 was 1.15
compared to 1.24 at March 31, 1999. Working capital decreased to $453,149 at
June 30, 1999 from $553,063 at March 31, 1999. Despite the decrease in the
current ratio and working capital, the Company believes that, for the current
fiscal year, it will continue to maintain its ability to meet its cash
requirements for debt service and operations. In the current quarter, the
Company's operations generated cash flow of $288,155 while in the same quarter a
year earlier operations operated at a cash flow deficit of $90,675. Accounts
receivable increased to $1,536,632 at June 30, 1999 from $1,096,948 at March 31,
1999. Contract drilling in progress increased to $577,939 at June 30, 1999 from
$221,000 at March 31, 1999. The increases in accounts receivable and contract
drilling in progress at June 30, 1999, reflect the increased drilling activity
which the Company experienced when compared with the quarter ended March 31,
1999.
Since March 31, 1999, property and equipment costs increased by a net of
$278,781. Of this amount, $286,281 was spent on drilling equipment and $7,500 in
transportation equipment was sold.
Debt obligations in the form of notes payable decreased by $111,228 from
March 31, 1999 to June 30, 1999. Accounts payable at June 30, 1999 were
$1,999,556, an increase of $750,473 from $1,249,083 at March 31, 1999. The
primary reason for this increase was the higher costs associated with turnkey
contracts. Accrued expenses decreased to $631,081 at June 30, 1999 from $638,321
at March 31, 1999.
Results of Operations
Contract drilling revenue for the quarter ended June 30, 1999 was
$3,100,040 compared to $4,185,878 in the same quarter a year earlier. This
decrease in drilling revenue was the result of a decrease in drilling days. In
the current quarter, the Company had 235 drilling days compared to 400 drilling
days in the same quarter in fiscal 1999. The rig utilization rate for the
current quarter was 39% compared to 73% in the same quarter a year earlier. The
decrease in the
6
<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
number of drilling days was the result of low demand for drilling rigs and the
stacking of two rigs during the current quarter. The Company's shallowest-depth
capacity rig was stacked in the Company's yard due to weak demand. The second
rig was stacked while undergoing a complete refurbishment of the rig. Both rigs
will be back in operation in the Company's second quarter. The average revenue
per drilling day increased to $13,192 from $10,465 in the corresponding quarter
of fiscal 1999. This increase in the average revenue per drilling day was the
result of an increase in the number of turnkey drilling contracts. In the
current quarter, 83% of drilling revenue came from turnkey contracts and 17% of
drilling revenue came from daywork and footage contracts. In the same quarter in
fiscal 1999, 56% of drilling revenue came from turnkey contracts while 44% came
from daywork and footage contracts. Turnkey contracts typically provide the
highest potential revenue and profit margin per day; however, they also expose
the Company to greater risk.
Oil and gas revenue for the quarter ended June 30, 1999 was $4,122,
principally from overriding royalty interests, compared to $51,133 in the same
quarter a year earlier. This decrease in revenue in the current quarter was due
to the Company's sale of all its operated oil and gas properties in the last
quarter of fiscal 1999.
Total operating costs and expenses for the quarter ended June 30, 1999 were
$3,039,522, down $1,270,447, from operating costs and expenses of $4,309,969 in
the same quarter a year earlier. When compared with the same quarter a year
earlier, contract drilling costs decreased $1,238,975 in the quarter ended June
30, 1999. Average drilling costs per day in the current quarter were $10,587
compared to $9,317 in the same quarter a year earlier. Depreciation, depletion
and amortization costs decreased to $354,509 in the quarter ended June 30, 1999
from $357,132 in the quarter ended June 30, 1998. This decrease was the result
of the Company's sale of its oil and gas interests in the last quarter of fiscal
1999 resulting in no depletion expense in the current quarter and the increase
in the estimated useful lives of drilling rigs. This change in estimated useful
lives was implemented in order to more accurately reflect the Company's
historical experience with regard to its drilling rigs. This change in estimated
useful lives reduced depreciation expense in the current quarter by
approximately $36,000. General and administrative expenses increased to $197,096
in the current quarter from $169,020 in the same quarter a year earlier. A large
portion of the increase in general and administrative expenses were legal costs
associated with a lawsuit, which was settled in June, 1999.
Other income and expense decreased to $47,966 of net expenses in the
current quarter from $62,318 of net expenses in the same quarter a year earlier,
primarily due to decreased interest expense.
Accounting Matters
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative investments embedded in other
contracts, and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a "fair value
hedge," a "cash flow hedge," or a hedge of a foreign currency exposure of a net
investment in a foreign operation. The accounting for changes in the fair value
of a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the
FASB issued SFAS No. 137, which delayed the adoption of SFAS No. 133 for all
fiscal quarters of all fiscal years beginning after June 15, 2000. Management
does not expect that the adoption of SFAS No. 133 will have a material impact on
the Company's financial position, results of operations, or liquidity as the
Company has no derivative instruments and no hedging activities.
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
7
<PAGE> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Company has addressed its internal year 2000 issue with modifications to
existing programs. Additionally, contact has been made with financial
institutions, major vendors and customers with regard to the year 2000 issue.
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 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.
Market Risk
There have been no significant changes in the Company's market risk factors
since March 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the current quarter, the Company settled Civil Action No. SA 98 CA 752
HG, South Texas Drilling & Exploration, Inc. V. Stonewall Surplus Lines
Insurance Company in the United States District Court for the Western District
of Texas, San Antonio Division. In this action, the Company asked the Court to
declare that it had no obligation to reimburse the attorneys' fees and expenses
incurred by Stonewall in a case previously settled by the Company. Stonewall had
counterclaimed to be reimbursed for attorneys' fees and expenses paid with
respect to that previously settled case. The Company has recorded the
settlement, which did not have a material impact on the Company's financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(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/ Michael E. Little
---------------------------
Michael E. Little
Chairman of the Board
Dated: August 6, 1999
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/ Michael E. Little Chairman of the Board and August 6 1999
- -------------------------------------- Chief Executive Officer
Michael E. Little
/s/ Wm. Stacy Locke President and Chief August 6 1999
- -------------------------------------- Operating Officer and
Wm. Stacy Locke Director
/s/ William D. Hibbetts Director August 6 1999
- --------------------------------------
William D. Hibbetts
/s/ Chris F. Parma Vice President and August 6 1999
- -------------------------------------- Chief Financial Officer
Chris F. Parma
</TABLE>
9
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000320575
<NAME> SOUTH TEXAS DRILLING & EXPLORATION
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,303,539
<SECURITIES> 0
<RECEIVABLES> 1,536,632
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,529,893
<PP&E> 16,012,791
<DEPRECIATION> 8,958,173
<TOTAL-ASSETS> 10,584,511
<CURRENT-LIABILITIES> 3,076,744
<BONDS> 0
0
3,799,994
<COMMON> 610,078
<OTHER-SE> 857,259
<TOTAL-LIABILITY-AND-EQUITY> 10,584,511
<SALES> 4,122
<TOTAL-REVENUES> 3,112,339
<CGS> 0
<TOTAL-COSTS> 3,039,522
<OTHER-EXPENSES> 47,966
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,851
<INCOME-TAX> 3,223
<INCOME-CONTINUING> 21,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,628
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
