<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, 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. 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 5, 1999
----- -------------------------------
Common Stock, $.10 par value 6,100,784
<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>
September 30, March 31,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 1,125,010 1,411,493
Receivables 172,931 1,096,948
Contract drilling in progress 890,483 221,000
Prepaid expenses 201,715 154,591
------------ ------------
Total current assets 2,390,139 2,884,032
------------ ------------
Property and equipment 19,192,937 15,734,010
Accumulated depreciation, depletion and amortization 9,332,219 8,611,165
------------ ------------
Net property and equipment 9,860,718 7,122,845
------------ ------------
Total assets 12,250,857 10,006,877
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments, long-term debt 702,395 443,565
Accounts payable 2,073,830 1,249,083
Accrued expenses 688,740 638,321
------------ ------------
Total current liabilities 3,464,965 2,330,969
Long-term debt, less current installments 3,628,707 2,354,205
------------ ------------
Total liabilities 7,093,672 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 September 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 September 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 September 30, and at March 31, 1999 610,078 610,078
Additional paid-in capital 16,324,031 16,324,031
Retained earnings (deficit) (15,576,918) (15,412,400)
------------ ------------
Total shareholders' equity 5,157,185 5,321,703
------------ ------------
Total liabilities and shareholders' equity $ 12,250,857 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 Six Months Ended
September 30, September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Contract drilling $ 3,294,535 $ 3,713,777 6,394,575 7,899,655
Oil and gas 4,024 44,518 8,146 95,651
Management fees and other 5,484 24,262 13,661 50,018
----------- ----------- ----------- -----------
Total operating revenues 3,304,043 3,782,557 6,416,382 8,045,324
----------- ----------- ----------- -----------
Costs and expenses:
Contract drilling 2,797,069 3,605,264 5,284,986 7,332,156
Oil and gas 91 62,911 91 119,836
Depreciation, depletion and amortization 374,046 385,580 728,555 742,712
General and administrative 117,644 216,391 314,740 385,411
----------- ----------- ----------- -----------
Total operating costs and expenses 3,288,850 4,270,146 6,328,372 8,580,115
----------- ----------- ----------- -----------
Earnings (loss) from operations 15,193 (487,589) 88,010 (534,791)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (67,115) (85,530) (133,211) (175,388)
Interest income 20,935 28,109 37,665 55,649
Gain (loss) on sale of assets -- (41,265) 1,400 (41,265)
----------- ----------- ----------- -----------
Total other income (expense) (46,180) (98,686) (94,146) (161,004)
----------- ----------- ----------- -----------
Loss before income taxes (30,987) (586,275) (6,136) (695,795)
Income taxes 3,159 25,830 6,382 29,630
----------- ----------- ----------- -----------
Net earnings (loss) (34,146) (612,105) (12,518) (725,425)
Preferred stock dividend requirements 76,000 76,000 152,000 152,000
----------- ----------- ----------- -----------
Net (loss) applicable to common
stockholders $ (110,146) (688,105) (164,518) (877,425)
=========== =========== =========== ===========
Loss per common share-Basic and Diluted $ (0.02) (0.12) (0.03) (0.15)
=========== =========== =========== ===========
Weighted average number of shares
outstanding-Basic and Diluted 6,100,784 5,900,784 6,100,784 5,873,799
=========== =========== =========== ===========
</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>
Six Months Ended
September 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (12,518) (725,425)
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation, depletion, amortization 728,555 742,712
Gain (loss) on sale of assets (1,400) 41,265
Changes in current assets and liabilities:
Accounts and notes receivable 924,017 (1,186,339)
Contract drilling in progress (669,483) 676,177
Prepaid expenses (47,124) (125,797)
Accounts payable 824,747 1,224,650
Prepaid drilling contracts -- (99,000)
Accrued expenses (101,579) (4,642)
----------- -----------
Net cash provided by operations 1,645,215 543,601
----------- -----------
Cash flows from financing activities:
Payments of debt (243,313) (354,460)
Proceeds of debt 1,776,645 --
Payment of dividends on preferred stock -- (64,000)
Proceeds from exercise of warrants and options -- 375
----------- -----------
Net cash provided (used) by financing activities 1,533,332 (418,085)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (3,466,428) (717,376)
Proceeds from sale of equipment 1,398 58,365
----------- -----------
Net cash used in investing activities (3,465,030) (659,011)
----------- -----------
Net increase (decrease) in cash (286,483) (533,495)
Beginning cash and cash equivalents 1,411,493 2,586,710
----------- -----------
Ending cash and cash equivalents $ 1,125,010 2,053,215
=========== ===========
Supplementary Disclosure:
Common stock issued to directors -- 26,437
Retirement of treasury stock -- (136,905)
Interest paid 133,470 175,708
Increase in dividend accrual 152,000 152,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
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, 1999, the Company had investment tax credit
carryforwards of approximately $20,000 (expiring 2000 through 2001) and
minimum tax credit carryforwards of $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. On September 29, 1999, the Company completed its acquisition of
the drilling operations of Howell Drilling, Inc., a San Antonio, Texas
based land drilling contractor. The purchase included two drilling rigs,
a Cabot 900 and a Cabot 750, drill pipe and collars, assorted spare
drilling equipment, transportation equipment and office furniture and
fixtures. The total expenditure for the Howell operations was
$2,513,395, of which $1,750,000 was financed by the Company's primary
lender. The terms of the new debt are the same as the previously
outstanding debt from the lender. The interest rate is prime (8.25% at
September 30, 1999) plus 1.75%. The debt provides for monthly principal
payments (based on a seven-year amortization) of $20,833 plus interest
and a due date of November 1, 2000. The acquisition was accounted for as
a purchase.
5
<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
6. 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, 1999
----------------------------------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $ (34,146)
Less: preferred stock dividends (76,000)
---------
Income (loss) available to common
stockholders - Basic and Diluted $(110,146) 6,100,784 $(0.02)
========= ========= ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September, 1998
----------------------------------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(612,105)
Less: Preferred stock dividends (76,000)
---------
Income (loss) available to common
stockholders - Basic and Diluted $(688,105) 5,900,784 $ (0.12)
========== ========= =======
Six Months Ended
September, 1999
----------------------------------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $ (12,518)
Less: Preferred stock dividends (152,000)
---------
Income (loss) available to common
stockholders - Basic and Diluted $(164,518) 6,100,784 $(0.03)
========= ========= ======
</TABLE>
6
<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months Ended
September, 1998
---------------------------------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(725,425)
Less: Preferred stock dividends (152,000)
----------
Income (loss) available to common stockholders -
Basic and Diluted $(877,425) 5,873,799 $ (0.15)
========== ========= =======
</TABLE>
7. 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 six-month period ended September 30, 1999, was approximately $72,000
higher than it would have been had the useful lives not been changed.
8. The Company has been named as a defendant in lawsuits filed on
September 8 and 9, 1999 by Sutton Producing Company and the working
interest owners in the 57th and 288th Judicial District Courts of Bexar
County, Texas. These lawsuits, which have been consolidated and concern
the same subject matter, allege products liability, negligence,
misrepresentation, and fraud, as well as violations of the Deceptive
Trade Practices Act, including breach of express and implied warranties,
false representations , and unconscionability. This suit arises from the
Plaintiffs' purchase of allegedly defective pipe. Plaintiff seeks relief
in the form of monetary damages totaling $519,006.77, along with
punitive damages, fees, costs and interest.
Under the terms of the contract between the Company and Sutton
Producing Corporation, the Company was to drill a well to the turnkey
depth after which the Company would begin operating on a daywork basis
under the direction, supervision, and control of Sutton Producing
Corporation. The contract expressly provides, however, that Sutton
Producing Corporation would be solely responsible and assume liability
for all consequences of operations by both parties while on a daywork
basis, including results and all other risks or liabilities incurred in
or incident to such operations. Sutton Producing Corporation's
responsibilities were subject only to such obligations and liabilities
specifically assumed by the Company, and the Company is not aware of any
such assumed obligations. The Company believes that the evidence will
demonstrate that the Company had in fact completed the drilling of the
well to the turnkey depth and was operating on a daywork basis when
Plaintiffs' claims arose. It is the Company's position, therefore, that
Sutton Producing Corporation has no right of recourse against it and
furthermore that Sutton Producing Corporation's contractual assumption
of all obligations and liabilities during daywork operations includes
any claims made against the Company. While this case is in its early
stages, the Company believes that, although the ultimate disposition of
the case cannot be predicted with certainty, the outcome will have no
material adverse effect on the Company's consolidated financial
statements.
9. Due to the Company's weak performance in the current quarter and
its large amount of non-financed capital expenditures, the Company is
not in compliance with the debt service coverage covenant of its debt
with its major lender. The Company has requested and received a waiver
from the lender for this violation. Management believes that with
increased rig utilization the Company will be able to maintain
compliance with this covenant in the future.
7
<PAGE> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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, 1999 were $1,125,010 compared
to $1,411,493 at March 31, 1999. The current ratio at September 30, 1999 was .69
compared to 1.24 at March 31, 1999. Working capital decreased to $(1,074,826) at
September 30, 1999 from $553,063 at March 31, 1999. The primary reasons for the
decrease in the current ratio and in working capital were the utilization of
cash to fund the refurbishment of one of the Company's drilling rigs and to
partially fund the purchase of the drilling assets of Howell Drilling, Inc. 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 six-month period ended September 30, 1999, the Company's operations
generated cash flow of $1,645,000 while in the same period a year earlier
operations generated cash flow of $544,000. Accounts receivable decreased to
$172,931 at September 30, 1999 from $1,096,948 at March 31, 1999. Contract
drilling in progress increased to $890,483 at September 30, 1999 from $221,000
at March 31, 1999. The substantial decrease in accounts receivable and the
increase in contract drilling in progress at September 30, 1999 compared to
March 31, 1999, were due to more drilling contracts in process at September 30,
1999 than at March 31, 1999.
Since March 31, 1999, property and equipment costs increased $3,458,927.
Of this amount, $3,339,310 was spent on drilling equipment, $114,617 on
transportation equipment and $5,000 on office furniture and fixtures. Of the
funds spent on drilling equipment, $538,807 was spent on the refurbishment of
one of the Company's drilling rigs. The refurbishment began in April, 1999 and
the rig was returned to service in August, 1999. In late September, 1999, the
Company completed the purchase of the drilling operations of Howell Drilling,
Inc., a San Antonio, Texas based land drilling contractor. The purchase included
two drilling rigs, a Cabot 900 and a Cabot 750, drill pipe and collars, assorted
spare drilling equipment, transportation equipment and office furniture and
fixtures. The total expenditure for the Howell operations was $2,513,395, of
which $1,750,000 was financed.
Debt obligations in the form of notes payable increased by a net of
$1,533,332 from March 31, 1999 to September 30, 1999. This increase was
comprised of new debt of $1,776,645 and principal payments of $243,313. The
major element of new debt was the debt incurred to purchase Howell Drilling,
Inc. This debt was provided by the Company's primary lender. The terms of the
debt provide for an interest rate of prime (8.25% at September 30, 1999) plus
1.75%, monthly principal payments (based on a seven-year amortization) of
$20,833 plus interest and a due date of November 1, 2000. Accounts payable at
September 30, 1999 were $2,073,830, an increase of $824,747 from $1,249,083 at
March 31, 1999. The primary reason for this increase was the higher costs
associated with turnkey contracts and costs associated with the rig
refurbishment. Accrued expenses increased to $688,740 at September 30, 1999 from
$638,321 at March 31, 1999.
Results of Operations
Contract drilling revenue for the quarter ended September 30, 1999 was
$3,294,535 compared to $3,713,777 in the same quarter a year earlier. This
decrease in drilling revenue was the result of decreased dayrates. In the
current quarter, the Company had 353 drilling days compared to 330 drilling days
in the same quarter in fiscal 1999. The rig utilization rate for the current
quarter was 62% compared to 60% in the same quarter a year earlier. The slight
increases in number of drilling days and utilization rate were accomplished
despite the stacking of two rigs for part of 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 were returned to service late in the current quarter. The
average revenues per drilling day decreased to $9,333 from $11,254 in the
corresponding quarter of fiscal 1999. This decrease was partially due to longer
than anticipated drilling time on two turnkey contracts because of problems
encountered in the drilling of the wells.
8
<PAGE> 9
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Oil and gas revenue for the quarter ended September 30, 1999 was $4,024,
principally from overriding royalty interests, compared to $44,518 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 September 30,
1999 were $3,288,850, down $981,296, from operating costs and expenses of
$4,270,146 in the same quarter a year earlier. When compared with the same
quarter a year earlier, contract drilling costs decreased $808,195 in the
quarter ended September 30, 1999. Average drilling costs per day in the current
quarter were $7,924 compared to $10,925 in the same quarter a year earlier. The
average daily drilling margin increased to $1,409 in the current quarter from
$329 in the same quarter a year earlier. Depreciation, depletion and
amortization costs decreased to $374,046 in the quarter ended September 30, 1999
from $385,580 in the quarter ended September 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 decreased to $117,644
in the current quarter from $216,391 in the same quarter a year earlier. The
primary reason for this decrease was legal and professional fees incurred in an
unsuccessful merger transaction in the prior year period.
Other income and expense decreased to $46,180 of net expenses in the
current quarter from $98,686 of net expenses in the same quarter a year earlier.
The net expenses in fiscal 1999 included a loss of $41,265 on the disposition of
fixed assets.
Due to the Company's weak performance in the current quarter and its
large amount of non-financed capital expenditures, the Company is not in
compliance with the debt service coverage covenant of its debt with its major
lender. The Company has requested and received a waiver from the lender for this
violation. Management believes that with increased rig utilization the Company
will be able to maintain compliance with this covenant in the future.
Contract drilling revenue for the six months ended September 30, 1999
was $6,394,575 compared to $7,899,655 in the same period in fiscal 1999. This
decrease in drilling revenue was the result of reduced demand for drilling rigs
in the six-month period ended September 30, 1999. In the six months ended
September 30, 1999, the Company had 568 drilling days compared to 730 drilling
days in the same period in fiscal 1998. The rig utilization rate for the six
months ended September 30, 1999, was 51% compared to 66% in the same period in
fiscal 1999. Average revenues per drilling day were $11,258 compared to $10,821
in the same period in fiscal 1999.
Oil and gas revenue for the six months ended September 30, 1999 was
$8,146, principally from overriding royalty interests, compared to $95,651 in
the same period a year earlier. This decrease in revenue in the current year 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 six months ended September
30, 1999 were $6,328,372, down $2,251,743, from operating costs and expenses of
$8,580,115 in the same period a year earlier. Drilling costs decreased
$2,047,170 in the current year when compared to the same period in fiscal 1999.
Average drilling costs per day in the current year were $9,305 compared to
$10,044 in the same period a year earlier. Depreciation, depletion and
amortization costs decreased to $728,555 in the six months ended September 30,
1999 from $742,712 in the same period in fiscal 1999. General and administrative
expenses decreased to $314,740 in the six months ended September 30, 1999 from
$385,411 in the same period in fiscal 1999.
Other income and expense decreased to $94,146 of net expenses in the six
months ended September 30, 1999 from $161,004 of net expenses in the same period
a year earlier.
9
<PAGE> 10
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Accounting Matters
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. 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 Company has addressed its internal year 2000
issue with modifications to existing programs and conversions to new 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 further 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, except for the additional debt incurred for the
purchase of Howell Drilling, Inc.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in lawsuits filed on September
8 and 9, 1999 by Sutton Producing Company and the working interest owners in the
57th and 288th Judicial District Courts of Bexar County, Texas. These lawsuits,
which have been consolidated and concern the same subject matter, allege
products liability, negligence, misrepresentation, and fraud, as well as
violations of the Deceptive Trade Practices Act, including breach of express and
implied warranties, false representations , and unconscionability. This suit
arises from the Plaintiffs' purchase of allegedly defective pipe. Plaintiff
seeks relief in the form of monetary damages totaling $519,006.77, along with
punitive damages, fees, costs and interest.
Under the terms of the contract between the Company and Sutton Producing
Corporation, the Company was to drill a well to the turnkey depth after which
the Company would begin operating on a daywork basis under the direction,
supervision, and control of Sutton Producing Corporation. The contract expressly
provides, however, that Sutton Producing
10
<PAGE> 11
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Corporation would be solely responsible and assume liability for all
consequences of operations by both parties while on a daywork basis, including
results and all other risks or liabilities incurred in or incident to such
operations. Sutton Producing Corporation's responsibilities were subject only to
such obligations and liabilities specifically assumed by the Company, and the
Company is not aware of any such assumed obligations. The Company believes that
the evidence will demonstrate that the Company had in fact completed the
drilling of the well to the turnkey depth and was operating on a daywork basis
when Plaintiffs' claims arose. It is the Company's position, therefore, that
Sutton Producing Corporation has no right of recourse against it and furthermore
that Sutton Producing Corporation's contractual assumption of all obligations
and liabilities during daywork operations includes any claims made against the
Company. While this case is in its early stages, the Company believes that,
although the ultimate disposition of the case cannot be predicted with
certainty, the outcome will have no material adverse effect on the Company's
consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
An 8K was filed by the Company on October 14, 1999 reporting
the acquisition by the Company of the drilling operations of
Howell Drilling, Inc.
11
<PAGE> 12
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: November 9, 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 November 9, 1999
- -------------------------- Chief Executive Officer
Michael E. Little
/s/ Wm. Stacy Locke President and Chief November 9, 1999
- -------------------------- Operating Officer and
Wm. Stacy Locke Director
/s/ William D. Hibbetts Director November 9, 1999
- --------------------------
William D. Hibbetts
/s/ Chris F. Parma Vice President and November 9, 1999
- -------------------------- Chief Financial Officer
Chris F. Parma
</TABLE>
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,125,010
<SECURITIES> 0
<RECEIVABLES> 172,931
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,390,139
<PP&E> 19,192,937
<DEPRECIATION> 9,332,219
<TOTAL-ASSETS> 12,250,857
<CURRENT-LIABILITIES> 3,464,965
<BONDS> 0
0
3,799,994
<COMMON> 610,078
<OTHER-SE> 747,113
<TOTAL-LIABILITY-AND-EQUITY> 12,250,857
<SALES> 8,146
<TOTAL-REVENUES> 6,416,382
<CGS> 91
<TOTAL-COSTS> 6,328,372
<OTHER-EXPENSES> 94,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,136)
<INCOME-TAX> 6,382
<INCOME-CONTINUING> (12,518)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,518)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
