<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, 2000.
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 7, 2000
----- -----------------------------
Common Stock, $.10 par value, 10,952,845
<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 2000 2000
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,833,446 1,922,457
Securities available for sale 900,757 1,003,116
Receivables 3,376,319 1,176,065
Contract drilling in progress 471,674 774,553
Prepaid expenses 127,854 489,952
------------ ------------
Total current assets 13,710,050 5,366,143
------------ ------------
Property and equipment 21,729,686 19,600,441
Accumulated depreciation, depletion and amortization (9,808,823) (9,296,357)
------------ ------------
Net property and equipment 11,920,863 10,304,084
------------ ------------
Total assets 25,630,913 15,670,227
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments, long-term debt 3,594,633 3,713,493
Accounts payable 5,160,784 3,964,934
Accrued expenses 1,307,775 941,241
------------ ------------
Total current liabilities 10,063,192 8,619,668
Long-term debt 313,994 267,067
------------ ------------
Total liabilities 10,377,186 8,886,735
------------ ------------
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 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 2,999,994 2,999,994
Common stock, $.10 par value. Authorized 15,000,000 shares, issued
10,952,845 at June 30 and 7,274,684 shares at March 31, 2000 1,095,284 727,468
Additional paid-in capital 25,355,753 17,723,569
Accumulated deficit (15,223,425) (15,796,017)
Accumulated other comprehensive income-
unrealized gain on securities available for sale 226,121 328,478
------------ ------------
Total shareholders' equity 15,253,727 6,783,492
------------ ------------
Total liabilities and shareholders' equity $ 25,630,913 15,670,227
============ ============
</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,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Contract drilling $ 8,804,995 3,100,040
Oil and gas 6,685 4,122
Management fees and other 56,572 8,177
------------ ------------
Total operating revenues 8,868,252 3,112,339
------------ ------------
Costs and expenses:
Contract drilling 7,475,376 2,487,917
Oil and gas 1,075 --
Depreciation, depletion and amortization 512,466 354,509
General and administrative 195,021 197,096
------------ ------------
Total operating costs and expenses 8,183,938 3,039,522
------------ ------------
Earnings from operations 684,314 72,817
------------ ------------
Other income (expense):
Interest expense (108,396) (66,096)
Interest income 87,084 16,730
Gain on sale of assets -- 1,400
------------ ------------
Total other income (expense) (21,312) (47,966)
------------ ------------
Earnings before income taxes 663,002 24,851
Income taxes 14,410 3,223
------------ ------------
Net earnings 648,592 21,628
Preferred stock dividend requirements 76,000 76,000
------------ ------------
Net earnings (loss) applicable to common stockholders $ 572,592 (54,372)
============ ============
Earnings (loss) per common share - Basic $ 0.06 (0.01)
============ ============
Earnings (loss) per common share - Diluted $ 0.05 (0.01)
============ ============
Weighted average number of shares outstanding - Basic 9,336,071 6,100,784
============ ============
Weighted average number of shares outstanding -Diluted 12,356,231 6,100,784
============ ============
</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,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 648,592 21,628
Adjustments to reconcile net earnings to net cash provided (used) by operating
activities:
Depreciation, depletion, amortization 512,466 354,509
Gain on sale of assets -- (1,400)
Changes in current assets and liabilities:
Accounts and notes receivable (2,200,254) (439,684)
Contract drilling in progress 302,879 (356,939)
Prepaid expenses 362,098 42,808
Accounts payable 1,195,850 750,473
Prepaid drilling contracts 101,800 --
Accrued expenses 188,734 (83,240)
----------- -----------
Net cash provided by operations 1,112,165 288,155
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 106,220 --
Payments of debt (178,154) (111,228)
Proceeds from sale of common stock 8,000,000 --
----------- -----------
Net cash provided (used) by financing activities 7,928,066 (111,228)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (2,129,242) (286,281)
Proceeds from sale of equipment -- 1,400
----------- -----------
Net cash used in investing activities (2,129,242) (284,881)
----------- -----------
Net increase (decrease) in cash 6,910,989 (107,954)
Beginning cash and cash equivalents 1,922,457 1,411,493
----------- -----------
Ending cash and cash equivalents $ 8,833,446 1,303,539
=========== ===========
Supplementary Disclosure:
Interest paid 108,525 65,737
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
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.
At April 1, 2000, the Company had investment tax credit carryforwards of
approximately $2,000 (expiring 2001) and a net operating loss carryforward
of approximately $12,324,000 (expiring 2001 through 2015) which are
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.
The Company issued common stock in fiscal years 1999 and 2000 and in the
first quarter of fiscal 2001. The issuance of common stock may have
resulted in a substantial change of ownership as defined in Internal Revenue
Code section 382. In accordance with section 382, the change in ownership
may have caused a limitation on the use of the Company's net operating loss
and investment credit carryovers. In the current quarter, the Company has
not provided for federal income tax liability as management believes the net
operating loss and investment credit carryovers will be sufficient to cover
any projected tax liability even if the carryovers are limited by section
382.
Continued
5
<PAGE> 6
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
4. 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, 2000
------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- -------------- -----------
<S> <C> <C> <C>
Net earnings $ 648,592
Less: Preferred stock dividends (76,000)
-----------
Income available to common stockholders-Basic 572,592 9,336,071 $ 0.06
===========
Effect of dilutive securities
Options 1,297,085
Preferred stock 76,000 1,723,075
----------- -----------
Income available to common stockholders
and assumed conversions-Diluted $ 648,592 12,356,231 $ 0.05
=========== =========== ===========
</TABLE>
<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>
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, 2000 were $8,833,446 compared to
$1,922,457 at March 31, 2000. The current ratio at June 30, 2000 was 1.36
compared to 0.62 at March 31, 2000. Working capital increased to $3,646,857 at
June 30, 2000 from $(3,253,525) at March 31, 2000. This increase in working
capital was the result of the Company's profitable operations in the current
quarter and the issuance of $8,000,000 of the Company's common stock in a
private placement. In exchange for the $8,000,000, the Company issued 3,678,161
shares of its common stock to WEDGE Energy Services, L.L.C. of Houston, Texas.
In the current quarter, the Company's operations generated cash flow of
$1,112,165 while in the same quarter a year earlier operations generated a cash
flow of $288,155. Accounts receivable increased to $3,376,319 at June 30, 2000
from $1,176,065 at March 31, 2000. Contract drilling in progress decreased to
$471,674 at June 30, 2000 from $774,553 at March 31, 2000.
6
<PAGE> 7
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Since March 31, 2000, property and equipment costs increased by a net of
$2,129,242. Of this amount, $2,077,269 was spent on drilling equipment, $51,461
was spent on transportation equipment and $512 was spent on office furniture
and fixtures. Of the $2,077,269 spent on drilling equipment, $1,100,000 was
spent as a down payment on the Company's two new IRI International Corporation
1700E SCR rigs which are scheduled for delivery in December, 2000 and April,
2001. These rigs will be capable of drilling wells in the depth range of 8,000
to 18,000 feet. The rigs will be highly mobile with 1700 horsepower electric
drawworks, water cooled disc brakes, independent electric rotary drive,
autodriller and a substructure fluid containment system. The combined cost of
both rigs is not expected to exceed $15,000,000.
Debt obligations in the form of notes payable decreased by a net $71,933
from March 31, 2000 to June 30, 2000. New debt incurred in the current quarter
included $91,302 secured by drilling equipment and $14,918 secured by
transportation equipment. At June 30, 2000, current installments of long-term
debt included $3,472,917 payable on the Company's debt secured by drilling
equipment, transportation equipment, furniture and fixtures and land and
improvements. This debt matures on November 1, 2000. The Company intends to pay
off this debt on or before maturity using its cash resources. Accounts payable
at June 30, 2000 were $5,160,784, an increase of $1,195,850 from $3,964,934 at
March 31, 2000. The primary reason for this increase was the higher costs
associated with turnkey contracts and greater rig utilization in the current
quarter than in the quarter ended March 31, 2000. Accrued expenses increased to
$1,128,775 at June 30, 2000 from $864,041 at March 31, 2000 primarily as a
result of accrued payroll costs and accrued preferred stock dividends.
Results of Operations
Contract drilling revenue for the quarter ended June 30, 2000 was
$8,804,995 compared to $3,100,040 in the same quarter a year earlier. This
increase in drilling revenue was the result of greater rig demand resulting in
increased drilling days. In the current quarter, the Company had 570 drilling
days compared to 235 drilling days in the same quarter in fiscal 2000. The rig
utilization rate for the current quarter was 78% compared to 39% in the same
quarter a year earlier. All eight of the Company's rigs were in operation
during the current quarter. The average revenue per drilling day increased to
$15,447 from $13,192 in the corresponding quarter of fiscal 2000. This increase
in the average revenue per drilling day was the result of increased turnkey
revenue and slightly higher daywork rates. In the current quarter, 73% of
drilling revenue came from turnkey contracts and 27% of drilling revenue came
from daywork and footage contracts. In the same quarter in fiscal 2000, 83% of
drilling revenue came from turnkey contracts while 17% came from daywork
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, 2000 was $6,685,
principally from overriding royalty interests, compared to $4,122 in the same
quarter a year earlier. This increase in revenue in the current quarter was due
to increased prices for oil and natural gas.
Total operating costs and expenses for the quarter ended June 30, 2000
were $8,183,938, up $5,144,416, from operating costs and expenses of $3,039,522
in the same quarter a year earlier. When compared with the same quarter a year
earlier, contract drilling costs increased $4,987,459 in the quarter ended June
30, 2000. Average drilling costs per day in the current quarter were $13,115
compared to $10,587 in the same quarter a year earlier. Depreciation, depletion
and amortization costs increased to $512,466 in the quarter ended June 30, 2000
from $354,509 in the quarter ended June 30, 1999. This increase was the result
of the Company's capital expenditures in the current quarter and in the latter
part of fiscal 2000. General and administrative expenses decreased slightly to
$195,021 in the current quarter from $197,096 in the same quarter a year
earlier.
Other income and expense decreased to $21,312 of net expenses in the
current quarter from $47,966 of net expenses in the same quarter a year
earlier, primarily due to increased interest income.
7
<PAGE> 8
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
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. 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.
Market Risk
There have been no significant changes in the Company's market risk
factors since March 31, 2000.
Subsequent Events
On July 21, 2000, the Company signed a definitive stock purchase agreement
to acquire 100% of the common stock of Pioneer Drilling Company, Inc., of
Corpus Christi, Texas. The purchase includes three SCR drilling rigs, a lease
on a fourth SCR rig and auxiliary drilling equipment. The common stock will be
purchased for $12 million in a combination of cash and South Texas Drilling &
Exploration common stock, and includes the assumption of approximately $1.5
million of debt. Pioneer has two Cabot 750-E Series rigs, rated to 10,000 feet,
which are drilling for a major oil concern in a long term drilling program in
Webb County, Texas. Pioneer also has two 16,000 foot SCR rigs, which are
currently working in south Texas and have backlog commitments through the end
of the current calendar year. The purchase is expected to close in August,
2000.
In conjunction with the purchase of the common stock of Pioneer Drilling
Company, the Company has secured committments from two banks for $12,000,000 to
be used in the purchase of Pioneer and for general corporate purposes. One
committment is for $9,000,000 with interest at the bank's prime rate plus one
percent. Monthly principal payments, based on a seven year amortization, will
be $107,143. The loan will mature in three years. The second committment is for
$3,000,000 with interest at New York prime plus one percent. The loan will be
payable interest only for the first three months then 83 monthly payments of
$50,582 and one for the balance on or before maturity. The loan will mature in
seven years and three months.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Sanchez v. Michael Petroleum Corporation, et. Al., 341st judicial District
Court of Webb County, Texas, Third Amended Petition filed on or about June 23,
2000. Jesse Sanchez, an employee of the Company, was injured while working on a
triple rig operated by Michael Petroleum Corporation, when a survey bar broke
and injured his chest. Mr. Sanchez has sued the Company on the basis that the
Company intentionally failed to furnish him with a safe workplace. Mr. Sanchez
claims that his actual damages do not exceed $2 million and seeks punitive
damages in excess of $1 million. Mr. Sanchez's wife and children have been
added as additional plaintiffs, and seek recovery for loss of consortium,
support and services. Along with the Company, Sanchez has sued the well
operator, project engineer and manufacturer of the wireline unit in question on
a negligence and strict liability basis. The Company believes that the suit
against the Company has no merit, and is only brought in an attempt to
circumvent the workers compensation insurance regime that
8
<PAGE> 9
SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
should supply Mr. Sanchez's only recourse in this matter. The Company believes
that the allegation that the Company intentionally harmed Mr. Sanchez is untrue
and is unsupported by the facts of the situation, and intends to vigorously
defend against Mr. Sanchez's accusations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated May 11, 2000
reporting information regarding the private placement of common stock
with WEDGE Energy Services, L.L.C.
9
<PAGE> 10
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 10, 2000
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 10, 2000
---------------------- Chief Executive Officer
Michael E. Little
/s/ Wm. Stacy Locke President and Chief August 10, 2000
---------------------- Operating Officer and
Wm. Stacy Locke Director
/s/ William D. Hibbetts Director August 10, 2000
-----------------------
William D. Hibbetts
/s/ Chris F. Parma Vice President and August 10, 2000
---------------------- Chief Financial Officer
Chris F. Parma
</TABLE>
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
