-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KzkNNmSb310CXmgZucbKLiHOMGGqfawviLMCPk8EiBtkqGxcEwebEW6uB46883bq nIsQIUZQyywPOl2iDwbu8Q== 0000950134-99-010101.txt : 19991117 0000950134-99-010101.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950134-99-010101 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH TEXAS DRILLING & EXPLORATION INC CENTRAL INDEX KEY: 0000320575 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 742088619 STATE OF INCORPORATION: TX FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-70145 FILM NUMBER: 99753154 BUSINESS ADDRESS: STREET 1: 9310 BROADWAY BLDG I CITY: SAN ANTONIO STATE: TX ZIP: 78217 BUSINESS PHONE: 5128287689 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH TEXAS DRILLING CO DATE OF NAME CHANGE: 19810715 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999 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 2 SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31, 1999 1999 ------------ ------------ 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 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 3 SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended September 30, September 30, ------------------------------- -------------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 4 SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Ended September 30, ------------------------------- 1999 1998 ----------- ----------- 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
See accompanying notes to condensed consolidated financial statements. 4 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 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:
Three Months Ended September 30, 1999 ---------------------------------------------- Weighted Average Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- 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) ========= ========= ======
Three Months Ended September, 1998 ---------------------------------------------- Weighted Average Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- 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 ----------- ------------- --------- 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) ========= ========= ======
6 7 SOUTH TEXAS DRILLING & EXPLORATION, INC. AND SUBSIDIARIES
Six Months Ended September, 1998 --------------------------------------------- Weighted Average Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- 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) ========== ========= =======
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 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 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 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 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 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.
Signature Title Date - --------- ----- ---- /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
12 13 EXHIBIT INDEX
Exhibit No. Description - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS MAR-31-2000 APR-01-1999 SEP-30-1999 1,125,010 0 172,931 0 0 2,390,139 19,192,937 9,332,219 12,250,857 3,464,965 0 0 3,799,994 610,078 747,113 12,250,857 8,146 6,416,382 91 6,328,372 94,146 0 0 (6,136) 6,382 (12,518) 0 0 0 (12,518) (0.03) (0.03)
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