<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
____________________
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12757
TMBR/SHARP DRILLING, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-1835108
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4607 WEST INDUSTRIAL BLVD.
MIDLAND, TEXAS 79703
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (area code) (915) 699-5050
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
Exchange 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
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.10 Par Value Outstanding at August 6, 1996
---------------------------- -----------------------------
(Title of Class) 3,382,586
<PAGE> 2
TMBR/SHARP DRILLING, INC.
FORM 10-Q REPORT
INDEX
Page No.
Part I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets, June 30, 1996 and
March 31, 1996 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations, Three Months
Ended June 30, 1996 and 1995 . . . . . . . . . . . . . 5
Statements of Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of Cash Flows, Three Months
Ended June 30, 1996 and 1995 . . . . . . . . . . . . . 8
Notes to Financial Statements . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 12
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 15
-2-
<PAGE> 3
PART ONE - FINANCIAL INFORMATION (UNAUDITED)
Item 1. FINANCIAL STATEMENTS
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 1996 (Unaudited) and March 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30,
1996 March 31,
ASSETS (Unaudited) 1996
------ ------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21 $ 339
Trade receivables,
net of allowance for doubtful
accounts of $1,225 at both
June 30, and March 31, 1996 2,756 2,942
Inventories 61 51
Deposits 73 423
Other 393 410
-------- --------
Total current assets 3,304 4,165
-------- --------
Property and equipment, at cost:
Drilling equipment 39,879 39,750
Oil and gas properties, based on
successful efforts accounting 10,913 10,398
Other property and equipment 3,196 3,195
-------- --------
53,988 53,343
Less accumulated depreciation,
depletion and amortization (46,314) (46,022)
-------- --------
Net property and equipment 7,674 7,321
-------- --------
Other assets 202 174
-------- --------
Total assets $ 11,180 $ 11,660
======== ========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 4
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 1996 (Unaudited) and March 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30,
1996 March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1996
------------------------------------ ------------ -----------
<S> <C> <C>
Current liabilities:
Trade payables $ 1,565 $ 3,336
Accrued workers' compensation 1,279 1,279
Other 486 786
-------- --------
Total current liabilities 3,330 5,401
-------- --------
Long term liabilities:
Borrowings from bank 3,000 1,300
-------- --------
Total liabilities 6,330 6,701
-------- --------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued, 4,651,325 and 4,615,525
shares at June 30, and
March 31, 1996, respectively 465 461
Additional paid-in capital 60,659 60,654
Accumulated deficit (56,124) (56,006)
Treasury stock-common, 1,268,739
shares at June 30, and
March 31, 1996, at cost (150) (150)
-------- --------
Total stockholders' equity 4,850 4,959
-------- --------
Total liabilities and
stockholders' equity $ 11,180 $ 11,660
======== ========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 5
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 1996 and 1995 (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
June 30,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Contract drilling $ 2,930 $ 5,931
Oil and gas 487 359
----------- -----------
Total revenues 3,417 6,290
----------- -----------
Operating costs and expenses:
Contract drilling 2,445 5,004
Oil and gas production 207 84
Dry holes and abandonments 217 16
Depreciation, depletion and
amortization 292 270
General and administrative 384 396
----------- -----------
Total operating costs
and expenses 3,545 5,770
----------- -----------
Operating income (loss) (128) 520
----------- -----------
Other income (expense):
Interest (69) (32)
Gain on sales of assets 65 --
Other, net 14 35
----------- -----------
Total other income (expense) 10 3
----------- -----------
Net income (loss) before income
tax provision (118) 523
Provision for income taxes -- (12)
----------- -----------
Net income (loss) $ (118) $ 511
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 6
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 1996 and 1995 (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
June 30,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net income (loss) per share
of common stock $ (.03) $ .13
=========== ===========
Weighted average number of
common shares outstanding 4,079,434 4,055,291
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE> 7
TMBR/SHARP DRILLING, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended June 30, 1996 (Unaudited) and
Year Ended March 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Treasury Stock
--------------
Common Stock Additional Common Stock Total
-------------- Paid-In Accumulated -------------- Stockholders'
Shares Amount Capital Deficit Shares Amount Equity
------ ------ ------- ----------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31, 1996 4,616 $ 461 $ 60,654 $(56,006) 1,270 $(150) $ 4,959
Exercise of
stock options 35 4 5 -- -- -- 9
Net income (loss) -- -- -- (118) -- -- (118)
----- ----- -------- -------- ------- ----- -------
Balance,
June 30,
1996 4,651 $ 465 $ 60,659 $(56,124) 1,270 $(150) $ 4,850
===== ===== ======== ======== ======= ===== =======
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE> 8
TMBR/SHARP DRILLING, INC.
STATEMENTS OF CASH FLOWS
For the three months ended June 30, 1996 and 1995 (Unaudited)
(In thousands)
Three months ended June 30,
------------------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net income (loss) $ (118) $ 511
Adjustments to reconcile net income
to net cash provided (required) by
operating activities:
Depreciation, depletion and
amortization 292 270
Dry holes and abandonments 217 16
Gain on sales of assets (65) --
Changes in assets and liabilities:
Trade receivables 186 (2,923)
Deposits 350 --
Inventories and other assets (21) 154
Trade payables (1,771) 543
Accrued interest and other liabilities (300) 60
-------- --------
Total adjustments (1,112) (1,880)
-------- --------
Net cash required by
operating activities (1,230) (1,369)
Cash flows from investing activities:
Additions to property and equipment (868) (720)
Proceeds from sales of property and
equipment 71 --
-------- --------
Net cash required by
investing activities (797) (720)
Cash flows from financing activities:
Repayments of capital lease -- (20)
Issuance of common stock 9 53
Loans from bank 1,700 745
Repayments of leasehold borrowings -- (119)
-------- --------
Net cash provided by
financing activities 1,709 659
-------- --------
Net decrease in cash
and cash equivalents (318) (1,430)
Cash and cash equivalents at beginning
of period 339 1,590
-------- --------
Cash and cash equivalents at end of period $ 21 $ 160
======== ========
See accompanying notes to financial statements.
-8-
<PAGE> 9
TMBR/SHARP DRILLING, INC.
NOTES TO FINANCIAL STATEMENTS
The amounts presented in the balance sheet as of March 31, 1996 were
derived from the Company's audited financial statements included in its
Form 10-K Report filed for the year then ended. The notes to such
statements are incorporated herein by reference.
(1) Management's Representation
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (all of which are of a normal recurring
nature) necessary to present fairly the Company's financial position as of
June 30, 1996 and March 31, 1996, the results of operations for the three
months ended June 30, 1996 and 1995, and the cash flows for the three month
period ended June 30, 1996 and 1995.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the related notes in the Company's Annual Report on Form 10-
K for the fiscal year ended March 31, 1996.
(2) Summary of Significant Accounting Policies
Inventories
Inventories consist primarily of casing and tubing. The Company
values its inventories at the lower of cost or estimated net recoverable
value using the specific identification method.
Property and Equipment
Drilling equipment is depreciated on a units-of-production method
based on the monthly utilization of the equipment. Drilling equipment
which is not utilized during a month is depreciated using a minimum
utilization rate of approximately twenty-five percent. Estimated useful
lives range from four to eight years. Other property and equipment is
depreciated using the straight-line method of depreciation with estimated
useful lives of three to seven years.
Oil and gas properties are accounted for using the successful efforts
method. Accordingly, the costs incurred to acquire property (proved and
unproved), all development costs and successful exploratory costs are
capitalized, whereas the costs of unsuccessful exploratory wells are
expensed. Geological and geophysical costs, including seismic costs, are
charged to expense when incurred. In cases where the Company provides
contract drilling services related to oil and gas properties in which it
has an ownership interest, the Company's proportionate share of costs
related to these properties is capitalized as stated above, net of the
-9-
<PAGE> 10
Company's working interest share of profits from the related drilling
contracts. Capitalized costs of undeveloped properties, which are not
depleted until proved reserves can be associated with the properties, are
periodically reviewed for possible impairment.
Depletion, depreciation and amortization of capitalized oil and gas
property costs was provided using the units-of-production method based on
estimated proved or proved developed oil and gas reserves, as applicable,
of the respective property units.
Major renewals and betterments are capitalized in the appropriate
property accounts while the cost of repairs and maintenance is charged to
operating expense in the period incurred. For assets sold or otherwise
retired, the cost and related accumulated depreciation amounts are removed
from the accounts and any resulting gain or loss is recognized.
Net Income (Loss) Per Common Share
Net income (loss) per share of common stock is based on the weighted
average number of common shares outstanding during each period. All common
stock equivalents are considered anti-dilutive for purposes of calculating
the net loss per share and dilutive for purposes of calculating the net
income per share.
(3) Debt
Line of Credit
On January 16, 1996, the Company entered into a loan agreement with
Norwest Bank Texas, Midland, N.A. (Norwest) that provides for a $3,000,000
revolving line of credit secured by the Company's drilling rigs and related
equipment, accounts receivable and inventory. Borrowings under the line of
credit bear interest at the Norwest Bank Minnesota, National Association
base rate and the interest is payable monthly. The loan matures January
15, 1998 at which time the then outstanding principal and all of the
accrued and unpaid interest is due and payable. At June 30, 1996, the
Company had borrowed $3,000,000 under the facility. The Company is
required to maintain certain financial covenants, including a requirement
to maintain a minimum tangible net worth of $6.25 million. As of June 30,
1996, the Company was not in compliance with this requirement, and obtained
a waiver allowing their non-compliance. The Company is working with the
bank to modify the terms of the loan agreement in order to eliminate the
non-compliance with the debt covenant.
(4) Stockholders' Equity
1984 Stock Option Plan
In August of 1984, the Company adopted the 1984 Stock Option Plan (the
"Plan") which initially authorized 375,000 shares of the Company's common
stock to be issued as either incentive stock options or nonqualified stock
options. This Plan was amended in August 1986 to increase the authorized
-10-
<PAGE> 11
shares to 475,000 shares of the Company's common stock. In January 1988,
the Plan was amended to reduce the option price on certain options issued
prior to March 31, 1986, to reflect the then current fair market value of
the Company's common stock. The Plan provides that options may be granted
to key employees or directors for various terms at a price not less than
the fair market value of the shares on the date of the grant. Options to
purchase 108,000 shares of common stock are currently outstanding under the
Plan, with 71,250 of the options being exercisable at June 30, 1996. No
additional shares are available for grant as the Plan expired by its own
terms in August 1994. The options that were granted prior to the
expiration of the Plan, and which are outstanding, remain subject to the
terms of the Plan.
1994 Stock Option Plan
In July 1994, the Company adopted its 1994 Stock Option Plan (the
"1994 Plan") which authorized the grant of options to purchase up to
750,000 shares of the Company's common stock. These options may be issued
as either incentive or nonqualified stock options. The 1994 Plan provides
that options may be granted to key employees or directors for various terms
at a price not less than the fair market value of the shares on the date of
grant. The 1994 Plan was ratified and approved by the stockholders at the
Company's annual meeting of stockholders held on August 30, 1994. The
Company has not granted any options under the 1994 Plan.
(5) Employee Benefits
Effective May 1, 1995, the Company established the TMBR/Sharp
Drilling, Inc. Employee Retirement Plan which is a 401(K) profit sharing
plan. Company contributions are discretionary and have been currently set
at 25% for each dollar contributed by each eligible employee, limited,
however, to a maximum of 5% of the employee's compensation.
(6) Contingencies
On March 19, 1992, the Company was notified by the Texas Department of
Insurance that the Company's former workers' compensation insurance
carriers, Sir Lloyd's Insurance Company and its affiliate, Standard
Financial Indemnity Corporation ("SFIC"), had been placed in liquidation by
order of the 201st District Court of Travis County, Texas on March 12, 1992
in Cause No. 92-12765, The State of Texas vs. Sir Lloyd's Insurance Company
and Sir Insurance Agency, Inc., and in Cause No. 91-12766, The State of
Texas vs. Standard Financial Indemnity Corporation. Approximately two
months before being ordered into liquidation, SFIC requested that the
Company pay policy premiums in the amount of $646,476. On July 22, 1993
the special deputy receiver of SFIC billed the Company approximately
$1,061,000 for retrospective premiums, but adjusted the amount to $854,153
on January 12, 1994. Although the Company disputes the amount claimed by
SFIC and its receiver, the Company is presently unable to determine whether
and to what extent such amount is, in fact, an accurate estimate of amounts
owed to SFIC, if any, largely as a result of the difficulty of verifying
the insurance carrier's estimated claims and adjustments and the
unavailability of SFIC personnel. However, an accrual was made in the
-11-
<PAGE> 12
Company's financial statements for the amount in question.
In a related development, on November 3, 1995, the Company was
notified that a lawsuit had been filed in Travis County, Texas styled Texas
Property and Casualty Insurance Guaranty Association vs. TMBR/Sharp
Drilling, Inc. (Cause No. 95-12318). The Texas Property and Casualty
Insurance Guaranty Association ("Guaranty Association") seeks a recovery of
past workers' compensation claims advanced by the Guaranty Association
related to the Company's workers compensation insurance program with SFIC.
The Guaranty Association is seeking to recover a total of $803,057.11.
The Company disagrees with the claims made by the Guaranty Association
and intends to vigorously defend its position against the Receiver of SFIC
and the Texas Guaranty Association. The Company believes that if the
Guaranty Association's claim is ultimately determined to be valid and
enforceable, then the Receiver's claim against the Company is either
without merit or that its claim would be offset against the claims of the
Guaranty Association. For these reasons, the Company has not accrued the
Guaranty Association's claim in its financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Total revenues were $3,417,000 for the three months ended June 30,
1996 which represents a 46% decrease over the same period in 1995.
Operating expenses as percent of revenues were 104% for the three months
ended June 30, 1996 versus 92% for the same period of the prior year. The
operating results were negatively affected by a decrease in rig utilization
rates. Rig utilization rates were 34% for the three months ended June 30,
1996 compared to 54% in the same period in 1995.
Oil and gas revenues increased by approximately 36% due to the
increase in the number of producing wells in which the Company has acquired
ownership interests. Accordingly, oil and gas production expenses and
depreciation, depletion and amortization expenses also increased.
Net working capital was a negative $26,000 for the period ended June
30, 1996 compared to a negative $1,236,000 for the period ended March 31,
1996. The increase in working capital is primarily a result of decrease in
trade payables.
Liquidity and Capital Resources
On January 16, 1996, the Company entered into a loan agreement with
Norwest Bank Texas, Midland, N. A. (Norwest) that provides for a $3,000,000
revolving line of credit secured by the Company's drilling rigs and related
equipment, accounts receivable and inventory. Borrowings under the line of
credit bear interest at the Norwest Bank Minnesota, National Association
base rate. Interest only is payable monthly. The loans mature January 15,
1998, at which time, the then outstanding principal and accrued interest is
due and payable. At June 30, 1996, the Company had borrowed $3,000,000
-12-
<PAGE> 13
under the facility. The Company intends to meet its cash flow requirements
for fiscal 1997 through cash flow provided from operations and if needed,
additional borrowings.
The Company believes it owns a sufficient number of drilling rigs to
remain competitive within its areas of operation. However, the cash flow
generated from operations and the Company's operating results will continue
to be directly affected by the level of drilling activity in the Company's
operating areas. By focusing on drilling contracts which can provide
operating cash flow, the Company believes its operating cash flow will
improve. Cash required by operating activities was approximately $1.2
million for the quarter compared with $1.4 million for the three months
ended June 30, 1995.
As a result of the present worldwide excess supply of crude oil and
natural gas and higher domestic finding costs on an equivalent unit basis,
producers have significantly reduced their domestic drilling budgets. This
decreased demand coupled with the extreme competitive conditions prevalent
in the contract drilling industry continue to challenge the Company.
PART TWO - OTHER INFORMATION
Item 1. Legal Proceedings
On March 19, 1992, the Company was notified by the Texas Department of
Insurance that the Company's former workers' compensation insurance
carriers, Sir Lloyd's Insurance Company and its affiliate, Standard
Financial Indemnity Corporation ("SFIC"), had been placed in liquidation by
order of the 201st District Court of Travis County, Texas on March 12, 1992
in Cause No. 92-12765, The State of Texas vs. Sir Lloyd's Insurance Company
and Sir Insurance Agency, Inc., and in Cause No. 91-12766, The State of
Texas vs. Standard Financial Indemnity Corporation. Approximately two
months before being ordered into liquidation, SFIC requested that the
Company pay policy premiums in the amount of $646,476. On July 22, 1993
the special deputy receiver of SFIC billed the Company approximately
$1,061,000 for retrospective premiums, but adjusted the amount to $854,153
on January 12, 1994. Although the Company disputes the amount claimed by
SFIC and its receiver, the Company is presently unable to determine whether
and to what extent such amount is, in fact, an accurate estimate of amounts
owed to SFIC, if any, largely as a result of the difficulty of verifying
the insurance carrier's estimated claims and adjustments and the
unavailability of SFIC personnel. However, an accrual was made in the
Company's financial statements for the amount in question.
In a related development, on November 3, 1995, the Company was
notified that a lawsuit had been filed in Travis County, Texas styled Texas
Property and Casualty Insurance Guaranty Association vs. TMBR/Sharp
Drilling, Inc. (Cause No. 95-12318). The Texas Property and Casualty
Insurance Guaranty Association ("Guaranty Association") seeks a recovery of
past workers' compensation claims advanced by the Guaranty Association
related to the Company's workers compensation insurance program with SFIC.
-13-
<PAGE> 14
The Guaranty Association is seeking to recover a total of $803,057.11.
The Company disagrees with the claims made by the Guaranty Association
and intends to vigorously defend its position against the Receiver of SFIC
and the Texas Guaranty Association. The Company believes that if the
Guaranty Association's claim is ultimately determined to be valid and
enforceable, then the Receiver's claim against the Company is either
without merit or that its claim would be offset against the claims of the
Guaranty Association. For these reasons, the Company has not accrued the
Guaranty Association's claim in its financial statements.
-14-
<PAGE> 15
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 1996.
-15-
<PAGE> 16
SIGNATURES
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.
TMBR/SHARP DRILLING, INC.
August 13, 1996 By: /s/ Patricia R. Elledge
--------------- -------------------------
Date Patricia R. Elledge
Controller/Treasurer
(Ms. Elledge is the Chief Financial
Officer and has been duly authorized
to sign on behalf of the Registrant)
-16-
<PAGE> 17
Exhibit Index
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 21
<SECURITIES> 0
<RECEIVABLES> 3981
<ALLOWANCES> 1225
<INVENTORY> 61
<CURRENT-ASSETS> 3304
<PP&E> 53988
<DEPRECIATION> 46314
<TOTAL-ASSETS> 11180
<CURRENT-LIABILITIES> 3330
<BONDS> 0
0
0
<COMMON> 465
<OTHER-SE> 4385
<TOTAL-LIABILITY-AND-EQUITY> 11180
<SALES> 0
<TOTAL-REVENUES> 3417
<CGS> 0
<TOTAL-COSTS> 3545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> (118)
<INCOME-TAX> 0
<INCOME-CONTINUING> (118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
