<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, 1997
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 4, 1997
(Title of Class) 4,523,386
<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, 1997 and
March 31, 1997 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations, Three Months
Ended June 30, 1997 and 1996 . . . . . . . . . . . . . 5
Statements of Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of Cash Flows, Three Months
Ended June 30, 1997 and 1996 . . . . . . . . . . . . . 8
Notes to Financial Statements . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 13
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 17
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PART ONE - FINANCIAL INFORMATION (UNAUDITED)
Item 1. FINANCIAL STATEMENTS
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 1997 (Unaudited) and March 31, 1997
(In thousands, except per share data)
June 30,
1997 March 31,
ASSETS (Unaudited) 1997
------ ------------- -----------
Current assets:
Cash and cash equivalents $ 2,269 $ 1,048
Marketable securities 87 87
Trade receivables,
net of allowance for doubtful
accounts of $1,135 at both
June 30, and March 31, 1997 7,324 6,218
Inventories 59 74
Deposits 73 73
Other 533 560
-------- --------
Total current assets 10,345 8,060
-------- --------
Property and equipment, at cost:
Drilling equipment 43,305 42,690
Oil and gas properties, based on
successful efforts accounting 13,899 13,102
Other property and equipment 3,609 3,584
-------- --------
60,813 59,376
Less accumulated depreciation,
depletion and amortization (48,679) (47,851)
-------- --------
Net property and equipment 12,134 11,525
-------- --------
Other assets 174 176
-------- --------
Total assets $ 22,653 $ 19,761
======== ========
See accompanying notes to financial statements.
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<PAGE> 4
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 1997 (Unaudited) and March 31, 1997
(In thousands, except per share data)
June 30,
1997 March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1997
------------------------------------ ------------ -----------
Current liabilities:
Trade payables $ 3,488 $ 2,739
Accrued workers' compensation 1,245 1,245
Other 1,073 1,405
-------- --------
Total current liabilities 5,806 5,389
-------- --------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued, 5,758,125 and 5,696,825
shares at June 30, and
March 31, 1997, respectively 576 570
Additional paid-in capital 68,497 68,413
Accumulated deficit (52,076) (54,461)
Treasury stock-common, 1,268,739
shares at June 30, and
March 31, 1997, at cost (150) (150)
-------- --------
Total stockholders' equity 16,847 14,372
-------- --------
Total liabilities and
stockholders' equity $ 22,653 $ 19,761
======== ========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 1997 and 1996 (Unaudited)
(In thousands, except per share data)
Three months ended
June 30,
-----------------------------
1997 1996
----------- -----------
Revenues:
Contract drilling $ 9,201 $ 2,930
Oil and gas 529 487
----------- -----------
Total revenues 9,730 3,417
----------- -----------
Operating costs and expenses:
Contract drilling 5,954 2,445
Oil and gas production 199 207
Dry holes and abandonments 10 217
Depreciation, depletion and
amortization 828 292
General and administrative 433 384
----------- -----------
Total operating costs
and expenses 7,424 3,545
----------- -----------
Operating income (loss) 2,306 (128)
----------- -----------
Other income (expense):
Interest 31 (69)
Gain on sales of assets 84 65
Other, net 14 14
----------- -----------
Total other income (expense), net 129 10
----------- -----------
Net income (loss) before income
tax provision 2,435 (118)
Provision for income taxes (50) --
----------- -----------
Net income (loss) $ 2,385 $ (118)
=========== ===========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 1997 and 1996 (Unaudited)
(In thousands, except per share data)
Three months ended
June 30,
-----------------------------
1997 1996
----------- -----------
Net income (loss) per share
of common stock $ .47 $ (.03)
=========== ===========
Weighted average number of
common shares outstanding 5,032,724 4,079,434
=========== ===========
See accompanying notes to financial statements.
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<PAGE> 7
TMBR/SHARP DRILLING, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended June 30, 1997 (Unaudited) and
Year Ended March 31, 1997
(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, 1997 5,697 $ 570 $ 68,413 $(54,461) 1,270 $(150) $14,372
Exercise of
stock options 61 6 84 -- -- -- 90
Net income -- -- -- 2,385 -- -- 2,385
----- ----- -------- -------- ------- ----- -------
Balance,
June 30,
1997 5,758 $ 576 $ 68,497 $(52,076) 1,270 $(150) $16,847
===== ===== ======== ======== ======= ===== =======
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 8
TMBR/SHARP DRILLING, INC.
STATEMENTS OF CASH FLOWS
For the three months ended June 30, 1997 and 1996 (Unaudited)
(In thousands)
Three months ended June 30,
------------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 2,385 $ (118)
Adjustments to reconcile net income
to net cash provided (required) by
operating activities:
Depreciation, depletion and
amortization 828 292
Dry holes and abandonments 10 217
Gain on sales of assets (84) (65)
Changes in assets and liabilities:
Trade receivables (1,106) 186
Deposits -- 350
Inventories and other assets 29 (21)
Trade payables 749 (1,771)
Accrued interest and other liabilities (332) (300)
-------- --------
Total adjustments 94 (1,112)
-------- --------
Net cash provided (required) by
operating activities 2,479 (1,230)
Cash flows from investing activities:
Additions to property and equipment (1,519) (868)
Proceeds from sales of property and
equipment 171 71
-------- --------
Net cash required by
investing activities (1,348) (797)
Cash flows from financing activities:
Issuance of common stock 90 9
Loans from bank -- 1,700
-------- --------
Net cash provided by
financing activities 90 1,709
-------- --------
Net increase (decrease) in
cash and cash equivalents 1,221 (318)
Cash and cash equivalents at beginning
of period 1,048 339
-------- --------
Cash and cash equivalents at end of
period $ 2,269 $ 21
======== ========
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, 1997 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, 1997 and March 31, 1997, the results of operations for the three
months ended June 30, 1997 and 1996, and the cash flows for the three month
period ended June 30, 1997 and 1996.
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, 1997.
(2) Summary of Significant Accounting Policies
Marketable Securities
During 1997, the Company adopted the accounting procedures as
established by the SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 115, marketable securities,
such as those owned by the Company, are classified as available-for-sale
securities and are to be reported at market value, with unrealized gains
and losses, net of income taxes, excluded from earnings and reported as a
separate component of stockholders' equity. The market value of these
securities at June 30, 1997 was not materially different from the
historical cost, and therefore, no unrealized gains or losses have been
recorded.
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
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<PAGE> 10
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
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 is 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) 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
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 103,000 shares of common stock are currently outstanding under the
Plan. All of these options are earned and exercisable at June 30, 1997.
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<PAGE> 11
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.
On September 3, 1996, the Company granted 465,000 shares of
nonqualified stock options to key employees under the 1994 Plan. The
following sets forth certain information concerning these nonqualified
options.
Number Option Price
of ----------------------
Shares Per Share Total
------ ----------------------
Outstanding March 31, 1997 465,000 $7.75 $3,603,750
Exercised 9,000 7.75 69,750
------- ---- ---------
Outstanding June 30, 1997 456,000 $7.75 $3,534,000
======= ==== =========
All of the nonqualified stock options granted on September 3, 1996 are
earned and exercisable as of May 1, 1997.
In connection with a private placement, the Company has outstanding a
warrant representing 36,250 common shares with an exercise price of $13.20.
This warrant becomes exercisable on February 17, 1998 and expires on
February 17, 2002.
(4) Effects of Future Adoption of Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings
Per Share" superseding Accounting Principles Board Opinion No. 15 ("APB
15") "Earnings Per Share." SFAS 128 simplifies earnings per share ("EPS")
calculations by replacing previously reported primary EPS with what will be
called basic EPS which is calculated by dividing reported earnings
available to common shareholders by the weighted average shares
outstanding. No dilution for potentially dilutive securities will be
included in basic EPS. Previously reported fully diluted EPS will be
called diluted EPS which will include potentially dilutive securities. The
requirements under SFAS 128 will not be incorporated into the Company's
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<PAGE> 12
financial statements until the fiscal year ending March 31, 1998.
Presented below are the pro forma effects of SFAS 128 on the Company's
EPS disclosures for the three months ending June 30, 1997 and 1996:
1997 1996
---- ----
Primary EPS as reported $ 0.47 $(0.03)
Effect of SFAS 128 0.06 (0.01)
---- ----
Pro-forma basic EPS $ 0.53 $(0.04)
==== ====
Fully diluted EPS as
reported $ 0.47 $(0.03)
Effect of SFAS 128 0.00 0.00
---- ----
Pro-forma diluted EPS $ 0.47 $(0.03)
==== ====
(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
In March 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 approximate amount of $646,000. 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 the receiver for SFIC, 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. However, an accrual was made in
the Company's financial statements for the amount in question. In a
related development, on June 5, 1995, the Company received a letter from
the Texas Property and Casualty Insurance Guaranty Association ("Guaranty
Association") requesting payment in the approximate amount of $729,000 for
claims that the Guaranty Association has paid on behalf of SFIC. The
Guaranty Association does not believe that the policies written by SFIC
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<PAGE> 13
involved a transfer of insurance risk as required by the Texas Insurance
Code and is asserting that it is entitled to reimbursement for all monies
paid to claimants under these policies. In November, 1995, the Guaranty
Association filed a lawsuit against the Company in Travis County, Texas,
styled Texas Property and Casualty Insurance Guaranty Association vs.
TMBR/Sharp Drilling, Inc., Cause No. 95-12318. The Guaranty Association is
seeking to recover past workers' compensation claims in the amount of
approximately $803,000, which have been advanced by the Guaranty
Association under the Company's workers compensation insurance program with
SFIC. In May, 1996, and pursuant to an order of the Travis County District
Court, the claims of the receiver for SFIC were assigned to and became part
of the Guaranty Association's claims against the Company. The Company has
rejected a settlement offer made by the Guaranty Association for an amount
less than the amount accrued by the Company and the Company intends to
vigorously defend its position against the Guaranty Association.
The Company provides for its workers' compensation claims based upon
the most recent information available from its insurance carrier concerning
claims and estimated costs. However, in future years the Company may
receive retroactive adjustments, both favorable and unfavorable, related to
estimates of claim costs for previous years, which may be material to the
Company's results of operations. No provision for retroactive adjustments
to claim costs is recorded until the Company receives notification from its
insurance carrier because this amount, if any, cannot be estimated. The
Company is generally responsible for the first $10,000 ($100,000 prior to
November 1993) in claim costs for each workers' compensation injury.
The Company is a defendant in various lawsuits generally incidental to
its business. The Company does not believe that the ultimate resolution of
such litigation will have a significant effect on the Company's financial
position or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to historical information, this discussion contains
certain forward-looking statements that involve risks and uncertainties
about the business, long-term strategy, financial condition and future of
the Company. Factors that may affect future results are included in the
discussion below and in Part I, Items 1 and 2 of the Company's Form 10-K
for the year ended March 31, 1997. Actual results could differ materially
from those forward-looking statements.
Results of Operations
Total revenues were $9,730,000 for the three months ended June 30,
1997 which represents a 185% increase over the same period in 1996.
Operating expenses as percent of revenues were 76% for the three months
ended June 30, 1997 versus 104% for the same period of the prior year. The
operating results were positively affected by an increase in demand for the
Company's contract drilling services which resulted in an increase in rig
utilization rates. The Company has also experienced an increase in the
average price received for its contract drilling services. Rig utilization
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<PAGE> 14
rates were 81% for the three months ended June 30, 1997 compared to 34% in
the same period in 1996.
Oil and gas revenues increased by approximately 9% due to an increase
in the number of equivalent barrels of oil and gas produced. Oil and gas
production expenses decreased by approximately 8%.
During the quarter ended June 30, 1997, the Company completed the
assembly of an additional drilling rig from its inventory of rig
components. This U-15 Unit rig is capable of drilling to a depth of
approximately 8,500 feet. The addition of this drilling rig brings the
Company's available fleet to 16 rigs. Depreciation, depletion and
amortization expense has increased due to the addition of the U-15 Unit
drilling rig, drill pipe and miscellaneous drilling equipment along with an
increase in the number of producing wells in which the Company has an
ownership interest.
Net working capital was $4.5 million at June 30, 1997 compared to $2.7
million at March 31, 1997. The increase in working capital can be
attributed to an increase in cash and cash equivalents and accounts
receivable from the increased drilling activity.
Liquidity and Capital Resources
In January, 1996, the Company entered into a loan agreement with its
bank lender providing for a revolving credit facility (the "Credit
Facility") maturing on January 15, 1998. The aggregate principal amount of
the Company's borrowings outstanding at any one time under the revolving
facility are limited to the lesser of $3.0 million or one-third of the
borrowing base amount then in effect. The borrowing base amount is
redetermined by the bank monthly. The Credit Facility was established to
finance the Company's purchases of drill pipe and oil and gas exploration
activities. Interest only is payable monthly and the entire principal
amount is due and payable on January 15, 1998. The Credit Facility bears
interest at the bank's base rate and is secured by substantially all of the
Company's accounts receivable, drilling rigs and related equipment. At
June 30, 1997, there were no amounts outstanding under the Credit Facility.
In August, 1996, the Company entered into a second loan agreement with
its bank lender. This second loan agreement provides for a $2.0 million
revolving line of credit (the "Line of Credit") secured by substantially
all of the Company's producing oil and gas properties. The Line of Credit
was established to finance the Company's oil and gas exploration activities
and for general corporate purposes. The Line of Credit bears interest at
the bank's base rate and interest only is payable monthly. The Line of
Credit matures on February 15, 1998, at which time the principal amount
then outstanding is due and payable, plus any accrued and unpaid interest.
At June 30, 1997, no amounts were outstanding under the Line of Credit.
The Company intends to meet its fiscal 1998 cash flow requirements,
including amounts, if any, that may be required to be paid by the Company
as a result of the claims asserted against the Company as described in
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<PAGE> 15
"Item 1 - Legal Proceedings", through cash flow provided from operations
and, if needed, additional borrowings under the Credit Facility and Line of
Credit. As described in "Item 1 - Legal Proceedings", the Company is a
defendant in a lawsuit filed against it by Texas Property and Casualty
Insurance Guaranty Association which has resulted in the Company's accrual
of approximately $854,000 for a contingent liability. If the Company
ultimately incurs any amount in settlement of the lawsuit, the Company's
liquidity could be adversely affected to the extent of the amount actually
paid in settlement of the lawsuit or in satisfaction of any judgment
against the Company. However, in either event, the Company believes that
its capital resources are more than adequate to fund any such liability and
that any adverse effects on the Company's liquidity would not be material
and would not result in any material constraints on the Company's future
operations.
Trends and Prices
Although the domestic onshore contract drilling business is currently
experiencing increased demand for drilling services, primarily due to
stronger oil and gas prices and technological advances, the market for
onshore contract drilling services has generally been depressed since 1982,
when oil and gas prices began to weaken. The Company cannot predict either
the future level of demand for its contract drilling services or future
conditions in the contract drilling industry.
The contract drilling industry is experiencing a shortage of qualified
drilling rig personnel. The continued growth and expansion of the Company
will depend upon, among other factors, the successful retention of skilled
and qualified drilling rig personnel. If the Company is unable to attract
and retain additional qualified personnel, its ability to market and
operate more drilling rigs and expand its operations will continue to be
restricted.
In recent years, oil and gas prices have been extremely volatile.
Prices for oil and gas are affected by market supply and demand factors as
well as actions of state and local agencies, the U. S. and foreign
governments and international cartels. The Company has no way of
accurately predicting the supply and demand for oil and gas, domestic or
worldwide political events or the effects of any such factors on the prices
received by the Company for its oil and gas.
PART TWO - OTHER INFORMATION
Item 1. Legal Proceedings
In March 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
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<PAGE> 16
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 approximate amount of $646,000. 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 the receiver for SFIC, 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. However, an accrual was made in
the Company's financial statements for the amount in question. In a
related development, on June 5, 1995, the Company received a letter from
the Texas Property and Casualty Insurance Guaranty Association ("Guaranty
Association") requesting payment in the approximate amount of $729,000 for
claims that the Guaranty Association has paid on behalf of SFIC. The
Guaranty Association does not believe that the policies written by SFIC
involved a transfer of insurance risk as required by the Texas Insurance
Code and is asserting that it is entitled to reimbursement for all monies
paid to claimants under these policies. In November, 1995, the Guaranty
Association filed a lawsuit against the Company in Travis County, Texas,
styled Texas Property and Casualty Insurance Guaranty Association vs.
TMBR/Sharp Drilling, Inc., Cause No. 95-12318. The Guaranty Association is
seeking to recover past workers' compensation claims in the amount of
approximately $803,000, which have been advanced by the Guaranty
Association under the Company's workers compensation insurance program with
SFIC. In May, 1996, and pursuant to an order of the Travis County District
Court, the claims of the receiver for SFIC were assigned to and became part
of the Guaranty Association's claims against the Company. The Company has
rejected a settlement offer made by the Guaranty Association for an amount
less than the amount accrued by the Company and the Company intends to
vigorously defend its position against the Guaranty Association.
The Company provides for its workers' compensation claims based upon
the most recent information available from its insurance carrier concerning
claims and estimated costs. However, in future years the Company may
receive retroactive adjustments, both favorable and unfavorable, related to
estimates of claim costs for previous years, which may be material to the
Company's results of operations. No provision for retroactive adjustments
to claim costs is recorded until the Company receives notification from its
insurance carrier because this amount, if any, cannot be estimated. The
Company is generally responsible for the first $10,000 ($100,000 prior to
November 1993) in claim costs for each workers' compensation injury.
The Company is a defendant in various lawsuits generally incidental to
its business. The Company does not believe that the ultimate resolution of
such litigation will have a significant effect on the Company's financial
position or results of operations.
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<PAGE> 17
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, 1997.
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<PAGE> 18
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 6, 1997 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)
-18-
<PAGE> 18
Exhibit Index
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 2269
<SECURITIES> 87
<RECEIVABLES> 7324
<ALLOWANCES> 1135
<INVENTORY> 59
<CURRENT-ASSETS> 10345
<PP&E> 60813
<DEPRECIATION> 48679
<TOTAL-ASSETS> 22653
<CURRENT-LIABILITIES> 5806
<BONDS> 0
0
0
<COMMON> 576
<OTHER-SE> 16271
<TOTAL-LIABILITY-AND-EQUITY> 22653
<SALES> 0
<TOTAL-REVENUES> 9730
<CGS> 0
<TOTAL-COSTS> 7424
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2435
<INCOME-TAX> 50
<INCOME-CONTINUING> 2385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2385
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
