<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, 1998
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 7, 1998
(Title of Class) 4,710,886
<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, 1998 and
March 31, 1998 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations, Three Months
Ended June 30, 1998 and 1997 . . . . . . . . . . . . . 5
Statements of Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of Cash Flows, Three Months
Ended June 30, 1998 and 1997 . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . 14
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, 1998 (Unaudited) and March 31, 1998
(In thousands, except share data)
June 30,
1998 March 31,
ASSETS (Unaudited) 1998
------ ------------- -----------
Current assets:
Cash and cash equivalents $ 3,591 $ 1,623
Marketable securities 87 87
Trade receivables,
net of allowance for doubtful
accounts of $1,135 at both
June 30, and March 31, 1998 7,665 8,149
Inventories 104 82
Deposits 104 73
Other 582 664
-------- --------
Total current assets 12,133 10,678
-------- --------
Property and equipment, at cost:
Drilling equipment 48,772 48,691
Oil and gas properties, based on
successful efforts accounting 16,155 15,452
Other property and equipment 3,786 3,786
-------- --------
68,713 67,929
Less accumulated depreciation,
depletion and amortization (54,847) (54,132)
-------- --------
Net property and equipment 13,866 13,797
-------- --------
Other assets 173 173
-------- --------
Total assets $ 26,172 $ 24,648
======== ========
See accompanying notes to financial statements.
-3-
<PAGE> 4
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 1998 (Unaudited) and March 31, 1998
(In thousands, except share data)
June 30,
1998 March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1998
------------------------------------ ------------ -----------
Current liabilities:
Trade payables $ 4,224 $ 2,622
Accrued workers' compensation 370 411
Other 944 1,655
-------- --------
Total current liabilities 5,538 4,688
-------- --------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued, 5,979,625 shares at
June 30, and March 31, 1998 598 598
Additional paid-in capital 69,429 69,429
Accumulated deficit (49,243) (49,917)
Treasury stock-common, 1,268,739
shares at June 30, and
March 31, 1998, at cost (150) (150)
-------- --------
Total stockholders' equity 20,634 19,960
-------- --------
Total liabilities and
stockholders' equity $ 26,172 $ 24,648
======== ========
See accompanying notes to financial statements.
-4-
<PAGE> 5
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share data)
Three months ended
June 30,
-----------------------------
1998 1997
----------- -----------
Revenues:
Contract drilling $ 6,270 $ 9,201
Oil and gas 499 529
----------- -----------
Total revenues 6,769 9,730
----------- -----------
Operating costs and expenses:
Contract drilling 4,587 5,954
Oil and gas production 175 199
Dry holes and abandonments 196 10
Depreciation, depletion and
amortization 720 828
General and administrative 449 433
----------- -----------
Total operating costs
and expenses 6,127 7,424
----------- -----------
Operating income 642 2,306
----------- -----------
Other income:
Interest 42 31
Gain on sales of assets 4 84
Other, net -- 14
----------- -----------
Total other income, net 46 129
----------- -----------
Net income before income
tax provision 688 2,435
Provision for income taxes (14) (50)
----------- -----------
Net income $ 674 $ 2,385
=========== ===========
See accompanying notes to financial statements.
-5-
<PAGE> 6
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share data)
Three months ended
June 30,
-----------------------------
1998 1997
----------- -----------
Net income per common share:
Basic $ .14 $ .53
Diluted .13 .47
=========== ===========
Weighted average number of
common shares outstanding:
Basic 4,710,886 4,467,204
Diluted 5,083,957 5,032,724
=========== ===========
See accompanying notes to financial statements.
-6-
<PAGE> 7
TMBR/SHARP DRILLING, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended June 30, 1998 (Unaudited) and
Year Ended March 31, 1998
(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, 1998 5,980 $ 598 $ 69,429 $(49,917) 1,270 $(150) $19,960
Net income -- -- -- 674 -- -- 674
----- ----- -------- -------- ------- ----- -------
Balance,
June 30,
1998 5,980 $ 598 $ 69,429 $(49,243) 1,270 $(150) $20,634
===== ===== ======== ======== ======= ===== =======
</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, 1998 and 1997 (Unaudited)
(In thousands)
Three months ended June 30,
------------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 674 $ 2,385
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation, depletion and
amortization 720 828
Dry holes and abandonments 196 10
Gain on sales of assets (4) (84)
Changes in assets and liabilities:
Trade receivables 484 (1,106)
Deposits (31) --
Inventories and other assets 60 29
Trade payables 1,602 749
Accrued interest and other liabilities (752) (332)
-------- --------
Total adjustments 2,275 94
-------- --------
Net cash provided by
operating activities 2,949 2,479
Cash flows from investing activities:
Additions to property and equipment (1,033) (1,519)
Proceeds from sales of property and
equipment 52 171
-------- --------
Net cash required by
investing activities (981) (1,348)
Cash flows from financing activities:
Issuance of common stock -- 90
-------- --------
Net cash provided by
financing activities -- 90
-------- --------
Net increase in
cash and cash equivalents 1,968 1,221
Cash and cash equivalents at beginning
of period 1,623 1,048
-------- --------
Cash and cash equivalents at end of
period $ 3,591 $ 2,269
======== ========
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, 1998 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, 1998 and March 31, 1998, the results of operations for the three
months ended June 30, 1998 and 1997, and the cash flows for the three
months ended June 30, 1998 and 1997.
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, 1998.
(2) Summary of Significant Accounting Policies
Marketable Securities
Under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", 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,
1998 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
lives range from four to eight years. Other property and equipment is
depreciated using the straight-line method of depreciation with estimated
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<PAGE> 10
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 Per Common Share
On April 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share" which
superseded 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 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 is included in basic EPS. Previously reported fully
diluted EPS is called diluted EPS which includes all potentially dilutive
securities.
(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 provided 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 bore interest at the Norwest Bank Minnesota, National Association
base rate and the interest was payable monthly. The loan agreement had an
extended maturity date of April 15, 1998, at which time, the outstanding
principal and all of the accrued and unpaid interest were due and payable.
-10-
<PAGE> 11
In August, 1996, the Company entered into a second loan agreement with
Norwest. The second loan agreement provided for a $2,000,000 revolving
line of credit secured by substantially all of the Company's producing oil
and gas properties. Borrowings under the line of credit bore interest at
the Norwest base rate and the interest was payable monthly. The line of
credit had an extended maturity date of April 15, 1998, at which time, the
principal amount outstanding was due and payable, plus any accrued and
unpaid interest. The borrowings under both loan agreements were paid in
full in February, 1997.
On May 26, 1998, the Company renewed and extended the prior loan
agreements with Norwest Bank Texas, N. A.. The amended and restated loan
agreement provides for a $5,000,000 revolving line of credit secured by the
Company's drilling rigs and related equipment, accounts receivable and
inventory. Borrowings under the renewed and extended line of credit bear
interest at the Norwest Bank base rate and the interest is payable monthly.
The renewed and extended loan agreement matures on May 26, 2000.
(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
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 100,000 shares of common stock are currently outstanding under the
Plan. All of these options are earned and exercisable at June 30, 1998.
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. Options
to purchase 337,500 shares of common stock are exercisable and outstanding
-11-
<PAGE> 12
under the Plan at June 30, 1998.
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.
(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
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, 1998. Actual results could differ materially
from those forward-looking statements.
Results of Operations
Total revenues were $6,769,000 for the three months ended June 30,
1998 which represents a 30% decrease over the same period in 1997.
Operating expenses as percent of revenues were 91% for the three months
ended June 30, 1998 versus 76% for the same period of the prior year. The
operating results were negatively affected by a decrease in demand for the
Company's contract drilling services which resulted in a decrease in rig
utilization rates. The Company has also experienced a decrease in the
average price received for its contract drilling services. Rig utilization
rates were 48% for the three months ended June 30, 1998 compared to 81% in
the same period in 1997.
Oil and gas revenues decreased by approximately 6% due to a decrease
in the price received for crude oil. In fiscal 1998, the Company sold a
group of fourteen wells in Ector County, Texas. These wells had high
lifting costs on an equivalent barrel of oil ("EBO") basis. As a result of
this sale, oil and gas production expenses for the quarter ended June 30,
-12-
<PAGE> 13
1998 decreased by approximately 12% when compared to the same quarter in
the prior year.
In fiscal 1998, the Company recognized a non-cash charge of
approximately $3.1 million due to a writedown of the carrying value of its
oil and gas properties. As a result of this writedown, depreciation,
depletion and amortization expense decreased by approximately 13% when
compared to the same quarter of the prior year.
Net working capital was $6.6 million at June 30, 1998 compared to $6.0
million at March 31, 1998. The increase in working capital can be
attributed to an increase in cash and cash equivalents.
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") originally maturing on January 15, 1998. The aggregate
principal amount of the Company's borrowings outstanding at any one time
under the revolving facility was limited to the lesser of $3.0 million or
one-third of the borrowing base amount then in effect. The borrowing base
amount was 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 was payable monthly. The entire
principal amount was due and payable on January 15, 1998, which was
extended to April 15, 1998. The Credit Facility bore interest at the
bank's base rate and was secured by substantially all of the Company's
accounts receivable, drilling rigs and related equipment.
In August 1996, the Company entered into a second loan agreement with
its bank lender. This agreement provided 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 bore interest at the
bank's base rate, with interest only to be paid monthly. The original
maturity date of February 15, 1998, was extended to April 15, 1998. At
that time, the principal amount then outstanding was due and payable, plus
any accrued and unpaid interest.
On May 26, 1998, the Company renewed, extended and consolidated the
prior loan facilities with its bank lender. The amended and restated loan
agreement provides for a $5.0 million revolving line of credit secured by
the Company's drilling rigs and related equipment, accounts receivable and
inventory. Borrowings under this line of credit bear interest at the
Norwest Bank base rate and accrued interest is payable monthly. The loan
facility matures on May 26, 2000. At June 30, 1998, no amounts were
outstanding under the loan facility.
The Company anticipates that funds for its capital expenditures in
fiscal 1999 will be available from a combination of sources, including (i)
borrowings under the line of credit, (ii) funds raised through issuances of
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<PAGE> 14
equity or debt securities in public or private transactions, and (iii)
internally generated funds.
Trends and Prices
Although the Company achieved record growth, profitability and rig
utilization in fiscal 1998, the contract drilling industry is currently
experiencing decreased demand and declining prices for contract drilling
services due to the weakening of oil and gas prices. The Company will
certainly be affected by oil and gas industry conditions but cannot predict
either the future level of demand for its contract drilling services or
future conditions in the contract drilling industry.
In recent years, oil and gas prices have been extremely volatile.
Prices are affected by market supply and demand factors as well as by
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 of and demand for oil and gas, domestic or international political
events or the effects of any such factors on the prices received by the
Company for its oil and gas.
Year 2000 Issues
The Company has reviewed the effect of the year 2000 issues relating
to its information systems. The Company has determined that the year 2000
issues directly related to its information systems will not have a material
impact on its business, operations nor its financial position. However,
the Company cannot determine what effect, if any, the year 2000 issues
affecting its vendors, customers and the numerous local, state, federal and
other U. S. government entities with which it conducts business or which it
is regulated or governed or taxed will have on its business or financial
position.
PART TWO - OTHER INFORMATION
Item 1. Legal Proceedings
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.
-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, 1998.
-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, 1998 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-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 3591
<SECURITIES> 87
<RECEIVABLES> 7665
<ALLOWANCES> 1135
<INVENTORY> 104
<CURRENT-ASSETS> 12133
<PP&E> 68713
<DEPRECIATION> 54847
<TOTAL-ASSETS> 26172
<CURRENT-LIABILITIES> 5538
<BONDS> 0
0
0
<COMMON> 598
<OTHER-SE> 20036
<TOTAL-LIABILITY-AND-EQUITY> 26172
<SALES> 0
<TOTAL-REVENUES> 6769
<CGS> 0
<TOTAL-COSTS> 6127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 688
<INCOME-TAX> 14
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 674
<EPS-PRIMARY> .14
<EPS-DILUTED> .13
</TABLE>
