<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, 2000
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 (including 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, 2000
(Title of Class) 4,958,386
<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, 2000 and
March 31, 2000 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations, Three Months
Ended June 30, 2000 and 1999 . . . . . . . . . . . . . 5
Statements of Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of Cash Flows, Three Months
Ended June 30, 2000 and 1999 . . . . . . . . . . . . . 8
Notes to Financial Statements. . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . . 15
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 15
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<PAGE> 3
PART ONE - FINANCIAL INFORMATION (UNAUDITED)
Item 1. FINANCIAL STATEMENTS
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 2000 (Unaudited) and March 31, 2000
(In thousands, except per share data)
June 30,
2000 March 31,
ASSETS (Unaudited) 2000
------ ------------- -----------
Current assets:
Cash and cash equivalents $ 259 $ 980
Marketable securities 49 49
Trade receivables,
net of allowance for doubtful
accounts of $1,486 on both
June 30, and March 31, 2000 7,847 6,398
Inventories 104 111
Deposits 73 73
Other 565 796
-------- --------
Total current assets 8,897 8,407
-------- --------
Property and equipment, at cost:
Drilling equipment 52,184 51,858
Oil and gas properties, based on
successful efforts accounting 20,823 21,155
Other property and equipment 3,787 3,768
-------- --------
76,794 76,781
Less accumulated depreciation,
depletion and amortization (61,216) (61,736)
-------- --------
Net property and equipment 15,578 15,045
-------- --------
Other assets 173 173
-------- --------
Total assets $ 24,648 $ 23,625
======== ========
See accompanying notes to financial statements.
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<PAGE> 4
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 2000 (Unaudited) and March 31, 2000
(In thousands, except per share data)
June 30,
2000 March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 2000
------------------------------------ ------------ -----------
Current liabilities:
Trade payables $ 2,503 $ 4,240
Other 1,627 1,339
-------- --------
Total current liabilities 4,130 5,579
Long Term liabilities:
Borrowings from bank 3,650 2,250
-------- --------
Total liabilities 7,780 7,829
-------- --------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued 6,227,125 shares at
June 30, and March 31, 2000,
respectively 623 623
Additional paid-in capital 69,672 69,672
Accumulated deficit (53,239) (54,311)
Accumulated other comprehensive
income (loss) (38) (38)
Treasury stock-common, 1,268,739
shares at June 30, and
March 31, 2000, at cost (150) (150)
-------- --------
Total stockholders' equity 16,868 15,796
-------- --------
Total liabilities and
stockholders' equity $ 24,648 $ 23,625
======== ========
See accompanying notes to financial statements.
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<PAGE> 5
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 2000 and 1999 (Unaudited)
(In thousands, except per share data)
Three months ended
June 30,
-----------------------------
2000 1999
----------- -----------
Revenues:
Contract drilling $ 7,247 $ 1,723
Oil and gas 1,015 481
----------- -----------
Total revenues 8,262 2,204
----------- -----------
Operating costs and expenses:
Contract drilling 4,844 1,712
Oil and gas production 276 245
Dry holes and abandonments 485 81
Depreciation, depletion and
amortization 1,106 554
General and administrative 425 402
----------- -----------
Total operating costs
and expenses 7,136 2,994
----------- -----------
Operating income (loss) 1,126 (790)
----------- -----------
Other income (expense):
Interest, net (60) 17
Gain on sales of assets 27 --
Other, net 1 17
----------- -----------
Total other income (32) 34
----------- -----------
Net income (loss) before income
tax provision 1,094 (756)
Provision for
income taxes (22) --
----------- -----------
Net income (loss) $ 1,072 $ (756)
=========== ===========
See accompanying notes to financial statements.
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<PAGE> 6
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 2000 and 1999 (Unaudited)
(In thousands, except per share data)
Three months ended
June 30,
-----------------------------
2000 1999
----------- -----------
Net income (loss) per common share:
Basic $ .22 $ (.16)
Diluted .20 (.16)
=========== ===========
Weighted average number of
common shares outstanding:
Basic 4,958,386 4,710,886
Diluted 5,405,341 4,710,886
=========== ===========
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, 2000 (Unaudited) and
Year Ended March 31, 2000 (Audited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury Stock Total
-------------- Paid-In Accumulated Comprehensive -------------- Stockholders'
Shares Amount Capital Deficit Income (Loss) Shares Amount Equity
------ ------ ------- ----------- ------------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31, 2000 6,227 $ 623 $ 69,672 $(54,311) $(38) 1,270 $(150) $15,796
Net income -- -- -- 1,072 -- -- -- 1,072
----- ----- -------- -------- ---- ------- ----- ------
Balance,
June 30, 2000 6,227 $ 623 $ 69,672 $(53,239) $(38) 1,270 $(150) $16,868
===== ===== ======== ======== ==== ======= ===== ======
</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, 2000 and 1999 (Unaudited)
(In thousands)
Three months ended June 30,
------------------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 1,072 $ (756)
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation, depletion and
amortization 1,106 554
Dry holes and abandonments 485 81
Gain on sales of assets (27) --
Changes in assets and liabilities:
Trade receivables (1,449) 344
Deposits -- --
Inventories and other assets 238 96
Trade payables (1,737) 438
Accrued interest and other liabilities 288 (327)
-------- --------
Total adjustments (1,096) 1,186
-------- --------
Net cash provided by
operating activities (24) 430
Cash flows from investing activities:
Additions to property and equipment (2,144) (657)
Proceeds from sales of property and
equipment 47 --
-------- --------
Net cash required by
investing activities (2,097) (657)
Cash flows from financing activities:
Borrowings from bank 1,400 --
------- --------
Net cash provided by
financing activities 1,400 --
-------- --------
Net (decrease) increase in
cash and cash equivalents (721) (227)
Cash and cash equivalents at beginning
of period 980 1,195
-------- --------
Cash and cash equivalents at end of
period $ 259 $ 968
======== ========
See accompanying notes to financial statements.
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<PAGE> 9
TMBR/SHARP DRILLING, INC.
NOTES TO FINANCIAL STATEMENTS
The amounts presented in the balance sheet as of March 31, 2000 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, 2000 and March 31, 2000, the results of operations for the three
months ended June 30, 2000 and 1999, and the cash flows for the three month
periods ended June 30, 2000 and 1999.
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, 2000.
(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, 2000
was approximately $49,000. An unrealized loss of approximately $38,000 was
deducted from stockholders equity and was included as a component of other
comprehensive income.
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.
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<PAGE> 10
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 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
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
In May, 1998, the Company entered into a loan agreement with its bank
lender which provided for a $5.0 million revolving line of credit secured by
substantially all of the Company's drilling rigs and related equipment,
accounts receivable and inventory. Borrowings under the line of credit bore
interest at the bank's base rate and accrued interest was payable monthly.
The loan facility originally matured on May 26, 2000 but was extended to July
15, 2000.
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<PAGE> 11
On June 26, 2000, the Company renewed and extended the prior loan
agreements with its bank lender. The second 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 Wells
Fargo Bank Texas, N. A. (formerly Norwest Bank, Texas N.A.) base rate (9.5%
at June 30, 2000) and accrued interest is payable monthly. The loan facility
will mature on August 31, 2002, at which time all outstanding principal and
interest will be due in full. At March 31, 2000 and June 30, 2000,
respectively, $2,250,000 and $3,650,000 were outstanding under the loan
facility
(4) Stockholders' Equity
1984 Stock Option Plan
In August 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 outstanding and exercisable under the
Plan. 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 (including officers and directors who are
also key employees) 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. In September 1998, options outstanding
under the plan were amended to reduce the option price to $4.125 per share.
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<PAGE> 12
On September 3, 1996, the Company granted 465,000 shares of nonqualified
stock options to key employees under the 1994 Plan. At June 30, 2000,
options to purchase 325,500 shares of common stock remain outstanding, all of
which are earned and exercisable. On September 1, 1998, the Company granted
240,000 shares of incentive stock options at a price of $4.125 to key
employees under the 1994 Plan. On June 30, 2000, options to purchase 183,000
shares were earned and exercisable. The remaining 56,000 shares will become
exercisable over a two year period.
1998 Stock Option Plan
In September 1998, the Company adopted, subject to stockholder approval,
its 1998 Stock Option Plan (the "1998 Plan") which authorizes 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 1998 Plan provides that options may be granted to key employees
or directors at a price not less than the fair market value of the shares on
the date of grant. The Company granted options to purchase 50,000 shares of
common stock to two outside directors under the 1998 Plan. These
nonqualified options were granted on September 1, 1998, subject to
stockholder approval, at $4.125 per share and became exercisable on August
31, 1999, the date on which the stockholders of the Company approved and
adopted the 1998 Plan. The fair market value of the Company's common stock
on August 31, 1999 was $6.063 per share. As a result, the Company recognized
approximately $97,000 in compensation expense related to these nonqualified
options during the year ended March 31, 2000. At June 30, 2000, options to
purchase 25,000 shares were outstanding under the 1998 Plan.
In connection with a private placement completed in February 1997, the
Company issued and currently has outstanding a warrant to purchase 36,250
common shares with an exercise price of $13.20 per share. This warrant
became exercisable on February 17, 1998 and expires on February 17, 2002.
(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.
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<PAGE> 13
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, 2000. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct, and actual
results could differ materially from those forward-looking statements.
Results of Operations
Total revenues were $8,262,000 for the three months ended June 30, 2000
which represents a 275% increase from the same period in 1999. Operating
expenses as a percent of revenues were 86% for the three months ended June
30, 2000 versus 136% 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 a increase in rig utilization
rates. The Company has also experienced an increase in the average price
received for its contract drilling services. Rig utilization rates were 62%
for the three months ended June 30, 2000 compared to 16% in the same period
in 1999
Oil and gas revenues increased by approximately 111% for the three
months ended June 30, 2000. This increase can be primarily attributed to an
approximate 84% and 81% increase in the average prices received for crude oil
and natural gas, respectively. The quantity of crude oil produced increased
by approximately 23% while natural gas production remained relatively flat.
Oil and gas production expenses increased approximately 13%.
Depreciation, depletion and amortization expense increased by
approximately 100% when compared to the three months ended June 30, 1999.
The increase in rig utilization rates caused an increase in depreciation
expense as drilling equipment is depreciated using the units-of production
method based on the monthly utilization of the equipment. In addition, the
Company added a Gardner Denver 800 rig to its available fleet and purchased
drill pipe and drill collars during the year ended March 31, 2000. The
increase in depreciation, depletion and amortization expense for the quarter
ended June 30, 2000 reflects the added equipment.
Net working capital was $4.8 million at June 30, 2000 compared to $2.8
million at March 31, 2000.
Liquidity and Capital Resources
In May, 1998, the Company entered into a loan agreement with its bank
lender which provided for a $5.0 million revolving line of credit secured by
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<PAGE> 14
substantially all of the Company's drilling rigs and related equipment,
accounts receivable and inventory. Borrowings under the line of credit bore
interest at the bank's base rate and accrued interest was payable monthly.
The loan facility originally matured on May 26, 2000 but was extended to July
15, 2000.
On June 26, 2000, the Company renewed and extended the prior loan
agreements with its bank lender. The second 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 Wells
Fargo Bank Texas, N. A. (formerly Norwest Bank, Texas N.A.) base rate (9.5%
at June 30, 2000) and accrued interest is payable monthly. The loan facility
will mature on August 31, 2002, at which time all outstanding principal and
interest will be due in full. At March 31, 2000 and June 30, 2000,
respectively, $2,250,000 and $3,650,000 were outstanding under the loan
facility
The Company anticipates that funds for its capital expenditures in
fiscal 2001 will be available from a combination of sources, including (i)
borrowings under the line of credit, (ii) funds raised through issuances of
equity or debt securities in public or private transactions, and (iii)
internally generated funds.
Trends and Prices
The contract drilling industry is currently experiencing increased
demand and increasing prices for contract drilling services due to the rise
of oil and gas prices. The Company will be affected by oil and gas price
fluctuations in the industry, 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 Year 2000 (Y2K) issue created a risk that computer systems, products
and equipment utilizing date-sensitive software or computer chips with two-
digit date fields would fail to properly recognize the Year 2000. Such
failures by the Company's software and hardware or that of government
entities, service providers, suppliers and customers could have resulted in
interruptions of the Company's business which could have had a material
adverse impact on the Company. Significant uncertainty existed concerning
the potential effects associated with such compliance as systems that
improperly recognized such information would generate erroneous data or cause
a system to fail.
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<PAGE> 15
The Company is not currently aware of any Year 2000 compliance problems
relating to its own operations or that of its significant vendors, customers,
purchasers and local, state, federal and other U. S. government entities, but
intends to monitor and assess Year 2000 issues.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary sources of market risk for the Company include fluctuations
in commodity prices and interest rate fluctuations. At June 30, 2000, the
Company had not entered into any hedge arrangements, commodity swap
agreements, commodity futures, options or other similar agreements relating
to crude oil and natural gas.
At June 30, 2000, the Company had $3,650,000 borrowed under its $5.0
million revolving line of credit which bears interest at the lender's base
rate in effect from time to time. As borrowings under this line of credit
bear interest at a variable rate, the Company is subject to interest rate
risk.
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.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
3.1 - Articles of Incorporation of the Company, as amended.
(Incorporated by reference to exhibit 3.1 in Registrant's
Annual Report on Form 10-K dated June 28, 1991)
3.2 - Bylaws of the Registrant, as amended. (Incorporated by
reference to Exhibit 3.2 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
10.1 - Second Amended and Restated Loan Agreement dated June 26,
2000 between Wells Fargo Bank Texas, N.A. and the
Registrant.
27 - Financial Data Schedule
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<PAGE> 16
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 2000.
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<PAGE> 17
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 9, 2000 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)
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<PAGE> 18
Exhibit Index
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 in Registrant's
Annual Report on Form 10-K dated June 28, 1991)
3.2 Bylaws of the Registrant, as amended. (Incorporated by
reference to Exhibit 3.2 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
10.1* Second Amended and Restated Loan Agreement dated June 26,2000
between Wells Fargo Bank Texas, N.A. and the Registrant.
27* Financial Data Schedule
--------------------------
*Filed herewith.
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