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, 2002
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
At August 1, 2002, 5,419,486 shares of the issuer's common stock, $.10
par value, were outstanding.
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TMBR/SHARP DRILLING, INC.
FORM 10-Q REPORT
INDEX
Page No.
Part I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets, June 30, 2002 and
March 31, 2002 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations, Three Months
Ended June 30, 2002 and 2001 . . . . . . . . . . . . . 5
Statements of Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of Cash Flows, Three Months
Ended June 30, 2002 and 2001 .. . . . . . . . . . . . 8
Notes to Financial Statements. . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . . 20
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 21
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PART ONE - FINANCIAL INFORMATION (UNAUDITED)
Item 1. FINANCIAL STATEMENTS
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 2002 (Unaudited) and March 31, 2002
(In thousands, except per share data)
June 30,
2002 March 31,
ASSETS (Unaudited) 2002
------ ------------- -----------
Current assets:
Cash and cash equivalents $ 3,455 $ 3,258
Marketable securities 90 97
Trade receivables,
net of allowance for doubtful
accounts of $1,401 on both
June 30 and March 31, 2002 11,579 11,011
Inventories 155 162
Deposits 346 346
Other 1,017 1,018
-------- --------
Total current assets 16,642 15,892
-------- --------
Property and equipment, at cost:
Drilling equipment 63,021 61,370
Oil and gas properties, based on
successful efforts accounting 36,454 34,616
Other property and equipment 3,757 3,531
-------- --------
103,232 99,517
Less accumulated depreciation,
depletion and amortization (74,430) (72,947)
-------- --------
Net property and equipment 28,802 26,570
-------- --------
Other assets 173 173
-------- --------
Total assets $ 45,617 $ 42,635
======== ========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
June 30, 2002 (Unaudited) and March 31, 2002
(In thousands, except per share data)
June 30,
2002 March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 2002
- ------------------------------------ ------------ -----------
Current liabilities:
Trade payables $ 6,257 $ 5,193
Other 2,294 1,610
-------- --------
Total current liabilities 8,551 6,803
-------- --------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued 6,687,825 and 6,667,725
shares at June 30, and
March 31, 2002, respectively 669 667
Additional paid-in capital 71,660 71,492
Accumulated deficit (35,116) (36,187)
Accumulated other comprehensive
income 3 10
Treasury stock-common, 1,268,739
shares at June 30, and
March 31, 2002, at cost (150) (150)
-------- --------
Total stockholders' equity 37,066 35,832
-------- --------
Total liabilities and
stockholders' equity $ 45,617 $ 42,635
======== ========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 2002 and 2001 (Unaudited)
(In thousands, except per share data)
Three months ended
June 30,
-----------------------------
2002 2001
----------- -----------
Revenues:
Contract drilling $ 7,743 $ 13,447
Oil and gas 1,685 1,580
----------- -----------
Total revenues 9,428 15,027
----------- -----------
Operating costs and expenses:
Contract drilling 5,265 6,660
Oil and gas production 474 409
Dry holes and abandonments 28 526
Exploration -- 3
Depreciation, depletion and
amortization 1,721 1,609
General and administrative 930 577
----------- -----------
Total operating costs
and expenses 8,418 9,784
----------- -----------
Operating income 1,010 5,243
----------- -----------
Other income (expense):
Interest, net 11 (21)
Gain on sales of assets 46 198
Other, net 4 3
----------- -----------
Total other income (expense) 61 180
----------- -----------
Net income before income
tax provision 1,071 5,423
Provision for income taxes -- (108)
----------- -----------
Net income $ 1,071 $ 5,315
=========== ===========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended June 30, 2002 and 2001 (Unaudited)
(In thousands, except per share data)
Three months ended
June 30,
-----------------------------
2002 2001
----------- -----------
Net income per common share:
Basic $ .20 $ 1.04
Diluted .19 .97
=========== ===========
Weighted average number of
common shares outstanding:
Basic 5,402,873 5,089,168
Diluted 5,643,875 5,493,000
=========== ===========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended June 30, 2002 (Unaudited) and
Year Ended March 31, 2002 (Audited)
(In thousands)
Accumulated
Common Stock Additional Other Treasury Stock Total
-------------- Paid-In Accumulated Comprehensive -------------- Stockholders'
Shares Amount Capital Deficit Income (Loss) Shares Amount Equity
------ ------ ------- ----------- ------------- ------ ------ ------------
Balance,
March 31, 2002 6,668 $ 667 $ 71,492 $(36,187) $ 10 1,270 $(150) $ 35,832
Exercise of
Stock Options 15 2 92 -- -- -- -- 94
Issuance of Stock 5 -- 76 -- -- -- -- 76
Net Income -- -- -- 1,071 -- -- -- 1,071
Other comprehensive
loss, net of tax
Unrealized loss
on marketable
equity securities -- -- -- -- (7) -- -- (7)
---------
Comprehensive
Income -- -- -- -- -- -- -- 1,064
---------
Balance,
June 30,
2002 6,688 $ 669 $ 71,660 $(35,116) $ 3 1,270 $(150) $ 37,066
===== ====== ======== ========= ==== ====== ====== ========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
STATEMENTS OF CASH FLOWS
For the three months ended June 30, 2002 and 2001 (Unaudited)
(In thousands)
Three months ended June 30,
--------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 1,071 $ 5,315
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation, depletion and
amortization 1,721 1,609
Dry holes and abandonments 28 526
Gain on sales of assets (46) (198)
Changes in assets and liabilities:
Trade receivables (569) (409)
Inventories and other assets 9 (28)
Trade payables 1,064 (1,321)
Accrued interest and other liabilities 684 367
-------- --------
Total adjustments 2,891 546
-------- --------
Net cash provided by
operating activities 3,962 5,861
Cash flows from investing activities:
Additions to property and equipment (3,978) (5,550)
Proceeds from sales of property and
equipment 43 235
-------- --------
Net cash required by
investing activities (3,935) (5,315)
Cash flows from financing activities:
Repayments of Bank Borrowings -- (702)
Proceeds from exercise of stock options 94 155
Issuance of common stock 76 29
-------- --------
Net cash (required) provided
by financing activities 170 (518)
-------- --------
Net increase in cash
and cash equivalents 197 28
Cash and cash equivalents at beginning
of period 3,258 301
-------- --------
Cash and cash equivalents at end of
period $ 3,455 $ 329
======== ========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
NOTES TO FINANCIAL STATEMENTS
The amounts presented in the balance sheet as of March 31, 2002 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, 2002 and March 31, 2002, the results of operations for the three
months ended June 30, 2002 and 2001, and the cash flows for the three month
periods ended June 30, 2002 and 2001.
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, 2002.
(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, 2002
was approximately $90,000. An unrealized loss of approximately $7,000 was
deducted from stockholders equity and was included as a component of other
comprehensive loss.
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-
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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 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 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.
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For the Quarter Ended June 30,
2002 2001
--------------------------- --------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------- ------ ------ ------
Income before extraordinary
item and accounting change $1,071 $5,315
Basic EPS
Income available to common
stockholders 1,071 5,402,873 $ .20 5,315 5,089,168 $1.04
Effect of Dilutive Securities
Stock Options 241,002 403,832
----- --------- ---- ----- --------- ----
Diluted EPS
Income available to common
stockholders + assumed
conversions $1,071 5,643,875 $ .19 $5,315 5,493,000 $ .97
===== ========= ==== ===== ========= ====
Reclassifications
Certain reclassifications have been made to the June 30, 2001 financial
statements to conform to the June 30, 2002 presentation.
(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.
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 (4.75%
at June 30, 2002) and accrued interest is payable monthly. The loan facility
originally matured on August 31, 2002. On February 12, 2002, the maturity
date of the loan facility was extended to August 31, 2003, at which time all
outstanding principal and interest will be due in full. At March 31, 2002
and June 30, 2002, respectively, no amounts were outstanding under the loan
facility.
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(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.
On September 3, 1996, the Company granted 465,000 shares of nonqualified
stock options to key employees under the 1994 Plan. All of the nonqualified
stock options granted on September 3, 1996 are earned and exercisable as of
May 7, 1997. 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 March 9, 2002, all of the shares were earned and exercisable. The
following sets forth certain information concerning these options.
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Number
of Option
Shares Exercise Price
Underlying -------------------
Options Per Share Total
---------- -------------------
Outstanding March 31, 2002 250,400 $4.125-4.5375 $ 1,035,375
Exercised (5,000) 4.125 (20,625)
------- ------------ ---------
Outstanding June 30, 2002 245,400 $4.125-4.5375 $ 1,014,750
======= ============ =========
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. On June 13, 2001, the Company
granted options to purchase 40,000 shares of common stock of four directors
under the 1998 Plan. The nonqualified options were granted at an exercise
price of $17.18 per share which represented the fair market value on the date
of the grant. On October 10, 2001, the Company granted options to purchase
292,000 shares of common stock to key employees under the 1998 Plan. These
incentive options were granted at an exercise price of $11.50 per share which
represented the fair market value on the date of the grant. These options
become exercisable over a two year period ending October 10, 2003. At June
30, 2002, options to purchase 327,000 shares were outstanding under the 1998
Plan.
Directors' Fee Stock Plan
On June 14, 2001, the Company adopted the Directors' Fee Stock Plan (the
"Plan") which authorizes the issuance of up to 25,000 shares of the Company's
common stock. The Plan provides that 300 shares of the Company's common
stock will be issued to each Non-employee Director for each Board of
Directors' meeting attended and 100 shares of common stock to each Non-
employee Director for each committee meeting attended. During the quarter
ended June 30, 2002, 5,100 shares were issued under the Plan and the Company
recognized approximately $78,000 as Directors' compensation expense.
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In connection with a private placement completed in February 1997, the
Company issued 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 expired unexercised on February 17, 2002.
(5) Contingencies
The Company is a defendant in various lawsuits generally incidental
to its business. In addition, in August 2001, the Equal Employment
Opportunity Commission ("EEOC") filed suit in the El Paso Division of the
United States District Court for the Western District of Texas. The suit
involved a claim of hostile work environment made on behalf of four former
employees. In May, 2002, the Court transferred the cause to the
Midland/Odessa Division. The employees on behalf of whom the Equal
Employment Opportunity Commission originally brought suit and one additional
employee have recently been allowed to intervene in the litigation on an
individual basis. It is expected that these employees will file additional
state common law causes of action arising out of the allegations of hostile
work environment. The EEOC is seeking back pay, front pay, pecuniary losses
and punitive damages of an unspecified amount. The intervenors are seeking
unspecified damages. The Company disputes the claims made by the Equal
Employment Opportunity Commission and the anticipated claims by the
intervenors and intends to defend the lawsuits vigorously. The Company does
not believe that the ultimate resolution of such litigation, including the
lawsuits brought by the EEOC and the five intervenors, will have a
significant effect on the Company's financial position or results of
operations.
On May 8, 2002, the Company experienced an uncontrolled flow ("flow") on
the Leiman #1 well in Loving County, Texas. The Company has a 25% working
interest in this well. The uncontrolled flow was encountered while running a
7 liner in the well bore. The flow was ultimately controlled with no injury
to personnel or damage to the Company's rig or related equipment. The
planned total depth of the well was approximately 22,000 feet but the
uncontrolled flow was experienced at a depth of 19,115 feet. The well was
not salvageable and has been plugged and abandoned. Costs associated with
re-gaining control of the well and plugging and abandonment were
approximately $1.5 million. The cost to re-drill the well to a depth of
19,115 feet is estimated to be $5.6 million. The Leiman #1R well was spudded
on July 8, 2002 and is at depth of 8,787 on August 8, 2002. The Company has
submitted claims for reimbursement from its insurance carrier, St. Paul's
Surplus Lines, who has acknowledged coverage under both the control of well
and re-drill/replacement well provisions under the Company's Operators Extra
Expense insurance. The Company's working interest portion of the costs
associated with re-gaining control, plugging and abandonment and re-drilling
this well have been capitalized.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Some statements contained in this Form 10-Q report are "forward-looking
statements". All statements other than statements of historical facts
included in this report, including, without limitation, statements regarding
planned capital expenditures, the availability of capital resources to fund
capital expenditures, estimates of proved reserves, the Company's financial
position, business strategy and other plans and objectives for future
operations, are forward-looking statements. Forward-looking statements can
be identified by the use of forward-looking terminology like "may," "will,"
"expect," "intend,""anticipate," "estimate," "continue," "present value,"
"future" or "reserves" or other variations of comparable terminology. The
Company believes the assumptions and expectations reflected in these forward-
looking statements are reasonable. However, no assurance can be given that
the Company's expectations will prove to be correct or that it will be able
to take any actions that are presently planned. All of these statements
involve assumptions of future events and risks and uncertainties. Risks and
uncertainties associated with forward-looking statements include, but are not
limited to:
fluctuations in prices of oil and gas;
future capital requirements and availability of financing;
risks associated with the drilling of wells;
competition;
general economic conditions;
governmental regulations;
receipt of amounts owed to the Company by purchasers of its
production and counterparties to its hedging contracts; and
hedging activities.
For these and other reasons, actual results may differ materially
from those projected or implied. Undue reliance should not be placed on
forward-looking statements and projections of any future results should not
be based on such statements.
Before investing in the Company's common stock, one should be aware that
there are various risks associated with an investment. Some of these risk
factors are described on page 18 in the Company's Form 10-K dated March 31,
2002.
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Critical Accounting Policies
Contract Drilling Operations
Drilling revenues from footage and daywork contracts are recognized as
work is performed utilizing the percentage-of-completion method. Costs under
footage and daywork contracts are recognized in the period they are incurred.
The Company utilizes the completed contract method to recognize drilling
revenues and expenses relating to turnkey contracts. Expected losses on all
in-process contracts are recognized in the period the loss can reasonably be
determined.
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 25%. 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.
The contract drilling industry is currently experiencing a decrease in
demand and downward pressure on prices for contract drilling services due to
the uncertainty surrounding oil and gas prices. The Company has been and will
continue to 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. The contract drilling
industry remains highly competitive. The Company believes it owns a
sufficient number of drilling rigs to remain competitive within its areas of
operation. In addition, the Company believes it competes favorably with
respect to the depth capabilities of its rigs, the experience level of its
personnel, its reputation and its relationship with existing customers.
However, the Company's operating results will continue to be directly
affected by the level of drilling activity in the Company's service areas.
Oil and Gas Operations
The Company's oil and gas producing activities are accounted for using
the successful efforts method of accounting. Accordingly, the Company
capitalizes all costs incurred to acquire oil and gas properties (proved and
unproved), all development costs, and the costs of successful exploratory
wells. 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 for oil and
gas properties in which it has an ownership interest, the Company's
proportionate share of costs is capitalized as stated above, net of its
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.
For properties with proved or proved developed oil and gas reserves,
depletion, depreciation and amortization of capitalized costs is calculated
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by applying the units-of-production method to the estimated amount of such
reserves.
Recent Accounting Pronouncements
The FASB has issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which establishes requirements for the accounting of removal-
type costs associated with asset retirements. The standard is effective for
fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Company is currently assessing the impact on its financial
statements.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement supercedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed" and eliminates the requirement for SFAS 121 to
allocate goodwill to long-lived assets to be tested for impairment. The
provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The Company adopted this statement on April 1,
2002. The adoption of this statement had no immediate impact on the Company
but will change how the Company assesses impairment of long-lived assets and
may result in discontinued operations presentation for future sales of
certain assets.
Results of Operations
Total revenues were $9,428,000 for the three months ended June 30, 2002
which represents a 37% decrease from the same period in 2001. Operating
expenses as a percent of revenues were 89% for the three months ended June
30, 2002 versus 65% 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 51%
for the three months ended June 30, 2002 compared to 76% in the same period
in 2001.
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Oil and gas revenues increased by approximately 7% for the three months
ended June 30, 2002. The following table sets forth certain information
relating to crude oil and natural gas produced:
Three months ended
June 30,
----------------------
2002 2001
------- -------
Quantities Produced
-------------------
Oil (bbls) 46,388 27,583
Gas (mcf) 261,572 154,698
Average Price
-------------
Oil (bbls) $ 22.82 $ 26.27
Gas (mcf) $ 2.40 $ 5.53
Average Daily Production
------------------------
Oil (bbls) 510 303
Gas (mcf) 2,874 1,700
Oil and gas production expenses increased approximately 16% for the
three months ended June 30, 2002. The increase in production expenses for
the three months ended June 30, 2002 can be attributed to the increase in
quantities of crude oil and natural gas produced. In addition, the Company
has experienced a general rise in the cost of services and supplies which are
included in production expenses.
Depreciation, depletion and amortization expense increased by
approximately 7% compared to the three months ended June 30, 2001. The
company has been purchasing drill pipe and has updated and refurbished
drilling rigs and ancillary equipment. In addition, depletion expense
increased as a result of an increase in the number of oil and gas producing
properties in which the Company has an ownership interest coupled with an
increase in the quantities of crude oil and natural gas produced as oil and
gas properties are depleted using the units-of-production method. The
depreciable base of the Company's assets increased by approximately $4.0
million during the quarter ended June 30, 2002 compared to $ 5.6 million
during the same quarter in the prior year.
General and administrative expenses increased primarily as a result of
an increase in insurance expenses and directors' fees.
Net working capital was $8.1 million at June 30, 2002 compared to $9.1
million at March 31, 2002.
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Income Taxes
At March 31, 2002, the Company had approximately $47.2 million of unused
net operating loss ("NOL") carryforwards for tax purposes. Use of these
carryforwards is dependent upon the Company's ability to generate taxable
earnings in future periods. These carryforwards began to expire in fiscal
2000 and approximately $5.7 million will expire in 2002. The Company's
ability to utilize its NOL carryforwards may be substantially limited in the
future under the Internal Revenue Code of 1986, as amended (the "Code"). If
the Company experiences an ownership change under applicable provisions of
the Code, the carryforward would be limited to an annual amount determined by
specified interest rates and other variables. The Company does not believe
an ownership change has occurred to date.
The effective tax rates differ from the statutory tax rate of 34%
primarily due to the utilization of NOLs. Tax expense is generally limited
to alternative minimum tax.
The Company utilizes an asset and liability approach for financial
accounting and reporting for income taxes. The Company has a deferred tax
asset primarily due to its NOL carryforwards. The Company has provided a
valuation allowance for the entire balance of deferred tax assets as it is
more likely than not that the deferred tax asset will not be realized.
Liquidity and Capital Resources
In June, 2000, the Company entered into a second amended and restated
loan agreement with Wells Fargo Bank Texas, N.A. The loan agreement provides
for a $5.0 million revolving line of credit facility, of which $5.0 million
was available at June 30, 2002. The facility is secured by the Company's
drilling rigs and related equipment, accounts receivable and inventory.
Borrowings under the revolving facility bear interest at annual rate equal to
the bank's base rate, or 4.75% at June 30, 2002. Accrued and unpaid interest
on outstanding principal is payable monthly. The loan facility matures on
August 31, 2003, at which time all outstanding principal and accrued and
unpaid interest will be due in full. At June 30, 2002, no amounts were
outstanding under the loan facility. The principal amount outstanding at any
one time may not exceed the lesser of $5.0 million or one-third of the
borrowing base amount. The borrowing base amount is the sum of the Company's
accounts receivable and the value of its inventory, drilling rigs, drill pipe
and related equipment. The borrowing base amount is redetermined quarterly by
the Company, except that the bank may, in its discretion, make its own
determination of the borrowing base which will be the controlling borrowing
base amount. At June 30, 2002, the borrowing base amount was $38,328,742.
The Company anticipates that funds for its capital expenditures in
fiscal 2003 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.
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Trends and Prices
The contract drilling industry is currently experiencing decreased
demand and decreasing prices for contract drilling services due to the
instability of oil and gas prices. The Company will be affected by 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.
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 March 31, 2002, 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.
Commodity Price Risk - The Company produces and sells crude oil, natural
gas and natural gas liquids. As a result, its operating results are
significantly affected by fluctuations in commodity prices caused by changing
market forces.
Historically, the Company has not entered into hedging arrangements for
its oil and gas production and it does not have any delivery commitments.
The Company may, in the future, attempt to reduce its exposure to the
volatility of oil and gas prices by hedging a portion of its production. In
a typical hedge transaction, the Company would have the right to receive from
the counterparty to the hedge, the excess of the fixed price specified in the
hedge over a floating price based on a market index, multiplied by the
quantity hedge. If the floating price exceeds the fixed price, the Company
would be required to pay the counterparty this difference multiplied by the
quantity hedged. In the case, the Company would be required to pay the
difference regardless of whether it had sufficient production to cover the
quantities specified in the hedge. Significant reductions in production at
times when the floating price exceeds the fixed price could require the
Company to make payments under the hedge agreements even though such payments
are not offset by sales of production. Hedging could also prevent the
hedging party from receiving the full advantage of increases in oil and gas
prices above the fixed amount specified in the hedge.
Interest Rate Risk - At June 30, 2002 the Company had no borrowings
outstanding under its loan agreement. However, when it does have outstanding
borrowings, the Company's exposure to changes in interest rates primarily
results from short term changes in its bank's prime rate.
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PART TWO - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in various lawsuits generally incidental to
its business. In addition, in August 2001, the Equal Employment Opportunity
Commission ("EEOC") filed suit in the El Paso Division of the United States
District Court for the Western District of Texas. The suit involved a claim
of hostile work environment made on behalf of four former employees. In May,
2002, the Court transferred the cause to the Midland/Odessa Division. The
employees on behalf of whom the Equal Employment Opportunity Commission
originally brought suit and one additional employee have recently been
allowed to intervene in the litigation on an individual basis. It is
expected that these employees will file additional state common law causes of
action arising out of the allegations of hostile work environment. The EEOC
is seeking back pay, front pay, pecuniary losses and punitive damages of an
unspecified amount. The intervenors are seeking unspecified damages. The
Company disputes the claims made by the Equal Employment Opportunity
Commission and the anticipated claims by the intervenors and intends to
defend the lawsuits vigorously. The Company does not believe that the
ultimate resolution of such litigation, including the lawsuits brought by the
EEOC and the five intervenors, 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)
Executive Compensation Plans and Arrangements
---------------------------------------------
(Exhibits 10.1 through and including Exhibit 10.20 constitute
executive compensation plans and arrangements of the Registrant)
Exhibit 10.1 - Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 10.3 in Registrant's Registration Statement on
Form 10 as amended, effective October 9, 1984)
Exhibit 10.2 - Nonqualified Stock Option Agreement dated August
29, 1990, between Thomas C. Brown and the Registrant.
(Incorporated by reference to Exhibit 10.15 in Registrant's Annual
Report on form 10-K dated June 25, 1993)
Exhibit 10.3 - Nonqualified Stock Option Agreement dated August
30, 1988, between Joe G. Roper and the Registrant. (Incorporated
by reference to Exhibit 10.17 in Registrant's Annual Report on Form
10-K dated June 25, 1993)
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Exhibit 10.4 - Incentive Stock Option Agreement dated November 16,
1993 between Joe G. Roper and the Registrant. (Incorporated by
reference to Exhibit 10.5 in Registrant's Annual Report on Form 10-
K dated June 27, 1994)
Exhibit 10.5 - Incentive Stock Option Agreement dated December 4,
1992 between Patricia R. Elledge and the Registrant. (Incorporated
by reference to Exhibit 10.20 in Registrant's Annual Report on Form
10-K dated June 25, 1993)
Exhibit 10.6 - Incentive Stock Option Agreement dated December 4,
1992 between Don H. Lawson and the Registrant. (Incorporated by
reference to Exhibit 10.21 in Registrant's Annual Report on Form
10-K dated June 25, 1993)
Exhibit 10.7 - Incentive Stock Option Agreement dated November 16,
1993 between Don H. Lawson and the Registrant. (Incorporated by
reference to Exhibit 10.10 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
Exhibit 10.8 - 1994 Stock Option Plan. (Incorporated by reference
to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated
June 28, 1995)
Exhibit 10.9 - TMBR/Sharp Drilling, Inc. Employee Retirement Plan.
(Incorporated by reference to Exhibit 10.11 in Registrant's Annual
Report on Form 10-K dated June 28, 1995)
Exhibit 10.10 - 1998 Stock Option Plan (Incorporated by reference to
Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated
November 12, 1998)
Exhibit 10.11 - Incentive Stock Option Agreement dated September 1,
1998, between Don H. Lawson and the Registrant. (Incorporated by
reference to Exhibit 10.18 in Registrant's Annual Report on Form
10-K dated June 29, 1999)
Exhibit 10.12 - Incentive Stock Option Agreement dated September 1,
1998, between Jeffrey D. Phillips and the Registrant.
(Incorporated by reference to Exhibit 10.19 in Registrant's Annual
Report on Form 10-K dated June 29, 1999)
Exhibit 10.13 - Incentive Stock Option Agreement dated September 1,
1998, between Patricia R. Elledge and the Registrant.
(Incorporated by reference to Exhibit 10.20 in Registrant's Annual
Report on Form 10-K dated June 29, 1999)
Exhibit 10.14 - Incentive Stock Option Agreement dated September 1,
1998, between Joe G. Roper and the Registrant. (Incorporated by
reference to Exhibit 10.21 in Registrant's Annual Report on Form
10-K dated June 29, 1999)
Exhibit 10.15 - Incentive Stock Option Agreement dated September 1,
1998, between Thomas C. Brown and the Registrant. (Incorporated by
reference to Exhibit 10.22 in Registrant's Annual Report on Form
10-K dated June 29, 1999)
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Exhibit 10.16 - First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Patricia R. Elledge and
the Registrant. (Incorporated by reference to Exhibit 10.23 in
Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.17 - First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Jeffrey D. Phillips and
the Registrant. (Incorporated by reference to Exhibit 10.24 in
Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.18 - First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Joe G. Roper and the
Registrant. (Incorporated by reference to Exhibit 10.25 in
Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.19 - First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Thomas C. Brown and the
Registrant. (Incorporated by reference to Exhibit 10.26 in
Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.20 - Directors' Fee Stock Plan (Incorporated by reference to
Exhibit 10.20 of Registrant's Annual Report on Form 10-K dated June
15, 2001)
Exhibit 10.21 - Form of Stock Purchase Agreement, dated as of February
13, 1997, between the Registrant and the stockholders named therein
(Incorporated by reference to Exhibit 10.1 in the Registrant's
Registration Statement on Form S-3, No. 333-23391)
Exhibit 10.22 - Second Amended and Restated Loan Agreement dated June
26, 2000 between Wells Fargo Bank, Texas N. A. and the Registrant.
(Incorporated by reference to Exhibit 10.1 in Registrant's
Quarterly Report on Form 10-Q dated August 9, 2000)
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(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the first
quarter ended June 30, 2002:
(1) Report dated May 22, 2002, announcing the dismissal
Registrant's Certifying Accountant.
(2) Report dated June 3, 2002, announcing the engagement of
Registrant's new Certifying Accountant.
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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 12, 2002 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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INDEX TO EXHIBITS
Description
-----------
Exhibit 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)
Exhibit 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)
Executive Compensation Plans and Arrangements
---------------------------------------------
(Exhibits 10.1 through and including Exhibit 10.20
constitute executive compensation plans and
arrangements of the Registrant)
Exhibit 10.1 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.3 in Registrant's
Registration Statement on Form 10, as amended,
effective October 9, 1984)
Exhibit 10.2 Nonqualified Stock Option Agreement dated
August 29, 1990, between Thomas C. Brown and the
Registrant. (Incorporated by reference to Exhibit
10.15 in Registrant's Annual Report on Form 10-K
dated June 25, 1993)
Exhibit 10.3 Nonqualified Stock Option Agreement dated
August 30, 1988, between Joe G. Roper and the
Registrant. (Incorporated by reference to Exhibit
10.17 in Registrant's Annual Report on Form 10-K
dated June 25, 1993)
Exhibit 10.4 Incentive Stock Option Agreement dated
November 16, 1993 between Joe G. Roper and the
Registrant. (Incorporated by reference to Exhibit
10.5 in Registrant's Annual Report on Form 10-K
dated June 27, 1994)
Exhibit 10.5 Incentive Stock Option Agreement dated
December 4, 1992 between Patricia R. Elledge and
the Registrant. (Incorporated by reference to
Exhibit 10.20 in Registrant's Annual Report on Form
10-K dated June 25, 1993)
Exhibit 10.6 Incentive Stock Option Agreement dated
December 4, 1992 between Don H. Lawson and the
Registrant. (Incorporated by reference to Exhibit
10.21 in Registrant's Annual Report on Form 10-K
dated June 25, 1993)
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Exhibit 10.7 Incentive Stock Option Agreement dated
November 16, 1993 between Don H. Lawson and the
Registrant. (Incorporated by reference to Exhibit
10.10 in Registrant's Annual Report on Form 10-K
dated June 27, 1994)
Exhibit 10.8 1994 Stock Option Plan. (Incorporated by
reference to Exhibit 10.10 in Registrant's Annual
Report on Form 10-K dated June 28, 1995)
Exhibit 10.9 TMBR/Sharp Drilling, Inc. Employee Retirement
Plan. (Incorporated by reference to Exhibit 10.11
in Registrant's Annual Report on Form 10-K dated
June 28, 1995)
Exhibit 10.10 1998 Stock Option Plan (Incorporated by reference
to Exhibit 10.1 in Registrant's Quarterly Report on
Form 10-Q dated November 12, 1998)
Exhibit 10.11 Incentive Stock Option Agreement dated September 1,
1998, between Don H. Lawson and the Registrant.
(Incorporated by reference to Exhibit 10.18 in
Registrant's Annual Report on Form 10-K dated June
29, 1999)
Exhibit 10.12 Incentive Stock Option Agreement dated September 1,
1998, between Jeffrey D. Phillips and the
Registrant. (Incorporated by reference to Exhibit
10.19 in Registrant's Annual Report on Form 10-K
dated June 29, 1999)
Exhibit 10.13 Incentive Stock Option Agreement dated September 1,
1998, between Patricia R. Elledge and the
Registrant. (Incorporated by reference to Exhibit
10.20 in Registrant's Annual Report on Form 10-K
dated June 29, 1999)
Exhibit 10.14 Incentive Stock Option Agreement dated September 1,
1998, between Joe G. Roper and the Registrant.
(Incorporated by reference to Exhibit 10.21 in
Registrant's Annual Report on Form 10-K dated June
29, 1999)
Exhibit 10.15 Incentive Stock Option Agreement dated September 1,
1998, between Thomas C. Brown and the Registrant.
(Incorporated by reference to Exhibit 10.22 in
Registrant's Annual Report on Form 10-K dated June
29, 1999)
Exhibit 10.16 First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Patricia R.
Elledge and the Registrant. (Incorporated by reference to
Exhibit 10.23 in Registrant's Annual Report on Form 10-K
dated June 29, 1999)
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Exhibit 10.17 First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Jeffrey
D. Phillips and the Registrant. (Incorporated by
reference to Exhibit 10.24 in Registrant's Annual
Report on Form 10-K dated June 29, 1999)
Exhibit 10.18 First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Joe G.
Roper and the Registrant. (Incorporated by
reference to Exhibit 10.25 in Registrant's Annual
Report on Form 10-K dated June 29, 1999)
Exhibit 10.19 First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Thomas
C. Brown and the Registrant. (Incorporated by
reference to Exhibit 10.26 in Registrant's Annual
Report on Form 10-K dated June 29, 1999)
Exhibit 10.20 Directors' Fee Stock Plan (Incorporated by reference to
Exhibit 10.20 in Registrant's Annual Report on Form 10-K
dated June 15, 2001)
Exhibit 10.21 Form of Stock Purchase Agreement, dated as of February
13, 1997, between the Registrant and the stockholders
named therein (Incorporated by reference to Exhibit 10.1
in the Registrant's Registration Statement on Form S-3,
No. 333-23391)
Exhibit 10.22 Second Amended and Restated Loan Agreement dated June 26,
2000 between Wells Fargo Bank, Texas N. A. and the
Registrant. (Incorporated by reference to Exhibit 10.1
in Registrant's Quarterly Report on Form 10-Q dated
August 9,2000)
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