10-Q 1 dec01edg.txt 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 December 31, 2001 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 February 6, 2001 (Title of Class) 5,385,186 2 TMBR/SHARP DRILLING, INC. FORM 10-Q REPORT INDEX Page No. Part I. Financial Information (Unaudited) Item 1. Financial Statements Balance Sheets, December 31, 2001 and March 31, 2001 . . . . . . . . . . . . . . . . . . . . 3 Statements of Operations, Three Months Ended December 31, 2001 and 2000 . . . . . . . . . . . 5 Statements of Operations, Nine Months Ended December 31, 2001 and 2000 . . . . . . . . . . . 7 Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . 9 Statements of Cash Flows, Nine Months Ended December 31, 2001 and 2000 . . . . . . . . . . . 10 Notes to Financial Statements. . . . . . . . . . . . . . 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . 19 Part II. Other Information Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 20 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 20 -2- 3 PART ONE - FINANCIAL INFORMATION (UNAUDITED) Item 1. FINANCIAL STATEMENTS TMBR/SHARP DRILLING, INC. BALANCE SHEETS December 31, 2001 (Unaudited) and March 31, 2001 (In thousands, except per share data) December 31, 2001 March 31, ASSETS (Unaudited) 2001 ------ ------------- ----------- Current assets: Cash and cash equivalents $ 4,917 $ 301 Marketable securities 86 91 Trade receivables, net of allowance for doubtful accounts of $1,401 at December 31, and $1,227 at March 31, 2001 11,561 13,625 Inventories 193 148 Deposits 73 73 Other 986 871 -------- -------- Total current assets 17,816 15,109 -------- -------- Property and equipment, at cost: Drilling equipment 60,384 55,599 Oil and gas properties, based on successful efforts accounting 33,061 26,372 Other property and equipment 3,504 2,844 -------- -------- 96,949 84,815 Less accumulated depreciation, depletion and amortization (67,610) (64,696) -------- -------- Net property and equipment 29,339 20,119 -------- -------- Other assets 173 173 -------- -------- Total assets $ 47,328 $ 35,401 ======== ======== See accompanying notes to financial statements. -3- 4 TMBR/SHARP DRILLING, INC. BALANCE SHEETS December 31, 2001 (Unaudited) and March 31, 2001 (In thousands, except per share data) December 31, 2001 March 31, LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 2001 ------------------------------------ ------------ ----------- Current liabilities: Trade payables $ 5,967 $ 7,414 Other 2,302 2,301 -------- -------- Total current liabilities 8,269 9,715 -------- -------- Long Term liabilities: Borrowings from bank -- 1,080 -------- -------- Total liabilities 8,269 10,795 -------- -------- Contingencies Stockholders' equity: Common stock, $0.10 par value Authorized, 50,000,000 shares; issued 6,639,825 and 6,332,225 shares at December 31, and March 31, 2001, respectively 664 633 Additional paid-in capital 71,354 70,122 Accumulated deficit (32,808) (46,003) Accumulated other comprehensive income (loss) (1) 4 Treasury stock-common, 1,268,739 shares at December 31, and March 31, 2001, at cost (150) (150) -------- -------- Total stockholders' equity 39,059 24,606 -------- -------- Total liabilities and stockholders' equity $ 47,328 $ 35,401 ======== ======== See accompanying notes to financial statements. -4- 5 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Three months ended December 31, 2001 and 2000 (Unaudited) (In thousands, except per share data) Three months ended December 31, ----------------------------- 2001 2000 ----------- ----------- Revenues: Contract drilling $ 10,829 $ 8,914 Oil and gas 1,281 1,340 ----------- ----------- Total revenues 12,110 10,254 ----------- ----------- Operating costs and expenses: Contract drilling 6,368 5,737 Oil and gas production 511 363 Dry holes and abandonments 447 59 Exploration 56 25 Depreciation, depletion and amortization 1,685 1,322 Writedown of oil and gas properties 100 - General and administrative 850 606 ----------- ----------- Total operating costs and expenses 10,017 8,112 ----------- ----------- Operating income 2,093 2,142 ----------- ----------- Other income (expense): Interest, net 10 (52) Gain on sales of assets 7 Other, net 576 32 ----------- ----------- Total other income (expense) 593 (20) ----------- ----------- Net income before income tax provision 2,686 2,122 Provision for income taxes (62) (44) ----------- ----------- Net income $ 2,624 $ 2,078 =========== =========== See accompanying notes to financial statements. -5- 6 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Three months ended December 31, 2001 and 2000 (Unaudited) (In thousands, except per share data) Three months ended December 31, ----------------------------- 2001 2000 ----------- ----------- Net income per common share: Basic $ .50 $ .42 Diluted .48 .38 ========== ========== Weighted average number of common shares outstanding: Basic 5,299,803 4,993,310 Diluted 5,517,645 5,456,418 =========== =========== See accompanying notes to financial statements. -6- 7 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Nine months ended December 31, 2001 and 2000 (Unaudited) (In thousands, except per share data) Nine months ended December 31, ----------------------------- 2001 2000 ----------- ----------- Revenues: Contract drilling $ 38,254 $ 24,404 Oil and gas 4,442 3,622 ----------- ----------- Total revenues 42,696 28,026 ----------- ----------- Operating costs and expenses: Contract drilling 20,808 15,926 Oil and gas production 1,391 978 Dry holes and abandonments 968 808 Exploration 59 171 Depreciation, depletion and amortization 4,971 3,759 Writedown of oil and gas properties 100 -- General and administrative 2,120 1,485 ----------- ----------- Total operating costs and expenses 30,417 23,127 ----------- ----------- Operating income 12,279 4,899 ----------- ----------- Other income (expense): Interest, net (1) (183) Gain on sales of assets 531 142 Other, net 662 32 ----------- ----------- Total other income (expense) 1,192 (9) ----------- ----------- Net income before income tax provision 13,471 4,890 Provision for income taxes (276) (99) ----------- ----------- Net income $ 13,195 $ 4,791 =========== =========== See accompanying notes to financial statements. -7- 8 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Nine months ended December 31, 2001 and 2000 (Unaudited) (In thousands, except per share data) Nine months ended December 31, ----------------------------- 2001 2000 ----------- ----------- Net income per common share: Basic $ 2.56 $ .96 Diluted 2.44 .88 =========== =========== Weighted average number of common shares outstanding: Basic 5,164,677 4,970,928 Diluted 5,413,121 5,423,578 =========== =========== See accompanying notes to financial statements. -8- 9 TMBR/SHARP DRILLING, INC. STATEMENTS OF STOCKHOLDERS EQUITY Nine Months Ended December 31, 2001 (Unaudited) and Year Ended March 31, 2001 (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, 2001 6,332 $ 633 $ 70,122 $(46,003) $ 4 1,270 $(150) $ 24,606 Exercise of Stock Options 304 30 1,169 -- -- -- -- 1,199 Issuance of Stock 4 1 63 -- -- -- -- 64 Net Income -- -- -- 13,195 -- -- -- 13,195 Other comprehensive loss, net of tax Unrealized loss on marketable equity securities -- -- -- -- (5) -- -- (5) ------- Comprehensive Income -- -- -- -- -- -- -- 13,190 ----- ----- -------- -------- ---- ------- ----- ------- Balance, December 31, 2001 6,640 $ 664 $ 71,354 $(32,808) $ (1) 1,270 $(150) $ 39,059 ===== ===== ======== ======== ==== ======= ===== =======
See accompanying notes to financial statements. -9- 10 TMBR/SHARP DRILLING, INC. STATEMENTS OF CASH FLOWS For the nine months ended December 31, 2001 and 2000 (Unaudited) (In thousands) Nine months ended December 31, ------------------------------ 2001 2000 ------- -------- Cash flows from operating activities: Net income $ 13,195 $ 4,791 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 4,971 3,759 Dry holes and abandonments 968 808 Writedown of properties 100 -- Gain on sales of assets (531) (142) Changes in assets and liabilities: Trade receivables 2,064 (2,089) Inventories and other assets (160) 48 Trade payables (1,447) (1,567) Accrued interest and other liabilities 1 838 -------- -------- Total adjustments 5,966 1,655 -------- -------- Net cash provided by operating activities 19,161 6,446 Cash flows from investing activities: Additions to property and equipment (15,452) (7,498) Proceeds from sales of property and equipment 724 356 -------- -------- Net cash required by investing activities (14,728) (7,142) Cash flows from financing activities: Borrowings from Bank -- 1,400 Repayments of Bank Borrowings (1,080) (1,700) Issuance of common stock 1,263 161 -------- -------- Net cash provided (required) by financing activities 183 (139) -------- -------- Net increase (decrease) in cash and cash equivalents 4,616 (835) Cash and cash equivalents at beginning of period 301 980 -------- -------- Cash and cash equivalents at end of period $ 4,917 $ 145 ======== ======== See accompanying notes to financial statements. -10- 11 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS The amounts presented in the balance sheet as of March 31, 2001 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 December 31, 2001 and March 31, 2001, the results of operations for the three and nine months ended December 31, 2001 and 2000, and the cash flows for the nine month periods ended December 31, 2001 and 2000. 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, 2001. (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 December 31, 2001 was approximately $86,000. An unrealized loss of approximately $5,000 was deducted from stockholders equity and was included as a component of other comprehensive income (loss) as of December 31, 2001. 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- -11- 12 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. -12- 13 For the Nine Months Ended December 31 -------------------------------------- Per Share Income Shares Amount ------ ------ --------- Income before extraordinary item and accounting change $13,195 Basic EPS Income available to common stockholders 13,195 5,164,677 $2.56 Effect of Dilutive Securities Stock Options 248,444 ----- --------- ---- Diluted EPS Income available to common stockholders + assumed conversions $13,195 5,413,121 $2.44 ====== ========= ==== Reclassifications Certain reclassifications have been made to the December 31, 2000 financial statements to conform to the December 31, 2001 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 December 31, 2001) 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, 2001 and December 31, 2001, respectively, $1,080,000 and $0 were outstanding under the loan facility. -13- 14 (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 5,000 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. 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 December 31, 2001, options to purchase 269,900 shares were earned and exercisable. The remaining 6,000 shares will become earned and exercisable on March 9, 2002. The following table sets forth certain information concerning these options. -14- 15 Number of Option Shares Exercise Price Underlying ------------------- Options Per Share Total ---------- ------------------- Outstanding March 31, 2001 484,400 $4.125-4.5375 $ 2,030,325 Exercised (208,500) $4.125-4.5375 (885,638) ------- ------------ --------- Outstanding December 31, 2001 275,900 $4.125-4.5375 $ 1,144,687 ======= ============ ========= 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 to four directors under the 1998 Plan. These nonqualified options were granted at an exercise price of $17.18 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 exercised 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 December 31, 2001, options to purchase 332,000 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. -15- 16 (5) 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, 2001. 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 $12,110,000 and $42,696,000 for the three and nine months ended December 31, 2001 which represents a 18% and 52% increase, respectively, from the same periods in the prior year. Operating expenses as a percent of revenues were 83% and 71% for the three and nine months ended December 31, 2001 versus 79% and 83% for the same periods of the prior year. The operating results were positively affected by an increase in demand for the Company's contract drilling services which resulted in an increase in rig utilization rates. The Company has also experienced an increase in average price received for its contract drilling services. Recently however, demand and drilling prices have both been negatively impacted by the decrease in crude oil and natural gas prices. Rig utilization rates were 63% and 71%, respectively for the three and nine months ended December 31, 2001 compared to 68% and 66% in the same periods in 2000. Oil and gas revenues decreased by approximately 4% for the three months ended December 31, 2001 when compared to the same period in prior year. This decrease is primarily a result of the recent decrease in crude oil and natural gas prices. Oil and gas revenues increased approximately 23% for the nine months ended December 31, 2001 which is primarily attributable to an increase quantities of oil and gas produced. The following table sets forth certain information relating to oil and gas revenues: -16- 17 Three months ended Nine months ended December 31, December 31, ---------------------- ---------------------- 2001 2000 2001 2000 ------- ------- ------- ------- Quantities ----------- Oil (bbls) 34,952 25,223 95,801 81,658 Gas (mcf) 190,703 113,013 536,740 329,687 Average Price ------------- Oil (bbls) $ 21.82 $ 32.85 $ 24.38 $ 29.36 Gas (mcf) $ 2.72 $ 4.52 $ 3.93 $ 3.71 The increase in natural gas production from the prior year is principally due to two wells that have come on line during the nine months ended December 31, 2001. Oil and gas production expenses increased approximately 41% and 42% for the three and nine months ended December 31, 2001. This increase is primarily attributable to new wells that have begun production during the nine months ended December 31, 2001. In addition, the Company has experienced a general rise in the cost of services and supplies which are included in production expenses. Also production taxes have increased along with the increase in oil and gas revenues. Depreciation, depletion and amortization expense increased by approximately 27% and 32% when compared to the three and nine months ended December 31, 2000. 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. Also, the Company has been purchasing drill pipe and drill collars and has updated and refurbished drilling rigs and engines. The depreciable base of the Company's assets increased by approximately $12.3 million in fiscal 2001 and by approximately $15.5 million in the nine months ended December 31, 2001. These increases will affect the depreciation recognized, accordingly. In addition, depletion expense increased due to the increase in crude oil and natural gas production as oil and gas properties are depleted using the units-of-production method. General and administrative expenses have increased by approximately 40% and 43%, respectively for the three and nine months ended December 31, 2001 when compared to the same periods of the prior year. This increase is primarily due to an increase in payroll expenses, insurance expenses and bad debt expenses. -17- 18 The Company recognized a non-cash charge of approximately $100,000 during the quarter ended December 31, 2001 related to the writedown of the carrying value of its oil and gas properties. On April 12, 2001, an explosion, fire and subsequent blow-out destroyed one of our National 75A rigs that had a depth capacity of 12,500 feet. Three Company employees were injured as a result of the fire. Their injuries are covered under the Company's workers' compensation insurance policy. On August 15, 2001, the Company received a partial settlement from the equipment insurance carrier in the amount of $95,000. During the quarter ended September 30, 2001, the Company recognized approximately $82,000 as miscellaneous income related to this rig fire. On October 31, 2001, the Company received $571,500 which represents the remainder of the settlement from its equipment insurance carrier. The Company recognized the remainder of the miscellaneous income related to the rig fire in the quarter ended December 31, 2001. Net working capital was $9.5 million at December 31, 2001 compared to $5.4 million at March 31, 2001. 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 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 December 31, 2001) 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, 2001 and December 31, 2001, respectively, $1,080,000 and $0 were outstanding under the loan facility. The Company anticipates that funds for its capital expenditures in fiscal 2002 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. -18- 19 Trends and Prices 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. Oil and gas prices have been negatively impacted by the slowing of the United States and global economies. 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. 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 December 31, 2001, 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 December 31, 2001, the Company did not have any funds 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. However, as borrowings under this line of credit bear interest at a variable rate, the Company will be subject to interest rate risk when and if funds are borrowed. -19- 20 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) (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 2001. -20- 21 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. February 13, 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) -21- 22 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) -------------------------- -22-