10-Q 1 edg10q063003.txt 1 UNITED STATES 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, 2003 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) (432) 699-5050 N/A (Former name, former address and former fiscal year, if changed since last report) 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X At August 5, 2003, 5,497,636 shares of the issuer's common stock, $.10 par value, were outstanding. 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, 2003 and March 31, 2003 . . . . . . . . . . . . . . . . . . . . 3 Statements of Operations, Three Months Ended June 30, 2003 and 2002 . . . . . . . . . . . . . 5 Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . 7 Statements of Cash Flows, Three Months Ended June 30, 2003 and 2002 .. . . . . . . . . . . . 8 Notes to Financial Statements. . . . . . . . . . . . . . 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . 27 Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . 28 Part II. Other Information Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 28 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 29 -2- 3 PART ONE - FINANCIAL INFORMATION (UNAUDITED) Item 1. FINANCIAL STATEMENTS TMBR/SHARP DRILLING, INC. BALANCE SHEETS June 30, 2003 (Unaudited) and March 31, 2003 (In thousands, except share data) June 30, 2003 March 31, ASSETS (Unaudited) 2003 ------ ------------- ------------- Current assets: Cash and cash equivalents $ 5,603 $ 4,431 Trade receivables, net of allowance for doubtful accounts of $941 on both June 30 and March 31, 2003 9,497 10,484 Insurance Receivable -- 1,063 Inventories 251 101 Deposits 782 782 Other 1,432 1,231 -------- -------- Total current assets 17,565 18,092 -------- -------- Property and equipment, at cost: Drilling equipment 65,991 63,531 Oil and gas properties, based on successful efforts accounting 44,702 42,756 Other property and equipment 3,877 3,874 -------- -------- 114,570 110,161 Less accumulated depreciation, depletion and amortization (81,171) (79,695) -------- -------- Net property and equipment 33,399 30,466 -------- -------- Deferred tax asset 6,223 6,760 Other assets 173 173 -------- -------- Total assets $ 57,360 $ 55,491 ======== ======== See accompanying notes to financial statements. -3- 4 TMBR/SHARP DRILLING, INC. BALANCE SHEETS June 30, 2003 (Unaudited) and March 31, 2003 (In thousands, except share data) June 30, 2003 March 31, LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 2003 ------------------------------------ ------------ ----------- Current liabilities: Trade payables $ 6,011 $ 6,548 Other 2,385 2,275 Asset Retirement Obligation 174 -- -------- -------- Total current liabilities 8,570 8,823 Long Term Liabilities: Asset Retirement Obligation 462 -- -------- -------- Total Liabilities 9,032 8,823 -------- -------- Contingencies Stockholders' equity: Common stock, $0.10 par value Authorized, 50,000,000 shares; issued 6,766,375 and 6,738,125 shares at June 30, and March 31, 2003, respectively 677 674 Additional paid-in capital 72,617 72,219 Accumulated deficit (24,816) (26,075) Treasury stock-common, 1,268,739 shares at June 30, and March 31, 2003, at cost (150) (150) -------- -------- Total stockholders' equity 48,328 46,668 -------- -------- Total liabilities and stockholders' equity $ 57,360 $ 55,491 ======== ======== See accompanying notes to financial statements. -4- 5 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Three months ended June 30, 2003 and 2002 (Unaudited) (In thousands, except share data) Three months ended June 30, ----------------------------- 2003 2002 ----------- ----------- Revenues: Contract drilling $ 9,379 $ 7,743 Oil and gas 2,754 1,685 ----------- ----------- Total revenues 12,133 9,428 ----------- ----------- Operating costs and expenses: Contract drilling 6,398 5,265 Oil and gas production 513 474 Dry holes and abandonments 48 28 Exploration 56 -- Depreciation, depletion and amortization 1,770 1,721 General and administrative 950 930 Accretion of asset retirement obligation 12 -- ----------- ----------- Total operating costs and expenses 9,747 8,418 ----------- ----------- Operating income 2,386 1,010 ----------- ----------- Other income (expense): Interest, net 14 11 Gain on sales of assets 17 46 Merger costs (620) -- Other, net 13 4 ----------- ----------- Total other income (expense) (576) 61 ----------- ----------- Income before income tax provision and cumulative effect of change in accounting principle 1,810 1,071 Income tax provision (benefit) Current 36 -- Deferred 579 -- ----------- ----------- Income before cumulative effect of change in accounting principle 1,195 1,071 Cumulative effect of change in accounting principle, net of related tax benefit of approximately $33 64 -- ----------- ----------- Net income $ 1,259 $ 1,071 =========== =========== See accompanying notes to financial statements. -5- 6 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Three months ended June 30, 2003 and 2002 (Unaudited) (In thousands, except share data) Three months ended June 30, ----------------------------- 2003 2002 ----------- ----------- Net income per common share: Basic: Income before cumulative effect of change in accounting principle $ .22 $ .20 Cumulative effect of change in accounting principle .01 -- ----------- ----------- Net income $ .23 $ .20 =========== =========== Diluted Income before cumulative effect of change in accounting principle $ .21 $ .19 Cumulative effect of change in accounting principle .01 -- ----------- ----------- Net income $ .22 $ .19 =========== =========== Weighted average number of common shares outstanding: Basic 5,486,891 5,402,873 Diluted 5,738,233 5,643,875 =========== =========== See accompanying notes to financial statements. -6- 7 TMBR/SHARP DRILLING, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Three Months Ended June 30, 2003 (Unaudited) (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~~2003 6,~~668~~738 $ ~~667~~674 $ 7172,~~492~~219 $(3626,~~187~~075) ~~$ 10~~ 1,269 $(150) $ 3546,~~832~~668 Exercise of Stock Options 3028 3 ~~142~~322 -- -- -- --325 ~~145~~Effect ~~Issuance~~ of Stock 10Option 1Exercise ~~264~~- -- 76 -- -- -- ~~265~~76 Net Income -- -- -- 31,~~226~~259 -- -- ~~-- 3~~1,~~226~~259 ~~Other comprehensive loss, net of tax Unrealized loss on marketable equity securities -- -- -- -- (10) -- -- (10) -------- Comprehensive Income -- -- -- -- -- -- -- 3,216 --------~~ Balance, ~~December~~June 3130, ~~2002~~2003 6,~~708~~766 $ ~~671~~677 $ 7172,~~898~~617 $(3224,~~961~~816) ~~$ --~~ 1,269 $(150) $ 3948,~~458~~328 ===== ====== ======== ========= ===== =~~=====~~ ====== =========

See accompanying notes to financial statements. -7- 8 TMBR/SHARP DRILLING, INC. STATEMENTS OF CASH FLOWS For the three months ended June 30, 2003 and 2002 (Unaudited) (In thousands) Three months ended June 30, --------------------------- 2003 2002 --------- ---------- Cash flows from operating activities: Net income $ 1,259 $ 1,071 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 1,770 1,721 Accretion of asset retirement obligation 12 -- Cumulative effect of change in accounting principle (64) -- Deferred tax provision 579 Dry holes and abandonments 48 28 Gain on sales of assets (17) (46) Changes in assets and liabilities: Trade receivables 987 (569) Insurance receivable 1,063 -- Inventories and other assets (351) 9 Trade payables (537) 1,064 Accrued interest and other liabilities 110 684 -------- -------- Total adjustments 3,600 2,891 -------- -------- Net cash provided by operating activities 4,859 3,962 Cash flows from investing activities: Additions to property and equipment (4,058) (3,978) Proceeds from sales of property and equipment 46 43 -------- -------- Net cash required by investing activities (4,012) (3,935) Cash flows from financing activities: Proceeds from exercise of stock options 325 94 Issuance of common stock -- 76 -------- -------- Net cash provided by financing activities 325 170 -------- -------- Net increase in cash and cash equivalents 1,172 197 Cash and cash equivalents at beginning of period 4,431 3,258 -------- -------- Cash and cash equivalents at end of period $ 5,603 $ 3,455 ======== ======== See accompanying notes to financial statements. -8- 9 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS The amounts presented in the balance sheet as of March 31, 2003 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, 2003 and March 31, 2003, the results of operations for the three months ended June 30, 2003 and 2002, and the cash flows for the three month periods ended June 30, 2003 and 2002. 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, 2003. (2) Summary of Significant Accounting Policies 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. Oil and gas properties are accounted for using the successful efforts method of accounting. 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 -9- 10 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS 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 Basic earnings per share ("EPS") 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. Diluted EPS includes all potentially dilutive securities. The following table sets forth certain information concerning EPS.

For the ~~Nine~~Three Months Ended ~~December~~June 3130, 2003 2002 ~~2001~~ --------------------------- -------------------------- Per Per Net Share Net Share Income Shares Amount Income Shares Amount ------ ------ ------- ------ ------ ------ ~~Income~~(In ~~before~~thousands, ~~extraordinary~~except ~~item~~per ~~and~~share ~~accounting~~data) ~~change $3,226 $13,195~~ Basic EPS ~~Income~~$ ~~available to common stockholders 3~~1,~~226~~259 5,~~417,936~~487 $ .6023 13$ 1,~~195~~071 5,~~164,677~~403 $2 .5620 Effect of Dilutive Securities Stock Options ~~255,088~~251 ~~248,444~~241 ----- --------- ---- ------ --------- ---- Diluted EPS ~~Income available to common stockholders + assumed conversions~~ $3 1,~~226~~259 5,~~673,024~~738 $ .5722 $13 1,~~195~~071 5,~~413,121~~644 $2 .4419 ===== ========= ==== ====== ========= ====

-10- 11 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS Stock Based Employee Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which establishes accounting and reporting standards for various stock based compensation plans. SFAS 123 encourages the adoption of a fair value based method of accounting for employee stock options, but permits continued application of the accounting method prescribed by Accounting Principles Board Opinion No. 25 ("Opinion 25"), "Accounting for Stock Issued to Employees." The Company has elected to continue to apply the provisions of Opinion 25. Under Opinion 25, if the exercise price of the Company's stock options equals the market value of the underlying stock on the date of grant, no compensation expense is recognized. SFAS 123, as amended by Statement of Financial Accounting Standards No. 148, "Accounting For Stock-based Compensation, Transition and Disclosure" ("SFAS 148"), requires disclosure of pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method of the statement. See Note 4 "Stockholders' Equity." The SFAS 123 pro forma information for the quarters ended June 30, 2003 and 2002 is as follows:

~~For~~Quarters ~~the~~ended ~~Three~~June ~~Months Ended December 31~~30, ~~2002 2001~~ --------------------------- ---------~~-----------------~~ ~~Per~~2003 ~~Per~~2002 ~~Share Share Income Shares Amount Income Shares Amount~~ ------ ------ ------- ------ ~~------~~(In ~~------~~thousands, ~~Income~~except ~~before~~per ~~extraordinary~~share ~~item~~amounts) ~~and~~Net ~~accounting~~income, ~~change~~as reported $ ~~812~~1,259 $ 21,~~624~~071 ~~Basic~~Add: ~~EPS~~Stock-based ~~Income~~employee ~~available~~compensation toexpense ~~common~~included ~~stockholders~~in ~~812~~net 5income,~~430,628~~ $net ~~.15~~of ~~2,624~~tax ~~5,229,803~~-- $78 ~~.50~~Deduct: ~~Effect~~Stock-based ofemployee ~~Dilutive~~compensation ~~Securities~~expense ~~Stock~~determined ~~Options~~under ~~229,903~~fair ~~287~~value based method (SFAS 123),~~842~~ ~~-----~~net of tax (210) (490) --------- ---- ----- -----~~----~~ ~~----~~Net ~~Diluted~~income, ~~EPS~~pro ~~Income~~forma ~~available~~$ to1,049 $ 659 Basic Net income per common ~~stockholders~~share, +as ~~assumed~~reported ~~conversions~~$ 0.23 $ ~~812~~0.20 5Net income per common share,~~660,531~~ pro forma $ 0.1419 $ ~~2,624~~0.12 5Diluted Net income per common share,~~517,645~~ as reported $ 0.4822 ~~=====~~$ ~~=========~~0.19 ~~====~~Net ~~=====~~income ~~=========~~per ~~====~~common share, pro forma $ 0.18 $ 0.12

-11- 12 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS Reclassifications Certain reclassifications have been made to the June 30, 2002 financial statements to conform to the June 30, 2003 presentation. (3) Debt Line of Credit 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, 2003. 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 an annual rate equal to the bank's base rate, or 4.00% at June 30, 2003. Accrued and unpaid interest on outstanding principal is payable monthly. The loan facility matures on August 31, 2004, at which time all outstanding principal and accrued and unpaid interest will be due in full. At June 30, 2003, 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, 2003, the borrowing base amount was approximately $41.5 million. In addition to certain customary affirmative covenants, the loan agreement contains restrictions with respect to (i) incurring additional debt, (ii) incurring or permitting liens to exist on any of the Company's property, assets or revenues, (iii) declaring or paying dividends or other distributions on its capital stock (or acquiring any of its capital stock), (iv) issuing capital stock, (v) entering into transactions with affiliates, (vi) disposing of assets, and (vii) certain other matters. The loan agreement also contains financial covenants with respect to minimum tangible net worth, the current ratio and the ratio of total liabilities to net worth. (4) Stockholders' Equity 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 -12- 13 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS 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. At June 30, 2003, options to purchase 240,000 common shares were outstanding under the 1994 Plan. 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, subject to shareholder approval. These nonqualified options were granted 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. 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. On November 20, 2002, the Company granted options to purchase 98,000 shares of common stock to non- officer key employees under the 1998 Plan. These incentive options were granted at an exercise price of $15.93 per share which represented the fair market value on the date of the grant. These options become earned and -13- 14 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS exercisable on November 20, 2003. The following sets forth certain information concerning these options. Number of Option Shares Exercise Price Underlying ------------------- Options Per Share Total ---------- ------------------- Outstanding March 31, 2003 373,500 $11.50-17.18 $ 4,956,590 Exercised (28,250) 11.50 (324,875) Forfeited (4,500) 11.50 (51,750) ------- ------------ --------- Outstanding June 30, 2003 340,750 $11.50-17.18 $ 4,579,965 ======= ============ ========= 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. No shares were issued during the three months ended June 30, 2003. The Company recognized approximately $49,000 as Directors' compensation expense which was paid in cash. 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. The Company accrues for such items when liability is both probable and the amount can be reasonably estimated. The Company does not believe that the ultimate resolution of any of its existing lawsuits will have a material effect on its financial position or results of operations. -14- 15 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS Workers Compensation Currently the Company is covered under a three year retroactive plan and is providing for its workers compensation claims based upon the most recent information available from its insurance carrier concerning claims and estimated costs. In future years, the Company may receive retroactive adjustments, both favorable and unfavorable, related to estimates of claim costs for previous years, which may be material to the Company's results of operations. No provision for retroactive adjustments to claim costs is recorded until the Company receives notification from its insurance carrier because this amount, if any, cannot be estimated. Retention Agreements. In November, 2002, the Company entered into retention agreements with ten of its employees. The retention agreements increase the likelihood that the Company will be able to rely on the continued dedication and availability of the services of the employees notwithstanding a change in control or proposed change in control of the Company and the associated personal uncertainties and risks. Generally, a "change in control" occurs on the date: any person becomes the beneficial owner of securities representing more than 50% of the combined voting power of the Company's outstanding securities; (i) the Company's shareholders approve the consolidation, merger or other business combination of the Company in which it is not the surviving or continuing corporation or pursuant to which shares of its common stock are converted into cash, securities or other property, or (ii) the Company's shareholders approve the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the Company's assets; the Company's shareholders approve any plan or proposal for the liquidation or dissolution of the Company: without the approval or recommendation of a majority of the Company's then existing board of directors, a third person causes or brings about (through solicitation of proxies or otherwise) the removal or resignation of a majority of the then existing members of the board of directors or if a third -15- 16 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS person causes or brings about (through solicitation of proxies or otherwise) an increase in the size of the board of directors such that the then existing members of the Company's board of directors thereafter represent a minority of the total number of persons comprising the entire board; or any shares of any class of the Company's stock are purchased pursuant to a tender or exchange offer (other than an offer by the Company). Under the retention agreements, if (i) a change in control occurs or (ii) an employee is terminated for other than dishonesty, conviction of a felony or the continued failure by the employee to perform the duties assigned to the employee, the employee will receive a bonus equal to the product of the employee's base salary paid by the Company during the preceding twelve months, multiplied by a factor ranging from 1.26 to 2.97. The Company has no obligation to pay the bonuses required under the retention agreements if an employee dies, becomes disabled, retires, ceases to act in his or her position or voluntarily terminates his or her employment prior to the occurrence of either of the events described in (i) and (ii) of this paragraph. Bonuses payable to an employee shall be reduced to the extent it is determined that such payments would exceed $1.00 less than three times the employee's "base amount" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the"Code"). The retention agreements remain in effect through December 31, 2003, and will be automatically extended for additional one year periods thereafter, unless by September 30 of any year the Company gives notice that a retention agreement will not be extended. The Company estimates the total bonuses payable under the change of control agreements is approximately $2.2 million. (6) Merger with Patterson-UTI Energy, Inc. On May 26, 2003, the Company entered into an Agreement and Plan of Merger, dated as of May 26, 2003, with Patterson-UTI Energy, Inc. and Patterson-UTI Acquisition, LLC, a Texas limited liability company and a wholly owned subsidiary of Patterson-UTI Energy, Inc. Under terms of the merger agreement, the Company will merge with and into Patterson-UTI Acquisition, LLC, with Patterson-UTI Acquisition, LLC being the surviving company. Subject to the terms and conditions in the merger agreement, each issued and outstanding share of the Company's common stock not owned directly or indirectly by Patterson-UTI Energy, Inc. or by TMBR/Sharp (except shares of common stock held by persons who object to the merger, and who comply with -16- 17 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS all of the provisions of Texas law concerning the right of holders of shares of common stock to dissent from the merger and require appraisal of their common stock), will be converted into the right to receive $9.09 in cash and 0.312166 of a share of common stock, $.01 par value per share, of Patterson- UTI Energy, Inc. Patterson-UTI Energy, Inc. will pay each holder cash in lieu of any fractional shares. Under the terms of the merger agreement, the Company agreed not to solicit competing offers, but it may consider and accept an unsolicited offer if, based on advice of counsel, it believes it must do so in the exercise of its fiduciary duty. If the Company accepts an unsolicited offer, or its board of directors withdraws its recommendation in light of an unsolicited offer, or the shareholders do not vote to approve the merger because of an unsolicited offer, the Company would be required to pay to Patterson a breakup fee of $3.5 million. The merger is subject to customary conditions to closing, including approval by the Company's shareholders, and receipt by the Company and Patterson of opinions from their respective counsel that the consummation of the merger will constitute a reorganization within the meaning of Section 368(a)of the Code, as well as any necessary regulatory filings and approvals. There can be no assurance that the merger will be consummated in accordance with the terms of the merger agreement, if at all. (7) Adoption of SFAS 143, "Accounting for Asset Retirement Obligations" Effective April 1, 2003, the Company adopted SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset. Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method over the asset's useful life. The adoption of SFAS 143 resulted in an increase of total liabilities as retirement obligations were required to be recognized, the recorded cost of assets increased to include the retirement costs added to the carrying amount of the asset and operating expenses increased subsequent to April 1, 2003 due to the accretion of the retirement obligation. Depletion and depreciation recognized in fiscal 2004 and subsequent periods will decrease since the salvage values assigned to these assets (now excluded from depreciation and depletion) exceeded the asset retirement costs recorded. The majority of the asset retirement obligations recorded by the Company relate to the plugging and abandonment of oil and gas wells. The Company adopted SFAS No. 143 on April 1, 2003, and recorded a discounted liability of approximately $619,000 for the future retirement obligation, an increase to property and equipment of approximately $444,000 and a benefit of approximately $64,000 (net of a deferred tax benefit of $33,000) as the -17- 18 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS cumulative effect of change in accounting principle. There was no impact on the Company's cash flows as a result of adopting SFAS 143. Subsequent to the adoption of SFAS 143, there has been no significant current period activity with respect to additional asset retirement liabilities, settled liabilities or revisions of estimated cash flows. Accretion expense of approximately $12,000 was recognized in the three months ended June 30, 2003. The following unaudited pro forma information has been prepared to give effect to the adoption of SFAS 143 as if it had been adopted on April 1, 2000.

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, our 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. We believe the -18- 19 assumptions and expectations reflected in these forward-looking statements are reasonable. However, no assurance can be given that our expectations will prove to be correct or that we 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; timing and amount of future production of oil and natural gas; governmental regulations; operating costs and other expenses; cash flow, anticipated liquidity and prospects for growth; estimates of proved reserves and exploitation and exploration opportunities; and marketing of oil and natural gas. 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 our common stock, one should be aware that there are various risks associated with an investment. Some of these risk factors are described on page 17 in our Annual Report on Form 10-K dated March 31, 2003. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operation is based upon financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified below certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates, including those related to oil and gas revenues, oil and gas properties, income taxes and contingencies and litigation, and are based on -19- 20 historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements: Revenue Recognition - 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. Due to the nature of turnkey contracts and risks therein, we utilize 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. Depreciation - Contract Drilling Operations. 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. Revenue Recognition - Oil and Gas Properties. We follow the sales method of accounting for oil and natural gas revenues. Under this method, revenues are recognized based on actual volumes of oil and natural gas sold to purchasers. No receivables, payables or unearned revenue are recorded unless a working interest owner's aggregate sales from the property exceed its share of the total reserves-in-place. Successful Efforts Accounting. We account for our oil and natural gas operations using the successful efforts method of accounting. Under this method, all costs associated with property acquisition, successful exploratory wells and all development wells are capitalized. Items charged to expense generally include geological and geophysical costs, cost of unsuccessful exploratory wells and oil and natural gas production costs. Proved Reserve Estimates. Estimates of our proved reserves included in this report are prepared in accordance with GAAP and SEC guidelines. The accuracy of a reserve estimate is a function of: - the quality and quantity of available data; - the interpretation of that data; -20- 21 - the accuracy of various mandated economic assumptions; and - the judgment of the persons preparing the estimate. The proved reserve information included in our report dated March 31, 2003 is based on estimates prepared by Joe C. Neal & Associates. Estimates prepared by others may be higher or lower than our estimates. Because these estimates depend on many assumptions, all of which may substantially differ from actual results, reserve estimates may be different from the quantities of oil and natural gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate. Our shareholders should not assume that the present value of future net cash flows is the current market value of its estimated proved reserves. In accordance with SEC requirements, the estimates of discounted future net cash flows are based from proved reserves on prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. Our estimates of proved reserves directly impact depletion expense. If the estimates of proved reserves decline, the rate at which we record depletion expense increases, reducing net income. Such a decline may result from property performance or from lower market prices or increases in costs, which may make it uneconomic to drill for and produce higher cost fields. In addition, the decline in proved reserve estimates may impact the outcome of our assessment of our oil and gas producing properties for impairment. Impairment of Proved Oil and Gas Properties. We review our proved properties whenever management judges that events or circumstances indicate that the recorded carrying value of the properties may not be recoverable. Management assesses whether or not an impairment provision is necessary based upon management's outlook of future commodity prices and net cash flows that may be generated by the properties. Proved oil and gas properties are reviewed for impairment on a property-by-property basis, which is the lowest level at which depletion of proved properties is calculated. Impairment of Unproved Oil and Gas Properties. Management periodically assesses individually significant unproved oil and gas properties for impairment, on a project-by-project basis. Management's assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such projects impact the amount and timing of impairment provisions. -21- 22 Valuation of Deferred Tax Assets. We compute income taxes in accordance with SFAS No. 109. "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach which results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of those assets and liabilities. SFAS No. 109 also requires the recording of a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. Merger with Patterson-UTI Energy, Inc. On May 26, 2003, we entered into an Agreement and Plan of Merger, dated as of May 26, 2003, with Patterson-UTI Energy, Inc. and Patterson-UTI Acquisition, LLC, a Texas limited liability company and a wholly owned subsidiary of Patterson-UTI Energy, Inc. Under terms of the merger agreement, we will merge with and into Patterson-UTI Acquisition, LLC, with Patterson-UTI Acquisition, LLC being the surviving company. Subject to the terms and conditions in the merger agreement, each issued and outstanding share of our common stock not owned directly or indirectly by Patterson-UTI Energy, Inc. or by us (except shares of common stock held by persons who object to the merger, and who comply with all of the provisions of Texas law concerning the right of holders of shares of common stock to dissent from the merger and require appraisal of their common stock), will be converted into the right to receive $9.09 in cash and 0.312166 of a share of common stock, $.01 par value per share, of Patterson-UTI Energy, Inc. Patterson-UTI Energy, Inc. will pay each holder cash in lieu of any fractional shares. Under the terms of the merger agreement, we agreed not to solicit competing offers, but we may consider and accept an unsolicited offer if, based on advice of counsel, we believe we must do so in the exercise of our fiduciary duty. If we accept an unsolicited offer, or our board of directors withdraws its recommendation in light of an unsolicited offer, or the shareholders do not vote to approve the merger because of an unsolicited offer, we would be required to pay to Patterson a breakup fee of $3.5 million. The merger is subject to customary conditions to closing, including approval by our shareholders, and receipt by us and Patterson of opinions from their respective counsel that the consummation of the merger will constitute a reorganization within the meaning of Section 368(a) of the Code, as well as any necessary regulatory filings and approvals. There can be no assurance that the merger will be consummated in accordance with the terms of the merger agreement, if at all. -22- 23 Recent Accounting Pronouncements In July, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which establishes requirements for the accounting of removal-type costs associated with asset retirements. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted each period toward its future value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity reports a gain or loss upon settlement to the extent the actual costs differ from the recorded liability. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. We adopted SFAS No. 143 on April 1, 2003. Upon adoption of SFAS No. 143, we recorded a benefit of $64,735 (net of tax) as the cumulative effect of the change in accounting principle. The majority of the asset retirement obligation recognized related to the projected cost to plug and abandon oil and gas wells. In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Most significantly, this Statement eliminates the requirement under Statement 4 to aggregate all gains and losses from extinguishment of debt, and if material, be classified as an extraordinary item. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. There is no current impact to us as we have no outstanding debt. In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We expect no impact to our financial statements as we do not anticipate exiting or disposing of any of our activities. SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure", amends SFAS No. 123 "Accounting for Stock-Based Compensation". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is required to be adopted for fiscal years ending after December 15, 2002. We currently account for stock-based compensation in accordance with APB Opinion No. 25 which allows recognition of compensation expense only to the extent that the fair market value is greater than the option price. -23- 24 On April 22, 2003, the FASB announced its decision to require all companies to expense the value of employee stock options. Companies will be required to measure the cost according to the fair value of the options. The new guidelines have not been released but are expected to be finalized and to become effective in 2004. When final rules are announced, we will assess the impact to our financial statements. In November 2002, the FASB issued Financial Interpretation No.45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN No. 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of certain guarantees. Initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. FIN No. 45 also requires disclosures about guarantees in financial statements for interim or annual periods ending after December 15, 2002. We do not expect the adoption of FIN No. 45 to have a material impact on our financial statements. FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51". FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without financial support from other parties. We do not expect the adoption of FIN No. 46 to have a material impact on our financial statements. In May 2003, the FASB issued Statement No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect the adoption of FAS No. 150 to have a material impact on our financial statements. Results of Operations Total revenues were $12.1 million for the three months ended June 30, 2003 which represents a 29% increase from the same period in the prior year. Operating expenses as a percent of revenues were 80% for the three months ended June 30, 2003 compared to 89% for the same period of the prior year. The operating results were positively affected by an increase in demand for our contract drilling services which resulted in an increase in rig utilization rates. We have also experienced a decrease in the average price received for our contract drilling services. Rig utilization rates were 66% for the three months ended June 30, 2003 compared to 51% for the three months ended June 30, 2002. Oil and gas revenues increased by approximately 63%, for the three months ended June 30, 2003 when compared to the same period of the prior -24- 25 year. The following table sets forth certain information relating to crude oil and natural gas produced: Three Months Ended June 30, 2003 2002 ------- ------- Quantities Produced ------------------- Oil (bbls) 40,624 46,388 Gas (mcf) 288,684 261,572 Average Price ------------- Oil (bbls) $ 29.35 $ 22.82 Gas (mcf) $ 5.41 $ 2.40 Average Daily Production ------------------------ Oil (bbls) 446 510 Gas (mcf) 3,172 2,874 Oil and gas production expenses increased by approximately 8%, for the three months ended June 30, 2003 when compared to the same period of the prior year, which can be attributed primarily to increases in production taxes. The decrease in quantities of oil produced can be attributed to the production, in the quarter ended June 30, 2002, of two oil wells. These wells were in the initial production period in the prior year's quarter and had several months production included due to various reasons, including delays in completing division orders. In addition, quantities were affected by normal declining production. General and administrative expenses, and depreciation, depletion and amortization expenses remained relatively flat. Other expenses increased as approximately $620,000 was expended as a result of the proposed merger with Patterson-UTI Energy, Inc. (See Note 6). Net working capital was $9.0 million at June 30, 2003 compared to $9.3 million at March 31, 2003. Income Taxes At March 31, 2003, we had approximately $33.0 million of unused net operating loss ("NOL") carryforwards for tax purposes. Use of these carryforwards is dependent upon our ability to generate taxable earnings in future periods. These carryforwards began to expire in fiscal 2000 and we estimate approximately $10.3 million expired in fiscal 2003. Our ability to utilize our NOL carryforwards may be substantially limited in the future under -25- 26 the Code. If we experience 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. We estimate that we will be able to utilize approximately $3.9 million of NOL carryforwards in fiscal 2003 to reduce taxable income. As of June 30, 2003, we do not believe an ownership change has occurred. However, if the merger with Patterson is completed, we believe that a change of control would occur and utilization of future NOL carryforwards would be limited. We assess the need for a valuation allowance against our deferred tax assets based on whether we believe that it is more likely than not that the deferred tax asset is realizable. As of June 30, 2002, we fully reserved our deferred tax asset as we determined that realization of any portion of the deferred tax asset was not more likely than not. Realization of the deferred tax asset requires us to generate future taxable income. During fiscal 2003, after considering increases in commodity prices, recent utilization of NOL carryforwards to reduce taxable income, and the anticipated expiration of NOL carryforwards, we determined that it was more likely than not that a portion of the deferred tax assets was realizable. Accordingly, a benefit of approximately $6.8 million was recognized during the quarter ended March 31, 2003 as the valuation allowance was reduced. In addition, during fiscal 2003 the valuation allowance was reduced through the utilization of NOL carryforwards to reduce taxable income as well as the expiration of unused NOL carryforwards. Our effective tax rate for the quarter ended June 30, 2002 differs from the statutory tax rate of 34% primarily due to the utilization of NOLs. We utilize an asset and liability approach for financial accounting and reporting for income taxes. We have a deferred tax asset primarily due to our NOL carryforwards. Liquidity and Capital Resources In June, 2000, we 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, 2003. The facility is secured by our drilling rigs and related equipment, accounts receivable and inventory. Borrowings under the revolving facility bear interest at an annual rate equal to the bank's base rate, or 4.00% at June 30, 2003. Accrued and unpaid interest on outstanding principal is payable monthly. The loan facility matures on August 31, 2004, at which time all outstanding principal and accrued and unpaid interest will be due in full. At June 30, 2003, 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 our accounts receivable and the value of our inventory, drilling rigs, drill pipe and related equipment. The borrowing base amount is redetermined quarterly by us, 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, 2003, the borrowing base amount was approximately $41.5 million. We may in the future have to reserve a trade receivable from one customer. At June 30, 2003, the customer owed us approximately $1.5 million, -26- 27 of which approximately $.9 million was over 90 days past due. Since the end of the quarter the customer has paid approximately $197,000 related to this receivable. Currently this receivable is not specifically reserved as the customer is making cash payments to us and collection efforts are ongoing. If our evaluation of this receivable changes in the future, we may have to reserve a portion or the total amount of this receivable. If the merger with Patterson is not completed, we anticipate that funds for our capital expenditures in fiscal 2004 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 a slight increase in demand and a firming of prices for contract drilling services due to the recent increase and stability surrounding oil and gas prices. We will continue to be affected by price fluctuations in the industry, but cannot predict either the future level of demand for our 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. We have 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 we receive for our oil and gas. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary sources of market risk for us includes fluctuations in commodity prices and interest rate fluctuations. At June 30, 2003, we were not a party to any hedge arrangements, commodity swap agreements, commodity futures, options or other similar agreements relating to crude oil and natural gas. Commodity Price Risk - We produce and sell crude oil, natural gas and natural gas liquids. As a result, our operating results are significantly affected by fluctuations in commodity prices caused by changing market forces. Historically, we have not entered into hedging arrangements for our oil and gas production and we does not have any delivery commitments. We may, in the future, attempt to reduce our exposure to the volatility of oil and gas prices by hedging a portion of our production. In a typical hedge transaction, we 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 hedged. If the floating price exceeds the fixed price, we would be required to pay the counterparty this difference multiplied by the quantity hedged. In this case, we would be required to pay the difference regardless of whether we had sufficient production to cover the quantities specified in the hedge. Significant reductions in production at times when the floating price exceeds -27- 28 the fixed price could require us 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, 2003 we had no borrowings outstanding under our loan agreement. However, when we do have outstanding borrowings, our exposure to changes in interest rates primarily results from short term changes in our bank's prime rate. Item 4. Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10- Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 was evaluated by our management, with the participation of our Chief Executive Officer, Thomas C. Brown (principal executive officer), and our Controller/Treasurer, Patricia R. Elledge (principal financial officer). Mr. Brown and Ms. Elledge have concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this Quarterly Report on Form 10-Q, to help ensure that information we are required to disclose in reports that we file with the SEC is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods prescribed by the SEC. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART TWO - OTHER INFORMATION Item 1. Legal Proceedings We are a defendant in various lawsuits generally incidental to our business. We accrue for such items when a liability is both probable and the amount can be reasonable estimated. We do not believe that the ultimate resolution of any of our existing lawsuits will have a material effect on our financial position or results of operations. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit 2.1 - Agreement and Plan of Merger by and among the Registrant, Patterson-UTI Energy, Inc. and Patterson-UTI Acquisition, LLC, dated May 26, 2003 (Incorporated by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K dated May 27, 2003) -28- 29 *Exhibit 31.1 - Certification of principal executive officer *Exhibit 31.2 - Certification of principal financial officer *Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Exhibit 32.2 - Certification of Controller/Treasurer (chief financial officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. --------------------------------- *Filed herewith (b) Reports on Form 8-K: (1) On May 27,2003, the Company filed a Current Report on Form 8-K, dated May 26, 2003 announcing under items 5 and 7 thereof the Company's definitive merger agreement with Patterson-UTI Energy, Inc. (2) On June 27, 2003, the Company filed a Current Report on Form 8- K, dated June 27, 2003 furnishing under items 7, 9 and 12 thereof the Company's public announcement of its annual financial results for the fiscal year ended March, 31, 2003. -29- 30 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 14, 2003 By: /s/ Patricia R. Elledge --------------- -------------------------- Date Patricia R. Elledge Controller/Treasurer (Ms.Elledge is the principal financial officer and has been duly authorized to sign on behalf of the Registrant) -30- 31 INDEX TO EXHIBITS Description ----------- Exhibit 2.1 Agreement and Plan of Merger by and among the Registrant, Patterson-UTI Energy, Inc. and Patterson-UTI Acquisition, LLC, dated May 26, 2003. (Incorporated by reference to Exhibit 2.1 to Form 8-K dated May 27, 2003) *Exhibit 31.1 Certification of principal executive officer *Exhibit 31.2 Certification of principal financial officer *Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Exhibit 32.2 Certification of Controller/Treasurer (chief financial officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. --------------------------------- *Filed herewith -31- 32 Exhibit 31.1 CERTIFICATION I, Thomas C. Brown, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TMBR/Sharp Drilling, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 33 (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Thomas C. Brown ----------------------------- Thomas C. Brown Chief Executive Officer (principal executive officer) 34 Exhibit 31.2 CERTIFICATION ------------- I, Patricia R. Elledge, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TMBR/Sharp Drilling, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 35 (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Patricia R. Elledge ----------------------------- Patricia R. Elledge Controller/Treasurer (principal financial officer) 36 Exhibit 32.1 CERTIFICATION ------------- (Not filed pursuant to the Securities Exchange Act of 1934) Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Thomas C. Brown, the Chairman of the Board of Directors and Chief Executive Officer of TMBR/Sharp Drilling, Inc. (the "Company"), hereby certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2003 fully complies with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and the information contained in that Form 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2003 /s/ Thomas C. Brown --------------------------------------- Thomas C. Brown, Chairman of the Board of Directors and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 37 Exhibit 32.2 CERTIFICATION ------------- (Not filed pursuant to the Securities Exchange Act of 1934) Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Patricia R. Elledge, the Controller/Treasurer (chief financial officer) of TMBR/Sharp Drilling, Inc. (the "Company"), hereby certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2003 fully complies with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and the information contained in that Form 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2003 /s/ Patricia R. Elledge ----------------------------------------- Patricia R. Elledge, Controller/Treasurer (chief financial officer) A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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