<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
____________________
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12757
TMBR/SHARP DRILLING, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1835108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4607 WEST INDUSTRIAL BLVD.
MIDLAND, TEXAS 79703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (area code) (915) 699-5050
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.10 Par Value Outstanding at February 1, 1996
(Title of Class) 3,321,786<PAGE>
<PAGE> 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, 1995 and
March 31, 1995 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations, Three Months
Ended December 31, 1995 and 1994 . . . . . . . . . . . 5
Statements of Operations, Nine Months
Ended December 31, 1995 and 1994 . . . . . . . . . . . 7
Statements of Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . 9
Statements of Cash Flows, Nine Months
Ended December 31, 1995 and 1994 . . . . . . . . . . . 10
Notes to Financial Statements . . . . . . . . . . . . . 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 14
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 18
-2-
<PAGE> 3
PART ONE - FINANCIAL INFORMATION (UNAUDITED)
Item 1. FINANCIAL STATEMENTS
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
December 31, 1995 (Unaudited) and March 31, 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1995 March 31,
ASSETS (Unaudited) 1995
------ ------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74 $ 1,590
Trade receivables,
net of allowance for doubtful
accounts of $1,225 at both
December 31, and March 31, 1995 3,575 2,568
Inventories 46 45
Deposits 422 513
Other 113 265
-------- --------
Total current assets 4,230 4,981
-------- --------
Property and equipment, at cost:
Drilling equipment 39,656 38,308
Oil and gas properties, based on
successful efforts accounting 8,711 5,790
Other property and equipment 3,211 3,206
-------- --------
51,578 47,304
Less accumulated depreciation,
depletion and amortization (43,406) (42,505)
-------- --------
Net property and equipment 8,172 4,799
-------- --------
Other assets 347 260
-------- --------
Total assets $ 12,749 $ 10,040
======== ========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 4
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
December 31, 1995 (Unaudited) and March 31, 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1995 March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1995
------------------------------------ ------------ -----------
<S> <C> <C>
Current liabilities:
Current portion of capital lease
obligations $ -- $ 92
Trade payables 3,436 1,839
Accrued workers' compensation 1,274 1,220
Leasehold purchase obligation -- 386
Loans from bank 500 --
Other 618 728
-------- --------
Total current liabilities 5,828 4,265
-------- --------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued, 4,590,525 and 4,393,525
shares at December 31 and
March 31, 1995, respectively 459 439
Additional paid-in capital 60,650 60,540
Accumulated deficit (54,038) (55,054)
Treasury stock-common, 1,268,739
shares at December 31, and
March 31, 1995, at cost (150) (150)
-------- --------
Total stockholders' equity 6,921 5,775
-------- --------
Total liabilities and
stockholders' equity $ 12,749 $ 10,040
======== ========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 5
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended December 31, 1995 and 1994 (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
December 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Contract drilling $ 5,066 $ 5,703
Oil and gas 305 252
----------- -----------
Total revenues 5,371 5,955
----------- -----------
Operating costs and expenses:
Contract drilling 4,411 4,720
Oil and gas production 168 110
Dry holes and abandonments 131 --
Depreciation, depletion and
amortization 373 252
General and administrative 403 391
----------- -----------
Total operating costs
and expenses 5,486 5,473
----------- -----------
Operating income (loss) (115) 482
----------- -----------
Other income (expense):
Interest (33) (40)
Other, net 23 174
----------- -----------
Total other income (expense) (10) 134
----------- -----------
Net income (loss) before income
tax provision (125) 616
Provision for income taxes -- (13)
----------- -----------
Net income (loss) $ (125) $ 603
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 6
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended December 31, 1995 and 1994 (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
December 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net income (loss) per share
of common stock $ (.03) $ .15
=========== ===========
Weighted average number of
common shares outstanding 4,095,906 4,051,108
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE> 7
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Nine months ended December 31, 1995 and 1994 (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
December 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Contract drilling $ 16,194 $ 12,723
Oil and gas 1,096 610
----------- -----------
Total revenues 17,290 13,333
----------- -----------
Operating costs and expenses:
Contract drilling 13,372 10,624
Oil and gas production 374 232
Dry holes and abandonments 422 301
Depreciation, depletion and
amortization 898 577
General and administrative 1,174 1,086
----------- -----------
Total operating costs
and expenses 16,240 12,820
----------- -----------
Operating income 1,050 513
----------- -----------
Other income (expense):
Interest (99) (106)
Gain on sales of assets 24 100
Other, net 71 218
----------- -----------
Total other income (expense) (4) 212
----------- -----------
Net income before income
tax provision 1,046 725
Provision for income taxes (30) (13)
----------- -----------
Net income $ 1,016 $ 712
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE> 8
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Nine months ended December 31, 1995 and 1994 (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
December 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net income per share
of common stock $ .25 $ .18
=========== ===========
Weighted average number of
common shares outstanding 4,083,980 4,036,957
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-8-
<PAGE> 9
TMBR/SHARP DRILLING, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
Nine Months Ended December 31,1995 (Unaudited) and
Year Ended March 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Treasury Stock
--------------
Common Stock Additional Common Stock Total
-------------- Paid-In Accumulated -------------- Stockholders'
Shares Amount Capital Deficit Shares Amount Equity
------ ------ ------- ----------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31, 1995 4,394 $ 439 $ 60,540 $(55,054) 1,269 $(150) $ 5,775
Exercise of
stock options 197 20 110 -- -- -- 130
Net income -- -- -- 1,016 -- -- 1,016
----- ----- -------- -------- ------- ----- -------
Balance,
December 31,
1995 4,591 $ 459 $ 60,650 $(54,038) 1,269 $(150) $ 6,921
===== ===== ======== ======== ======= ===== =======
</TABLE>
See accompanying notes to financial statements.
-9-
<PAGE> 10
TMBR/SHARP DRILLING, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended December 31,1995 and 1994 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended December 31,
------------------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,016 $ 712
Adjustments to reconcile net income
to net cash provided (required) by
operating activities:
Depreciation, depletion and amortization 898 577
Dry holes and abandonments 422 301
Gain on sales of assets (24) (100)
Changes in assets and liabilities:
Trade receivables (1,007) (2,284)
Deposits 91 193
Inventories and other assets 64 (130)
Trade payables 1,597 752
Accrued interest and other liabilities (56) (88)
-------- --------
Total adjustments 1,985 (779)
-------- --------
Net cash provided (required) by operating activities 3,001 (67)
Cash flows from investing activities:
Additions to property and equipment (4,695) (1,985)
Proceeds from sales of property and equipment 26 106
-------- --------
Net cash required by investing activities (4,669) (1,879)
Cash flows from financing activities:
Repayments of capital lease (92) (69)
Issuance of common stock 130 96
Loans from bank 500 600
Leasehold borrowings -- 578
Repayments of leasehold borrowings (386) --
-------- --------
Net cash provided by financing activities 152 1,205
-------- --------
Net decrease in cash and cash equivalents (1,516) (741)
Cash and cash equivalents at beginning of period 1,590 1,039
-------- --------
Cash and cash equivalents at end of period $ 74 $ 298
======== ========
</TABLE>
See accompanying notes to financial statements.
-10-
<PAGE> 11
TMBR/SHARP DRILLING, INC.
NOTES TO FINANCIAL STATEMENTS
The amounts presented in the balance sheet as of March 31, 1995 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, 1995 and March 31, 1995, the results of operations for the
three and nine months ended December 31, 1995 and 1994, and the cash flows
for the nine month period ended December 31, 1995 and 1994.
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, 1995.
(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.
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
also has an ownership interest, the Company's proportionate share of costs
related to these properties is capitalized as stated above, net of its
working interest share of profits from the related drilling contracts.
Capitalized costs of undeveloped properties, which are not depleted until
-11-
<PAGE> 12
proved reserves can be associated with the properties, are periodically
reviewed for possible impairment.
Depletion of capitalized oil and gas property costs is provided using
the units-of-production method based on estimated proved or proved
developed oil and gas reserves, as applicable, of the respective property
units. Other property and equipment is depreciated using the straight-line
method of depreciation with estimated useful lives of three to seven years.
Major renewals and betterments are capitalized in the appropriate
property accounts while the cost of repairs and maintenance is charged to
operating expense in the period incurred. For assets sold or otherwise
retired, the cost and related accumulated depreciation amounts are removed
from the accounts and any resulting gain or loss is recognized.
Net Income (Loss) Per Common Share
Net income (loss) per share of common stock is based on the weighted
average number of common shares outstanding during each period. All common
stock equivalents are considered anti-dilutive for purposes of calculating
the net loss per share and dilutive for purposes of calculating the net
income per share.
(3) Debt
Line of Credit
The Company and its lender entered into an agreement which provides
for a $1,000,000 revolving line of credit ("LOC") secured by the Company's
accounts receivable. At December 31, 1995, the Company had borrowed
$500,000 against the LOC. The LOC bears interest at 1% above the Norwest
Bank Minnesota, Base Rate and matures on July 15, 1996. In January, 1996,
the Company and its bank lender entered into a loan agreement providing for
the renewal, extension and increase in principal amount of the LOC. See
Note 7.
Leasehold Purchase Obligation
On December 9, 1994, the Company entered into an agreement with
Paladin Exploration Co., Inc. ("Paladin") to acquire certain oil and gas
leases. The Company agreed to reimburse Paladin an aggregate amount of
approximately $629,000 (including imputed interest at a rate of 9.5% per
annum) for leasehold acquisition, legal and seismic costs incurred by
Paladin associated with the acquisition of such leases. During the quarter
ended December 31, 1995, the Company satisfied this obligation to Paladin.
See Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.
(4) Stockholders' Equity
1984 Stock Option Plan
-12-
<PAGE> 13
In August of 1984, the Company adopted the 1984 Stock Option Plan (the
"Plan") which initially authorized 375,000 shares of the Company's common
stock to be issued as either incentive stock options or nonqualified stock
options. This Plan was amended in August 1986 to increase the authorized
shares to 475,000 shares of the Company's common stock. In January 1988,
the Plan was amended to reduce the option price on certain options issued
prior to March 31, 1986, to reflect the then current fair market value of
the Company's common stock. The Plan provides that options may be granted
to key employees or directors for various terms at a price not less than
the fair market value of the shares on the date of the grant. Options to
purchase 108,000 shares of common stock are currently outstanding under the
Plan, with 60,500 of the options being exercisable at December 31, 1995.
No additional shares are available for grant as the Plan expired by its own
terms in August 1994. The options that were granted prior to the
expiration of the Plan, and which are outstanding, remain subject to the
terms of the Plan.
1994 Stock Option Plan
In July 1994, the Company adopted its 1994 Stock Option Plan (the
"1994 Plan") which authorized the grant of options to purchase up to
750,000 shares of the Company's common stock. These options may be issued
as either incentive or nonqualified stock options. The 1994 Plan provides
that options may be granted to key employees or directors for various terms
at a price not less than the fair market value of the shares on the date of
grant. The 1994 Plan was ratified and approved by the stockholders at the
Company's annual meeting of stockholders held on August 30, 1994. The
Company has not granted any options under the 1994 Plan.
(5) Employee Benefits
Effective May 1, 1995, the Company established the TMBR/Sharp
Drilling, Inc. Employee Retirement Plan which is a 401(K) profit sharing
plan. Company contributions are discretionary and have been currently set
at 25% for each dollar contributed by each eligible employee, limited,
however, to a maximum of 5% of the employee's compensation.
(6) Contingencies
On March 19, 1992, the Company was notified by the Texas Department of
Insurance that the Company's former workers' compensation insurance
carriers, Sir Lloyd's Insurance Company and its affiliate, Standard
Financial Indemnity Corporation ("SFIC"), had been placed in liquidation by
order of the 201st District Court of Travis County, Texas on March 12, 1992
in Cause No. 92-12765, The State of Texas vs. Sir Lloyd's Insurance Company
and Sir Insurance Agency, Inc., and in Cause No. 91-12766, The State of
Texas vs. Standard Financial Indemnity Corporation. Approximately two
months before being ordered into liquidation, SFIC requested that the
Company pay policy premiums in the amount of $646,476. On July 22, 1993
the special deputy receiver of SFIC billed the Company approximately
$1,061,000 for retrospective premiums, but adjusted the amount to $854,153
on January 12, 1994. Although the Company disputes the amount claimed by
SFIC and its receiver, the Company is presently unable to determine whether
-13-
<PAGE> 14
and to what extent such amount is, in fact, an accurate estimate of amounts
owed to SFIC, if any, largely as a result of the difficulty of verifying
the insurance carrier's estimated claims and adjustments and the
unavailability of SFIC personnel. However, an accrual was made in the
Company's financial statements for the amount in question.
In a related development, on November 3, 1995, the Company was
notified that a lawsuit had been filed in Travis County, Texas styled Texas
Property and Casualty Insurance Guaranty Association vs. TMBR/Sharp
Drilling, Inc. (Cause No. 95-12318). The Texas Property and Casualty
Insurance Guaranty Association ("Guaranty Association") seeks a recovery of
past workers' compensation claims advanced by the Guaranty Association
related to the Company's workers compensation insurance program with SFIC.
The Guaranty Association is seeking to recover a total of $803,057.11.
The Company disagrees with the claims made by the Guaranty Association
and intends to vigorously defend this lawsuit. The Company believes that
if the Guaranty Association's claim is ultimately determined to be valid
and enforceable, then the Receiver's claim against the Company is either
without merit or that its claim would be offset against the claims of the
Guaranty Association. For these reasons, the Company has not accrued the
Guaranty Association's claim in its financial statements.
(7) Subsequent Events
On January 16, 1996, the Company entered into a loan agreement with
Norwest Bank Texas, Midland, N.A. (Norwest) that provides for a $3,000,000
revolving line of credit secured by the Company's drilling rigs and related
equipment, accounts receivable and inventory. Borrowings under the line of
credit bear interest at the Norwest Bank Minnesota, National Association
base rate and the interest is payable monthly. The loans mature January
15, 1998 at which time the then outstanding principal and all of the
accrued and unpaid interest is due and payable. At February 1, 1996, the
Company had borrowed $500,000 under the facility.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Pursuant to its agreement with an exploration and production company,
the Company agreed to fund approximately $629,000 (including imputed
interest at a rate of 9.5% per annum) for leasehold acquisition, legal and
seismic costs incurred in acquiring certain oil and gas leases. During the
quarter ended December 31, 1995, the remaining obligation (approximately
$37,000) relating to this agreement was satisfied. See Note (3).
The Company intends to meet its capital resource requirements for
fiscal 1996 through available cash balances on hand and cash flow provided
through operations. If needed, the Company will also consider borrowing
funds from its bank lender. See Note (7).
The Company believes it owns a sufficient number of drilling rigs to
-14-
<PAGE> 15
remain competitive within its areas of operation. However, the cash flow
generated from operations will continue to be directly affected by the
level of drilling activity in the Company's areas of operations. By
focusing on drilling contracts which can provide operating cash flow and
maintaining its cost containment program, the Company believes its
operating cash flow will improve. Cash provided by operating activities
was $3,001,000 for the nine months ended December 31, 1995, compared with
an outflow of $67,000 for the nine months ended December 31, 1994.
Results of Operations
Total revenues were approximately $5,371,000 and $17,290,000 for the
three and nine months ended December 31, 1995, respectively, which
represents a 10% decrease and a 30% increase over the same periods in 1994,
respectively. Operating expenses as a percent of revenues were 102% and
94% for the three and nine months ended December 31, 1995, respectively,
versus 92% and 96% for the same periods of the prior year. The operating
results were negatively affected by a decrease in rig utilization rates.
Rig utilization rates were 42% and 45% for the three and nine months
ended December 31, 1995, respectively, as compared to 52% and 42% for the
same periods in 1994. Rig utilization in the Company's operating market is
difficult to project, primarily due to the intense competition within the
industry and the inability to accurately determine the number of rigs
available for work.
Oil and gas revenues increased by approximately 21% and 80% for the
three and nine months ended December 31, 1995, respectively, compared to
the same periods in 1994. Accordingly, oil and gas production expenses
also increased. Depreciation and depletion expense has also increased due
to the increase in the number of producing wells in which the Company has
acquired ownership interests.
On September 5, 1995, the Company entered into a 10 year License
Agreement with the Government of the Republic of Palau and the State of
Kayangel which grants the Company the right to explore for oil and natural
gas offshore. The license covers approximately 1.1 million gross acres
within the waters of Palau. The Company is considering the feasibility of
conducting exploration activities jointly with other parties, entering into
farmout arrangements with third parties or entering into other "earned
interest" arrangements with industry partners. Under the license
agreement, the Company is required to commence drilling of an exploratory
well no later than 9-5-97, and an additional well within six months of the
initial well. The Company estimates that it will cost approximately
$6,000,000 to drill the two wells.
Net working capital was a negative $1,598,000 for the period ended
December 31, 1995 as compared to $716,000 for the period ended March 31,
1995. This decrease in working capital is a result of a decrease in cash
and an increase in accounts payable. The Company expended approximately
$4.7 million in cash during the nine months ended December 31, 1995 for
asset acquisitions, including a 110 National drilling rig with a depth
capacity of 22,000 feet. Additionally, the Company continues to invest in
oil and gas exploration projects.
-15-
<PAGE> 16
Financial Condition
Recently, the Company has entered into "turnkey" drilling contracts
which create substantially more economic risk to the Company than footage
or daywork contracts. Under a turnkey contract, the Company contracts to
drill a well to a specified depth and bears the risk of loss to that depth.
Typically, turnkey contracts are more profitable than footage or daywork
contracts but the Company could experience substantial losses if drilling
problems occur under its turnkey contracts.
For the nine months ended December 31, 1995, the Company has
experienced improved operating results which can be attributable to several
factors. The Company's oil and gas exploration program has been successful
and drilling rig utilization rates have stabilized as have drilling prices.
The Company has substantially improved its safety record which has had a
positive impact on worker's compensation costs. All of these factors
coupled with a successful cost containment program have positively impacted
the Company's operating margins. However, the Company is still subject to
considerable uncertainty due to the instability of oil and gas prices,
decreased demand for contract drilling services and the intense competition
prevalent in the contract drilling industry.
-16-
<PAGE> 17
PART TWO - OTHER INFORMATION
Item 1. Legal Proceedings
On March 19, 1992, the Company was notified by the Texas Department of
Insurance that the Company's former workers' compensation insurance
carriers, Sir Lloyd's Insurance Company and its affiliate, Standard
Financial Indemnity Corporation ("SFIC"), had been placed in liquidation by
order of the 201st District Court of Travis County, Texas on March 12, 1992
in Cause No. 92-12765, The State of Texas vs. Sir Lloyd's Insurance Company
and Sir Insurance Agency, Inc., and in Cause No. 91-12766, The State of
Texas vs. Standard Financial Indemnity Corporation. Approximately two
months before being ordered into liquidation, SFIC requested that the
Company pay policy premiums in the amount of $646,476. On July 22, 1993
the special deputy receiver of SFIC billed the Company approximately
$1,061,000 for retrospective premiums, but adjusted the amount to $854,153
on January 12, 1994. Although the Company disputes the amount claimed by
SFIC and its receiver, the Company is presently unable to determine whether
and to what extent such amount is, in fact, an accurate estimate of amounts
owed to SFIC, if any, largely as a result of the difficulty of verifying
the insurance carrier's estimated claims and adjustments and the
unavailability of SFIC personnel. However, an accrual was made in the
Company's financial statements for the amount in question.
In a related development, on November 3, 1995, the Company was
notified that a lawsuit had been filed in Travis County, Texas styled Texas
Property and Casualty Insurance Guaranty Association vs. TMBR/Sharp
Drilling, Inc. (Cause No. 95-12318). The Texas Property and Casualty
Insurance Guaranty Association ("Guaranty Association") seeks a recovery of
past workers' compensation claims advanced by the Guaranty Association
related to the Company's workers compensation insurance program with SFIC.
The Guaranty Association is seeking to recover a total of $803,057.11.
The Company disagrees with the claims made by the Guaranty Association
and intends to vigorously defend this lawsuit. The Company believes that
if the Guaranty Association's claim is ultimately determined to be valid
and enforceable, then the Receiver's claim against the Company is either
without merit or that its claim would be offset against the claims of the
Guaranty Association. For these reasons, the Company has not accrued the
Guaranty Association's claim in its financial statements.
-17-
<PAGE> 18
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
10.1 - Loan Agreement dated January 16, 1996, between Norwest
Bank Texas, Midland, N.A. and the Registrant.
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1995.
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<PAGE> 19
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.
<TABLE>
<S> <C>
February 12, 1996 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)
</TABLE>
-19-
<PAGE> 20
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.1 Loan Agreement dated January 16, 1996,
between Norwest Bank Texas, Midland, N.A.
and the Registrant.
27 Financial Data Schedule
</TABLE>
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 74
<SECURITIES> 0
<RECEIVABLES> 4800
<ALLOWANCES> 1225
<INVENTORY> 46
<CURRENT-ASSETS> 4230
<PP&E> 51578
<DEPRECIATION> 43406
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<PAGE> 1
LOAN AGREEMENT
This Loan Agreement, dated as of January 16, 1996, is made
by and between TMBR/SHARP DRILLING, INC., a Texas corporation
(the "Borrower"), and NORWEST BANK TEXAS, MIDLAND, N.A., a
national banking association (the "Bank").
RECITALS
WHEREAS, Borrower is currently indebted to the Bank as
evidenced by that certain Promissory Note dated July 14, 1995
(the "Prior Note") in the original principal amount of
$1,000,000.00;
WHEREAS, the outstanding principal balance of the Prior Note
on the date hereof is $500,000.00;
WHEREAS, the Borrower has requested that the Bank renew,
extend and increase the principal amount of the Prior Note;
WHEREAS, the Bank is agreeable to the Borrower's requests
but only upon and subject to the terms and provisions which are
hereinafter specified.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the parties hereto hereby
agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.01 Certain Definitions. As used in this
Agreement, terms defined in the preamble and recitals shall have
the meanings set forth therein and the following terms shall have
the following meanings:
"Affiliate" as to any Person, shall mean any other
Person (other than a Subsidiary) which, directly or
indirectly, is in control of, is controlled by, or is
under common control with, such Person. For purposes
of this definition, "control" of a Person means the
power, directly or indirectly, either to (i) vote 10%
or more of the securities having ordinary voting power
for the election of directors of such Person or (ii)
direct or cause the direction of the management and
policies of such Person, whether by contract or
otherwise.
<PAGE> 2
"Agreement" shall mean this Loan Agreement, as
amended, supplemented or otherwise modified from time
to time.
"Base Rate" shall mean that variable rate of
interest per annum established by Norwest Bank,
Minnesota, National Association ("Norwest Minnesota"),
from time to time as its "base rate." Such rate is set
by Norwest Minnesota as a general reference rate of
interest, taking into account such factors as Norwest
Minnesota may deem appropriate, it being understood
that many of Norwest Minnesota's commercial or other
loans are priced in relation to such rate, that it is
not necessarily the lowest or best rate actually
charged to any customer and that Norwest Minnesota may
make various commercial or other loans at rates of
interest having no relationship to such rate.
"Borrowing Base Amount" shall mean at any date,
the amount determined pursuant to Section 2.04(a)(i)
under this Agreement at such date.
"Borrowing Base Assets" shall mean the Borrower's
accounts receivable, drilling in progress, inventory,
equipment, drill pipe, drilling rigs and related
equipment and which is subject to the Liens,
privileges, priorities and security interests existing
and to exist under the terms of the Security
Instruments from the Borrower or any other Person to or
in favor of the Bank.
"Borrowing Base Report" shall have the meaning set
forth in Section 2.04(b).
"Borrowing Date" shall mean any Business Day
specified in a notice pursuant to Section 2.03 as a
date on which the Borrower requests the Bank to make
Revolving Credit Loans hereunder.
"Business Day" shall mean a day other than a
Saturday, Sunday or legal holiday for commercial banks
under the laws of the State of Texas.
"Cash Flow" shall mean, with respect to any period
of calculation thereof, the sum of (i) the net income
(or loss) from continuing operations of Borrower during
such period (excluding extraordinary income but
including extraordinary expenses), plus (ii)
depreciation, deple-tion and amortization expenses of
Borrower during such period.
2
<PAGE> 3
"Change in Control" shall mean the occurrence
after the date of this Agreement of any circumstance or
event in which (i) a Person shall cause or bring about
(through solicitation of proxies or otherwise) the
removal or resignation of a majority of the members of
the Board of Directors of the Borrower serving in such
capacity on the date of this Agreement or a Person
causes or brings about (through solicitation of proxies
or otherwise) an increase in the size of the existing
Board of Directors of the Borrower such that the
existing members of the Board of Directors thereafter
represent a minority of the total number of persons
comprising the entire Board; or (ii) a Person,
including a "group" as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, becomes the
beneficial owner of shares of any class of stock of the
Borrower having twenty percent (20%) or more of the
total number of votes that may be cast for the election
of directors of the Borrower.
"Closing Date" shall mean the date on which the
conditions precedent set forth in Section 7.01 shall be
satisfied.
"Commitment" shall mean the obligation of the Bank
to make Revolving Credit Loans to the Borrower
hereunder in an aggregate principal amount at any one
time out-standing not to exceed the amount provided for
in accor-dance with the provisions of this Agreement,
including, without limitation, Section 2.01 of this
Agreement.
"Commitment Period" shall mean the period from and
including the date hereof to but not including the
Termination Date or such earlier date on which the
Commitments shall terminate as provided herein.
"Contractual Obligation" shall mean, as to any
Person, any provision of any security issued by such
Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which
it or any of its property is bound.
"Current Ratio" shall mean the ratio of (i) the
sum of the current assets of Borrower, to (ii) the sum
of the current liabilities (excluding, however, current
liabilities attributable to the Note) of Borrower.
"Debt to Worth Ratio" shall mean the ratio of (i)
the sum of the total liabilities of the Borrower to
(ii) the sum of the Borrower's Net Worth.
3
<PAGE> 4
"Environmental Laws" shall mean any and all
foreign, Federal, state, local or municipal laws,
rules, orders, regulations, statutes, ordinances,
codes, decrees, requirements of any Governmental
Authority or other Requirements of Law (including
common law) regulating, relating to or imposing
liability or standards of conduct concerning protection
of human health or the environment, as now or may at
any time hereafter be in effect.
"Environmental Complaint" shall mean any written
complaint, order, citation, notice or other written
communication from any Person with respect to the
existence or alleged existence of a violation of any
Environmental Law in connection with or with respect to
any air emission, water discharge, noise emission,
asbestos, hazardous substance or any other
environmental matter regulated under Environmental Laws
at, upon, under or within any of the property owned,
leased or used by the Borrower.
"Event of Default" shall mean the occurrence of
any of the events specified in Section 6.01 hereof.
"Excepted Liens" shall mean (i) Liens for taxes,
assessments or other governmental charges or levies not
yet due or which are being contested in good faith by
appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the
books of Borrower in conformity with GAAP; (ii) pledges
or deposits in connection with workers' compensation,
unemployment insurance or other social security legis-
lation, old age pension or public liability obliga-
tions; (iii) vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's or
other like Liens arising in the ordinary course of
business which are not overdue for a period of more
than 60 days or which are being contested in good faith
by appropriate proceedings; (iv) Liens arising under
customary oil and gas operating agreements entered into
in the ordinary course of business with respect to
obligations which are not overdue for a period of more
than 60 days or which are being contested in good faith
by appropriate proceedings; (v) restrictions,
easements, reservations, exceptions, encroachments,
rights-of-way, and other similar encumbrances incurred
in the ordinary course of business and other similar
irregularities in title which, in the aggregate, are
not substantial in amount and which do not in any case
materially detract from the value of the property
subject thereto or materially interfere with the
conduct of the business of Borrower; and (vi) deposits
to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds
4
<PAGE> 5
and other obligations of a like nature incurred in the
ordinary course of business.
"GAAP" shall mean generally accepted accounting
principles in the United States of America in effect
from time to time.
"Governmental Authority" shall mean any nation or
government, any state or other political subdivision
thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Highest Lawful Rate" shall mean the maximum
nonusurious interest rate, if any, that at any time or
from time to time may be contracted for, taken, re-
served, charged or received on the Note or on other
Indebtedness owing to the Bank, as the case may be,
under laws applicable to the Note or other Indebtedness
owing to the Bank which are presently in effect or, to
the extent allowed by applicable law, under such
applicable laws which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate
than applicable laws now allow.
"Indebtedness" of any Person at any date shall
mean (i) all obligations, liabilities and indebtedness
of such Person for borrowed money or for the deferred
purchase price of property or services (other than
current trade liabilities incurred in the ordinary
course of business and which are not in excess of 90
days past the invoice or billing date) for which such
Person is liable, contingently or otherwise, as
obligor, guarantor, surety or otherwise, or in respect
of which such Person otherwise assures a creditor
against loss; (ii) any other indebtedness of such
Person which is evidenced by a note, bond, debenture or
similar instrument; (iii) all obligations of such
Person under leases which shall have been, or should
have been, in accordance with GAAP, recorded as capital
leases for which such Person is liable, con-tingently
or otherwise, as obligor, guarantor or otherwise, or in
respect of which such Person otherwise assures a
creditor against loss; and (iv) unfunded vested
benefits under each employee benefit plan.
"Intangible Assets" shall mean all assets of the
Borrower that would be classified as intangible assets,
but in any event including, without limitation, (i)
deferred assets, other than prepaid insurance and
prepaid taxes; (ii) patents, copyrights, trademarks,
tradenames, franchises, goodwill, experimental expenses
and other similar assets which would be classified as
intangible assets on a balance sheet of such Person;
(iii) unamortized debt discount and expense; and (iv)
5
<PAGE> 6
assets located, and notes and receivables due from
obligors domiciled, outside of the United States.
"Lien" shall mean any mortgage, encumbrance,
pledge, hypothecation, assignment, charge, security
agreement, lien (statutory or other), deposit
agreement, conditional sale or trust receipt or a
lease, consignment or bailment for security purposes,
and reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances
affecting property. For purposes of this Agreement,
Borrower shall be deemed to be the owner of any
property which it has acquired or holds subject to a
conditional sale agreement, financing lease or other
arrangement pursuant to which title to the property has
been retained by or vested in some other Person for
security purposes.
"Loan Documents" shall mean, collectively, this
Agreement, the Note, the Security Instruments, and all
other agreements, documents, certificates, letters and
instruments of whatever nature ever delivered or
executed pursuant to, or in connection with, this
Agreement, whether existing on the date hereof or
thereafter created, as any of the same may hereafter be
amended, supplemented, extended or restated.
"Material Adverse Effect" shall mean a material
adverse effect on (i) the business, operations,
property, condition (financial or otherwise), results
of operations, assets, liabilities or prospects of the
Borrower, (ii) the ability of the Borrower to perform
any of its obligations under the Loan Documents or
(iii) the validity or enforceability of this or any of
the other Loan Documents or the rights or remedies of
the Bank hereunder or thereunder.
"Material Environmental Amount" shall mean an
amount not otherwise covered by insurance payable by
the Borrower in excess of $75,000.00 for remedial
costs, compliance costs, compensatory damages, punitive
damages, fines, penalties or any combination thereof.
"Materials of Environmental Concern" shall mean
any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any
Environmental Law, including, without limitation,
petroleum and its derivatives and polychlorinated
biphenyls.
6
<PAGE> 7
"Net Worth" shall mean as of the date of determi-
nation all amounts included under stockholders' equity
on a balance sheet of the Borrower at such date.
"Note" shall have the meaning set forth in Section
2.02.
"Person" shall mean any individual, corporation,
partnership, joint venture, joint stock company,
business trust, trust, unincorporated association,
Governmental Authority, or any other form of entity of
whatever nature.
"Properties" shall have the meaning set forth in
Section 3.11(a).
"Requirement of Law" shall mean, as to any Person,
the certificate or articles of incorporation and bylaws
or other organizational or governing documents of such
Person, and any law, statute, code, ordinance, order,
treaty, rule, regulation or determination of an
arbitrator or a court or other Governmental Authority,
in each case applicable to or binding upon such Person
or any of its property or to which such Person or any
of its property is subject.
"Revolving Credit Loan" or "Revolving Credit
Loans" shall have the meaning set forth in Section
2.01.
"Security Instruments" shall mean, without limita-
tion, the agreements or instruments described in
Subsection 7.01(a) hereof and any and all other
instruments heretofore, now or hereafter executed and
delivered by the Borrower or any other Person to secure
or guarantee the payment or performance of the Note or
this Agreement, as any such agreement or instrument may
be amended or supplemented from time to time.
"Subsidiary" shall mean, as to any Person, a
corporation, partnership or other entity of which
shares of stock or other ownership interests having
ordinary voting power (other than stock or such other
ownership interests having such power only by reason of
the happening of a contingency) to elect a majority of
the board of directors or other managers of such
corporation, partnership or other entity are at the
time owned, or the management of which is otherwise
controlled, directly or indirectly, through one or more
intermediaries, or both, by such Person. Unless
otherwise qualified, all references to "Subsidiary" or
7
<PAGE> 8
to "Subsidiaries" in this Agreement shall refer to a
Subsidiary or Subsidiaries of Borrower.
"Tangible Net Worth" shall mean at a particular
date (i) the sum of the stockholders' equity of
Borrower, less (ii) the sum of the aggregate book value
of the Intangible Assets of Borrower.
"Termination Date" shall mean the second
anniversary of the Closing Date.
Section 1.02 Other Definitional Provisions. (i) Unless
otherwise specified therein, all terms defined in this Agreement
shall have the defined meanings when used in the Note or the
Security Instruments or any certificate or other Loan Document
made or delivered pursuant hereto.
(ii) As used herein and in the Note, and any
certificate or other document made or delivered pursuant hereto,
accounting terms relating to the Borrower not defined in Section
1.01 and accounting terms partly defined in Section 1.01, to the
extent not defined, shall have the respective meanings given to
them under GAAP.
(iii) The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision
of this Agreement, and Section, subsection, Schedule and Exhibit
references are to this Agreement unless otherwise specified.
(iv) The meanings given to terms defined herein shall
be equally applicable to both the singular and plural forms of
such terms.
Section 1.03 Accounting Principles. Where the character
or amount of any asset or liability or item of income or expense
is required to be determined or any consolidation or other
accounting computation is required to be made for the purposes of
this Agreement, such determination, consolidation or computation
shall be made in accordance with GAAP consistently applied,
except where such principles are inconsistent with the
requirements of this Agreement.
ARTICLE 2
AMOUNT AND TERMS OF COMMITMENTS
Section 2.01 Revolving Credit Loans. Subject to the terms
and conditions hereof, the Bank agrees to make revolving credit
loans (individually, a "Revolving Credit Loan"; collectively, the
"Revolving Credit Loans") to the Borrower from time to time
during the Commitment Period in an aggregate principal amount at
8
<PAGE> 9
any one time outstanding not to exceed the lesser of (i)
$3,000,000.00 or (ii) one-third (1/3) of the Borrowing Base
Amount. During the Commitment Period, the Borrower may use the
Commitment by borrowing, prepaying the Revolving Credit Loans in
whole or in part, and reborrowing, all in accordance with the
terms and conditions hereof.
Section 2.02 Revolving Credit Note. The Revolving Credit
Loans made by the Bank shall be evidenced by a promissory note of
the Borrower, substantially in the form of Exhibit A (the
"Note"). The Bank shall maintain in accordance with its usual
practice an account or other record evidencing the Indebtedness
of the Borrower to the Bank resulting from each Revolving Credit
Loan made by the Bank from time to time, including the amounts of
principal and interest payable and paid to the Bank from time to
time under this Agreement and the Note. The entries made in such
account or record of the Bank shall be prima facie evidence of
the existence and amounts of the obligations of the Borrower
therein recorded; provided, however, that the failure of the Bank
to maintain any such account or record, or any error therein,
shall not in any manner affect the absolute and unconditional
obligation of the Borrower to repay (with applicable interest)
the Revolving Credit Loans made to the Borrower in accordance
with the terms of this Agreement. The Note shall (x) be dated
the Closing Date, (y) be stated to mature two years from the
Closing Date and (z) bear interest on the unpaid principal amount
thereof from time to time outstanding at the applicable interest
rate per annum as provided in the Note. Interest on the Note
shall be payable on the dates specified in the Note.
Section 2.03 Procedure for Revolving Credit Borrowing.
The Borrower may borrow under the Commitment during the
Commitment Period on any Business Day, provided that the Borrower
shall give the Bank irrevocable notice specifying (A) the amount
to be borrowed and (B) the requested Borrowing Date; provided,
that such notice shall be waived by the Bank in the case of, and
only in the case of, the initial Revolving Credit Loan to be made
on the Closing Date. Each borrowing pursuant to the Revolving
Commitment shall be in an aggregate principal amount of the
lesser of (i) $50,000.00 or a whole multiple thereof, or (ii) the
then remaining unadvanced portion of the available Commitment.
Section 2.04 Borrowing Base Amount. The Borrowing Base
Amount shall be determined as follows:
(a) Initial Borrowing Base Amount. (i) The Borrowing
Base Amount shall be $10,163,400.00 during the period from the
date hereof to the date on which the Borrower receives notice of
the first determination of the Borrowing Base Amount by the Bank
pursuant to Section 2.04(b) and thereafter the Borrowing Base
Amount shall be the Borrowing Base Amount most recently
determined pursuant to Section 2.04(b).
9
<PAGE> 10
(b) Determinations of the Borrowing Base Amount. (i)
No later than 45 days after the end of each month throughout the
Commitment Period, the Borrower shall, at its own expense,
furnish to the Bank a borrowing base report ("Borrowing Base
Report"), in the form attached hereto as Exhibit B, which report
shall be dated as of the end of each such month and shall set
forth, by category, the Borrowing Base Assets and the Borrowing
Base Amount as therein provided.
(ii) Within 15 days after it receives each Borrowing
Base Report, the Bank shall make a determination of the Borrowing
Base Amount, and shall notify the Borrower of the new Borrowing
Base Amount, if any; provided, that if the Bank does not so
notify the Borrower of a new Borrowing Base Amount, then the
Borrowing Base Amount set forth in the Borrowing Base Report
furnished to the Bank by the Borrower pursuant to Section
2.04(b)(i) shall be deemed to be the Borrowing Base Amount until
a new Borrowing Base Amount is determined by the Bank and notice
of such new Borrowing Base Amount is given to the Borrower. Each
determination of the Borrowing Base Amount shall be made by the
Bank in the exercise of its sole discretion in accordance with
the then current standards and practices of the Bank for similar
oil and gas/contract drilling equipment loans, taking into
account such factors as the Bank may deem appropriate, including,
without limitation the nature and extent of the Borrower's
interest in the Borrowing Base Assets and the anticipated timing
and extent of net operating income therefrom. The Bank may in
its sole discretion discount the value of any Borrowing Base
Asset set forth in a Borrowing Base Report by the same factors
utilized by it in discounting the value of comparable borrowing
base assets in comparable transactions for comparable borrowers.
(iii) The Borrower agrees to pay or reimburse the Bank
for all reasonable out-of-pocket costs and expenses incurred by
the Bank in connection with (a) the examination of each Borrowing
Base Report furnished to the Bank by the Borrower, (b) any
redetermi-nation by the Bank of the Borrowing Base Amount
pursuant to such Borrowing Base Report (including independent
appraisals of the Borrowing Base Assets which the Bank may, but
shall not be required to, obtain in connection with any
redetermination of the Borrowing Base Amount by the Bank), and
(c) the notification of the Borrower of such redetermined
Borrowing Base Amount.
(iv) Each delivery by the Borrower to the Bank of a
Borrowing Base Report shall be deemed to constitute a
representation and warranty by the Borrower to the Bank that the
Borrower has good and marketable title to the Borrowing Base
Assets and any other property rights or interests described in
such report, and that none of such Borrowing Base Assets or other
property rights or interests is subject to any Lien other than as
permitted by Section 5.02.
10
<PAGE> 11
Section 2.05 Optional and Mandatory Prepayments. (i) The
Borrower may at any time and from time to time prepay the
Revolving Credit Loans, in whole or in part, without premium or
penalty, upon at least four Business Days' irrevocable notice to
the Bank, specifying the date and amount of prepayment. If any
such notice is given, the amount specified in such notice shall
be due and payable on the date specified therein. Partial
prepayments shall be in an aggregate principal amount of
$50,000.00 or a whole multiple thereof.
(ii) If the aggregate unpaid principal amount of the
Revolving Credit Loans shall at any time exceed one-third (1/3)
of the Borrowing Base Amount at such time, the Bank shall so
notify the Borrower, and the Borrower shall, within 30 days after
such notification, prepay the principal of the Revolving Credit
Loans, in an aggregate amount at least equal to such excess,
together with accrued interest on the amount prepaid to the date
of such prepayment.
Section 2.06 Payment Procedure. All payments and prepay-
ments made by the Borrower under the Note or this Agreement shall
be made without setoff or counterclaim to the Bank at its office
at 500 West Texas Avenue, Midland, Texas 79701, and shall be
made in immediately available funds, prior to 1:00 p.m., Midland,
Texas time, on the date that such payment is required or
permitted to be made. Any payment received by the Bank after
1:00 p.m. on any date shall be considered for all purposes
(including the calculation of interest, to the extent permitted
by applicable law) as having been made on the next following
Business Day. If the date of any payment or prepayment of the
Note falls on a day which is not a Business Day, then for all
purposes of the Note and this Agreement such date shall be deemed
to have fallen on the next following Business Day, and such
extension of time shall in such case be included in the
computation of payment of interest.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement and to make
the Revolving Credit Loans, the Borrower hereby represents and
warrants to the Bank (which representations and warranties will
survive the delivery of the Note and the making of the Revolving
Credit Loans hereunder) that:
Section 3.01 Corporate Existence; Compliance with Law.
Borrower (i) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization,
(ii) has the corporate power and authority, and the legal right,
to own and operate its property (including, without limitation,
the Borrowing Base Assets), to lease the property it operates as
lessee and to conduct the business in which it is currently
engaged, (iii) is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its
11
<PAGE> 12
ownership, lease or operation of property or the conduct of its
business requires such qualification and (iv) is in compliance
with all Requirements of Law except to the extent that the
failure to comply therewith could not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
Section 3.02 Corporate Power; Authorization; Enforceable
Obligations. Borrower has the corporate power and authority, and
the legal right, to make, deliver and perform the Loan Documents
to which it is a party and to borrow hereunder and has taken all
necessary corporate action to authorize the borrowings on the
terms and conditions of this Agreement and the Note and to
authorize the execution, delivery and performance of the Loan
Documents to which it is a party. No consent or authorization
of, filing with, notice to or other act by or in respect of, any
Governmental Authority or any other Person is required in
connection with the borrowings hereunder or with the execution,
delivery, performance, validity or enforceability of the Loan
Documents to which the Borrower is a party. This Agreement has
been, and each other Loan Document to which it is a party will
be, duly executed and delivered on behalf of the Borrower. This
Agreement constitutes, and each other Loan Document to which it
is a party when executed and delivered will constitute, a legal,
valid and binding obligation of Borrower enforceable against
Borrower in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
Section 3.03 No Legal Bar. The execution, delivery and
performance of the Loan Documents to which the Borrower is a
party, the borrowings hereunder and the use of the proceeds
thereof will not violate any Requirement of Law or Contractual
Obligation of the Borrower and will not result in, or require,
the creation or imposition of any Lien (other than as permitted
hereby) on any of Borrower's properties or revenues pursuant to
any such Requirement of Law or Contractual Obligation.
Section 3.04 No Default. Borrower is not in default under
or with respect to any of its Contractual Obligations in any
respect which could have a Material Adverse Effect. No Event of
Default has occurred and is continuing.
Section 3.05 Ownership of Property; Liens. Borrower has
good record and marketable title in fee simple to, or a valid
leasehold interest in, all its real property (including, without
limitation, the Borrowing Base Assets), and good title to, or a
valid leasehold interest in, all its other property, and none of
such property is subject to any Lien except as permitted by
Section 5.02.
12
<PAGE> 13
Section 3.06 No Burdensome Restrictions. Except as
described in Schedule 3.06, no Requirement of Law or Contractual
Obligation of Borrower could reasonably be expected to have a
Material Adverse Effect.
Section 3.07 Taxes. Borrower has filed or caused to be
filed all tax returns which, to the knowledge of the Borrower,
are required to be filed and has paid all taxes shown to be due
and payable on said returns or on any assessments made against it
or any of its property and all other taxes, fees or other charges
imposed on it or any of its property by any Governmental
Authority (other than any the amount or validity of which are
currently being contested in good faith by appropriate
proceedings and with respect to which reserves in conformity with
GAAP have been provided on the books of the Borrower); no tax
Lien has been filed, and, to the knowledge of the Borrower, no
claim is being asserted, with respect to any such tax, fee or
other charge.
Section 3.08 Federal Regulations. No part of the proceeds
of any Revolving Credit Loan will be used for "purchasing" or
"carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulation G or Regulation U of
the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect. If requested by the Bank,
the Borrower will furnish to the Bank a statement to the
foregoing effect in conformity with the requirements of FR Form
G-1 or FR Form U-1 referred to in said Regulation G or Regulation
U, as the case may be.
Section 3.09 Investment Company Act; Public Utility
Holding Company Act; Other Regulations. Borrower is not (a) an
"investment company", or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of
1940, as amended or (b) a "holding company" as defined in, or
otherwise subject to regulation under, the Public Utility Holding
Company Act of 1935. Borrower has not made an election to be
treated as a utility (as defined in subdivision (2) of subsection
(a) of Section 35.01 of the Texas Business and Commerce Code.
Borrower is not primarily engaged in the transmission of goods or
gas by pipeline, and does not hold itself out to the public as
having facilities for the transmission of goods or gas by pipe-
line which are available for hire by the general public.
Section 3.10 Purpose of Loan. The proceeds of the
Revolving Credit Loans shall be used by the Borrower to purchase
drill pipe and related equipment necessary for the drilling of
oil and gas wells, and for general corporate purposes.
Section 3.11 Environmental Matters. Except for environ-
mental matters which, in the aggregate, could not reasonably be
expected to either (i) result in the existence of an unsatisfied
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liability in excess of a Material Environmental Amount or (ii)
have a Material Adverse Effect:
(a) to the best of the Borrower's knowledge, the
facilities and properties (real or personal) owned, leased
or operated by the Borrower (the "Properties") do not
contain, and have not previously contained, any Materials of
Environmental Concern in amounts or concentrations which (i)
constitute or constituted a violation of, or (ii) could give
rise to liability under, any Environmental Law;
(b) to the best of the Borrower's knowledge, the
Properties and all operations at the Properties are in
compliance, and have in the last five years been in
compliance, with all applicable Environmental Laws, and
there is no contamination at, under or about the Properties
or violation of any Environmental Law with respect to the
Properties or the business operated by Borrower;
(c) Borrower has not received any notice of violation,
alleged violation, non-compliance, liability or potential
liability regarding environmental matters or compliance with
Environmental Laws with regard to any of the Properties or
the business of the Borrower, nor does the Borrower have
knowledge or reason to believe that any such notice will be
received or is being threatened;
(d) to the best of the Borrower's knowledge, materials
of Environmental Concern have not been transported or
disposed of from the Properties in violation of, or in a
manner or to a location which could reasonably be expected
to give rise to liability under, any Environmental Law, nor
have any Materials of Environmental Concern been generated,
treated, stored or disposed of at, on or under any of the
Properties in violation of, or in a manner that could give
rise to liability under, any applicable Environmental Law;
(e) no judicial proceeding or governmental or
administrative action is pending or, to the knowledge of the
Borrower, threatened, under any Environmental Law to which
Borrower is or will be named as a party with respect to the
Properties or the business of Borrower, nor are there any
consent decrees or other decrees, consent orders,
administra-tive orders or other orders, or other
administrative or judicial requirements outstanding under
any Environmental Law with respect to the Properties or the
business of Borrower; and
(f) to the best of the Borrower's knowledge, there has
been no release or threat of release of Materials of
Environmental Concern at or from the Properties, or arising
from or related to the operations of the Borrower in
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<PAGE> 15
connection with the Properties or otherwise in connection
with the business of the Borrower, in violation of or in
amounts or in a manner that could give rise to liability
under Environmental Laws.
Section 3.12 Insurance. The Borrower maintains with
financially sound and reputable insurance companies insurance in
at least such amounts and against at least such risks (but
including in any event public liability) as are usually insured
against in the same general area by companies engaged in the same
or a similar business and such insurance is otherwise in
compliance with the Loan Documents; provided, however, Borrower
does not maintain insurance on its drilling rigs.
Section 3.13 Financial Condition. The balance sheet of
the Borrower as of September 30, 1995 and the related statements
of income and of cash flows for the six-month period then ended,
copies of which have been delivered to the Bank, are true and
correct in all material respects and present fairly the financial
condition of Borrower as at such date and the results of its
operations and cash flows for the periods stated (subject to
normal year-end audit adjustments). Borrower did not have, at
the date of the most recent balance sheet referred to above, any
guaranty obligation, contingent liability or liability for taxes,
or any long-term lease or unusual forward or long-term
commitment, which is not reflected in the foregoing financial
statements or in the notes thereto. During the period from
September 30, 1995 to and including the date hereof there has
been no sale, transfer or other disposition by Borrower of any
material part of its business or property and no purchase or
other acquisition of any business or property (including any
capital stock of any other Person) material in relation to the
financial condition of Borrower at September 30, 1995. Since
September 30, 1995, no change, either in any case or in the
aggregate, has occurred in the condition, financial or otherwise,
of Borrower which would have a Material Adverse Effect.
Section 3.14 Investments and Guaranties. At the date of
this Agreement, Borrower has not made any material investments
in, advances to or guaranties of the obligations of any Person.
Section 3.15 No Litigation. Except as set forth in
Schedule 3.06, there is no litigation, legal, administrative or
arbitral proceeding, investigation or other action of any nature
pending or, to the knowledge of the Borrower, threatened against
or affecting Borrower which involves the possibility of any
judgment or liability not fully covered by insurance, and which
would have a Material Adverse Effect; and, to the best of
Borrower's knowledge, since September 30, 1995, Borrower has not
committed any act, or failed to take any action, in connection
with the conduct of its business or with respect to any
Contractual Obligation which is likely to result in the assertion
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<PAGE> 16
of any adverse claim of any nature whatsoever by any Person
against Borrower or its properties, revenues or assets.
Section 3.16 Licenses and Permits. Borrower has not
failed to obtain any license, permit, franchise or other
governmental authorization necessary to the ownership of any of
its properties or the conduct of its business, which violation or
failure would have (in the event that such violation or failure
were asserted by any Person through appropriate action) a
Material Adverse Effect.
Section 3.17 ERISA. Each employee benefit plan which
Borrower has sponsored, maintained or contributed to has complied
in all material respects with the applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, and
the Internal Revenue Code of 1986, as amended.
Section 3.18 No Material Misstatements. No information,
exhibit, schedule or report furnished to the Bank by the Borrower
in connection with this Agreement contains any untrue statement
of a material fact or omits to state any material fact necessary
to make the statements contained therein not misleading.
ARTICLE 4
AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitment
remains in effect or any Indebtedness is owing to the Bank
hereunder or under the Note or any other Loan Document, the
Borrower shall:
Section 4.01 Financial Statements and Reports. Furnish or
cause to be furnished to the Bank from time to time (i) such
information regarding the business and affairs and financial
condition of the Borrower as the Bank may reasonably request, and
(ii) without request, the following:
(a) Annual Financial Statements - promptly after
becoming available, but in any event within 90 days
after March 31 of each year, a copy of the audited
balance sheet of the Borrower as at the end of such
year, and the related statements of income and retained
earnings and of cash flows of the Borrower for such
year, setting forth in each case in comparative form
the corresponding figures for the preceding year,
accompanied by the report of the Borrower's independent
certified public accountants;
(b) Monthly Financial Statements - promptly after
becoming available, but in any event within 45 days
after the end of each month, the unaudited balance
sheet of the Borrower as at the end of such month, and
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<PAGE> 17
the related unaudited statements of income and retained
earnings and of cash flows of the Borrower for such
month and for the period from the beginning of the most
recent fiscal year to the end of such month, setting
forth in each case in comparative form the
corresponding figures for the corresponding period of
the preceding year, accompanied by the report of the
Principal Financial Officer of the Borrower, which
report shall be to the effect that such statements are
true and correct in all material respects necessary for
a fair presentation (subject to normal year-end
adjustments);
(c) Accounts Receivable Reports - promptly after
becoming available, but in any event within 45 days
after the end of each month, a list of accounts
receivable of Borrower, and an aging of all such
receivables on the basis of 30-60-90 and over 90 days
from date of invoice;
(d) Calculation of Ratios - promptly after
becoming available, but in any event within 45 days
after the end of each month, the calculations of
Current Ratio, Tangible Net Worth, Cash Flow and Debt
to Worth Ratio pursuant to Sections 5.16, 5.17, 5.18
and 5.19, respectively, hereof; and
(e) Shareholder Communications; Regulatory
Filings - promptly after their availability, but in any
event within five Business Days after the same are
sent, copies of all financial statements, reports and
other communica-tions furnished by Borrower to its
shareholders, and within five Business Days after the
same are filed, copies of all forms, reports and other
filings made by the Borrower with the Securities and
Exchange Commission.
Section 4.02 Certificates of Compliance. Concurrently
with the furnishing of the annual financial statements pursuant
to Subsection 4.01(a) hereof and the calculation of the ratios
pursuant to Subsection 4.01(d) hereof, furnish or cause to be
furnished to the Bank a certificate in the form attached hereto
as Exhibit C and Exhibit D, respectively, signed by the principal
financial officer of the Borrower to the effect (i) that a review
of the activities of the Borrower has been made under such
officer's supervision with a view to determining whether the
Borrower has fulfilled all of its obligations under this
Agreement, the Note and the Security Instruments; (ii) that the
Borrower has fulfilled its obligations under such instruments and
that all representations made herein or therein continue to be
true and correct in all material respects except as otherwise
stated therein, or if there is then in existence an Event of
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<PAGE> 18
Default, specifying such Event of Default and the nature and
status thereof; and (iii) to the extent requested from time to
time by the Bank, specifically affirming compliance by the
Borrower with any covenants under this Agreement or any Security
Instrument and accompanied by such financial or other details,
information and material as the Bank may reasonably request to
evidence such compliance.
Section 4.03 Payment of Taxes and Other Charges. Pay and
discharge or cause to be paid and discharged promptly all taxes,
assessments and governmental charges or levies, other than any
the amount or validity of which are currently being contested in
good faith by appropriate proceedings and with respect to which
reserves in conformity with GAAP have been provided on the books
of the Borrower.
Section 4.04 Maintenance of Existence; Conduct of
Business. (i) Maintain its separate corporate existence, rights
and franchises; (ii) observe and comply (to the extent necessary
so that any failure would not have a Material Adverse Effect)
with all Contractual Obligations and Requirements of Law; (iii)
maintain its properties in good and workable condition at all
times and make all repairs, replacements, additions, betterments
and improvements to its properties as are needful and proper so
that the business carried on in connection therewith may be
conducted properly and efficiently at all times; and (iv) take
all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in the normal course of its
business.
Section 4.05 Further Assurances. Cure promptly any
defects in the creation and issuance of the Note and the
execution and delivery of this Agreement, any Security Instrument
or other Loan Document to which the Borrower is a party, and
promptly execute and deliver to the Bank upon request all such
other and further documents, agreements and instruments in
compliance with or accomplishment of the covenants and agreements
of the Borrower in this Agreement and the Security Instruments or
to further evidence and more fully describe the collateral
intended as security for the Note, or to correct any omissions in
any Security Instrument, or more fully to state the security
obligations set out herein or in any Security Instrument, or to
perfect, protect or preserve any Liens created pursuant to any
Security Instrument, or to make any recordings, to file any
notices, or obtain any consents, all as may be necessary or
appropriate in connection therewith as determined by the Bank.
Section 4.06 Performance of Obligations. Perform every
act and discharge all of its obligations provided to be performed
and discharged by it under this Agreement and under the Security
Instruments and other Loan Documents at the time or times and in
the manner specified.
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<PAGE> 19
Section 4.07 Reimbursement of Expenses. Pay all
reasonable legal fees and out-of-pocket expenses incurred by the
Bank in connection with the negotiation, preparation and
administration of this Agreement, the Note, the Security
Instruments and any and all other Loan Documents (including any
amendments hereto or thereto or consents or waivers hereunder or
thereunder) and all reasonable fees, charges or taxes for the re-
cording or filing of the Security Instruments, and promptly
reimburse the Bank for all amounts expended, advanced or incurred
by the Bank to satisfy any obligation of the Borrower under this
Agreement or any other Person under any Security Instrument, or
to collect the Note, or to enforce the rights of the Bank under
this Agreement or any Security Instrument, which amounts will
include all court costs, reasonable attorneys' fees (including,
without limitation, for trial, appeal or other proceedings),
reasonable fees of auditors and accountants, and investigation
expenses reasonably incurred in connection with any such matters.
Section 4.08 Insurance. Maintain with financially sound
and reputable insurance companies insurance against such
liabilities, casualties, risks and contingencies and in such
types and amounts as is customary in the case of Persons engaged
in the same or similar businesses and similarly situated; and
furnish or cause to be furnished to the Bank, upon request, full
information as to the insurance carried, including copies of the
applicable policies; and apply the proceeds of such policies, if
any, to the prepayment of the Indebtedness then owing to the
Bank. Notwithstanding anything in this Section 4.08 to the
contrary, Borrower shall not be required to maintain insurance on
its drilling rigs.
Section 4.09 Accounts and Records. Keep proper books of
record and account in which full, true and correct entries will
be made of all dealings or transactions in relation to its
business and activities.
Section 4.10 Right of Inspection. Permit any officer,
employee, agent or representative of the Bank to visit and
inspect any of the properties of the Borrower, examine its books
of record and accounts, take copies and extracts therefrom, and
to discuss the business, operations, properties, finances and ac-
counts of the Borrower with the Borrower's officers, employees,
engineers, accountants and auditors, all at such reasonable times
and as often as the Bank may reasonably desire.
Section 4.11 Notice of Certain Events. Promptly notify
the Bank of the occurrence of (i) any event which constitutes an
Event of Default, together with a detailed statement by the Chief
Executive Officer of the Borrower of the steps being taken to
cure such Event of Default; (ii) the receipt of any notice from,
or the taking of any other action by, the holder of any
promissory note, debenture or other evidence of indebtedness with
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<PAGE> 20
respect to a claimed default, together with a detailed statement
specifying the notice given or other action taken by such holder
and the nature of the claimed default and what action the
Borrower is taking or proposes to take with respect thereto;
(iii) any legal, judicial or regulatory proceedings affecting
Borrower or any of its properties in which the amount involved is
material and is not covered by insurance or which, if adversely
determined, would have a Material Adverse Effect; (iv) any
dispute between the Borrower and any Governmental Authority or
any other Person which, if adversely determined, would have a
Material Adverse Effect; (v) any event or condition having a
Material Adverse Effect; and (vi) each Environmental Complaint.
Section 4.12 Borrowing Base Reports. Provide the Bank
with Borrowing Base Reports required by and in accordance with
Section 2.04(b)(i) of this Agreement.
ARTICLE 5
NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitment
remains in effect or any Indebtedness is owing to the Bank
hereunder or under the Note or any other Loan Document, the
Borrower shall not, directly or indirectly:
Section 5.01 Limitation on Indebtedness. Incur, create,
assume or suffer to exist any Indebtedness, except:
(a) Indebtedness of the Borrower under this
Agreement;
(b) Indebtedness existing on the date of this
Agreement which is set forth in the financial
statements referred to in Section 3.13 of this
Agreement, but not any increases thereof;
(c) obligations for the payment of rent or hire
of property under leases or lease agreements which
would not cause the aggregate amount of all payments
made by the Borrower pursuant to such leases or lease
agreements to exceed $250,000.00 during the terms
thereof; and
(d) additional Indebtedness of the Borrower not
to exceed $250,000.00 in aggregate principal amount at
any one time outstanding.
Section 5.02 Limitation on Liens. Create, incur, assume
or permit to exist any Lien on any of its property, assets or
revenues, whether now owned or hereafter acquired, except for:
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<PAGE> 21
(a) Liens securing the payment of any
Indebtedness of the Borrower under this Agreement; and
(b) Excepted Liens.
Section 5.03 Limitation on Investments, Acquisitions,
Loans and Advances. Make any loan, advance, extension of credit
or capital contribution to, or purchase any stock, bonds, notes,
debentures or other securities of or any assets constituting a
business unit of, or make any other investments in, any Person,
except:
(a) the outstanding investments, loans or
advances set forth in the financial statements referred
to in Section 3.13 of this Agreement, but not any
increases thereof;
(b) investments in (i) direct obligations of the
United States of America or any agency thereof; (ii)
certificates of deposit of the Bank of maturities less
than one year, or issued by other commercial banks in
the United States of America having capital and surplus
in excess of $50,000,000; or (iii) commercial paper of
maturities less than six months if at the time of
purchase such paper is rated in either of the two
highest rating categories of Standard & Poors
Corporation, Moody's Investors Service, Inc. or any
other rating agency satisfactory to the Bank;
(c) extensions of trade credit in the ordinary
course of business;
(d) investments in and acquisitions of oil and
gas properties and related assets, provided that such
investments or acquisitions are made in the ordinary
course of Borrower's business and not otherwise
prohibited by this Agreement;
(e) other investments, capital contributions,
loans or advances not to exceed the aggregate amount of
$250,000.00 at any one time outstanding; and
(f) loans and advances to employees of the
Borrower for travel, entertainment and similar expenses
in the ordinary course of business.
Section 5.04 Limitation on Dividends, Distributions and
Redemptions. Declare or pay any dividend (other than dividends
payable solely in common stock of the Borrower) on, or purchase,
redeem, retire or otherwise acquire for value, any shares of any
class of Borrower's capital stock now or hereafter outstanding,
or return any capital to its shareholders, or make any other
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<PAGE> 22
distribution in respect thereof, whether in cash or property on
in obligations of the Borrower or any Subsidiary.
Section 5.05 Limitation on Sales and Leasebacks. Enter
into any arrangement with any Person whereby it shall sell or
transfer any property, whether now owned or hereafter acquired,
and whereby it shall then or thereafter rent or lease as lessee
such property or any part thereof or other property which it
intends to use for substantially the same purpose or purposes as
the property sold or transferred.
Section 5.06 Limitation on Fundamental Changes. Enter
into any merger, consolidation or amalgamation, or liquidate,
wind up or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, lease, assign, transfer or
otherwise dispose of (whether in one transaction or in a series
of related transactions), all or substantially all of its
property, business or assets (whether now owned or hereafter
acquired), or make any material change in its present method of
conducting business.
Section 5.07 Limitation on Leases. Create, incur, assume
or suffer to exist any obligation for the payment of rent or hire
of property of any kind whatsoever (real or personal), under
leases or lease agreements (other than leases or lease agreements
which constitute Indebtedness and which are permitted by Section
5.01(c) of this Agreement, or oil and gas leases) which would
cause the aggregate amount of all payments made by the Borrower
pursuant to such leases or lease agreements to exceed $75,000 in
any period of twelve consecutive calendar months.
Section 5.08 Limitation on Negative Pledge Clauses. Enter
into with any Person any agreement, other than (a) this Agreement
and (b) the Loan Documents, which prohibits or limits the ability
of the Borrower to create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, whether now
owned or hereafter acquired.
Section 5.09 Limitation on Use of Proceeds. Permit the
proceeds of the Note to be used for any purpose other than as
permitted by Section 3.10 hereof.
Section 5.10 Limitation on Lines of Business. Enter into
any business, either directly or through any Subsidiary, except
for those businesses in which the Borrower is engaged on the date
of this Agreement or which are directly related thereto.
Section 5.11 Limitation on Sale of Assets. Convey, sell,
lease, assign, transfer or otherwise dispose of any of its
property, business or assets (including, without limitation,
receivables and leasehold interests), whether now owned or
hereafter acquired, except:
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<PAGE> 23
(a) obsolete, worn out, depleted or "uneconomic"
property disposed of in the ordinary course of
business;
(b) the sale of petroleum produced by the
Borrower in the ordinary course of Borrower's business;
(c) undeveloped, undrilled leasehold acreage held
in inventory, provided that in any fiscal year of the
Borrower the gross proceeds of such property so
disposed of shall not exceed $100,000.00; and
(d) the sale of any other assets or properties of
the Borrower, provided that in any fiscal year of the
Borrower the gross proceeds of such property so
disposed of shall not exceed $150,000.00.
Section 5.12 Limitation on Changes in Fiscal Year. Permit
its fiscal year to end on a day other than March 31.
Section 5.13 Limitation on Transactions with Affiliates.
Enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of property or the rendering of
any service, with any Affiliate unless such transaction is (a)
not otherwise prohibited under this Agreement, (b) in the
ordinary course of business and (c) upon fair and reasonable
terms no less favorable to the Borrower than it could obtain in a
comparable arm's length transaction with a Person which is not an
Affiliate.
Section 5.14 No Change in Control. Permit any Change in
Control of Borrower.
Section 5.15 Limitation on Issuance of Stock. Issue or
sell any shares of capital stock or other equity security (or any
options, warrants, rights or other convertible securities
entitling the holder thereof to acquire any such capital stock or
equity security) of any kind or class, except:
(a) the issuance and sale of capital stock or
other equity security, the proceeds of which will be
used to repay the Note in its entirety, and
(b) the issuance and sale of capital stock
pursuant to the Borrower's stock option plans and stock
options in existence on the date of this Agreement.
Section 5.16 Current Ratio. Permit the Current Ratio, as
defined herein and calculated pursuant to Exhibit E hereto, to
be: (i) less than .65 to 1.0 at any time during the period from
the date hereof until March 31, 1996; (ii) less than .75 to 1.0
at any time during the period from April 1, 1996 to June 30,
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<PAGE> 24
1996; or (iii) less than .80 to 1.0 at any time from and after
July 1, 1996.
Section 5.17 Tangible Net Worth. Permit the Tangible Net
Worth, as defined herein and calculated pursuant to Exhibit F
hereto, to be less than $6,250,000.00 as of the end of each
month.
Section 5.18 Cash Flow. Permit the Cash Flow, as defined
herein and calculated pursuant to Exhibit G hereto, to aggregate
less than $300,000.00 for each moving four-month period ending on
the date the Cash Flow calculation is made, with the first such
calculation to be made as of February 28, 1996 for the four-month
period then ended, followed by a similar calculation at the end
of each succeeding month. As an example, for the calculation to
be made for the four-month period ended February 28, 1996, the
cumulative aggregate Cash Flow for the months of November,
December, January and February shall not be less than $300,000.00
for such four-month period; the cumulative aggregate Cash Flow
for the four-month period ended March 31, 1996 shall not be less
than $300,000.00 for the months of December, January, February
and March; and so forth.
Section 5.19 Debt to Worth Ratio. Permit the Debt to
Worth Ratio, as defined herein and calculated pursuant to Exhibit
H hereto, to be greater than 1.5 to 1.0.
ARTICLE 6
EVENTS OF DEFAULT
Section 6.01 Events. Any of the following events shall
constitute and be considered an "Event of Default" as that term
is used herein:
(a) Payments - default shall be made in the
payment when due of any installment of principal or
interest on the Note or any other Indebtedness owing by
the Borrower to the Bank; or
(b) Representations and Warranties - any repre-
sentation or warranty made by the Borrower herein, or
by the Borrower or any other Person in any Security
Instrument, or in any other Loan Document furnished to
the Bank pursuant to or under this Agreement, any
Security Instrument or any other Loan Document, proves
to have been incorrect in any material respect as of
the date when made or deemed made and shall continue
unremedied for a period of 30 days after the earlier of
(i) the Borrower becoming aware of such default or (ii)
the Bank giving notice thereof to the Borrower; or
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<PAGE> 25
(c) Loan Agreement Covenants - default shall be
made by the Borrower in the due observance or
performance of any of the covenants or agreements
contained in Articles 4 and 5 of this Agreement, and in
the case of default under Article 4 such default
continues unremedied for a period of 30 days after the
earlier of (i) the Borrower becoming aware of such
default or (ii) the Bank giving notice thereof to the
Borrower; or
(d) Security Instrument Covenants - default is
made in the due observance or performance by Borrower
of any covenant, condition or agreement contained in
any Security Instrument, and such default continues un-
remedied beyond the expiration of any applicable grace
period which may be expressly allowed under such
Security Instrument; or
(e) Involuntary Bankruptcy or Other Proceedings -
an involuntary case or other proceeding shall be
commenced against Borrower which seeks liquidation,
reorganization or other relief with respect to it or
its debts or other liabilities under any bankruptcy,
insol-vency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiv-
er, liquidator, custodian or other similar official of
it or any substantial part of its property, and such
involuntary case or other proceeding shall remain un-
dismissed or unstayed for a period of 60 days; or an
order for relief against Borrower shall be entered in
any such case under the Federal Bankruptcy Code; or
(f) Voluntary Petitions, Etc. - Borrower shall
commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with
respect to itself or its debts or other liabilities
under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment
of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its
property, or shall consent to any such relief or to the
appointment of or taking possession by any such
official in an involuntary case or other proceeding
commenced against it, or shall make a general assign-
ment for the benefit of creditors, or shall fail
generally to, or shall admit in writing its inability
to pay its debts generally as they become due, or shall
take any corporate action to authorize or effect any of
the foregoing; or
(g) Discontinuance of Business - Borrower dis-
continues its usual business; or
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(h) Default on Other Indebtedness - Borrower
shall default in any payment of principal of or
interest on any Indebtedness (other than to the Bank)
in excess of $250,000.00 in outstanding principal
amount beyond any period of grace provided with respect
thereto, or in the performance of any other agreement,
term or condition contained in any agreement or
instrument under or by which any such Indebtedness is
created, evidenced or secured if the effect of such
default is to cause such obligation to become due be-
fore its stated maturity or to permit the holder(s) of
such obligation or the trustee(s) under any such agree-
ment or instrument to cause such obligation to become
due prior to its stated maturity, whether or not such
default or failure to perform should be waived by the
holder(s) of such obligation or such trustee(s); or
(i) Undischarged Judgments - Borrower shall fail
within 30 days after date of entry to pay, bond or
otherwise discharge any judgment or order for the pay-
ment of money in excess of $250,000.00 that is not
otherwise being satisfied in accordance with its terms
and is not stayed on appeal or otherwise being
appropriately contested in good faith; or
(j) Security Instruments - any Security Instru-
ment after delivery thereof shall for any reason cease
to be in full force and effect and valid, binding and
enforceable in accordance with its terms, or cease to
create a valid and perfected Lien of the priority
required thereby on any of the collateral purported to
be covered thereby, or Borrower or any other Person who
may have granted or purported to grant such Lien shall
so state in writing; or
(k) Material Adverse Effect - the occurrence of
any change or event which has a Material Adverse
Effect.
Section 6.02 Remedies.
(a) Upon the occurrence of any Event of Default
described in Subsection 6.01(e) or (f) hereof, the
lending obligations of the Bank hereunder shall
immediately terminate, and the entire principal amount
of all Indebtedness then outstanding and owing to the
Bank together with interest then accrued and unpaid
thereon shall become immediately due and payable, all
without demand and presentment for payment, notice of
nonpayment, protest, notice of protest, notice of dis-
honor, notice of intention to accelerate maturity or
notice of acceleration of maturity, or any other notice
26
<PAGE> 27
of default of any kind, all of which are hereby ex-
pressly waived by the Borrower.
(b) Upon the occurrence and at any time during
the continuance of any other Event of Default specified
in Section 6.01 hereof, the Bank may, by written notice
to the Borrower, (i) declare the entire principal
amount of all Indebtedness then outstanding and owing
to the Bank together with interest then accrued and
unpaid thereon to be immediately due and payable
without demand and presentment for payment, notice of
nonpayment, protest, notice of protest, notice of
dishonor, notice of intention to accelerate maturity or
notice of acceleration of maturity, or any other notice
of default of any kind, all of which are hereby
expressly waived by the Borrower, and/or (ii) terminate
the lending obligations of the Bank hereunder unless
and until the Bank shall reinstate same in writing.
Section 6.03 Right of Setoff. Upon the occurrence and
during the continuance of any Event of Default, or if Borrower
becomes insolvent, however evidenced, the Bank is hereby
authorized at any time and from time to time, without prior
notice to the Borrower (any such notice being expressly waived by
the Borrower), to setoff and apply any and all deposits (general
or special, time or demand, provisional or final) at any time
held and other Indebtedness at any time owing by the Bank to or
for the credit or the account of Borrower against any and all of
the Indebtedness owing to the Bank, irrespective of whether or
not the Bank shall have made any demand under this Agreement or
the Note and although such obligations may be unmatured. The
Bank agrees promptly to notify the Borrower after any such setoff
and application, provided that the failure to give such notice
shall not affect the validity of such setoff and application.
The rights of the Bank under this Section 6.03 are in addition to
other rights and remedies (including, without limitation, other
rights of setoff) which the Bank may have.
ARTICLE 7
CONDITIONS PRECEDENT
Section 7.01 Conditions to Initial Revolving Credit Loan.
The obligation of the Bank to make the initial Revolving Credit
Loan is subject to the satisfaction, prior to or concurrently
with the making of such Revolving Credit Loan on the Closing
Date, of the following conditions precedent.
(a) Loan Documents - the Bank shall have received
this Agreement, the Note and the Security Instruments
described in Schedule 7.01, in each case duly executed
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<PAGE> 28
and delivered by a duly authorized officer of the
Borrower.
(b) Closing Certificate - the Bank shall have
received a certificate of the Chairman of the Board of
Directors of Borrower, dated the Closing Date, sub-
stantially in the form of Exhibit I, with appropriate
insertions and attachments.
(c) Corporate Proceedings of the Borrower - the
Bank shall have received a copy of the resolutions, in
form and substance satisfactory to the Bank, of the
Board of Directors of the Borrower authorizing (i) the
execu-tion, delivery and performance of this Agreement
and the other Loan Documents to which it is a party and
(ii) the borrowings contemplated hereunder, certified
by the Chairman of the Board of Directors of Borrower
as of the Closing Date, which certificate shall be in
form and substance satisfactory to the Bank and shall
state that the resolutions thereby certified have not
been amended, modified, revoked or rescinded.
(d) Borrower Incumbency Certificate - the Bank
shall have received a certificate of the Borrower,
dated the Closing Date, as to the incumbency and
signature of the officers of the Borrower executing any
Loan Document in substantially the form of Exhibit J,
executed by the Chairman of the Board of Directors and
the Secretary or any Assistant Secretary of the
Borrower.
(e) Corporate Documents - the Bank shall have
received true and complete copies of the articles of
incorporation and bylaws of the Borrower, certified as
of the Closing Date as complete and correct copies
thereof by the Chairman of the Board of Directors of
the Borrower.
(f) Consents, Licenses and Approvals - the Bank
shall have received a certificate of the Chairman of
the Board of Directors of the Borrower (i) attaching
copies of all consents, authorizations and filings
referred to in subsection 3.02, and (ii) stating that
such consents, licenses and filings are in full force
and effect, and such certificate and each such consent,
authorization and filing shall be in form and substance
satisfactory to the Bank.
(g) Other - the Bank shall have received such
other documents as it may reasonably have requested at
any time at or prior to the Closing Date, including,
without limitation, a schedule of all insurance
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<PAGE> 29
presently maintained by the Borrower and an appraisal
of the Borrower's drilling rigs and related equipment
prepared by an independent appraiser acceptable to the
Bank and being in form and substance satisfactory to
the Bank.
Section 7.02 Conditions to Each Revolving Credit Loan.
The obligation of the Bank to make any Revolving Credit Loan
requested to be made by Borrower on any date (including, without
limitation, its initial Revolving Credit Loan) is subject to the
satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the
representations and warranties made by the Borrower in
or pursuant to the Loan Documents shall be true and
correct in all material respects on and as of such date
as if made on and as of such date.
(b) No Event of Default. No Event of Default
shall have occurred and be continuing on such date or
after giving effect to the Revolving Credit Loans
requested to be made on such date.
(c) Maintenance of Borrowing Base.
Notwithstanding Section 2.05(ii), after giving effect
to the Revolving Credit Loans requested to be made on
any date, the aggregate principal amount of the
Revolving Credit Loans then outstanding shall not
exceed the lesser of (i) $3,000,000.00 or (ii) one-
third (1/3) of the Borrowing Base Amount then in
effect.
(d) No Material Litigation. No litigation,
investigation or proceeding of or before any arbitrator
or Governmental Authority shall be pending or, to the
knowledge of the Borrower, threatened by or against the
Borrower or the Bank with respect to any of the Loan
Documents or any of the transactions contemplated
hereby or thereby.
(e) Borrowing Base Reports. The Bank shall have
received all Borrowing Base Reports required to be
delivered by Borrower pursuant to Section 2.04(b).
(f) Additional Matters. All corporate and other
proceedings, and all documents, instruments and other
legal matters in connection with the transactions
contemplated by this Agreement and the other Loan
Documents shall be satisfactory in form and substance
to the Bank, and the Bank shall have received such
other documents and legal opinions in respect of any
29
<PAGE> 30
aspect or consequence of the transactions contemplated
hereby or thereby as it shall reasonably request.
Each borrowing by the Borrower hereunder shall constitute a
representation and warranty by the Borrower as of the date
thereof that the conditions contained in this subsection have
been satisfied.
ARTICLE 8
MISCELLANEOUS
Section 8.01 Notices. Any notice required or permitted to
be given under or in connection with this Agreement, the Note or
the Security Instruments (except as may otherwise be expressly
required therein) shall be in writing and shall be mailed by
first class or express mail, postage prepaid, or sent by telex,
telegram, telecopy or other similar form of rapid transmission
confirmed by mailing (by first class or express mail, postage
prepaid) written confirmation at substantially the same time as
such rapid transmission, or personally delivered to any officer
of the receiving party. All such communications shall be mailed,
sent or delivered,
(a) if to the Borrower: TMBR/Sharp Drilling, Inc.
4607 West Industrial Blvd.
Midland, Texas 79703
(b) if to the Bank: Norwest Bank Texas, Midland, N.A.
500 W. Texas, Suite 400
Midland, Texas 79701
or to such other address or individual's or department's
attention as a party may furnish to the other party in writing.
Any communication so addressed and mailed shall be deemed to be
given when so mailed. Any notice so sent by rapid transmission
shall be deemed to be given when receipt of such transmission is
acknowledged. Any communication so delivered in person shall be
deemed to be given when receipted for by, or actually received
by, an authorized officer of the Borrower or the Bank, as the
case may be.
Section 8.02 Amendments and Waivers. Any provision of this
Agreement, the Note, the Security Instruments or the other Loan
Documents may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed by each Person
which is a party to the Loan Document being amended (or with
respect to which a waiver is being obtained) and the Bank.
Section 8.03 Indemnity by Borrower. The Borrower agrees
to indemnify, save and hold harmless the Bank and its Affiliates,
directors, officers, agents, attorneys and employees
(collectively, the "Indemnitees") from and against: (a) any and
all claims, demands, actions or causes of action that are
30
<PAGE> 31
asserted against any Indemnitee by any Person (other than the
Borrower) if the claim, demand, action or cause of action
directly or indirectly relates to a claim, demand, action or
cause of action that such Person asserts or may assert against
the Borrower, any Affiliate of the Borrower or any officer,
director or shareholder of the Borrower; (b) any and all claims,
demands, actions or causes of action that are asserted against
any Indemnitee by any Person (other than the Borrower) if the
claim, demand, action or cause of action arises out of or relates
to the Revolving Credit Loans, the use or contemplated use of
proceeds of the Revolving Credit Loans or the relationship of the
Borrower and the Bank under this Agreement; (c) any
administrative or investigative proceeding by any Governmental
Authority arising out of or related to a claim, demand, action or
cause of action described in clauses (a) or (b) above; and (d)
any and all liabilities, losses, costs or expenses (including
reasonable attorneys' fees and disbursements) that any Indemnitee
suffers or incurs as a result of any of the foregoing; provided,
that no Indemnitee shall be entitled to indemnification for any
liability, loss, cost or expense caused by its own gross
negligence or willful misconduct. If any claim, demand, action
or cause of action is asserted against any Indemnitee and such
Indemnitee intends to claim indemnification from the Borrower
under this Section 8.03, such Indemnitee shall promptly notify
the Borrower, but the failure to so promptly notify the Borrower
shall not affect the obligations of the Borrower under this
Section 8.03 unless such failure materially prejudices the
Borrower's right to participate, or the Borrower's rights, if
any, in the contest of such claim, demand, action or cause of
action, as hereinafter provided. Each Indemnitee may, and if
requested by the Borrower in writing shall, in good faith contest
the validity, applicability and amount of such claim, demand,
action or cause of action with counsel selected by such
Indemnitee and reasonably acceptable to the Borrower, and shall
permit the Borrower to participate in such contest. Any
Indemnitee that proposes to settle or compromise any claim or
proceeding for which the Borrower may be liable for payment of
indemnity hereunder shall give the Borrower written notice of the
terms of such proposed settlement or compromise reasonably in
advance of settling or compromising such claim or proceeding and
shall obtain the Borrower's prior written consent, which consent
shall not be unreasonably withheld. In connection with any
claim, demand, action or cause of action covered by this Section
8.03 against more than one Indemnitee, all such Indemnitees shall
be represented by the same legal counsel selected by the
Indemnitees and reasonably acceptable to the Borrower; provided,
that if such legal counsel determines in good faith and advises
the Borrower in writing that representing all such Indemnitees
would or could result in a conflict of interest under legal
requirements or ethical principles applicable to such legal
counsel or that a defense or counterclaim is available to an
Indemnitee that is not available to all such Indemnitees, then to
31
<PAGE> 32
the extent reasonably necessary to avoid such a conflict of
interest or to permit unqualified assertion of such a defense or
counterclaim, each Indemnitee shall be entitled to separate
representation by legal counsel selected by that Indemnitee and
reasonably acceptable to the Borrower. Any obligation or
liability of the Borrower to any Indemnitee under this Section
8.03 shall survive the expiration or termination of this
Agreement and the repayment of the Revolving Credit Loans and the
payment of all other Indebtedness owing to the Bank for the
statute of limitations period applicable to such claim or
contest.
Section 8.04 Invalidity. In the event that any one or more
of the provisions contained in this Agreement, the Note, any
Security Instrument or any other Loan Document shall, for any
reason, be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect
any other provisions of this Agreement, the Note or such Security
Instrument or other Loan Document.
Section 8.05 Survival of Agreements. All representations
and warranties of the Borrower herein or in the Security
Instruments, and all covenants and agreements herein or therein
not fully performed before the effective date or dates of this
Agreement and of the Security Instruments, shall survive such
date or dates.
Section 8.06 Successors and Assigns. All covenants and
agreements contained by or on behalf of the Borrower in this
Agreement, the Note and the Security Instruments and other Loan
Documents shall bind its successors and assigns and shall inure
to the benefit of the Bank and its successors and assigns.
Borrower shall not, however, have the right to assign its rights
hereunder or any interest herein, without the prior written
consent of the Bank. In the event that the Bank sells
participations in or assigns the Note or other Indebtedness owing
to the Bank to other lenders (which the Bank may undertake to do
in its sole discretion), each of such other lenders shall have
the rights to setoff against such Indebtedness and similar rights
or Liens to the same extent as may be available to the Bank.
Section 8.07 Renewal, Extension or Rearrangement. All pro-
visions of this Agreement and of any Security Instrument or other
Loan Document relating to the Note or other Indebtedness owing to
the Bank shall apply with equal force and effect to each and all
promissory notes hereinafter executed which in whole or in part
represent a renewal, extension for any period, increase or
rearrangement of any part of the Indebtedness originally
represented by the Note or of any part of such other
Indebtedness.
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<PAGE> 33
Section 8.08 Waivers. No course of dealing on the part of
the Bank, its officers, employees, consultants or agents, nor any
failure or delay by the Bank with respect to exercising any
right, power or privilege of the Bank under this Agreement, the
Note or any Security Instrument or other Loan Document shall
operate as a waiver thereof, except as otherwise provided in
Section 8.02 hereof.
Section 8.09 Cumulative Rights. Rights and remedies of the
Bank under this Agreement, the Note and the Security Instruments
and the other Loan Documents shall be cumulative, and the
exercise or partial exercise of any such right or remedy shall
not preclude the exercise of any other right or remedy.
Section 8.10 Construction. THIS AGREEMENT IS, AND THE NOTE
WILL BE, A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE UNITED STATES OF
AMERICA AND THE STATE OF TEXAS, AS SUCH LAWS ARE NOW IN EFFECT
AND, WITH RESPECT TO USURY LAWS, IF ANY, APPLICABLE TO THE BANK
AND TO THE EXTENT ALLOWED THEREBY, AS SUCH LAWS MAY HEREAFTER BE
IN EFFECT WHICH ALLOW A HIGHER MAXIMUM NONUSURIOUS INTEREST RATE
THAN SUCH LAWS NOW ALLOW.
Section 8.11 Taxes, Etc. Any taxes (excluding income
taxes) payable or ruled payable by any Governmental Authority in
respect of this Agreement, the Note, any Security Instrument or
any other Loan Document shall be paid by the Borrower, together
with interest and penalties, if any.
Section 8.12 Governmental Regulation. Anything contained
herein to the contrary notwithstanding, the Bank shall not be
obligated to extend credit to the Borrower in an amount in
violation of any limitation or prohibition provided by any
applicable statute or regulation.
Section 8.13 Counterparts. This Agreement may be executed
in one or more counterparts, and it shall not be necessary that
the signatures of all parties hereto be contained on any one
counter-part hereof. Each counterpart shall be deemed an
original, but all counterparts together shall constitute one and
the same instrument.
Section 8.14 Conflicts. If there is ever a conflict
between the terms, conditions, representations, warranties and
covenants contained in this Agreement and the terms, conditions,
representa-tions, warranties or covenants in any of the other
Loan Documents executed by the Borrower, the provisions of this
Agreement shall control; provided, however, the fact that any
term, condition, representation, warranty or covenant contained
in such other Loan Document is not contained herein shall not be,
or be deemed to be, a conflict.
33
<PAGE> 34
Section 8.15 Exhibits. The exhibits, annexes and schedules
attached to this Agreement are incorporated herein and shall be
considered a part of this Agreement for the purposes stated
herein, except that in the event of any conflict between any of
the provisions of such exhibits, annexes and schedules and the
provisions of this Agreement, the provisions of this Agreement
shall prevail.
Section 8.16 Titles of Articles, Sections and Subsections.
All titles or headings to articles, sections, subsections or
other divisions of this Agreement or the exhibits and schedules
hereto are only for the convenience of the parties and shall not
be construed to have any effect or meaning with respect to the
other content of such articles, sections, subsections or other
divisions, such other content being controlling as to the
agreement between the parties hereto.
Section 8.17 Entire Agreement. THIS AGREEMENT, THE NOTE,
THE SECURITY INSTRUMENTS AND THE OTHER LOAN DOCUMENTS CONSTITUTE
A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS
BUSINESS AND COMMERCE CODE AND REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN OR ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be duly executed as of the date first above
written.
TMBR/SHARP DRILLING, INC.
By: /s/ Thomas C. Brown
--------------------------------
Thomas C. Brown, Chairman of the
Board of Directors and Chief
Executive Officer
NORWEST BANK TEXAS, MIDLAND, N.A.
By: /s/ Scott A. Lovett
-------------------------------
Scott A. Lovett, Executive Vice
President
34
<PAGE> 35
EXHIBIT A
REVOLVING LINE OF CREDIT PROMISSORY NOTE
$3,000,000.00 January 16, 1996
FOR VALUE RECEIVED, in the manner, on the dates and in the
amounts herein stipulated, TMBR/SHARP DRILLING, INC., a Texas
corporation (the "Borrower"), promises and agrees to pay to the
order of Norwest Bank Texas, Midland, N.A., a national banking
association (the "Bank"), in Midland, Midland County, Texas, the
principal sum of Three Million and No/100 Dollars ($3,000,000.00)
or, if less, the aggregate unpaid balance of all advances here-
under, in lawful money of the United States of America, which
shall be legal tender in payment of all debts and dues, public
and private, at the time of payment, and to pay interest thereon
from the date of advance until maturity at a rate per annum which
shall from day to day be equal to the lesser of (a) the Base Rate
in effect from day to day (calculated on the basis of actual days
elapsed, but computed as if each calendar year consisted of 360
days) or (b) the Highest Lawful Rate. Each change in the rate of
interest charged under this Revolving Line of Credit Promissory
Note (this "Note") shall, subject to the terms hereof, become
effective, without notice to the Borrower, upon the effective
date of each change in the Base Rate or the Highest Lawful Rate,
as the case may be. Notwithstanding the foregoing, if at any
time the Base Rate exceeds the Highest Lawful Rate, the rate of
interest on this Note shall be limited to the Highest Lawful
Rate, but any subsequent reductions in the Base Rate shall not
reduce the rate of interest hereon below the Highest Lawful Rate
until the total amount of interest accrued hereon approximately
equals the amount of interest which would have accrued hereon if
the Base Rate had at all times been in effect. In the event that
at maturity (stated or by acceleration), or at final payment of
this Note, the total amount of interest paid or accrued hereon is
less than the amount of interest which would have accrued if the
Base Rate had at all times been in effect, then, at such time and
to the extent permitted by applicable laws, Borrower shall pay to
the Bank an amount equal to the difference between (a) the lesser
of the amount of interest which would have accrued if the Base
Rate had at all times been in effect or the amount of interest
which would have accrued if the Highest Lawful Rate had at all
times been in effect, and (b) the amount of interest actually
paid or accrued on this Note. All of the past-due principal and
accrued interest hereunder shall, at the option of the Bank, bear
interest from maturity (stated or by acceleration) until paid at
a rate per annum equal to the Highest Lawful Rate. Interest
calculations may be made ten days prior to any interest
installment due date under this Note, in which event, if there is
an adjustment in the interest rate in accordance with the terms
hereof during such ten-day period, then the Borrower shall
subsequently, on demand, pay to the Bank any underpayment, or the
35
<PAGE> 36
Bank shall pay to the Borrower, any overpayment, as the case may
be, as a result of any adjustment during such ten-day period.
This Note (a) is the Revolving Line of Credit Note referred
to in the Loan Agreement, dated as of the date hereof (as the
same may be amended, supplemented or otherwise modified from time
to time, the "Loan Agreement"), between the Borrower and the
Bank, (b) is subject to the terms and conditions thereof, and (c)
is subject to optional and mandatory prepayments in whole or in
part as provided in the Loan Agreement. Reference is made to the
Loan Agreement for a further statement of the rights, remedies,
powers, privileges, benefits, duties and obligations of the
Borrower and the Bank under the Loan Agreement and this Note.
Capitalized terms used herein which are defined in the Loan
Agreement shall have such defined meanings unless otherwise
defined herein.
This Note represents the renewal and extension, and increase
in principal amounts, but not the extinguishment, of the
principal amount outstanding on the Prior Note.
This Note is secured as provided in the Loan Agreement and
in the other Loan Documents, to which reference is hereby made
for a description of the properties and assets in which a Lien
and security interest has been granted, the nature and extent of
the security, the terms and conditions upon which the Liens and
security interest were granted and the rights of the holder of
this Note with respect thereto.
Each borrowing under this Note shall be in the minimum
amount of $50,000.00 (or the unadvanced portion hereof, whichever
is less) and shall be made only in accordance with the provisions
of the Loan Agreement. Subject to the terms hereof and of the
Loan Agreement, Borrower may borrow, repay and reborrow at any
time and from time to time under this Note.
Interest on the outstanding principal balance of this Note
shall be due and payable monthly on the fifteenth day of each
month, commencing February 15, 1996. The then outstanding
principal balance of this Note and all accrued and unpaid
interest shall be due and payable on January 15, 1998.
Time is of the essence of this Note. Upon the occurrence of
any one or more of the Events of Default specified in the Loan
Agreement, all amounts then remaining unpaid on this Note shall
become, or may be declared to be, immediately due and payable,
all as provided therein.
It is the intention of the Borrower and the Bank that the
Bank shall conform strictly to usury laws applicable to it.
Accordingly, if the transactions contemplated by the Loan
Agreement and this Note would be usurious as to the Bank under
laws applicable to it (including the laws of the United States of
America and the State of Texas or any other jurisdiction whose
36
<PAGE> 37
laws may be mandatorily applicable to the Bank notwithstanding
the other provisions of the Loan Agreement and this Note), then,
in that event, notwithstanding anything to the contrary in this
Note, the Loan Agreement or any other Loan Document or other
agreement entered into in connection with or as security for this
Note, (i) the aggregate of all consideration which is contracted
for, taken, reserved, charged or received by the Bank under this
Note, the Loan Agreement or any other Loan Document or agreement
entered into in connection with or as security for this Note
shall under no circumstances exceed the maximum amount allowed by
such applicable law, and any excess shall be credited by the Bank
on the principal amount of the Indebtedness to the Bank (or, to
the extent that the principal amount of the Indebtedness shall
have been or would thereby be paid in full, refunded by the Bank
to the Borrower); and (ii) in the event that the maturity of this
Note is accelerated by reason of an Event of Default under the
Loan Agreement or otherwise, or in the event of any prepayment,
then such consideration that constitutes interest under law
applicable to the Bank may never include more than the maximum
amount allowed by such applicable law, and excess interest, if
any, provided for in this Note, the Loan Agreement or otherwise
shall be cancelled automatically by the Bank as of the date of
such acceleration of prepayment and, if theretofore paid, shall
be credited by the Bank on the principal amount of the
Indebtedness (or, to the extent that the principal amount of such
Indebtedness shall have been or would thereby be paid in full,
refunded by the Bank to the Borrower).
To the extent that Article 5069-1.04 of the Texas Revised
Civil Statutes is relevant to the Bank for the purpose of
determining the Highest Lawful Rate, the applicable rate ceiling
under such Article shall be determined by the indicated (weekly)
rate ceiling from time to time in effect, subject to the Bank's
right subsequently to change such method in accordance with
applicable law.
All parties now or hereafter liable with respect to this
Note, whether maker, principal, surety, guarantor, endorser or
otherwise, hereby waive presentment, demand, protest and all
other notices of any kind.
THIS NOTE IS PERFORMABLE AND PAYABLE IN THE COUNTY OF
MIDLAND, STATE OF TEXAS, AND SHALL BE CONSTRUED IN ACCORDANCE
WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF TEXAS; PROVIDED,
HOWEVER, THAT THE LAWS PERTAINING TO ALLOWABLE RATES OF INTEREST
MAY, FROM TIME TO TIME, BE GOVERNED BY THE LAWS OF THE UNITED
STATES OF AMERICA.
TMBR/SHARP DRILLING, INC.
By: /s/ Thomas C. Brown
--------------------------------
Thomas C. Brown, Chairman of the
Board of Directors and Chief
Executive Officer
37
