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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Fee Required)
For the fiscal year ended March 31, 1997 Commission File Number 0-12757
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(No Fee Required)
TMBR/SHARP DRILLING, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1835108
(State of Incorporation) (I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
The aggregate market value of voting stock held by nonaffiliates of
the registrant at June 16, 1997 was approximately $50,937,068.
At June 16, 1997, there were 4,482,386 outstanding shares of the
Registrant's Common Stock.
The information required by Items 11, 12 and 13 of Part III of this
Form are incorporated by reference from the registrant's Proxy Statement to
be filed pursuant to Regulation 14A with respect to the registrant's Annual
Meeting to be held on or about August 29, 1997.
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TMBR/SHARP DRILLING, INC.
FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 18
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . 19
Item 6. Selected Financial Data . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . 22
Item 8. Financial Statements and Supplementary Data . . 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . 54
Part III
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . 54
Item 11. Executive Compensation . . . . . . . . . . . . . 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . 55
Item 13. Certain Relationships and Related Transactions . 55
Part IV and signatures
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . 56
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 60
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PART I
Item 1. BUSINESS
General
TMBR/Sharp Drilling, Inc. (the "Company") was incorporated under the
laws of Texas in October, 1982 under the name TMBR Drilling, Inc. In
August, 1986, the Company changed its name to TMBR/Sharp Drilling, Inc.
The principal executive offices of the Company are located at 4607
West Industrial Blvd., Midland, Texas, 79703 and its telephone number is
(915) 699-5050.
The Company is engaged in two lines of business, which include the
domestic onshore contract drilling of oil and gas wells, and the
acquisition, exploration for, development, production and sale of oil and
natural gas.
The Company provides domestic onshore contract drilling services to
major and independent oil and gas companies. The Company focuses its
operations in the Permian Basin of west Texas and eastern New Mexico. In
addition to its drilling rigs, the Company provides the crews and most of
the ancillary equipment used in the operation of its drilling rigs. Rig
utilization for the fiscal year ended March 31, 1997 was approximately 52%
compared to 45% for the year ended March 31, 1996.
The Company owns 15 drilling rigs, of which 1 was operating on behalf
of the Company for its own account, 12 of which were operating for non-
affiliated oil producers, and 2 were "stacked" (non-operating) at June 24,
1997. All of the Company's rigs are operational and actively marketed in
the Permian Basin of west Texas and eastern New Mexico. The Company
markets its contract drilling services to both major oil companies and
independent oil producers. The depth capabilities of the Company's rigs
range from 8,500 feet to 30,000 feet.
An onshore drilling rig consists of engines, drawworks, mast, pumps to
circulate drilling fluids, blowout preventers, the drillstring and related
equipment. The size and type of rig utilized for each drilling project
depends upon the location of the well, the well depth and equipment
requirements specified in the drilling contract, among other factors.
The Company believes it has established a reputation for reliability,
high quality equipment and well-trained crews. The Company continually
seeks to modify and upgrade its equipment to maximize the performance and
capabilities of its drilling rig fleet, which the Company believes provides
it with a competitive advantage. The Company has the capability to design,
repair and modify its drilling rig fleet from its principal support and
storage facilities in Midland, Texas, and an additional storage yard in
Odessa, Texas.
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The Company's oil and gas exploration and production operations
complement its onshore drilling operations. These activities are focused
in the mature producing regions in the Permian Basin. Oil and gas
operations comprised approximately 12% of the Company's revenues for the
fiscal year ended March 31, 1997. The Company's proved reserves, all of
which were proved developed producing, were approximately 887 MBOE and had
a present value of future net revenues of approximately $5.7 million at
March 31, 1997. At March 31, 1997, the Company owned interests in
approximately 18,498 gross (2,483 net) acres of developed oil and gas
properties, and approximately 7,687 gross (1,066 net) acres of undeveloped
properties.
The Company has no material patents, licenses, franchises, or
concessions which it considers significant to its operations.
The nature of the Company's business is such that it does not maintain
or require a "backlog" of products, customer orders, or inventory.
The Company's operations are not subject to renegotiation of profits
or termination of contracts at the election of the federal government.
The Company has not been a party to any bankruptcy, receivership,
reorganization, adjustment, or similar proceeding.
Generally, the Company's business activities are not seasonal in
nature. However, weather conditions can hinder drilling activities.
CONTRACT DRILLING OPERATIONS
Drilling Rigs
The following table sets forth the type and depth capabilities of the
Company's 15 onshore drilling rigs.
Rig No. Depth Capacity Type
2* 8,500 Weiss W-45
3* 8,500 Weiss W-45
6 12,500 National 75A
10* 12,500 National 75A
12 11,500 National 50A
14* 12,500 BDW 650
17* 9,500 Unit 15
22* 13,500 Brewster N-75
23* 13,500 National 75A
24* 13,500 Gardner Denver 700
27* 13,500 Gardner Denver 700
28* 16,000 Gardner Denver 800
29* 16,000 Gardner Denver 800
55* 30,000 Gardner Denver DW-2100
56* 20,000 National 110-M
----------------
*In active operation at June 24, 1997.
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Major overhauls, repairs and general maintenance for the drilling rigs
are primarily conducted at the Company's principal support and storage
facilities in Midland, Texas. The Company emphasizes the maintenance and
periodic improvement of its drilling equipment and believes that its rigs
are generally in good condition. See "Item 2. Properties".
Drilling Contracts
The Company's drilling contracts are usually obtained through
competitive bidding or as a result of direct negotiations with customers.
Such contracts typically obligate the Company to pay all expenses
associated with drilling an oil or gas well, including wages of drilling
personnel, maintenance expenses and incidental purchases of rig supplies
and equipment. The majority of the Company's contracts are "footage"
contracts with the remainder being "daywork" or "turnkey" contracts. Under
a footage contract, the Company charges an agreed price per foot of hole
drilled, whereas a day-work contract permits the Company to charge a per
diem fixed rate for each day the rig is in operation. A turnkey contract
specifies a total price for drilling a well plus providing other services,
materials or equipment which are typically the responsibility of the
operator under footage or daywork contracts. Prices for all contracts vary
depending on the location, depth, duration, complexity of the well to be
drilled, operating conditions and other factors peculiar to each proposed
well. Under footage and turnkey contracts, the Company manages the
drilling operation and the type of equipment to be used, subject to certain
customer specifications. The Company also bears the risk and expense of
mechanical malfunctions, equipment shortages, and other delays arising from
problems caused in drilling a well. Daywork contracts permit the operator
of the well to manage drilling operations and to specify the type of
equipment to be used. Under daywork contracts, the Company generally bears
none of the risk due to time delays caused by unforeseeable circumstances
such as stuck or broken drill pipe or blowouts. Of the 13 rigs working at
June 24, 1997, 7 were subject to daywork contracts, and 6 were subject to
footage contracts.
The Company's operations are subject to many hazards, including well
blowouts and fires that could cause personal injury, suspension of drilling
operations, damage to or destruction of equipment and damage to producing
formations and surrounding areas. The Company believes it is adequately
insured for public liability and damage to the property of others resulting
from its operations. The Company is self-insured for physical damage to or
loss of its rigs.
Rig Utilization
The Company's contract drilling revenues depend upon the utilization
of its drilling rigs and the contract rates received for its drilling
operations. These two factors are affected by a number of variables,
including competitive conditions in the drilling industry and the level of
exploration and development activity conducted by oil and gas producers at
any given time. The level of domestic drilling activity has historically
fluctuated and cannot be accurately predicted because of numerous factors
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affecting the petroleum industry, including oil and gas prices and the
degree of government regulation of the industry. Contract drilling
revenues and rig utilization rates for the past five years are set forth
below.
Contract Drilling
Year Ended Revenues Number of Percent of
March 31, (in thousands) Rigs Owned Utilization
---------- ----------------- ---------- -----------
1993 $ 17,996 15(a) 56.3%
1994 18,359 15 47.6%
1995 18,357 15 43.5%
1996 21,298 15 45.1%
1997 18,483 15 51.6%
____________________
(a) Of the total number of rigs owned, three were owned only for a
portion of the fiscal year ended March 31, 1993.
Customers
During the fiscal year ended March 31, 1997, the Company drilled a
total of 98 wells for approximately 24 customers. The following table sets
forth certain information with respect to the principal customers for the
Company's contract drilling services during such period.
Percent of Number of Wells
Name of Customer Total Revenues Drilled
---------------- -------------- ---------------
Titan Resources I, Inc. 18% 12
Enron Oil and Gas Company 16% 13
Pogo Producing Company 10% 19
The loss of any one or more of the above customers could have a
material adverse effect on the Company, depending upon the demand for the
Company's drilling rigs at the time of such loss and the Company's ability
to attract new customers.
Competition
The Company encounters substantial competition from other drilling
contractors in its contract drilling operations. The Company's principal
market areas of west Texas and eastern New Mexico are highly fragmented and
competitive. Companies compete primarily on the basis of contract rates,
suitability and availability of equipment and crews, experience of drilling
in certain areas, and reputation. The Company believes it competes
favorably with respect to all of these factors. Competition is primarily
on a well-by-well basis and may vary significantly at any particular time.
Drilling rigs can be moved from one region to another in response to
perceived long-term changes in levels of activity. In recent years,
competition within the industry has been intense due to the oversupply of
rigs which resulted from the rig overbuilding during the peak drilling
years of 1980 and 1981, and the depressed demand resulting from lower oil
and gas prices and excess deliverability of natural gas.
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Employees
At June 1, 1997, the Company had 42 salaried employees and
approximately 286 hourly paid employees. Employees of the Company are not
covered by any collective bargaining agreements and the Company has never
experienced a strike or work stoppage. The Company considers its employee
relations to be satisfactory.
REGULATION
Oil and Gas
The Company's operations are regulated by certain federal and state
agencies. In particular, oil and gas production and related operations are
or have been subject to price controls, taxes and other laws relating to
the oil and gas industry. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings,
whether additional laws and regulations will be adopted, or the effect such
changes may have on its business, financial condition or results of
operations.
The Company's oil and gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by
federal, state and local agencies. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on
the oil and gas industry increases the Company's cost of doing business and
affects its profitability. Because such rules and regulations are
frequently amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose
other requirements relating to the exploration and production of oil and
gas. Such states also have statutes or regulations addressing conservation
matters, including provisions for the unitization or pooling of oil and gas
properties, the establishment of maximum rates of production from oil and
gas wells and the regulation of spacing, plugging and abandonment of such
wells.
Sales of gas by the Company are not regulated and are made at market
prices. However, the Federal Energy Regulatory Commission ("FERC")
regulates interstate and certain intrastate gas transportation rates and
service conditions, which affect the marketing of gas produced by the
Company, as well as the revenues received by the Company for sales of such
production. Since the mid-1980s, FERC has issued a series of orders,
culminating in Order Nos. 636,636-A and 636-B ("Order 636"), that have
significantly altered the marketing and transportation of gas. Order 636
mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of
the sales, transportation, storage and other components of the city-gate
sales services such pipelines previously performed. One of FERC's purposes
in issuing the orders was to increase competition within all phases of the
gas industry. Order 636 and subsequent FERC orders issued in individual
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pipeline restructuring proceedings have been the subject of appeals, the
results of which have generally been supportive of the FERC's open-access
policy. In 1996, the United States Court of Appeals for the District of
Columbia Circuit largely upheld Order No. 636, et seq. Because further
review of certain of these orders is still possible, and other appeals
remain pending, it is difficult to predict the ultimate impact of the
orders on the Company and its gas marketing efforts. Generally, Order 636
has eliminated or substantially reduced the interstate pipelines'
traditional role as wholesalers of gas, and has substantially increased
competition and volatility in gas markets. While significant regulatory
uncertainty remains, Order 636 may ultimately enhance the Company's ability
to market and transport its gas, although it may also subject the Company
to greater competition.
The sale of oil by the Company is not regulated and is made at market
prices. The price the Company receives from the sale of oil is affected by
the cost of transporting the product to market. Effective as of January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for interstate common carrier oil pipelines, which,
generally, would index such rates to inflation, subject to certain
conditions and limitations. These regulations could increase the cost of
transporting oil by interstate pipelines, although the most recent
adjustment generally decreased rates. These regulations have generally
been approved on judicial review. The Company is not able to predict with
certainty what effect, if any, these regulations will have on it, but,
other factors being equal, the regulations may, over time, tend to increase
transportation costs or reduce wellhead prices for oil.
The Company is required to comply with various federal and state
regulations regarding plugging and abandonment of oil and gas wells.
Environmental
Various federal, state and local laws and regulations governing the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, health and safety, affect the Company's
operations and costs. These laws and regulations sometimes require
governmental authorization before certain activities, limit or prohibit
other activities because of protected areas or species, impose substantial
liabilities for pollution related to Company operations or properties, and
provide penalties for noncompliance. In particular, the Company's
exploration and production operations, its activities in connection with
storage and transportation of oil and other liquid hydrocarbons, and its
use of facilities for treating, processing or otherwise handling
hydrocarbons and related exploration and production wastes are subject to
stringent environmental regulation. As with the industry generally,
compliance with existing and anticipated regulations increases the
Company's overall cost of business. While these regulations affect the
Company's capital expenditures and earnings, the Company believes that such
regulations do not affect its competitive position in the industry because
its competitors are similarly affected by environmental regulatory
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programs. Environmental regulations have historically been subject to
frequent change and, therefore, the Company is unable to predict the future
costs or other future impacts of environmental regulations on its future
operations. A discharge of hydrocarbons or hazardous substances into the
environment could subject the Company to substantial expense, including the
cost to comply with applicable regulations that require a response to the
discharge, such as containment or cleanup, claims by neighboring landowners
or other third parties for personal injury, property damage or their
response costs and penalties assessed, or other claims sought by regulatory
agencies for response cost or for natural resource damages.
The following are examples of some environmental laws that potentially
impact the Company and its operations.
Water. The Oil Pollution Act ("OPA") was enact in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and
other statutes as they pertain to prevention of and response to major oil
spills. The OPA subjects owners of facilities to strict, joint and
potentially unlimited liability for removal costs and certain other
consequences of an oil spill, where such spill is into navigable waters, or
along shorelines. In the event of an oil spill into such waters,
substantial liabilities could be imposed upon the Company. States in which
the Company operates have also enacted similar laws. Regulations are
currently being developed under the OPA and similar state laws that may
also impose additional regulatory burdens on the Company.
The FWPCA imposes restrictions and strict controls regarding the
discharge of produced waters, other oil and gas wastes, any form of
pollutant, and, in some instances, storm water runoff, into waters of the
United States. The FWPCA provides for civil, criminal and administrative
penalties for any unauthorized discharges and, along with the OPA, imposes
substantially potential liability for the costs of the removal, remediation
or damages resulting from an unauthorized discharge. State laws for the
control of water pollution also prove civil, criminal and administrative
penalties and liabilities in the case of an unauthorized discharge into
state waters. The cost of compliance with the OPA and the FWPCA have not
historically been material to the Company's operations, but there can be no
assurance that changes in federal, state or local water pollution control
programs will not materially adversely effect the Company in the future.
Although no assurances can be given, the Company believes that compliance
with existing permits and compliance with foreseeable new permit
requirements will not have a material adverse effect on the Company's
financial condition or results of operations.
Air Emissions. Amendments to the Federal Clean Air Act enacted in
late 1990 (the "1990 CAA Amendments") require or will require most
industrial operations in the United States to incur capital expenditures in
order to meet air emissions control standards developed by the
Environmental Protection Agency ("EPA") and state environmental agencies.
Although no assurances can be given, the Company believes implementation of
the 1990 CAA Amendments will not have a material adverse effect on the
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Company's financial condition or results of operations.
Solid Waste. The Company generates non-hazardous solid wastes that
are subject to the requirements of the Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes. The EPA and the
states in which the Company operates are considering the adoption of
stricter disposal standards for the type of non-hazardous wastes generated
by the Company. RCRA also governs the generation, management, and disposal
of hazardous wastes. At present, the Company is not required to comply
with a substantial portion of the RCRA requirements because the Company's
operations generate minimal quantities of hazardous wastes. However, it is
anticipated that additional wastes, which could include wastes currently
generated during operations, could in the future be designated as
"hazardous wastes". Hazardous wastes are subject to more rigorous and
costly disposal and management requirements than are non-hazardous wastes.
Such changes in the regulations may result in additional capital
expenditures or operating expenses by the Company.
Superfund. The Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA"), also known as "Superfund", imposes liability,
without regard to fault or the legality of the original act, on certain
classes of persons in connection with the release of a "hazardous
substance" into the environment. These persons include the current owner
or operator of any site where a release historically occurred and companies
that disposed or arranged for the disposal of the hazardous substances
found at the site. CERCLA also authorizes the EPA and, in some instances,
third parties to act in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons
the costs they incur. In the course of its ordinary operations, the
Company may have managed substances that may fall within CERCLA's
definition of a "hazardous substance". the Company may be jointly and
severally liable under CERCLA for all or part of the costs required to
clean up sites where the Company disposed of or arranged for the disposal
of these substances. This potential liability extends to properties that
the Company owned or operated, as well as to properties owned and operated
by others at which disposal of the Company's hazardous substances occurred.
The Company may also fall into the category of the "current owner or
operator". The Company currently owns or leases numerous properties that
for many years have been used for the exploration and production of oil and
gas. Although the Company believes it has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or
other wastes may have been disposed of or released by the Company on or
under the properties owned or leased by the Company. In addition, many of
these properties have been previously owned or operated by third parties
who may have disposed of or released hydrocarbons or other wastes at these
properties. Under CERCLA, and analogous state laws, the Company could be
subject to certain liabilities and obligations, such as being required to
remove or remediate previously disposed wastes (including wastes disposed
of or released by prior owners or operators), to clean up contaminated
property (including contaminated groundwater) or to perform remedial
plugging operations to prevent future contamination.
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OIL AND GAS OPERATIONS
The Company's oil and gas operations involve the exploration for,
development and production of oil and natural gas. During the fiscal year
ended March 31, 1997, the Company's exploration efforts were conducted in
west Texas and eastern New Mexico.
The Company is actively investing in oil and gas properties for the
purpose of exploration, development and production of oil and gas. The
Company acquires or participates in these arrangements as a working
interest owner and usually provides the contract drilling services for such
ventures.
Exploration for oil and natural gas requires substantial expenditures,
especially for exploration in more remote areas. As is customary in the
oil and gas industry, the drilling of oil and gas wells is accomplished
through participation with other individuals, partnerships or corporations.
One of the parties experienced with operations in the area is usually
designated as the operator of the property and is responsible for the
direct supervision, administration and accounting for wells drilled and
completed pursuant to an operating agreement between the parties. The
Company typically serves as operator of oil and gas prospects assembled by
the Company and participates as a non-operating working interest owner in
prospects assembled and generated by third parties. As operator, the
Company supervises the drilling and completion of wells and production
therefrom and the further development of surrounding properties. The
operator of a well has significant control over its location and the timing
of its drilling. In addition, the operator of a well receives fees from
other working interest owners as reimbursement for the general and
administrative expenses attendant to the operation of the wells. The
operator will normally receive revenues and pay expenses equal to more than
its ownership interest in the wells, and then must remit or collect all but
its share to or from the other respective participants in the well. At
June 1, 1997 the Company was operator of 33 wells.
Oil and Gas Reserves
Information concerning the Company's estimated proved oil and gas
reserves is included in note (10) to the Company's financial statements.
See "Item 8 - Financial Statements and Supplementary Data".
The reserve information is only an estimate. There are numerous
uncertainties inherent in estimating oil and gas reserves and their
estimated values, including many factors beyond the control of the Company.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact
manner, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation
and judgment. As a result, estimates of different engineers often vary.
In addition, estimates of reserves are subject to revision due to the
results of drilling, testing and production subsequent to the date of such
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estimates. Accordingly, reserve estimates are often different from the
quantities of oil and gas that are ultimately recovered. The accuracy of
such estimates is highly dependent upon the accuracy of the underlying
assumptions upon which they are based.
In general, the volume of production from oil and gas properties
declines as reserves are depleted. Except to the extent the Company
acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of,
and volumes of production by, the Company will decline as reserves are
produced. The Company's future oil and gas production is therefore highly
dependent upon its level of success in acquiring or finding additional
reserves.
The Company has no reserves outside the United States.
No major discovery or other favorable or adverse event has occurred
since March 31, 1997 which is believed to have caused a significant change
in the estimated proved oil and gas reserves of the Company.
The Company's oil and gas reserves and production are not subject to
any long-term supply or similar agreements with foreign governments or
authorities.
The Company's estimate of reserves has not been filed with or included
in reports to any federal agency other than the Securities and Exchange
Commission.
Productive Wells and Acreage
The following tables set forth the gross and net productive oil and
gas wells and developed and undeveloped acreage in which the Company owned
a working interest as of March 31, 1997. Excluded from the table is
acreage in which the Company's interest is limited to royalty or similar
interests.
Productive Wells
Gross Net
----- ---
Oil Gas Oil Gas
--- --- --- ---
Texas................................... 71 9 10.334 1.335
New Mexico.............................. 10 2 2.621 .144
--- --- ------ -----
Total......................... 81 11 12.955 1.479
=== === ====== =====
Acreage
Developed Undeveloped
--------- -----------
Gross Net Gross Net
----- --- ----- ---
Texas............................ 16,487 2,144 7,687 1,066
New Mexico....................... 2,011 339 -- --
------ ----- ----- -----
Total.................. 18,498 2,483 7,687 1,066
====== ===== ===== =====
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Generally, the terms of developed oil and gas leaseholds are
continuing and such leases remain in force by virtue of, and so long as,
production from lands under lease is maintained. Undeveloped oil and gas
leaseholds are generally for a primary term, such as five or ten years,
subject to maintenance with the payment of specified minimum delay rentals
or extension by production.
In addition to the Company's developed and undeveloped acreage shown
above, 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 will allow the Company to explore for oil and natural gas
offshore. The license covers approximately 1.1 million acres within the
waters of Palau. Any exploration activities in the license area will be
conducted jointly with other third parties under a carried interest,
farmout or other similar arrangements which would allow the Company to
retain an ownership interest without incurring the initial costs of
exploration.
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Drilling Activity
The following table sets forth certain information concerning the
number of gross and net exploratory and development wells drilled for the
Company's account during the periods indicated.
Years Ended March 31,
------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Type of Well Gross Net Gross Net Gross Net
------------ ----- --- ----- --- ----- ---
Exploratory (1)
Oil 3 .700 7 1.340 4 .442
Gas 2 .433 1 .250 3 .293
Dry 5 1.077 11 2.067 9 1.195
Development (2)
Oil 7 1.835 6 .480 6 .842
Gas -- -- -- -- -- --
Dry 2 .625 3 .510 2 .212
--------------------------
(1) An exploratory well is a well drilled to find and produce oil or gas
in an unproved area, to find a new reservoir in a field previously
found to be productive of oil or gas in another reservoir, or to
extend a known reservoir.
(2) A development well is a well drilled within the proved area of a oil
or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
At June 24, 1997, the Company was participating in the drilling of 1
gross (.06 net) exploratory well in Glasscock County, Texas.
Substantially all of the equipment used in the Company's drilling
operations is owned by the Company; however, certain insignificant items of
drilling equipment are leased or rented as needed as such equipment either
cannot be purchased or is only necessary for the drilling of certain types
of wells located in certain areas.
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Production, Prices and Costs. The following table sets forth certain
information regarding the volumes of the Company's net production of oil
and gas, the average sales prices received associated with its sales of oil
and gas, and the average production (lifting) cost per equivalent barrel of
oil ("EBO").
Years Ended March 31,
----------------------------------
1997 1996 1995
---- ---- ----
Net Production
Oil (Bbls) 76,266 70,941 51,300
Gas (Mcf) 361,745 212,062 104,700
Sales Prices
Oil ($/Bbl) 23.93 17.67 17.13
Gas ($/Mcf) 1.81 1.52 1.55
Production (Lifting) Costs
per EBO (1) $ 6.77 $ 5.20 $ 4.07
--------------------
(1) An EBO is one barrel of oil equivalent using the ratio of six Mcf
of gas to one barrel of oil.
Title to Properties
As is customary in the oil and gas industry, a preliminary title
examination is conducted at the time oil or gas properties believed to be
suitable for drilling are acquired by the operator. Prior to the
commencement of operations, curative work determined to be appropriate as a
result of a title search is performed with respect to significant defects
before the operator commences development. Title examinations have been
performed with respect to substantially all of the Company's interests in
its producing properties. The Company believes that title to its
properties is good and defensible in accordance with standards generally
acceptable in the oil and gas industry, subject to such exceptions which,
in the Company's opinion, are not so material as to detract substantially
from the value of such properties. The Company's properties are subject to
royalty, overriding royalty, and other outstanding interests customary in
the industry, and are also subject to burdens such as liens incident to
operating agreements, current taxes not yet due, development obligations
under oil and gas leases, and other encumbrances, easements and
restrictions. The Company does not believe that any of these burdens will
materially interfere with the use of its properties in the operation of the
Company's business.
Markets and Customers
The Company sells its oil and gas at the wellhead on an "as-produced"
basis and does not refine petroleum products. Other than normal production
facilities, the Company does not own an interest in any bulk storage
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<PAGE> 16
facilities or pipelines. As is customary in the industry, the Company
sells its production in any one area to relatively few purchasers,
including transmission companies that have pipelines near the Company's
producing wells. Gas purchase contracts are generally on a short-term
"spot market" basis and usually contain provisions by which the prices and
delivery quantities for future deliveries will be determined. During the
year ended March 31, 1997, Amoco Production Company, EOTT Energy
Corporation and Texaco Trading and Transportation, Inc. accounted for
approximately 15%, 10% and 10%, respectively, of the Company's oil and gas
revenues for such period. The loss of any one of these purchasers could
cease or delay the Company's production and sale of its oil and gas
reserves to the extent that alternative purchasers having adequate
gathering facilities are not found to replace such purchaser's volume of
oil or gas purchased. However, in the event of a loss of any purchaser,
the Company believes that, under present circumstances, it would be able to
find other purchasers for its oil and gas production.
Competition
The Company encounters strong competition from major oil companies and
independent producers and operators in acquiring properties and leases for
exploration for oil and gas. Competition is particularly intense with
respect to the acquisition of desirable undeveloped oil and gas leases.
The principal competitive factors in the acquisition of undeveloped oil and
gas leases include the staff and data necessary to acquire and develop such
leases, as well as the amount of consideration and terms offered. Many of
the Company's competitors have financial resources, staffs and facilities
substantially greater than those of the Company. In addition, the
producing and marketing of natural gas and oil is affected by a number of
factors which are beyond the control of the Company, the effect of which
cannot be accurately predicted. Of significant importance recently has
been the domination and control of oil markets and prices by foreign
producers.
The principal raw materials and resources necessary for the
exploration and development of oil and gas are leasehold prospects under
which oil and gas reserves may be discovered, drilling rigs and related
equipment to explore for such reserves and knowledgeable personnel to
conduct all phases of oil and gas operations. The Company must compete for
such raw materials and resources with both major oil companies and
independent operators, and the continued availability, without periodic
interruption, of such materials and resources to the Company cannot be
assured.
Item 2. PROPERTIES
In addition to its drilling rigs and related equipment and its oil and
gas properties, the Company owns a 31 acre tract of land in Midland, Texas
on which the Company's executive offices are located and on which the
principal support and storage facilities for its contract drilling
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<PAGE> 17
operations are located. Such facilities include an office building and
fabrication and maintenance shop. The facility allows for open storage of
drilling equipment and drill pipe.
The Company also owns a 78 acre tract of land in Odessa, Texas, which
is presently being utilized as a secondary storage location. From time to
time, the Company's rigs are stored and stacked in the field at the rig's
last location site.
The Company owns a warehouse and yard facility situated on
approximately 4 acres in Midland, Texas. This additional storage is being
used to complement the existing Midland yard facility. The Company
believes that the support and storage facilities for its drilling rigs and
related equipment are more than adequate.
Item 3. LEGAL PROCEEDINGS
In March, 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 into 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 approximate amount of $646,000. 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 the receiver for SFIC, 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. However, an accrual was made in
the Company's financial statements for the amount in question. In a
related development, on June 5, 1995, the Company received a letter from
the Texas Property and Casualty Insurance Guaranty Association ("Guaranty
Association") requesting payment in the approximate amount of $729,000 for
claims that the Guaranty Association has paid on behalf of SFIC. The
Guaranty Association does not believe that the policies written by SFIC
involved a transfer of insurance risk as required by the Texas Insurance
Code and is asserting that it is entitled to reimbursement for all monies
paid to claimants under these policies. In November, 1995, the Guaranty
Association filed a lawsuit against the Company in Travis County, Texas,
styled Texas Property and Casualty Insurance Guaranty Association vs.
TMBR/Sharp Drilling, Inc., Cause No. 95-12318. The Guaranty Association is
seeking to recover past workers' compensation claims in the amount of
approximately $803,000, which have been advanced by the Guaranty
Association under the Company's workers compensation insurance program with
SFIC. In May, 1996, and pursuant to an order of the Travis County District
Court, the claims of the receiver for SFIC were assigned to and became a
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<PAGE> 18
part of the Guaranty Association's claims against the Company. The Company
has rejected a settlement offer made by the Guaranty Association for an
amount substantially less than the amount accrued by the Company, and the
Company intends to vigorously defend its position against the Guaranty
Association.
Currently the Company is covered under a deductible workers'
compensation policy with Petrosurance Casualty Company, an approved Texas
workers' compensation carrier, and Clarendon National Insurance Company.
The Company is also a defendant in other ordinary routine litigation
incidental to its business. The Company does not believe that the ultimate
resolution of these other lawsuits will have a material effect on the
Company's financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no meeting of security holders of the Company during the
fourth quarter of the fiscal year ended March 31, 1997, and no matters were
submitted to a vote of security holders during such period.
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<PAGE> 19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol "TBDI". The following table sets forth, on a per
share basis for the periods indicated, the range of high and low last
reported sales prices as reported by NASDAQ. The quotations are inter-
dealer prices without retail mark-ups, mark-downs or commissions and may
not represent actual transactions.
Price
--------------
High Low
---- ---
Fiscal 1996
First Quarter $ 7 3/4 $ 6 1/2
Second Quarter 10 1/2 9 1/4
Third Quarter 9 1/4 8
Fourth Quarter 8 1/4 6 3/4
Fiscal 1997
First Quarter 8 1/4 6 3/4
Second Quarter 12 7
Third Quarter 12 8
Fourth Quarter 13 7/8 10 3/4
The transfer agent for the Company's Common Stock is American Stock
Transfer & Trust Company, New York, New York.
On February 13, 1997, the Company privately placed 725,000 shares of
its Common Stock to eleven accredited investors, at a per share price of
$11.00. Rauscher Pierce Refsnes, Inc. ("Rauscher") served as placement
agent for the offering. The net proceeds from the sale of the shares,
approximately $7.47 million, were used to repay all of the Company's
outstanding bank debt (approximately $4.5 million) and for general working
capital purposes. As consideration for serving as placement agent,
Rauscher received a 5% cash commission (an aggregate of $398,750), and a
non-accountable expense allowance of $25,000. The Company also issued to
Rauscher, for nominal consideration, a five-year stock purchase warrant to
purchase 36,250 shares of the Company's Common Stock at an exercise price
of $13.20 per share. The Common Stock was sold in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Act"), and Rule 506 of Regulation D under the Act.
On June 16, 1997, the outstanding shares of the Company's Common Stock
were held of record by approximately 3,422 stockholders.
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<PAGE> 20
The Company has never declared or paid any cash dividends on its
Common Stock and has no present intention to pay cash dividends in the
future. The Company presently intends to retain all earnings to fund its
operations and future growth. Under the terms of the Company's Credit
Facility with its bank lender, the Company is prohibited from paying cash
dividends to the holders of Common Stock without the written consent of the
bank. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
-20-
<PAGE> 21
Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data
for the Company's operations for each of the five years
ended March 31, 1997. The data set forth in this table
should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations",
and the Company's Financial Statements and related notes
included elsewhere herein.
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenues:
Contract drilling $ 18,483 $ 21,298 $ 18,357 $ 18,359 $ 17,996
Oil and gas 2,491 1,683 1,042 621 557
------ ------ ------ ------ ------
Total operating revenues 20,974 22,981 19,399 18,980 18,553
Operating costs and expenses:
Contract drilling 14,190 17,252 14,630 14,989 15,570
Oil and gas production 924 554 350 318 221
Dry holes and abandonments 558 945 629 656 236
Depreciation, depletion
and amortization 1,784 907 876 746 702
General and administrative 1,560 1,599 1,553 1,339 1,401
Writedown of oil and
gas properties (a) 171 2,624 -- -- --
------ ------ ------ ------ ------
Total operating costs
and expenses 19,187 23,881 18,038 18,048 18,130
------ ------ ------ ------ ------
Operating income (loss) 1,787 (900) 1,361 932 423
Other income (expenses):
Interest (278) (139) (154) (89) (424)
Other 52 117 359 258 5,118
------ ------ ------ ------ ------
Total other income (expense) (226) (22) 205 169 4,694
------ ------ ------ ------ ------
Net income(loss) before income
tax provision 1,561 (922) 1,566 1,101 5,117
Provision for income taxes (16) (30) (30) (62) (149)
------ ------ ------ ------ ------
Net income (loss) before
extraordinary items $ 1,545 $ (952) $ 1,536 $ 1,039 $ 4,968
====== ====== ====== ====== ======
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<PAGE> 22
Net income (loss)
before extraordinary
items per share $0.38 ($0.23) $0.38 $0.23 $1.09
====== ====== ====== ====== ======
Weighted average number of
common shares outstanding 4,106 4,075 4,032 4,603 4,554
===== ===== ===== ===== =====
BALANCE SHEET DATA
Cash and cash equivalents $ 1,048 $ 339 $ 1,590 $ 1,039 $ 424
Total assets 19,761 11,660 10,040 7,648 7,932
Total debt -- 1,300 -- 74 16
Stockholders' equity 14,372 4,959 5,775 4,133 3,081
</TABLE>
____________________
(a) During fiscal years ended March 31, 1997 and 1996, the
Company recognized a non-cash charge of approximately
$171,000 and $2,624,000, respectively, due to a writedown
of the carrying value of its oil and gas properties. In
1996, this charge was a result of the adoption of Statement
of Financial Accounting Standards No. 121 ("SFAS 121")
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS 121 requires
the Company to assess the need for an impairment of
capitalized costs of oil and gas properties on a property-
by-property basis in contrast to the Company's prior policy
of evaluating the undiscounted future net revenues of its
oil and gas properties in total. According to SFAS 121,
if an impairment is indicated based on undiscounted future
cash flows, then it is recognized to the extent that net
capitalized costs exceed discounted future cash flows.
-2-
<PAGE> 23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-K Annual Report and documents incorporated by reference in
this Form 10-K Annual Report include certain statements that may be deemed
to be "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements, other than statements of
historical facts, included in this Annual Report that address activities,
events or developments that the Company estimates, intends, projects,
expects, believes or anticipates will or may occur in the future, including
such matters as market conditions, future capital, development and
exploration expenditures (including the amount and nature thereof),
drilling rig utilization rates, drilling of wells, reserve estimates,
business strategies and other plans and objectives of management of the
Company for future operations and activities, expansion and growth of the
Company's operations and other such matters are forward-looking statements.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other facts it
believes are appropriate in the circumstances. Such statements are subject
to a number of assumptions, risks and uncertainties, including the risk
factors discussed above, general economic and business conditions, the
business opportunities (or lack thereof) that may be presented to and
pursued by the Company, changes in law or regulations and other factors,
many of which are beyond the control of the Company. Such statements are
not guarantees of future performance and actual results or developments may
differ materially from those projected in the forward-looking statements.
Overview
Since 1982, the principal business of the Company has been domestic
onshore contract drilling of oil and gas wells. In 1987, the Company began
acquiring and participating in the exploration for and development of oil
and gas reserves.
Contract Drilling Operations
Drilling revenues from footage and daywork contracts are recognized as
work is performed utilizing the percentage-of-completion method. Costs on
footage and daywork contracts are recognized in the period incurred. The
Company utilizes the completed contract method to recognize drilling
revenues and expenses relating to turnkey contracts. Expected losses on
all in-process contracts are recognized in the period the loss can
reasonably be determined.
Drilling equipment is depreciated on a units-of-production method based
on the monthly utilization of the equipment. Drilling equipment which is
not utilized during a month is depreciated using a minimum utilization rate
of approximately twenty-five percent. Estimated useful lives range from
four to eight years. Other property and equipment is depreciated using the
straight-line method of depreciation with estimated useful lives of three
to seven years.
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<PAGE> 24
The following table sets forth certain information relating to the
Company's contract drilling operations:
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
(In thousands, except %'s)
Contract drilling revenues $18,483 $21,298 $18,357
Contract drilling expenses 14,190 17,252 14,630
Contract drilling expenses as
a percent of drilling revenues 76.8% 81.0% 79.7%
Rig utilization 51.6% 45.1% 43.5%
Oil and Gas Operations
The Company's oil and gas producing activities are accounted for using
the successful efforts method of accounting. Accordingly, the costs
incurred to acquire oil and gas properties (proved and unproved), all
development costs and successful exploratory costs are capitalized, whereas
the costs of unsuccessful exploratory wells are expensed. Geological and
geophysical costs, including seismic costs, are charged to expense when
incurred. In cases where the Company provides contract drilling services
related to oil and gas properties in which it has an ownership interest,
the Company's proportionate share of costs related to these properties is
capitalized as stated above, net of the Company's working interest share of
profits from the related drilling contracts. Capitalized costs of
undeveloped properties, which are not depleted until proved reserves can be
associated with the properties, are periodically reviewed for possible
impairment. Such unevaluated costs totaled approximately $196,000, and
$1,100,000 as of March 31, 1997 and March 31, 1996, respectively.
During 1997, 1996 and 1995, depletion, depreciation and amortization of
capitalized oil and gas property costs was provided using the units-of-
production method based on estimated proved or proved developed oil and gas
reserves, as applicable, of the respective property units.
The following table sets forth certain information relating to the
Company's oil and gas operations:
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
(In thousands)
Oil and gas revenues $2,491 $1,683 $1,042
Production expenses 924 554 350
Dry holes and abandonments 558 945 629
Depreciation, Depletion and
Amortization 802 468 400
Writedown of properties 171 2,624 --
The contract drilling industry remains highly competitive. Recently,
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<PAGE> 25
however, the demand for drilling rigs has improved from previous years.
The Company believes it owns a sufficient number of drilling rigs to remain
competitive within its areas of operation. In addition, the Company
believes it competes favorably with respect to the depth capacity of its
rigs, the availability of drilling equipment, the experience level of its
personnel, the reputation of the Company and its relationship with existing
customers. However, cash flow generated from operations and the Company's
operating results will continue to be directly affected by the level of
drilling activity in the Company's operating areas.
The Company has not entered into hedging arrangements and does not have
any delivery commitments. While hedging arrangements reduce exposure to
losses as a result of unfavorable price changes, they also limit the
ability to benefit from favorable market price changes.
RESULTS OF OPERATIONS
Comparison of Year ended March 31, 1997 to Year ended March 31, 1996
Contract drilling revenues for the year ended March 31, 1997 decreased
by approximately 13% from the year ended March 31, 1996. However, the
Company experienced an increase in the average price received for footage
and daywork contracts, respectively, when compared to the year ended March
31, 1996. Even though the Company experienced these increases in rates,
total drilling revenues for the year decreased by 13%. This decrease can
be attributed to a reduction in the number of turnkey wells drilled by the
Company. During the year ended March 31, 1996, the Company drilled 12
turnkey wells, while no turnkey wells were drilled by the Company during
the year ended March 31, 1997.
Rig utilization rates were approximately 52% and 45% for the years
ended March 31, 1997 and 1996, respectively. Rig utilization rates and
contract drilling revenues for the year ended March 31, 1997 were adversely
affected by extremely low utilization in the first three months of the
fiscal year. The utilization rate for the first quarter was 34% compared
to 70% for the fourth quarter of fiscal year ended March 31, 1997. During
the first quarter of the year, drilling prices were depressed and the
Company chose to underutilize its drilling equipment rather then subjecting
such equipment to additional wear and tear at unacceptable operating
margins. From July, 1996 through March 31, 1997, the Company experienced,
and is continuing to experience, a substantial increase in demand for its
contract drilling services. Rig utilization in the Company's operating
market is difficult to project because contract drilling is a highly
competitive industry. In addition, the number of rigs, industry wide,
actually available for work cannot be accurately determined.
Contract drilling expenses as a percent of contract drilling revenues
were approximately 77% and 81% for the years ended March 31, 1997 and 1996,
respectively. This decrease can be attributed to the increase in the
average price received for drilling contracts.
Oil and gas revenues increased by approximately 48% for the fiscal year
ended March 31, 1997. Accordingly, oil and gas production expenses
increased approximately 67% for the same period.
Depreciation, depletion and amortization expense has also increased due
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<PAGE> 26
to the addition of drill pipe and an increase in the number of producing
wells in which the Company has an ownership interest.
Interest expense increased approximately 100% for the year ended March
31, 1997 due to borrowings under the Company's credit facilities with its
bank lender during this period. See "Liquidity and Capital Resources"
below.
Net working capital was $2.6 million at March 31, 1997 compared to a
negative $1.2 million at March 31, 1996. The increase in working capital
can be attributed to an increase in accounts receivable, a decrease in
accounts payable and an increase in cash and cash equivalents.
Comparison of Year Ended March 31, 1996 to Year Ended March 31, 1995
Contract drilling revenues increased for the year ended March 31, 1996
by approximately 16% over the year ended March 31, 1995. During this
period, the Company experienced an increased demand for turnkey drilling
contracts. During fiscal year 1996, the Company drilled 12 turnkey wells
which represented 45% of total drilling revenues, compared to 8 in fiscal
year 1995, which represented 28% of total drilling revenues. Operating
costs as a percent of revenues remained relatively constant as did the
Company's rig utilization rates.
Oil and gas revenues increased by approximately 62% and 68% for the
years ended March 31, 1996 and 1995, respectively. This increase is
primarily a result of an increase in the number of wells in which the
Company owned an interest. Accordingly, the related oil and gas production
expenses increased over the same periods by 58% and 10%, respectively.
The Company participated as a working interest owner in the drilling of
28 wells during 1996, of which 14 were dry holes. The Company participated
as a working interest owner in the drilling of 24 wells in 1995, of which
11 were dry holes.
During 1996, the Company recognized a non-cash charge of approximately
$2.6 million due to a writedown of the carrying value of its oil and gas
properties. This charge was a result of the adoption of Statement of
Financial Accounting Standards No. 121 (SFAS 121) "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of". SFAS 121 requires the Company to assess the need for an impairment of
capitalized costs of oil and gas properties on a property-by-property basis
in contrast to the Company's prior policy of evaluating the undiscounted
future net revenues of its oil and gas properties in total. According to
SFAS 121, if an impairment is indicated based on undiscounted future cash
flows, then it is recognized to the extent that net capitalized costs
exceed discounted future cash flows.
Income Taxes
At March 31, 1997, the Company had approximately $71,683,000 of unused
net operating loss ("NOL") carryforwards for tax purposes. Realization of
the benefits of these carryforwards is dependent upon the Company's ability
to generate taxable earnings in future periods. If these carryforwards are
not utilized, they will begin to expire in 1998. The Company's ability to
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<PAGE> 27
utilize its NOL carryforwards may be substantially limited in the future
under the Internal Revenue Code of 1986, as amended (the "Code"). If the
Company experiences an ownership change under applicable provisions of the
Code, the carryforward would be limited to an annual amount calculated
based on specified interest rates and other variables. The Company does
not believe an ownership change has occurred to date.
The effective tax rates for the years ended March 31, 1997 and 1996
differ from the statutory tax rate of 34% primarily due to utilization of
NOLs. Tax expense is generally limited to alternative minimum tax.
The Company utilizes an asset and liability approach for financial
accounting and reporting for income taxes. The Company has a deferred tax
asset primarily due to net operating loss carryforwards. The Company has
provided a valuation allowance for the entire balance of deferred tax
assets as it is likely that a portion of the NOLs may expire before the
Company is able to use them.
Liquidity and Capital Resources
In January, 1996, the Company entered into a loan agreement with its
bank lender providing for a revolving credit facility (the "Credit
Facility") maturing on January 15, 1998. The aggregate principal amount of
the Company's borrowings outstanding at any one time under the revolving
facility are limited to the lesser of $3.0 million or one-third of the
borrowing base amount then in effect. The borrowing base amount is
redetermined by the bank monthly. The Credit Facility was established to
finance the Company's purchases of drill pipe and oil and gas exploration
activities. Interest only is payable monthly and the entire principal
amount is due and payable on January 15, 1998. The Credit Facility bears
interest at the bank's base rate and is secured by substantially all of the
Company's accounts receivable, drilling rigs and related equipment. At
March 31, 1997, there were no amounts outstanding under the Credit
Facility.
In August, 1996, the Company entered into a second loan agreement with
its bank lender. This second loan agreement provides for a $2.0 million
revolving line of credit (the "Line of Credit") secured by substantially
all of the Company's producing oil and gas properties. The Line of Credit
was established to finance the Company's oil and gas exploration activities
and for general corporate purposes. The Line of Credit bears interest at
the bank's base rate and interest only is payable monthly. The Line of
Credit matures on February 15, 1998, at which time the principal amount
then outstanding is due and payable, plus any accrued and unpaid interest.
At March 31, 1997, no amounts were outstanding under the Line of Credit.
On February 13, 1997, the Company closed a private placement of 725,000
shares of Common Stock at a price of $11.00 per share. The net proceeds
from the placement were approximately $7.4 million. Of such amount,
$4,532,438 was used to repay all of the Company's bank debt then
outstanding under the Credit Facility and Line of Credit. The remaining
proceeds will be used for the purchase of drill pipe and for general
corporate purposes. Management believes that the Company's improved
liquidity resulting from the infusion of equity capital will also enhance
the Company's ability to meet any unexpected capital needs and to fund
planned capital expenditures. The Company may reborrow under its Credit
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<PAGE> 28
Facility and Line of Credit in the future.
The Company intends to meet its fiscal 1998 cash flow requirements,
including amounts, if any, that may be required to be paid by the Company
as a result of the claims asserted against the Company as described in
"Item 3 - Legal Proceedings", through cash flow provided from operations
and, if needed, additional borrowings under the Credit Facility and Line of
Credit. As described in "Item 3 - Legal Proceedings", the Company is a
defendant in a lawsuit filed against it by Texas Property and Casualty
Insurance Guaranty Association which has resulted in the Company's accrual
of approximately $854,000 for a contingent liability. If the Company
ultimately incurs any liability as a result of a final, adverse judgment or
if the Company pays any amount in settlement of the lawsuit, the Company's
liquidity could be adversely affected to the extent of the amount actually
paid in settlement of the lawsuit or in satisfaction of any judgment
against the Company. However, in either event, the Company believes its
capital sources are more than adequate to fund any such liability and that
any adverse effects on the Company's liquidity would not be material and
would not result in any material constraints on the Company's future
operations.
The following table sets forth information regarding the capital
expenditures made by the Company during the last three fiscal years.
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Oil and gas exploration and development..... $3,424 $5,553 $2,980
Drill pipe and related equipment............ 2,940 1,452 459
Other....................................... 390 11 56
----- ----- -----
Total.................................. $6,754 $7,016 $3,495
===== ===== =====
The Company presently anticipates making capital expenditures of
approximately $7.0 million in its 1998 fiscal year. Of this amount, the
Company expects that approximately $4.0 million will be spent for the
acquisition of drill pipe, drill collars and related equipment, and
approximately $3.0 million for oil and gas exploration and development
activities. It is the Company's policy, however, to maintain maximum
flexibility to make capital expenditures for its lines of business based on
then existing economic conditions, the results of the Company's drilling
activities, and other factors affecting the Company's business.
Accordingly, the amounts actually expended in the Company's activities in
fiscal 1998 could differ substantially from the amounts estimated above.
The Company anticipates that funds for its capital expenditures in
fiscal 1998 will be available through a combination of sources, including
(i) borrowings under its Credit Facility and Line of Credit , (ii) funds
raised through issuances of equity or debt securities in public or private
transactions, and (iii) internally generated funds.
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<PAGE> 29
Trends and Prices
Although the domestic onshore contract drilling business is currently
experiencing increased demand for drilling services, primarily due to
stronger oil and gas prices and technological advances, the market for
onshore contract drilling services has generally been depressed since 1982,
when oil and gas prices began to weaken. The Company cannot predict either
the future level of demand for its contract drilling services or future
conditions in the contract drilling industry.
The contract drilling industry is experiencing a shortage of qualified
drilling rig personnel. This shortage has resulted in the Company's
intentional restriction on the number of drilling rigs it has in active
operations at any one time. The continued growth and expansion of the
Company will depend upon, among other factors, the successful retention of
skilled and qualified drilling rig personnel. If the Company is unable to
attract and retain additional qualified personnel, its ability to market
and operate more drilling rigs and expand its operations will continue to
be restricted.
In recent years, oil and gas prices have been extremely volatile.
Prices for oil and gas are affected by market supply and demand factors as
well as actions of state and local agencies, the U.S. and foreign
governments and international cartels. The Company has no way of
accurately predicting the supply and demand for oil and gas, domestic or
worldwide political events or the effects of any such factors on the prices
received by the Company for its oil and gas.
-29-
<PAGE> 30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants 30
Balance Sheets, March 31, 1997 and 1996 31
Statements of Operations, Years ended
March 31, 1997, 1996 and 1995 33
Statements of Stockholders' Equity,
Years ended March 31, 1997, 1996 and 1995 34
Statements of Cash Flows,
Years ended March 31, 1997, 1996 and 1995 35
Notes to Financial Statements 36
-30-
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of TMBR/Sharp Drilling, Inc.:
We have audited the accompanying balance sheets of TMBR/Sharp Drilling,
Inc. (a Texas corporation) as of March 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of
the three years in the period ended March 31, 1997. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TMBR/Sharp
Drilling, Inc. as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
As explained in Note 1 to the financial statements, effective January
1, 1996, the Company changed its method of accounting for impairment of
long-lived assets.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at
Item 14(a)2 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements, and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 23, 1997
-31-
<PAGE> 32
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1997 and 1996
(In thousands, except per share data)
ASSETS 1997 1996
------ ---- ----
Current assets:
Cash and cash equivalents $ 1,048 $ 339
Marketable securities 87 --
Trade receivables,
net of allowance for doubtful
accounts of $1,135 in 1997
and $1,225 in 1996. 6,218 2,942
Inventories 74 51
Deposits 73 423
Other 560 410
------ ------
Total current assets 8,060 4,165
------ ------
Property and equipment, at cost:
Drilling equipment 42,690 39,750
Oil and gas properties, based on
successful efforts accounting 13,102 10,398
Other property and equipment 3,584 3,195
------ ------
59,376 53,343
Less accumulated depreciation,
depletion and amortization (47,851) (46,022)
------ ------
Net property and equipment 11,525 7,321
------ ------
Other assets 176 174
------ ------
Total assets $ 19,761 $ 11,660
====== ======
See accompanying notes to financial statements.
-32-
<PAGE> 33
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1997 and 1996
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ ---- ----
Current liabilities:
Trade payables $ 2,739 $ 3,336
Accrued workers' compensation 1,245 1,279
Other 1,405 786
------ ------
Total current liabilities 5,389 5,401
------ ------
Long term liabilities:
Borrowings from bank -- 1,300
------ ------
Total liabilities 5,389 6,701
------ ------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value.
Authorized, 50,000,000 shares;
issued, 5,696,825 shares at
March 31, 1997 and 4,615,525 at
March 31, 1996. 570 461
Additional paid-in capital 68,413 60,654
Accumulated deficit (54,461) (56,006)
Treasury stock-common, 1,268,739 shares
at March 31, 1997 and 1996, at cost. (150) (150)
------ ------
Total stockholders' equity 14,372 4,959
------ ------
Total liabilities and
stockholders' equity $ 19,761 $ 11,660
====== ======
See accompanying notes to financial statements.
-33-
<PAGE> 34
TMBR/SHARP DRILLING, INC.
Statements of Operations
Years Ended March 31, 1997, 1996 and 1995
(In thousands, except per share data)
1997 1996 1995
---- ---- ----
Revenues:
Contract drilling $ 18,483 $ 21,298 $ 18,357
Oil and gas 2,491 1,683 1,042
------ ------ ------
Total revenues 20,974 22,981 19,399
------ ------ ------
Operating costs and expenses:
Contract drilling 14,190 17,252 14,630
Oil and gas production 924 554 350
Dry holes and abandonments 558 945 629
Depreciation, depletion and
amortization 1,784 907 876
Writedown of oil and gas
properties 171 2,624 --
General and administrative 1,560 1,599 1,553
------ ------ ------
Total operating costs
and expenses 19,187 23,881 18,038
------ ------ ------
Operating income (loss) 1,787 (900) 1,361
------ ------ ------
Other income (expense):
Interest (278) (139) (154)
Gain on sales of assets 65 26 100
Other, net (13) 91 259
------ ------ ------
Total other income
(expense), net (226) (22) 205
------ ------ ------
Net income (loss) before
income tax provision 1,561 (922) 1,566
Provision for income taxes (16) (30) (30)
------ ------ ------
Net income (loss) $ 1,545 $ (952) $ 1,536
====== ====== ======
Net income (loss) per
common share $ 0.38 $ (0.23) $ 0.38
========= ========= =========
Weighted average number of
common shares outstanding 4,105,882 4,074,567 4,032,195
========= ========= =========
See accompanying notes to financial statements.
-34-
<PAGE> 35
TMBR/SHARP DRILLING, INC.
Statements of Stockholders' Equity
Years Ended March 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Total
------------ Paid-In Accumulated --------------- Stockholders'
Shares Amount Capital Deficit Shares Amount Equity
------ ------ ---------- ----------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1994 4,226 $ 423 $ 60,450 $(56,590) 1,270 $(150) $ 4,133
Exercise of Stock
Options 168 16 90 -- -- -- 106
Net Income -- -- -- 1,536 -- -- 1,536
----- ----- -------- -------- ----- ----- -------
Balance, March 31,
1995 4,394 $ 439 $ 60,540 $(55,054) 1,270 $(150) $ 5,775
Exercise of Stock
Options 222 22 114 -- -- -- 136
Net Loss -- -- -- (952) -- -- (952)
----- ----- -------- -------- ----- ----- -------
Balance, March 31,
1996 4,616 $ 461 $ 60,654 $(56,006) 1,270 $(150) $ 4,959
Issuance of
Common Stock 750 76 7,704 -- -- -- 7,780
Exercise of Stock
Options 331 33 55 -- -- -- 88
Net Income -- -- -- 1,545 -- -- 1,545
----- ----- -------- -------- ----- ----- -------
Balance, March 31,
1997 5,697 $ 570 $ 68,413 $(54,461) 1,270 $(150) $14,372
===== ===== ======== ======== ===== ===== =======
See accompanying notes to financial statements.
-35-
<PAGE> 36
TMBR/SHARP DRILLING, INC.
Statements of Cash Flows
Years Ended March 31, 1997, 1996 and 1995
(In thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 1,545 $ (952) $ 1,536
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation, depletion and amortization 1,784 907 876
Dry holes and abandonments 558 945 629
Gain on sales of assets (65) (26) (100)
Writedown of properties 171 2,624 --
Changes in assets and liabilities:
Trade receivables (3,276) (374) 45
Deposits 350 90 273
Inventories and other assets (262) (65) (175)
Trade payables (597) 1,497 555
Accrued payables and other
current liabilities 585 117 (102)
-------- -------- --------
Total adjustments (752) 5,715 2,001
-------- -------- --------
Net cash provided
by operating activities 793 4,763 3,537
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (6,754) (7,016) (3,495)
Proceeds from sales of property
and equipment 102 44 106
-------- -------- --------
Net cash required
by investing activities (6,652) (6,972) (3,389)
-------- -------- --------
Cash flows from financing activities:
Repayments of capital lease -- (92) (89)
Proceeds from issuance of common stock 7,780 -- --
Proceeds from exercise of stock options 88 136 106
Proceeds from bank loan 3,200 1,300 --
Repayments of bank loan (4,500) -- --
Leasehold borrowings and repayments
of leasehold borrowings -- (386) 386
-------- -------- --------
Net cash provided by
financing activities 6,568 958 403
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents 709 (1,251) 551
Cash and cash equivalents at beginning
of year 339 1,590 1,039
-------- -------- --------
Cash and cash equivalents at end of year $ 1,048 $ 339 $ 1,590
======== ======== ========
See accompanying notes to financial statements.
-36-
<PAGE> 37
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(1) Organization, Nature of Business and Summary of Significant Accounting
Policies
Nature of Operations
TMBR/Sharp Drilling, Inc. (the "Company") was incorporated under the
laws of Texas in October, 1982 under the name TMBR Drilling, Inc. In
August, 1986, the Company changed its name to TMBR/Sharp Drilling, Inc.
The Company's principal businesses are the domestic onshore contract
drilling of oil and gas wells for major and independent oil and gas
producers, and, to a lesser extent, the exploration for, development and
production of oil and natural gas. The Company's drilling activities are
primarily conducted in the Permian Basin of west Texas and eastern New
Mexico.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
highly liquid debt instruments which have an original maturity of three
months or less to be cash equivalents. Cash payments for interest expense
were approximately $278,000 in 1997, $139,000 in 1996, and $154,000 in
1995. Cash payments for taxes due totaled $0, $23,000 and $13,000 during
1997, 1996 and 1995, respectively.
Marketable Securities
During 1997, the Company adopted the accounting procedures as
established by the SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 115, marketable securities,
such as those owned by the Company, are classified as available-for-sale
securities and are to be reported at market value, with unrealized gains
and losses, net of income taxes, excluded from earnings and reported as a
separate component of stockholders' equity. The market value of these
securities at March 31, 1997 was not materially different from the
historical cost, and therefore, no unrealized gains or losses have been
recorded.
-37-
<PAGE> 38
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Inventories
Inventories consist primarily of casing and tubing. The Company
values its inventories at the lower of cost or estimated net recoverable
value using the specific identification method.
Property and Equipment
Drilling equipment is depreciated on a units-of-production method
based on the monthly utilization of the equipment. Drilling equipment
which is not utilized during a month is depreciated using a minimum
utilization rate of approximately twenty-five percent. Estimated useful
lives range from four to eight years. Other property and equipment is
depreciated using the straight-line method of depreciation with estimated
useful lives of three to seven years.
Oil and gas properties are accounted for using the successful efforts
method of accounting. Accordingly, the costs incurred to acquire property
(proved and unproved), all development costs and successful exploratory
costs are capitalized, whereas the costs of unsuccessful exploratory wells
are expensed. Geological and geophysical costs, including seismic costs,
are charged to expense when incurred. In cases where the Company provides
contract drilling services related to oil and gas properties in which it
has an ownership interest, the Company's proportionate share of costs
related to these properties is capitalized as stated above, net of the
Company's working interest share of profits from the related drilling
contracts. Capitalized costs of undeveloped properties, which are not
depleted until proved reserves can be associated with the properties, are
periodically reviewed for possible impairment. Such unevaluated costs
totaled approximately $196,000 and $1,100,000 as of March 31, 1997 and
1996, respectively.
Depletion, depreciation and amortization 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.
-38-
<PAGE> 39
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Prior to 1996, the Company provided impairments for significant proved
oil and gas properties to the extent that net capitalized costs exceeded
aggregated undiscounted future net cash flows. During 1996, the Company
adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS 121 requires the Company to assess the
need for an impairment of capitalized costs of oil and gas properties on a
property-by-property basis. According to SFAS 121, if an impairment is
indicated based on undiscounted expected future cash flows, then it is
recognized to the extent that net capitalized costs exceed discounted
future cash flows. In connection with the adoption of SFAS 121, the
Company provided an impairment of $2,624,000 in 1996. An additional
impairment of $171,000 was recorded in 1997. Management's estimate of
future cash flows is based on their estimate of reserves and prices. It is
reasonably possible that a change in reserve or price estimates could occur
in the near term and adversely impact management's estimate of future cash
flows and consequently the carrying value of properties.
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.
Drilling Revenues and Costs
Drilling revenues from footage and daywork contracts are recognized as
work is performed utilizing the percentage-of-completion method. Costs on
footage and daywork contracts are recognized in the period incurred. The
Company utilizes the completed contract method to recognize drilling
revenues and expenses relating to turnkey contracts. Expected losses on
all in-process contracts are recognized in the period the loss can
reasonably be determined.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates with regard to these financial statements
include the estimate of proved oil and gas reserve volumes and the related
present value
-39-
<PAGE> 40
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
of estimated future net revenues therefrom (see Note 9), and the valuation
allowance for deferred taxes (see Note 5).
Net Income (Loss) Per Share of Common Stock
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 dilutive for purposes of calculating the
net income per share and are considered antidilutive for purposes of
calculating the net loss per share.
Stock Based Employee Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
"Accounting for Stock-Based Compensation," which establishes accounting and
reporting standards for various stock based compensation plans. SFAS 123
encourages the adoption of a fair value based method of accounting for
employee stock options, but permits continued application of the accounting
method prescribed by Accounting Principles Board Opinion No. 25 ("Opinion
25"), "Accounting for Stock Issued to Employees." The Company has elected
to continue to apply the provisions of Opinion 25. Under Opinion 25, if
the exercise price of the Company's stock options equals the market value
of the underlying stock on the date of grant, no compensation expense is
recognized. SFAS 123 requires disclosure of pro forma information
regarding net income and earnings per share as if the Company had accounted
for its employee stock options under the fair value method of the
statement. See Note 3 "Stockholders' Equity."
(2) Debt
Line of Credit
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 loan agreement matures
January 15, 1998 at which time the then outstanding principal and all of
the accrued and unpaid interest is due and payable.
-40-
<PAGE> 41
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
In August, 1996, the Company entered into a second loan agreement with
Norwest. The second loan agreement provides for a $2,000,000 revolving
line of credit secured by substantially all of the Company's producing oil
and gas properties. Borrowings under the line of credit bear interest at
the Norwest base rate and the interest is payable monthly. The line of
credit matures on February 15, 1998, at which time, the principal amount
then outstanding is due and payable, plus any accrued and unpaid interest.
The borrowings under
both loan agreements were paid in full in February, 1997.
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. At March 31, 1996,
the obligation outstanding to Paladin had been satisfied.
(3) Stockholders' Equity
(a) Common Stock
On February 13, 1997, the Company closed a private placement of
725,000 shares of common stock at a price of $11.00 per share. The net
proceeds from the placement were approximately $7.4 million.
(b) Stock Option Plans
1984 Stock Option Plan
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 106,000 shares of common stock are currently outstanding under the
Plan, with 82,250 of the options being exercisable at March 31, 1997. No
additional shares are available for grant as the Plan expired by its own
terms in August
-41-
<PAGE> 42
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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.
On September 3, 1996, the Company granted 465,000 shares of
nonqualified stock options to key employees under the 1994 Plan. The
following sets forth certain information concerning these nonqualified
options.
Number Option Price
of ---------------------
Shares Per Share Total
------ ---------------------
Outstanding March 31, 1996 -- -- --
Granted 465,000 $7.75 $3,603,750
------- ---- ---------
Outstanding March 31, 1997 465,000 $7.75 $3,603,750
======= ==== =========
All of the nonqualifed stock options granted on September 3, 1996 are
earned and exercisable as of May 1, 1997.
In addition to the aforementioned options, during fiscal year 1989, an
additional 500,000 shares of nonqualified stock options were granted to
another director who is also an officer. These options were granted at an
exercise price of $0.25 per share (estimated fair market value at date of
grant). On April 4, 1990, the Board of Directors also approved an
additional 500,000 shares of nonqualified stock options granted to another
director at an exercise price of $0.25 per share (estimated fair market
value at date of grant).
-42-
<PAGE> 42
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following sets forth certain information concerning these
nonqualified options:
Option Price
Number ------------
of Shares Per Share Total
--------- --------- -----
Outstanding March 31, 1995 862,000 $0.25 $215,500
Exercised (164,000) 0.25 (41,000)
--------- -------
Outstanding March 31, 1996 698,000 $0.25 $174,500
Exercised (329,200) 0.25 (82,300)
--------- -------
Outstanding March 31, 1997 368,800 $0.25 $ 92,200
========= =======
All nonqualified options outstanding were earned and exercisable as of
March 31, 1997.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value of each option grant is estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal 1997: no
dividend yield, expected volatility of 68.32% and a risk free interest rate
of 6.7%.
Year of Option Exercise Expected Fair
Grant Shares Price Life Value
------- ------ -------- -------- -----
1997 465,000 $7.75 5.0 $4.87
-43-
<PAGE> 44
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1997
-------------------
As Reported Pro Forma
----------- ---------
(In thousands, except per share amounts)
Net income (loss) from
continuing operations $1,545 $(436)
Net income (loss) from
continuing operations
per share $0.38 $(0.10)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts, as SFAS 123 does not apply to awards prior to
1995 and additional awards are anticipated in future years.
(4) Effects of Future Adoption of Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings
Per Share" superseding Accounting Principles Board Opinion No. 15 ("APB
15") "Earnings Per Share." SFAS 128 simplifies earnings per share ("EPS")
calculations by replacing previously reported primary EPS with what will be
called basic EPS which is calculated by dividing reported earnings
available to common shareholders by the weighted average shares
outstanding. No dilution for potentially dilutive securities will be
included in basic EPS. Previously reported fully diluted EPS will be
called diluted EPS which will
include potentially dilutive securities. The requirements under SFAS 128
will not be incorporated into the Company's financial statements until the
fiscal year ending March 31, 1998. Presented below are the pro-forma
effects
-44-
<PAGE> 45
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
of SFAS 128 on the Company's EPS disclosures for the years ending March 31,
1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Primary EPS as reported $ 0.38 $(0.23) $ 0.38
Effect of SFAS 128 0.05 0.00 0.11
---- ---- ----
Pro-forma basic EPS $ 0.43 $(0.23) $ 0.49
==== ==== ====
Fully diluted EPS as
reported $ 0.38 $(0.23) $ 0.38
Effect of SFAS 128 0.00 0.00 0.00
---- ---- ----
Pro-forma diluted EPS $ 0.38 $(0.23) $ 0.38
==== ==== ====
(5) Income Taxes
At March 31, 1997, the Company had approximately $71,683,000 of net
operating loss carryforwards for tax purposes. Realization of the benefits
of these carryforwards is dependent upon the Company's ability to generate
taxable earnings in future periods. If these carryforwards are not
utilized, they will begin to expire in 1998. The Company's ability to
utilize its net operating loss carryforwards may be substantially limited
in the future under Section 382 of the Internal Revenue Code (IRC). If the
Company encounters a change of control as defined in IRC Section 382, the
carryforward would be limited to an annual amount calculated based on
market value. The Company does not believe a change of control, as
defined, has occurred to date.
-45-
<PAGE> 46
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The Company utilizes an asset and liability approach for financial
accounting and reporting for income taxes. The major components of
deferred tax assets and liabilities follows:
March 31, 1997 March 31, 1996
-------------- --------------
Deferred Tax Assets (Liabilities)
Federal NOL Carryforwards $ 24,372,057 $ 24,279,040
Allowance for Bad Debts 385,803 416,403
Book over tax depreciation
and amortization 112,171 815,254
Accrued Workers Compensation 423,170 434,884
Other accrued expenses 40,689 (5,616)
---------- ----------
Total deferred tax assets 25,333,890 25,939,965
Valuation allowance (25,333,890) (25,939,965)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
The Company has provided a valuation allowance for the entire balance
of deferred tax assets at March 31, 1997 and March 31, 1996, as it is more
likely than not that the deferred tax asset will not be realized.
The effective tax rates for the years ended March 31, 1997, 1996 and
1995 differ from the statutory tax rate of 34% primarily due to utilization
of net operating loss carryforwards. Tax expense is generally limited to
alternative minimum tax.
-46-
<PAGE> 47
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following table sets forth a reconciliation of the tax provision
using statutory rates to the actual tax provision provided in the
statements of operations:
1997 1996 1995
---- ---- ----
Tax provision (benefit)
utilizing statutory rates $ 525 $(313) $ 532
Utilization of NOL (509) 343 (502)
--- --- ---
Tax provision $ 16 $ 30 $ 30
=== === ===
(6) Related Parties
During 1997, 1996 and 1995, the Company sold $190,000, $791,000 and
$1,731,000 and purchased $119,000, $427,000 and $357,000, respectively, of
goods and services from entities affiliated with individuals serving as
officers and/or directors of the Company. These purchases and sales are
transacted using market rates. These transactions are included in
"contract drilling revenue" and "contract drilling expense" or "other
income or expense" in the accompanying statements of operations.
The related party transactions discussed in the preceding paragraph
are noninterest-bearing and are settled in the normal course of business.
-47-
<PAGE> 48
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(7) Business Segments and Significant Customers
The Company is engaged in contract drilling of oil and gas wells and,
to a lesser extent, in oil and gas production. Information concerning the
Company's business segments follows:
Years Ended March 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
Revenues:
Contract drilling $ 18,483 $ 21,298 $ 18,357
Oil and gas 2,491 1,683 1,042
-------- -------- --------
$ 20,974 $ 22,981 $ 19,399
======== ======== ========
Net income (loss) (a):
Contract drilling $ 1,937 $ 2,245 $ 2,182
Oil and gas (114) (3,058) (492)
-------- -------- --------
1,823 (813) 1,690
Corporate expenses (b) (278) (139) (154)
-------- -------- --------
$ 1,545 $ (952) $ 1,536
======== ======== ========
Identifiable assets:
Contract drilling $ 11,711 $ 6,415 $ 5,117
Oil and gas 6,179 4,322 2,808
-------- -------- --------
17,890 10,737 7,925
Corporate assets (c) 1,871 923 2,115
-------- -------- --------
$ 19,761 $ 11,660 $ 10,040
======== ======== ========
Depreciation, depletion and
amortization:
Contract drilling $ 982 $ 439 $ 476
Oil and gas 802 468 400
-------- -------- --------
$ 1,784 $ 907 $ 876
======== ======== ========
Capital expenditures:
Contract drilling $ 3,330 $ 1,463 $ 515
Oil and gas 3,424 5,553 2,980
-------- -------- --------
$ 6,754 $ 7,016 $ 3,495
======== ======== ========
-48-
<PAGE> 49
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(a) General and administrative costs and other income are allocated
between segments based on identifiable assets.
(b) Corporate expenses consist of interest expense.
(c) Corporate assets are those assets which are not specifically
identifiable with a segment and consist primarily of cash and
cash equivalents, short-term investments and prepaid expenses.
For the years ended March 31, 1997, 1996 and 1995, contract drilling
revenues earned from individual customers constituting 10% or more of total
contract drilling revenues were:
(a) four customers in 1997 individually represented approximately
21%, 18%, 12% and 10% of drilling revenues,
(b) three customers in 1996 individually represented approximately
19%, 18% and 14% of drilling revenues,
(c) three customers in 1995 individually represented approximately
24%, 17% and 14% of drilling revenues.
The loss of one or more of the above customers could have a material
adverse effect on the Company, depending upon the demand for drilling rigs
at the time of such loss and the Company's ability to find new customers.
(8) Contingencies
In March, 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 into 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 approximate amount of $646,000. 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 the receiver for SFIC, 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. However, an accrual was made in
the Company's financial statements for
-49-
<PAGE> 50
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
the amount in question. In a related development, on June 5, 1995, the
Company received a letter from the Texas Property and Casualty Insurance
Guaranty Association ("Guaranty Association") requesting payment in the
approximate amount of $729,000 for claims that the Guaranty Association has
paid on behalf of SFIC. The Guaranty Association does not believe that the
policies written by SFIC involved a transfer of insurance risk as required
by the Texas Insurance Code and is asserting that it is entitled to
reimbursement for all monies paid to claimants under these policies. In
November, 1995, the Guaranty Association filed a lawsuit against the
Company in Travis County, Texas, styled Texas Property and Casualty
Insurance Guaranty Association vs. TMBR/Sharp Drilling, Inc., Cause No. 95-
12318. The Guaranty Association is seeking to recover past workers'
compensation claims in the amount of approximately $803,000, which have
been advanced by the Guaranty Association under the Company's workers
compensation insurance program with SFIC. In May, 1996, and pursuant to an
order of the Travis County District Court, the claims of the receiver for
SFIC were assigned to and became a part of the Guaranty Association's
claims against the Company. The Company has rejected a settlement offer
made by the Guaranty Association for an amount less than the amount accrued
by the Company and the Company intends to vigorously defend its position
against the Guaranty Association.
The Company provides for its workers' compensation claims based upon
the most recent information available from its insurance carrier concerning
claims and estimated costs. However, in future years the Company may
receive retroactive adjustments, both favorable and unfavorable, related to
estimates of claim costs for previous years, which may be material to the
Company's results of operations. No provision for retroactive adjustments
to claim costs is recorded until the Company receives notification from its
insurance carrier because this amount, if any, cannot be estimated. The
Company is generally responsible for the first $10,000 ($100,000 prior to
November 1993) in claim costs for each workers' compensation injury.
The Company is a defendant in various lawsuits generally incidental to
its business. The Company does not believe that the ultimate resolution of
such litigation will have a significant effect on the Company's financial
position or results of operations.
-50-
<PAGE> 51
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(9) Supplemental Information Related to Oil and Gas Activities
The Company's capitalized cost of oil and gas properties is as
follows:
March 31,
---------
1997 1996
---- ----
(In thousands)
Oil and gas properties $13,102 $10,398
Accumulated depreciation,
depletion and amortization (6,923) (6,076)
------- -------
$ 6,179 $ 4,322
======= =======
The Company's costs incurred related to oil and gas property
acquisition, exploration and development activities are as follows:
Years Ended March 31,
---------------------
1997 1996 1995
---- ---- ----
(In thousands)
Property acquisition costs $ 194 $ 970 $ 1,309
Exploration costs 920 3,969 1,035
Development costs 2,310 614 636
------- ------- -------
$ 3,424 $ 5,553 $ 2,980
======= ======= =======
-51-
<PAGE> 52
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The Company's results of operations from oil and gas producing
activities are as follows:
Years Ended March 31,
---------------------
1997 1996 1995
---- ---- ----
(In thousands)
Revenues $ 2,491 $ 1,683 $ 1,042
Production costs 924 554 350
Dry holes and abandonments 558 945 629
Depreciation, depletion and
amortization and valuation
provisions 973 3,092 400
Income tax provision -- -- --
------- ------- -------
Results of operations from
producing activities
(excluding corporate
overhead and interest costs) $ 36 $(2,908) $ (337)
======= ======= =======
(10) Unaudited supplemental oil and gas reserve information
The reserve information presented below are only estimates. There are
numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company.
Reserve engineering is a subjective process of estimating underground
accumulations of crude oil and natural gas that cannot be measured in an
exact manner, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation
and judgment. The quantities of oil and gas that are ultimately recovered,
production and operating costs, the amount and timing of future development
expenditures and future oil and gas prices may all differ from those
assumed in such estimates.
-52-
<PAGE> 53
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following sets forth proved oil and gas reserves at March 31,
1997, 1996 and 1995:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
Oil Gas Oil Gas Oil Gas
MBbls MMcf MBbls MMcf MBbls MMcf
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves:
Beginning of Year 368.6 2,815.6 275.6 1,129.4 120.4 313.5
Revisions of previous
estimates 103.5 (120.3) (26.9) 250.9 129.1 626.4
Improved recovery 3.7 (5.6) -- -- -- --
Purchases of minerals in
place and extensions 85.0 85.7 190.8 1,647.4 77.4 294.2
Sales of minerals in place -- -- -- -- -- --
Production (76.2) (361.7) (70.9) (212.1) (51.3) (104.7)
----- ------- ----- ------- ----- -------
End of year 484.6 2,413.7 368.6 2,815.6 275.6 1,129.4
===== ======= ===== ======= ===== =======
Proved Developed Resources:
Beginning of year 368.6 2,815.6 275.6 1,129.4 120.4 313.5
----- ------- ----- ------- ----- -------
End of year 484.6 2,413.7 368.6 2,815.6 275.6 1,129.4
===== ======= ===== ======= ===== =======
</TABLE>
-53-
<PAGE> 54
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
March 31,
-----------------------
1997 1996
---- ----
Standardized Measure
Future cash inflows $12,848 $10,369
Future production and
development costs (4,201) (3,089)
------- -------
Future net cash flows 8,647 7,280
10% discount factor (2,982) (2,326)
------- -------
Discounted future net cash flows 5,665 4,954
Discounted income taxes -- --
------- -------
Standardized Measure $ 5,665 $ 4,954
======= =======
1997 1996 1995
---- ---- ----
Standardized measure,
beginning of year $ 4,954 $ 2,879 $ 971
Revisions
Prices and costs 813 235 676
Accretion of discount 495 288 97
------- ------- --------
Net revisions 1,308 523 773
Discoveries and additions 970 2,681 1,764
Production (1,567) (1,129) (629)
------- ------- -------
Standardized measure,
end of year $ 5,665 $ 4,954 $ 2,879
======= ======= =======
-54-
<PAGE> 55
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company at June 24, 1997 are as
follows:
Director
or Officer
Name Age Position with Company since
Thomas C. Brown 70 Chairman of the Board of Directors
and Chief Executive Officer 1982
Joe G. Roper 68 Director and President 1982
Donald L. Evans (1) 50 Director 1982
David N. Fitzgerald (1) 74 Director 1984
Don H. Lawson 58 Vice President - Operations 1992
Patricia R. Elledge 39 Controller/Treasurer 1994
James M. Alsup 60 Secretary 1982
--------------------------
(1) Member of Compensation and Audit Committees
Directors of the Company serve until the annual meeting of
stockholders to be held in August, 1997, and until their successors in
office are elected and qualified. Each officer is appointed annually by
the Company's Board of Directors to serve at the Board's discretion and
until his successor in office is elected and qualified.
Mr. Brown has served as a Director of the Company since the Company's
formation in 1982. He is presently Chairman of the Board of Directors and
Chief Executive Officer of the Company and has served in such capacities
since 1990. Mr. Brown is also a Director of Tom Brown, Inc., the former
parent of the Company.
Mr. Roper has served as a Director of the Company since the Company's
formation in 1982. He served as Chairman of the Board of Directors and
Chief Executive Officer of the Company from 1982 until 1990 when he became
President of the Company.
-55-
<PAGE> 56
Mr. Evans has been a Director of the Company since the Company's
formation in 1982. He served as President of the Company from 1982 until
1990 when Mr. Roper was elected to the office of President. Mr. Evans is
currently the Chairman of the Board of Directors and Chief Executive
Officer of Tom Brown, Inc., positions he has held since 1990 and 1985,
respectively.
Mr. Fitzgerald has served as a Director of the Company since his
initial election to the Board of Directors in 1984. He is the President
and a shareholder of Dave Fitzgerald, Inc., a privately held oilfield
equipment sales company that Mr. Fitzgerald has owned and operated since
1963. Mr. Fitzgerald is also a Director of Mineral Development, Inc.
Mr. Lawson has been employed by the Company since 1967. He has been
the Vice President - Operations of the Company since 1992.
Ms. Elledge was employed by the Company from September, 1989 to
December, 1993 when she resigned to relocate. Ms. Elledge returned to the
employ of the Company in September, 1994 in her current capacity as
Controller - Treasurer.
Mr. Alsup has been the Secretary of the Company since the Company's
formation in 1982. He has been a partner in the law firm of Lynch,
Chappell & Alsup since 1970.
There are no family relationships between any of the Directors or
officers of the Company, except that Patricia R. Elledge is the daughter of
Joe G. Roper.
Item 11. EXECUTIVE COMPENSATION
The discussion under "Executive Compensation" in the Company's
definitive proxy statement for the 1997 annual meeting of stockholders is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under "Principal Shareholders" and the information
appearing under "Election of Directors" in the Company's definitive proxy
statement for the 1997 annual meeting of stockholders is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under "Executive Compensation - Certain Transactions"
in the Company's definitive proxy statement for the 1997 annual meeting of
stockholders is incorporated herein by reference.
-56-
<PAGE> 57
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a)1. See Index to Financial Statements at Item 8 29
(a)2. Financial Statement Schedules
Years ended March 31, 1997, 1996 and 1995
Schedule II - Valuation and Qualifying Accounts . . . . 59
All other schedules are omitted as the
required information is inapplicable or the
information is presented in the Financial
Statements or related notes.
(a)3. Exhibits:
Exhibit 3.1 - Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 in Registrant's Annual
Report on Form 10-K dated June 28, 1991)
Exhibit 3.2 - Bylaws of the Registrant, as amended. (Incorporated
by reference to Exhibit 3.2 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
Executive Compensation Plans and Arrangements
(Exhibits 10.1 through and including Exhibit 10.11 constitute
executive compensation plans and arrangements of the Registrant)
Exhibit 10.1 - Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 10.3 in Registrant's Registration Statement
on Form 10 as amended, effective October 9, 1984)
Exhibit 10.2 - Nonqualified Stock Option Agreement dated August
29, 1990, between Thomas C. Brown and the Registrant.
(Incorporated by reference to Exhibit 10.15 in Registrant's Annual
Report on form 10-K dated June 25, 1993)
Exhibit 10.3 - Nonqualified Stock Option Agreement dated August
30, 1988, between Joe G. Roper and the Registrant. (Incorporated
by reference to Exhibit 10.17 in Registrant's Annual Report on
Form 10-K dated June 25, 1993)
-57-
<PAGE> 58
Exhibit 10.4 - Incentive Stock Option Agreement dated November 16,
1993 between Joe G. Roper and the Registrant. (Incorporated by
reference to Exhibit 10.5 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
Exhibit 10.5 - Nonqualified Stock Option Agreement dated August 8,
1984, as amended January 15, 1988 and August 29, 1991, between
Donald L. Evans and the Registrant. (Incorporated by reference to
Exhibit 10.18 in Registrant's Annual Report on Form 10-K dated
June 25, 1993)
Exhibit 10.6 - Incentive Stock Option Agreement dated August 8,
1984, as amended, January 15, 1988 and August 29, 1991, between
Donald L. Evans and the Registrant. (Incorporated by reference to
Exhibit 10.19 in Registrant's Annual Report on Form 10-K dated
June 25, 1993)
Exhibit 10.7 - Incentive Stock Option Agreement dated December 4,
1992 between Patricia R. Elledge and the Registrant.
(Incorporated by reference to Exhibit 10.20 in Registrant's Annual
Report on Form 10-K dated June 25, 1993)
Exhibit 10.8 - Incentive Stock Option Agreement dated December 4,
1992 between Don H. Lawson and the Registrant. (Incorporated by
reference to Exhibit 10.21 in Registrant's Annual Report on Form
10-K dated June 25, 1993)
Exhibit 10.9 - Incentive Stock Option Agreement dated November 16,
1993 between Don H. Lawson and the Registrant. (Incorporated by
reference to Exhibit 10.10 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
Exhibit 10.10 - 1994 Stock Option Plan. (Incorporated by reference
to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated
June 28, 1995)
Exhibit 10.11 - TMBR/Sharp Drilling, Inc. Employee Retirement Plan.
(Incorporated by reference to Exhibit 10.11 in Registrant's Annual
Report on Form 10-K dated June 28, 1995)
Exhibit 10.12 - Asset Purchase Agreement dated June 22, 1992 between
the Registrant and State Farm Mutual Automobile Insurance Company.
(Incorporated by reference to Exhibit 10.14 in Registrant's Annual
Report on Form 10-K dated June 22, 1992)
Exhibit 10.13 - Stock Option Cancellation Agreement dated December
31, 1993 between the Registrant and State Farm Mutual Automobile
Insurance Company. (Incorporated by reference to Exhibit 10.1 in
Registrant's Current Report on Form 8-K dated January 6, 1994)
-58-
<PAGE> 59
Exhibit 10.14 - Loan Agreement dated January 16, 1996, between
Norwest Bank Texas, Midland, N.A. and the Registrant.
(Incorporated by reference to Exhibit 10.1 in Registrant's
Quarterly Report on Form 10-Q dated February 12, 1996)
Exhibit 10.15 - Form of Stock Purchase Agreement, dated as of
February 13, 1997, between the Registrant and the selling
stockholders named therein (Incorporated by reference to
Exhibit 10.1 in the Registrant's Registration Statement on
Form S-3, No. 333-23391)
*Exhibit 23.1 - Consent of Arthur Andersen LLP
*Exhibit 23.2 - Consent of Joe C. Neal & Associates
*Exhibit 27 - Financial Data Schedule
----------------------------------
*Filed herewith
(b) No reports on Form 8-K were filed during the last quarter of fiscal
1997.
-59-
<PAGE> 60
Schedule II
-----------
TMBR/SHARP DRILLING, INC.
Valuation and Qualifying Accounts
Years ended March 31, 1997, 1996 and 1995
(In thousands)
Recoveries
Balance at Additions or other Balance
beginning charged to reserve at end
Description of year operations reductions of year
--------------------- ---------- ---------- ---------- -------
Allowance for
doubtful accounts:
1997 $ 1,225 $ -- $ 90 $ 1,135
1996 $ 1,225 $ -- $ -- $ 1,225
1995 $ 1,265 $ -- $ 40 $ 1,225
-60-
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
June 27, 1997 By /s/ Thomas C. Brown
-------------------------
Thomas C. Brown, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.
June 27, 1997 /s/ Thomas C. Brown
--------------------------------
Thomas C. Brown, Chairman
of the Board of Directors
(Principal Executive Officer)
June 27, 1997 /s/ Joe G. Roper
-------------------------------
Joe G. Roper, President and
Director
June 27, 1997 /s/ Patricia R. Elledge
-------------------------------
Patricia R. Elledge, Controller/
Treasurer (Principal Financial
Officer)
June 27, 1997 /s/ David N. Fitzgerald
-------------------------------
David N. Fitzgerald, Director
June 27, 1997 /s/ Donald L. Evans
-------------------------------
Donald L. Evans, Director
-61-
<PAGE> 62
INDEX TO EXHIBITS
Description Page No.
----------- --------
Exhibit 3.1 Articles of Incorporation of the Company, as
amended. (Incorporated by reference to
Exhibit 3.1 in Registrant's Annual Report on
Form 10-K dated June 28, 1991)
Exhibit 3.2 Bylaws of the Company, as amended. (Incor-
porated by reference to Exhibit 3.2 in
Registrant's Annual Report on Form 10-K dated
June 27, 1994)
Executive Compensation Plans and Arrangements
(Exhibits 10.1 through and including Exhibit
10.11 constitute executive compensation plans
and arrangements of the Registrant)
Exhibit 10.1 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.3 in Registrant's
Registration Statement on Form 10, as
amended, effective October 9, 1984)
Exhibit 10.2 Nonqualified Stock Option Agreement dated
August 29, 1990, between Thomas C. Brown and
the Registrant. (Incorporated by reference
to Exhibit 10.15 in Registrant's Annual
Report on Form 10-K dated June 25, 1993)
Exhibit 10.3 Nonqualified Stock Option Agreement dated
August 30, 1988, between Joe G. Roper and the
Registrant. (Incorporated by reference to
Exhibit 10.17 in Registrant's Annual Report
on Form 10-K dated June 25, 1993)
Exhibit 10.4 Incentive Stock Option Agreement dated
November 16, 1993 between Joe G. Roper and
the Registrant. (Incorporated by reference
to Exhibit 10.5 in Registrant's Annual Report
on Form 10-K dated June 27, 1994)
Exhibit 10.5 Nonqualified Stock Option Agreement dated
August 8, 1984, as amended, January 15, 1988
and August 29, 1991, between Donald L. Evans
and the Registrant. (Incorporated by
reference to Exhibit 10.18 in Registrant's
Annual Report on Form 10-K dated June 25,
1993)
-62-
<PAGE> 63
Exhibit 10.6 Incentive Stock Option Agreement dated
August 8, 1984, as amended, January 15, 1988
and August 29, 1991, between Donald L. Evans
and the Registrant. (Incorporated by
reference to Exhibit 10.19 in Registrant's
Annual Report on Form 10-K dated June 25,
1993)
Exhibit 10.7 Incentive Stock Option Agreement dated
December 4, 1992 between Patricia R. Elledge
and the Registrant. (Incorporated by
reference to Exhibit 10.20 in Registrant's
Annual Report on Form 10-K dated June 25,
1993)
Exhibit 10.8 Incentive Stock Option Agreement dated
December 4, 1992 between Don H. Lawson and
the Registrant. (Incorporated by reference
to Exhibit 10.21 in Registrant's Annual
Report on Form 10-K dated June 25, 1993)
Exhibit 10.9 Incentive Stock Option Agreement dated
November 16, 1993 between Don H. Lawson and
the Registrant. (Incorporated by reference
to Exhibit 10.10 in Registrant's Annual
Report on Form 10-K dated June 27, 1994)
Exhibit 10.10 1994 Stock Option Plan. (Incorporated by
reference to Exhibit 10.10 in Registrant's
Annual Report on Form 10-K dated June 28,
1995)
Exhibit 10.11 TMBR/Sharp Drilling, Inc. Employee Retirement
Plan. (Incorporated by reference to Exhibit
10.11 in Registrant's Annual Report on Form
10-K dated June 28, 1995)
Exhibit 10.12 Asset Purchase Agreement dated June 22, 1992
between the Registrant and State Farm Mutual
Automobile Insurance Company. (Incorporated
by reference to Exhibit 10.14 in Registrant's
Annual Report on Form 10-K dated June 22,
1992)
Exhibit 10.13 Stock Option Cancellation Agreement dated
December 31, 1993 between the Registrant and
State Farm Mutual Automobile Insurance
Company. (Incorporated by reference to
Exhibit 10.1 in Registrant's Current Report
on Form 8-K dated January 6, 1994)
-63-
<PAGE> 64
Exhibit 10.14 Loan Agreement dated January 16, 1996, between
Norwest Bank Texas, Midland, N.A. and the
Registrant. (Incorporated by reference to
Exhibit 10.1 in Registrant's Quarterly Report
on Form 10-Q dated February 12, 1996)
Exhibit 10.15 Form of Stock Purchase Agreement, dated as of
February 13, 1997, between the Registrant and
the selling stockholders named therein
(Incorporated by reference to Exhibit 10.1 in
the Registrant's Registration Statement on
Form S-3, No. 333-23391)
*Exhibit 23.1 Consent of Arthur Andersen LLP 64
*Exhibit 23.2 Consent of Joe C. Neal & Associates 65
*Exhibit 27 Financial Data Schedule 66
--------------------
*Filed herewith
-64-
<PAGE> 65
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report included in this Form 10-K into
the Company's previously filed Registration Statements on Form S-8
(registration no. 33-46699 and no. 33-89878) and the Company's previously
filed registration statement on Form S-3, No. 333-23391.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
May 23, 1997
-65-
<PAGE> 66
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the
incorporation by reference of our report included in this Form 10-K into
the Company's previously filed Registration Statements on Form S-8
(registration no. 33-46699 and no. 33-898878) and the Company's previously
filed registration statement on Form S-3, No. 333-23391.
/s/ JOE C. NEAL & ASSOCIATES
Midland, Texas
June 24, 1997
-66-
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1048
<SECURITIES> 87
<RECEIVABLES> 6218
<ALLOWANCES> 1135
<INVENTORY> 74
<CURRENT-ASSETS> 8060
<PP&E> 59376
<DEPRECIATION> 47851
<TOTAL-ASSETS> 19761
<CURRENT-LIABILITIES> 5389
<BONDS> 0
0
0
<COMMON> 570
<OTHER-SE> 13802
<TOTAL-LIABILITY-AND-EQUITY> 19761
<SALES> 0
<TOTAL-REVENUES> 20974
<CGS> 0
<TOTAL-COSTS> 19187
<OTHER-EXPENSES> 226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278
<INCOME-PRETAX> 1561
<INCOME-TAX> 16
<INCOME-CONTINUING> 1545
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