<PAGE> 1
FORM 10-KA
(Amendment No. 2)
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, 1996 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.
The aggregate market value of voting stock held by nonaffiliates of
the registrant at June 3, 1996 was approximately $19,825,718.
At June 3, 1996, there were 3,382,586 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, 1996.
<PAGE> 2
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants 3
Balance Sheets, March 31, 1996 and 1995 4
Statements of Operations, Years ended
March 31, 1996, 1995 and 1994 6
Statements of Stockholders' Equity (Deficit),
Years ended March 31, 1996, 1995 and 1994 7
Statements of Cash Flows,
Years ended March 31, 1996, 1995 and 1994 8
Notes to Financial Statements 9
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<PAGE> 3
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, 1996 and 1995, and the
related statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended March 31, 1996.
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1996, 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 31, 1996
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<PAGE> 4
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1996 and 1995
(In thousands, except per share data)
ASSETS 1996 1995
------ ---- ----
Current assets:
Cash and cash equivalents $ 339 $ 1,590
Trade receivables,
net of allowance for doubtful
accounts of $1,225 in 1996
and 1995 2,942 2,568
Inventories 51 45
Deposits 423 513
Other 410 265
------ ------
Total current assets 4,165 4,981
------ ------
Property and equipment, at cost:
Drilling equipment 39,750 38,308
Oil and gas properties, based on
successful efforts accounting 10,398 5,790
Other property and equipment 3,195 3,206
------ ------
53,343 47,304
Less accumulated depreciation,
depletion and amortization (46,022) (42,505)
------ ------
Net property and equipment 7,321 4,799
------ ------
Other assets 174 260
------ ------
Total assets $ 11,660 $ 10,040
====== ======
See accompanying notes to financial statements.
-4-
<PAGE> 5
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1996 and 1995
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1996 1995
---------------------------------------------- ---- ----
Current liabilities:
Current portion of capital lease
obligations $ -- $ 92
Trade payables 3,336 1,839
Accrued workers' compensation 1,279 1,220
Leasehold purchase obligation -- 386
Other 786 728
------ ------
Total current liabilities 5,401 4,265
------ ------
Long term liabilities:
Borrowings from bank 1,300 --
------ ------
Total liabilities 6,701 4,265
------ ------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value.
Authorized, 50,000,000 shares;
issued, 4,615,525 shares at
March 31, 1996 and 4,393,525 at
March 31, 1995. 461 439
Additional paid-in capital 60,654 60,540
Accumulated deficit (56,006) (55,054)
Treasury stock-common, 1,268,739 shares
at March 31, 1996 and 1995, at cost. (150) (150)
------ ------
Total stockholders' equity 4,959 5,775
------ ------
Total liabilities and
stockholders' equity $ 11,660 $ 10,040
====== ======
See accompanying notes to financial statements.
-5-
<PAGE> 6
TMBR/SHARP DRILLING, INC.
Statements of Operations
Years Ended March 31, 1996, 1995 and 1994
(In thousands, except per share data)
1996 1995 1994
---- ---- ----
Revenues:
Contract drilling $ 21,298 $ 18,357 $ 18,359
Oil and gas 1,683 1,042 621
------ ------ ------
Total revenues 22,981 19,399 18,980
------ ------ ------
Operating costs and expenses:
Contract drilling 17,252 14,630 14,989
Oil and gas production 554 350 318
Dry holes and abandonments 945 629 656
Depreciation, depletion and
amortization 907 876 746
Writedown of oil and gas
properties 2,624 -- --
General and administrative 1,599 1,553 1,339
------ ------ ------
Total operating costs
and expenses 23,881 18,038 18,048
------ ------ ------
Operating income (loss) (900) 1,361 932
------ ------ ------
Other income (expense):
Interest (139) (154) (89)
Gain on sales of assets 26 100 103
Other, net 91 259 155
------ ------ ------
Total other income, net 22 205 169
------ ------ ------
Net income (loss) before
income tax provision (922) 1,566 1,101
Provision for income taxes (30) (30) (62)
------ ------ ------
Net income (loss) $ (952) 1,536 1,039
====== ====== ======
Net income (loss) per
common share $ (0.23) $ 0.38 $ 0.23
========= ========= =========
Weighted average number of
common shares outstanding 4,074,567 4,032,195 4,603,130
========= ========= =========
See accompanying notes to financial statements.
-6-
<PAGE> 7
TMBR/SHARP DRILLING, INC.
Statements of Stockholders' Equity (Deficit)
Years Ended March 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Treasury Stock
-------------------------- Total
Preferred Stock Common Stock Additional Common Preferred Stockholders'
--------------- ------------ Paid-In Accumulated --------------- --------------- Equity
Shares Amount Shares Amount Capital Deficit Shares Amount Shares Amount (Deficit)
------ ------ ------ ------ ---------- ----------- ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1993 4,170 $ 417 3,930 $ 393 $ 59,971 $(57,629) 47 $ (70) 4,170 $(1) $ 3,081
Retirement of
Preferred
Treasury Stock (4,170) (417) -- -- 416 -- -- -- (4,170) 1 --
Exercise of Stock
Options -- -- 296 30 63 -- -- -- -- -- 93
Contribution of
Common Stock
from
Shareholders -- -- -- -- -- -- 1,196 -- -- -- --
Purchase of
Treasury
Common Stock -- -- -- -- -- -- 27 (80) -- -- (150)
Net Income -- -- -- -- -- 1,039 -- -- -- -- 1,039
------- ----- ----- ----- -------- -------- ----- ----- ----- --- -------
Balance, March 31,
1994 -- $ -- -- $ 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 Income -- -- -- -- -- (952) -- -- -- -- (952)
------- ----- ----- ----- -------- -------- ----- ----- ----- --- -------
Balance, March 31,
1996 -- $ -- 4,616 $ 461 $ 60,654 $(56,006) 1,270 $(150) -- $ -- $ 4,959
======= ===== ===== ===== ======== ======== ===== ===== ===== === =======
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE> 8
TMBR/SHARP DRILLING, INC.
Statements of Cash Flows
Years Ended March 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (952) $ 1,536 $ 1,039
Adjustments to reconcile net
income to net cash provided
(required) by operating activities:
Depreciation, depletion and amortization 907 876 746
Dry holes and abandonments 945 629 656
Gain on sales of assets (26) (100) (103)
Writedown of properties 2,624 -- --
Changes in assets and liabilities:
Trade receivables (374) 45 1,780
Deposits 90 273 (347)
Inventories and other current assets (65) (175) 19
Trade payables 1,497 555 (1,809)
Accrued interest and other
current liabilities 117 (102) 333
-------- -------- --------
Total adjustments 5,715 2,001 1,275
-------- -------- --------
Net cash provided
by operating activities 4,763 3,537 2,314
Cash flows from investing activities:
Additions to property and equipment (7,016) (3,495) (1,970)
Proceeds from sales of property
and equipment 44 106 117
-------- -------- --------
Net cash required
by investing activities (6,972) (3,389) (1,853)
Cash flows from financing activities:
Proceeds from capital lease -- -- 186
Repayments of capital lease (92) (89) (45)
Proceeds from exercise of stock options 136 106 93
Purchase of treasury stock -- -- (80)
Proceeds from bank loan 1,300 -- --
Leasehold borrowings and repayments
of leasehold borrowings (386) 386 --
-------- -------- --------
Net cash provided by
financing activities 958 403 154
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents (1,251) 551 615
Cash and cash equivalents at beginning
of year 1,590 1,039 424
-------- -------- --------
Cash and cash equivalents at end of year $ 339 $ 1,590 $ 1,039
======== ======== ========
See accompanying notes to financial statements.
-8-
<PAGE> 9
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(1) Organization, Nature of Business and Summary of Significant Accounting
Policies
Organization and Nature of Business
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 $139,000 in 1996, $154,000 in 1995, and $89,000 in 1994.
Cash payments for taxes due totaled $23,000, $13,000 and $131,000 during
1996, 1995 and 1994, respectively.
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
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<PAGE> 10
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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 $1,100,000 and $973,000 as of March 31, 1996 and
1995, respectively.
During 1996, 1995 and 1994, 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.
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. The Company recognized a $2.6 million charge as a
result of the adoption of SFAS 121. 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.
-10-
<PAGE> 11
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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 of estimated future net revenues therefrom (see Note 8), and the
valuation allowance for deferred taxes (see Note 4).
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
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<PAGE> 12
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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. The disclosures required under SFAS 123 will be included in the
footnotes to the financial statements of the Company's 1997 annual report.
(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 loans mature January
15, 1998 at which time the then outstanding principal and all of the
accrued and unpaid interest is due and payable. At March 31, 1996, the
Company had borrowed $1,300,000 under the facility. The Company is
required to maintain certain financial covenants, including a requirement
to maintain a minimum tangible net worth of $6.25 million. As of March 31,
1996, the Company was not in compliance with this requirement, and obtained
a waiver allowing their non-compliance. The Company is working with the
bank to modify the terms of the loan agreement in order to eliminate the
non-compliance with the debt covenant.
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.
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<PAGE> 13
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(3) Stockholders' Equity (Deficit)
(a) Stock Option Plan
In August of 1984, the Company adopted the 1984 Stock Option Plan
(the "Plan") which 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. The
following sets forth certain information concerning these options:
Option Price
Number ------------
of Shares Per Share Total
--------- --------- -------
Outstanding March 31, 1994 334,000 $503,250
Exercised (158,000) $0.375 to 3.00 (67,125)
Forfeited (10,000) 0.375 to 3.00 (16,875)
------- -------
Outstanding March 31, 1995 166,000 $419,250
Exercised (58,000) $0.375 to 3.00 (95,250)
------- -------
Outstanding March 31, 1996 108,000 $324,000
======= =======
60,500 of the 108,000 option shares outstanding were exercisable at
March 31, 1996. The remaining 47,500 shares outstanding become exercisable
on June 1 of every year in 23,750 share increments becoming fully
exercisable on June 1, 1997.
In addition to the aforementioned options, in 1988, the Company issued
90,000 shares of nonqualified stock options to two directors at an exercise
price of $0.375 per share (estimated fair market value at date of grant).
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).
-13-
<PAGE> 14
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, 1994 862,000 $0.25 $215,500
--------- -------
Outstanding March 31, 1995 862,000 $0.25 $215,500
Exercised (161,800) 0.25 (40,450)
--------- -------
Outstanding March 31, 1996 700,200 $175,050
========= =======
All nonqualified options outstanding were earned and exercisable as of
March 31, 1996.
(b) Common stock
On December 31, 1993, the Company entered into an agreement cancelling
an option that would have allowed the Company to purchase approximately
1,595,000 shares of common stock at $0.25 per share. As consideration for
cancelling the option, State Farm contributed to the Company approximately
1,195,000 shares at no cost and retained 400,000 shares. The Company holds
the contributed shares as treasury stock at March 31, 1996.
(4) Income Taxes
At March 31, 1996, the Company had approximately $71,409,000 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.
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<PAGE> 15
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, 1996 March 31, 1995
-------------- --------------
Deferred Tax Assets (Liabilities)
Federal NOL Carryforwards $ 24,279,040 $ 24,607,475
Asset Impairment -- 99,490
Allowance for Bad Debts 416,403 416,427
Book over tax depreciation
and amortization 815,254 47,543
Accrued Workers Compensation 434,884 414,836
Other accrued expenses (5,616) 10,361
---------- ----------
Total deferred tax assets 25,939,965 25,596,132
Valuation allowance (25,939,965) (25,596,132)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
The Company has provided a valuation allowance for the entire balance
of deferred tax assets at March 31, 1996 and March 31, 1995, 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, 1996, 1995 and
1994 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. 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:
1996 1995 1994
---- ---- ----
Tax provision (benefit)
utilizing statutory rates (313) 532 374
Utilization of NOL 343 (502) (312)
--- --- ---
Tax provision 30 30 62
=== === ===
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<PAGE> 16
(5) Related Parties
During 1996, 1995 and 1994, the Company sold $791,000, $1,731,000 and
$847,000 and purchased $427,000, $357,000 and $411,000, 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 paragraphs
are noninterest-bearing and are settled in the normal course of business.
-16-
<PAGE> 17
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(6) 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,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
Revenues:
Contract drilling $ 21,298 $ 18,357 $ 18,359
Oil and gas 1,683 1,042 621
-------- -------- --------
$ 22,981 $ 19,399 $ 18,980
======== ======== ========
Net income (loss) (a):
Contract drilling $ 2,245 $ 2,182 $ 1,770
Oil and gas (3,058) (492) (674)
-------- -------- --------
(813) 1,690 1,096
Corporate expenses (b) (139) (154) (57)
-------- -------- --------
$ (952) $ 1,536 $ 1,039
======== ======== ========
Identifiable assets:
Contract drilling $ 6,415 $ 5,117 $ 4,661
Oil and gas 4,322 2,808 854
-------- -------- --------
10,737 7,925 5,515
Corporate assets (c) 923 2,115 2,133
-------- -------- --------
$ 11,660 $ 10,040 $ 7,648
======== ======== ========
Depreciation, depletion and
amortization:
Contract drilling $ 439 $ 476 $ 465
Oil and gas 468 400 281
-------- -------- --------
$ 907 $ 876 $ 746
======== ======== ========
Capital expenditures:
Contract drilling $ 1,463 $ 515 $ 951
Oil and gas 5,553 2,980 1,019
-------- -------- --------
$ 7,016 $ 3,495 $ 1,970
======== ======== ========
-17-
<PAGE> 18
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, 1996, 1995 and 1994, contract drilling
revenues earned from individual customers constituting 10% or more of total
contract drilling revenues were:
(a) three customers in 1996 individually represented approximately
19%, 18% and 14% of drilling revenues,
(b) three customers in 1995 individually represented approximately
24%, 17% and 14% of drilling revenues,
(c) two customers in 1994 individually represented approximately
40% and 15% 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.
(7) 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 of $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
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<PAGE> 19
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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.
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<PAGE> 20
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(8) Supplemental Information Related to Oil and Gas Activities
The Company's capitalized cost of oil and gas properties is as
follows:
March 31,
---------
1996 1995
---- ----
(In thousands)
Oil and gas properties $10,398 $ 5,790
Accumulated depreciation,
depletion and amortization (6,076) (2,982)
------- -------
$ 4,322 $ 2,808
======= =======
The Company's costs incurred related to oil and gas property
acquisition, exploration and development activities are as follows:
Years Ended March 31,
---------------------
1996 1995 1994
---- ---- ----
(In thousands)
Property acquisition costs $ 970 $ 1,309 $ 170
Exploration costs 3,969 1,035 609
Development costs 614 636 240
------- ------- -------
$ 5,553 $ 2,980 $ 1,019
======= ======= =======
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<PAGE> 21
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,
---------------------
1996 1995 1994
---- ---- ----
(In thousands)
Revenues $ 1,683 $ 1,042 $ 621
Production costs 554 350 318
Dry holes and abandonments 945 629 656
Depreciation, depletion and
amortization and valuation
provisions 3,092 400 281
Income tax provision -- -- --
------- ------- -------
Results of operations from
producing activities
(excluding corporate
overhead and interest costs $(2,908) $ (337) $ (634)
======= ======= =======
(9) 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.
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<PAGE> 22
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Quantities of proved reserves:
Crude Oil Natural Gas
(MBbl) (MMcf)
--------- -----------
Balance, March 31, 1993 108.3 353.2
Discoveries and additions 40.7 35.1
Production (28.6) (74.8)
--------- -----------
Balance, March 31, 1994 120.4 313.5
Discoveries and additions 206.5 920.6
Production (51.3) (104.7)
--------- -----------
Balance, March 31, 1995 275.6 1,129.4
Discoveries and additions 163.9 1,898.3
Production (70.9) (212.1)
--------- -----------
Balance, March 31, 1996 368.6 2,815.6
========= ===========
Proved Developed reserves:
Crude Oil Natural Gas
(MBbl) (MMcf)
--------- -----------
March 31, 1993 108.3 353.2
========= ===========
March 31, 1994 120.4 313.5
========= ===========
March 31, 1995 275.6 1,129.4
========= ===========
March 31, 1996 368.6 2,815.6
========= ===========
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<PAGE> 23
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
March 31,
-----------------------
1996 1995
---- ----
Standardized Measure
Future cash inflows production $10,369 $ 6,013
Future production and
development costs (3,089) (1,988)
------- -------
Future net cash flows 7,280 4,025
10% discount factor (2,326) (1,146)
------- -------
Discounted future net cash flows 4,954 2,879
Discounted income taxes -- --
------- -------
Standardized Measure $ 4,954 $ 2,879
======= =======
1996 1995 1994
---- ---- ----
Standardized measure,
beginning of year $ 2,879 $ 971 $ 1,139
Revisions
Prices and costs 235 676 (241)
Accretion of discount 288 97 114
------- ------- --------
Net revisions 523 773 (127)
Discoveries and additions 2,681 1,764 262
Production (1,129) (629) (303)
------- ------- -------
Standardized measure,
end of year $ 4,954 $ 2,879 $ 971
======= ======= =======
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<PAGE> 24
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.
May 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.
May 27, 1997 /s/ Thomas C. Brown
-------------------------------
Thomas C. Brown, Chairman
of the Board of Directors
(Principal Executive Officer)
May 27, 1997 /s/ Joe G. Roper
-------------------------------
Joe G. Roper, President and
Director
May 27, 1997 /s/ Patricia R. Elledge
-------------------------------
Patricia R. Elledge, Controller/
Treasurer (Principal Financial
Officer)
May 27, 1997 /s/ David N. Fitzgerald
-------------------------------
David N. Fitzgerald, Director
May 27, 1997 /s/ Donald L. Evans
-------------------------------
Donald L. Evans, Director
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